<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1996
REGISTRATION NO. 333-15101
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BROWN GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 5661 43-0197190
(STATE OR OTHER JURIS- (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
DICTION OF INCORPORATION CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
OR ORGANIZATION)
8300 MARYLAND AVE., ST. LOUIS, MISSOURI 63105
(314) 854-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------------------------
ROBERT D. PICKLE, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY
BROWN GROUP, INC.
8300 MARYLAND AVE.
ST. LOUIS, MISSOURI 63105
(314) 854-4000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
JAMES L. NOUSS, JR., ESQ.
BRYAN CAVE LLP
211 NORTH BROADWAY, SUITE 3600
ST. LOUIS, MISSOURI 63102
(314) 259-2000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
IF THE SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED IN
CONNECTION WITH THE FORMATION OF A HOLDING COMPANY AND THERE IS COMPLIANCE WITH
GENERAL INSTRUCTION G, CHECK THE FOLLOWING BOX. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
===============================================================================
<PAGE> 2
OFFER TO EXCHANGE
9 1/2% SENIOR NOTES DUE OCTOBER 15, 2006
FOR ALL OUTSTANDING 9 1/2% SENIOR NOTES DUE OCTOBER 15, 2006
[LOGO] BROWN GROUP, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON
DECEMBER 10, 1996 UNLESS EXTENDED.
Brown Group, Inc., a New York corporation (the ``Company''), is hereby
offering (the ``Exchange Offer''), upon the terms and subject to the conditions
set forth in this Prospectus and the accompanying Letter of Transmittal (the
``Letter of Transmittal''), to exchange $1,000 principal amount of its 9 1/2%
Senior Notes due October 15, 2006 (the ``Exchange Notes''), which exchange has
been registered under the Securities Act of 1933, as amended (the ``Securities
Act''), pursuant to a registration statement of which this Prospectus is a part
(the ``Registration Statement''), for each $1,000 principal amount of its
outstanding 9 1/2% Senior Notes due October 15, 2006 (the ``Private Notes''),
of which $100,000,000 in aggregate principal amount was issued on October 7,
1996 and is outstanding as of the date hereof. The form and terms of the
Exchange Notes are identical in all material respects to those of the Private
Notes, except for certain transfer restrictions and registration rights
relating to the Private Notes and except for certain interest provisions
related to such registration rights. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be entitled to
the benefits of an Indenture dated as of October 1, 1996 governing the Private
Notes and the Exchange Notes (the ``Indenture''). The Private Notes and the
Exchange Notes are sometimes referred to herein collectively as the ``Notes.''
See ``The Exchange Offer'' and ``Description of the Notes.''
The Exchange Notes will be redeemable at the option of the Company, in
whole or in part, at any time on or after October 15, 2001 at the redemption
prices set forth herein plus accrued and unpaid interest, if any, to the date
of redemption. In the event of a Change of Control (as defined herein), the
Company will be obligated to make an offer to purchase all of the outstanding
Notes at a purchase price equal to 101% of the principal amount thereof plus
accrued interest to the date of purchase. In addition, the Company will be
obligated to make an offer to purchase Notes at a purchase price equal to 100%
of the principal amount thereof plus accrued interest to the date of purchase
in the event of certain asset sales. See ``Description of the Notes.''
The Exchange Notes will be senior unsecured obligations of the Company,
will rank pari passu in right of payment with the Private Notes and all other
existing and future senior unsecured obligations of the Company and will rank
senior in right of payment to any future subordinated obligations of the
Company. The Notes will be effectively subordinated to all obligations,
including trade payables, of the Company's subsidiaries. As of August 3, 1996
the aggregate amount of outstanding obligations of the Company's subsidiaries
to which the holders of the Notes will be structurally subordinated, including
trade payables, was approximately $200 million. See ``Description of Certain
Indebtedness.''
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5:00 p.m., New York City time, on December 10,
1996, unless the Exchange Offer is extended by the Company in its sole
discretion (the ``Expiration Date''). Tenders of Private Notes may be withdrawn
at any time prior to the Expiration Date. Private Notes may be tendered only in
integral multiples of $1,000. The Exchange Offer is subject to certain
customary conditions. See ``The Exchange Offer.''
SEE ``RISK FACTORS'' COMMENCING ON PAGE 14 FOR CERTAIN INFORMATION THAT
SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN INVESTMENT IN
THE EXCHANGE NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
THE DATE OF THIS PROSPECTUS IS NOVEMBER 12, 1996
<PAGE> 3
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR ANY ACCOMPANYING PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, OR ANY UNDERWRITER,
AGENT OR DEALER. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY PROSPECTUS
SUPPLEMENT NOR ANY SALE MADE THEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THEREOF. THIS PROSPECTUS AND ANY RELATED PROSPECTUS
SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
--------------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the ``Exchange Act''), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the ``SEC'' or ``Commission''). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's Regional
Offices located at Seven World Trade Center, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can be obtained from the Public
Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its public reference facilities in New York, New
York and Chicago, Illinois, at prescribed rates. The Commission maintains a Web
site (http://www.sec.gov) that contains reports, proxy information and
information statements and other information filed electronically by the
Company with the Commission through its Electronic Data Gathering, Analysis and
Retrieval (EDGAR) System. Shares of the Company's Common Stock are listed on
the New York Stock Exchange and the Chicago Stock Exchange and such reports,
proxy statements and other information also can be inspected at the office of
the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005
and The Chicago Stock Exchange, Incorporated, 440 South LaSalle Street,
Chicago, Illinois 60605.
This Prospectus constitutes a part of a registration statement on Form S-4
(together will all amendments and exhibits thereto, the ``Registration
Statement'') filed by the Company with the Commission under the Securities Act
of 1933, as amended (the ``Securities Act''), with respect to the Notes. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Reference is made to such Registration Statement
and to the exhibits relating thereto for further information with respect to
the Company and the Notes. Any statements contained herein concerning the
provisions of certain documents are not necessarily complete, and in each
instance, reference is made to the copy of such document filed as an exhibit to
the Registration Statement or otherwise filed with the Commission for a more
complete description of the matter involved. Each such statement is qualified
in its entirety by such reference.
The Indenture with respect to the Notes provides that the Company shall,
whether or not required by the rules and regulations of the Commission, file
with the Commission for public availability and provide to the Trustee copies
of all quarterly and annual reports and other information, documents and
reports specified in Sections 13 and 15(d) of the Exchange Act for so long as
the Notes are outstanding.
2
<PAGE> 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended February
3, 1996, the Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended May 4, 1996 and August 3, 1996 and the Company's Reports on Form 8-K
dated March 8, 1996, September 27, 1996, October 2, 1996 and October 21, 1996,
which have been filed by the Company with the SEC pursuant to the Exchange Act
(File No. 1-2191), are incorporated by reference into this Prospectus and shall
be deemed to be a part hereof.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14, or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the Exchange Offer made hereby shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from the
date of the filing of such documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein, in an accompanying Prospectus
Supplement or in any subsequently filed document which also is or is deemed to
be incorporated by reference herein or in any Prospectus Supplement modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed to constitute a part of this Prospectus, except as so modified or
superseded.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE FROM BROWN GROUP,
INC., ATTENTION: CORPORATE SECRETARY, 8300 MARYLAND AVENUE, ST. LOUIS, MISSOURI
63105 (TELEPHONE (314) 854-4000.) IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY DECEMBER 4, 1996.
3
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed financial information and Consolidated
Financial Statements (including the Notes thereto) included and incorporated by
reference in this Prospectus. In particular, prospective purchasers should
carefully consider the factors set forth under ``Risk Factors.'' Unless the
context otherwise requires, the ``Company'' refers to Brown Group, Inc. and its
consolidated subsidiaries. The Company's fiscal year ends on the Saturday
closest to January 31. Fiscal years are identified according to the calendar
year in which they begin. References to years in connection with the Company's
business, financial condition or results of operations refer to the Company's
fiscal years.
THE COMPANY
Brown Group, Inc., founded in 1878, is one of the nation's leading footwear
retailers and wholesalers, providing a broad offering of branded and private
label casual, athletic and dress footwear products to men, women and children
at a variety of price points through multiple distribution channels both
domestically and internationally. The Company currently operates over 1,200
retail shoe stores in the United States and Canada under the Famous Footwear,
Naturalizer(R) and F.X. LaSalle(R) names. In addition, through its Brown Shoe
Company division and Pagoda wholesale operations, the Company designs, sources
and markets footwear to over 8,000 retail stores worldwide, including
department stores, mass merchandisers and specialty shoe stores. The Company
believes that it distinguishes itself from its competitors by providing
consistent style, comfort, quality and value in its broad base of footwear
offerings. Management believes the Company has completed its managed transition
from a predominately manufacturing driven concern with multiple specialty
retail concepts into a focused marketing-oriented footwear company. The
Company's net sales and EBITDA, as adjusted, for the twelve-month period ended
August 31, 1996 were approximately $1.5 billion and approximately $62 million,
respectively. The Company's net sales for the seven-month period ended August
31, 1996 were approximately $905 million compared to approximately $848 million
for the same period in 1995. EBITDA, as adjusted, was approximately $43 million
for the first seven months of 1996 as compared to approximately $20 million in
the same period in 1995.
The Company's retail operations represented approximately 63% of its net
sales for the twelve-month period ended August 3, 1996. The Company's retail
operations are conducted primarily through 780 Famous Footwear, 450
Naturalizer(R) and 16 F.X. LaSalle(R) stores. Famous Footwear stores feature
``brand names for less'' targeted to appeal to value-oriented families and
offer a broad assortment of athletic, dress and casual shoes for men, women and
children. Naturalizer(R) stores feature the Company's highly-recognized
Naturalizer(R) brand, one of the nation's leading women's footwear brands,
which is targeted to appeal to a style and comfort conscious woman between
40-60 years old, who seeks quality and value in her footwear selections. F.X.
LaSalle(R) stores, which are located in Canada, sell fashionable, generally
higher-priced footwear products. Company-owned brands, Company-licensed
footwear and third-party brands represented 20%, 1% and 79%, respectively, of
the Company's retail sales for the twelve months ended August 3, 1996.
The Company's wholesale operations represented approximately 37% of its net
sales for the twelve-month period ended August 3, 1996. The Company's wholesale
operations are conducted primarily through its Brown Shoe Company and Pagoda
divisions. Brown Shoe Company designs and markets the Company's Naturalizer(R),
NaturalSport(R), Life Stride(R), LS Studio(TM), Night Life(R) and Larry Stuart
Collection(R) brands. Customers of the Brown Shoe Company include
Dayton-Hudson, Dillard's, Federated, the May Company, Mercantile and Nordstrom.
Pagoda designs, markets and sources branded, licensed and private label
footwear to mass merchandisers, department stores and specialty stores.
Pagoda's footwear offering includes such brands as Dr. Scholl's(R), Le Coq
Sportif(R), Buster Brown(R) and Candies(R), some of which are licensed. In
addition, Pagoda sources footwear globally for its wholesale domestic and
international customers, including the branded marketing operations of Brown
Shoe Company. Management believes that through its Pagoda division the Company
is among the largest suppliers of footwear in the United States, having sourced
approximately 70 million pairs of footwear for its customers in 1995.
Company-owned brands, Company-licensed footwear and private-label footwear
represented 39%, 34% and 27%, respectively, of the Company's wholesale sales
for the twelve months ended August 3, 1996.
4
<PAGE> 6
Beginning in the early 1980's, the Company began restructuring its
operations in response to fundamental changes in the footwear industry.
Management believes it has completed its restructurings. As part of its
restructurings the Company has:
(i) Eliminated all of its domestic manufacturing facilities and
developed global design, sourcing and marketing capabilities;
(ii) Maintained diversity in footwear distribution capabilities
through its retail formats (particularly through the rapid growth
of Famous Footwear) and expanded its domestic and international
wholesale operations;
(iii) Improved its responsiveness to shifts in consumer preferences for
updated footwear styling; and
(iv) Improved its position as one of the nation's leading retailers and
wholesalers of athletic and casual footwear products.
Since the completion of the last restructuring in late 1995, management has
focused on increasing net sales, improving gross margins and controlling
corporate and divisional expenses to increase operating profitability. In the
first six months of 1996, net sales increased 6.5% and gross profit, excluding
restructuring expenses, has improved by over $33 million from the prior year
period, primarily through better product positioning and more efficient
sourcing. In addition, for the six months ended August 3, 1996, the Company has
achieved success in leveraging its expense structure, which has contributed to
an increase in EBITDA, as adjusted, of over $16 million from the prior year
period.
Management believes there are further opportunities for improving operating
performance, including benefits to be gained from:
(i) Store maturation and concentrated operational focus at Famous
Footwear;
(ii) The ongoing repositioning of the Company's Naturalizer(R) brand
and certain other brands to higher quality and moderately higher
price points;
(iii) The continued development of new licensed footwear brands;
(iv) Increased international penetration of the Company's Pagoda
marketing operations; and
(v) Improved expense controls and distribution logistics.
The Company's principal executive offices are located at 8300 Maryland
Avenue, St. Louis, Missouri 63105, and its telephone number is (314) 854-4000.
RECENT DEVELOPMENTS
On October 7, 1996, the Company completed the sale of its Private Notes in
the aggregate principal amount of $100 million. The net proceeds to the Company
from the sale of the Private Notes of approximately $97 million were used to
pay down the Company's revolving credit facility. As a result of the completion
of the sale of its Private Notes, on October 16, 1996, the Company elected to
reduce the lenders' commitment under its revolving credit facility to $150
million from $200 million pursuant to the terms of the revolving credit
facility. Also, on October 21, 1996, the Company borrowed $5 million against
its revolving credit facility and repurchased $5 million of its outstanding
long-term debt bearing interest at 7 1/8%. See ``Description of Certain
Indebtedness.''
5
<PAGE> 7
Set forth below are certain results of operations for the months ended
August 26, 1995 and August 31, 1996 and certain pro forma results of operations
for the twelve months ended August 31, 1996, after giving effect to the
offering of the Private Notes, the application of the net proceeds therefrom
and the repurchase of $5 million of its long-term debt bearing interest at
7 1/8%. Management believes that August is generally the most profitable month
of the year, driven by the back-to-school season.
<TABLE>
<CAPTION>
PRO FORMA
MONTH MONTH TWELVE
ENDED ENDED MONTHS
AUGUST AUGUST ENDED
26, 31, AUGUST 31,
1995 1996 1996<F1>
------ ------ ----------
(4 WEEKS) (4 WEEKS) (53 WEEKS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................... $ 147,739 $ 159,701 $ 1,513,323
Gross profit, excluding restructuring
expenses<F2>.......................... 50,964 59,342 548,551
Selling and administrative expenses,
excluding restructuring expenses<F2>.. 43,455 46,808 513,580
Restructuring expenses
(income)<F2><F3>...................... (1,700) -- (9,442)
Interest expense........................ 1,175 1,251 20,356
Other (income) expense, excluding
restructuring expenses<F2>............ 26 (694) (2,002)
Earnings (loss) from continuing
operations before income taxes and
cumulative effect of accounting
changes............................... 8,008 11,977 26,059
Income tax (provision) benefit.......... (2,942) (3,673) (5,111)
Discontinued operations and effect of
accounting changes, net of income
taxes<F2>............................. -- -- 2,600
Net earnings (loss)..................... 5,066 8,304 23,548
OTHER DATA:
EBITDA<F2>.............................. 11,054 15,275 71,232
EBITDA, as adjusted<F2>................. 9,354 15,275 61,790
Total capital expenditures.............. 2,123 1,203 16,675
Total debt.............................. 209,116 211,023 214,023
Ratio of EBITDA, as adjusted, to
interest expense<F2>.................. n/a n/a 3.04x
Ratio of total debt to EBITDA, as
adjusted<F2>.......................... n/a n/a 3.46x
Ratio of total debt to capitalization... 48% 47% 47%
Ratio of net debt to capitalization<F2>. 44% 44% 45%
<FN>
n/a--not applicable
<F1> The pro forma financial data reflects the impact of borrowing $100 million
aggregate principal amount of Private Notes at an annual rate of 9 1/2% as
of the beginning of the period presented, using $97 million of the net
proceeds therefrom to repay short-term notes payable which had carried an
average interest rate of approximately 6-7% during the period presented,
and drawing $5 million against the revolving credit facility and using the
$5 million to repurchase long-term debt which had carried an interest rate
of 7 1/8%. Approximately $3 million of issuance costs related to the
Private Notes is reflected based on an amortization period of 10 years.
<F2> See the notes to Summary Consolidated Financial Data for explanations.
<F3> For the month ended August 26, 1995, restructuring related income
represented the LIFO liquidation effect of footwear manufactured in closed
domestic facilities.
</TABLE>
Performance improvements have been achieved at the Company's Brown Shoe
Company, Pagoda and Famous Footwear divisions versus the prior year periods.
The Company's backlog as of August 31, 1996 was approximately $176 million, an
increase of approximately 5% over the prior year's backlog. In addition, both
Famous Footwear and Naturalizer retail stores have posted positive comparable
store sales gains year to date.
As of August 31, 1996, the Company had 17,965,952 shares of Common Stock
outstanding and the closing price of the Company's Common Stock as reported on
the New York Stock Exchange was $19.00, thus the Company's ``equity market
capitalization'' as of August 31, 1996 was over $340 million. The price of the
Company's Common Stock on the date any Private Notes are tendered for exchange
may vary widely from the price of the Company's Common Stock on August 31,
1996, and thus the Company's equity market capitalization may also be
significantly different.
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE, RATIOS AND OPERATING DATA)
The following table sets forth Summary Consolidated Financial Data for
Brown Group, Inc. for each of the five fiscal years in the period ended
February 3, 1996, for the six months ended July 29, 1995 and August 3, 1996,
and for the twelve months ended August 3, 1996, and, on a pro forma basis
(after giving effect to the sale of the Private Notes, the application of the
net proceeds therefrom and the repurchase of $5 million of its long-term debt
bearing interest of 7 1/8%) financial data for the twelve months ended August
3, 1996, for the six months ended August 3, 1996, and for fiscal 1995. Such
information should be read in conjunction with the historical Consolidated
Financial Statements of the Company and the Notes thereto which are included
elsewhere herein and incorporated herein by reference. Summary Consolidated
Financial Data for the Company as of and for the six months ended July 29, 1995
and for the six and twelve months ended August 3, 1996 has been derived from
the unaudited historical Consolidated Financial Statements and, in the opinion
of management, includes all adjustments that are considered necessary for a
fair presentation of the financial position and results of operations for such
interim periods. Results for the interim periods are not necessarily indicative
of results for full fiscal years.
<TABLE>
<CAPTION>
FISCAL YEARS
---------------------------------------------------- PRO FORMA
1991 1992 1993 1994 1995 1995 <F12>
---- ---- ---- ---- ---- ----------
(52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS) (53 WEEKS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $1,191,591 $1,243,842 $1,361,039 $1,461,637 $1,455,896 $1,455,896
Gross profit, excluding restructuring
expenses <F1>....................... 385,501 415,011 456,642 512,263 506,881 506,881
Selling and administrative expenses,
excluding restructuring expenses <F2> 361,281 378,835 409,248 448,827 493,598 493,598
Restructuring expenses, net
<F1><F2><F3>...................... -- 22,360 45,446 -- 4,010 4,010
Interest expense...................... 15,431 16,260 17,334 15,785 15,969 18,931
Other (income), excluding
restructuring expenses <F3>......... (2,244) (5,282) (209) (12,320) (1,970) (1,970)
Earnings (loss) from continuing
operations before income taxes and
cumulative effect of accounting
changes............................. 11,033 2,838 (15,177) 59,971 (4,726) (7,688)
Income tax (provision) benefit........ (2,771) 401 5,881 (26,405) 5,423 6,549
Discontinued operations and effect of
accounting changes, net of income
taxes <F4>.......................... (4,498) 1,425 (22,316) 5,832 2,600 2,600
Net earnings (loss)................... 3,764 4,664 (31,612) 39,398 3,297 1,461
Earnings (loss) per share from
continuing operations before
accounting changes.................. 0.48 0.19 (0.54) 1.91 0.04 (0.06)
Ratio of earnings to fixed charges <F5> 1.28x 1.07x .65x 2.38x .90x .85x
OTHER DATA:
EBITDA <F6>........................... $ 48,550 $ 40,014 $ 22,009 $ 97,851 $ 35,070 $ 35,070
EBITDA, as adjusted <F6>.............. 48,550 62,374 67,455 97,851 39,080 39,080
Depreciation and amortization......... 22,086 20,916 19,852 22,095 23,827 23,827
Capital expenditures:
New stores.......................... 6,283 5,569 9,004 12,338 13,285 13,285
Remodels............................ 2,634 2,739 5,158 4,193 5,336 5,336
Other <F7>.......................... 10,985 9,188 13,045 16,000 8,318 8,318
---------- ---------- ---------- ---------- ---------- ----------
Total............................. 19,902 17,496 27,207 32,531 26,939 26,939
Ratio of EBITDA, as adjusted, to
interest expense <F8>............... 3.15x 3.84x 3.89x 6.20x 2.45x 2.06x
Ratio of total debt to EBITDA, as
adjusted <F9>....................... 3.57x 3.71x 4.29x 1.80x 5.62x 5.69x
Ratio of total debt to
capitalization...................... 36% 44% 55% 41% 49% 49%
Ratio of net debt to capitalization
<F10>............................... 33% 42% 54% 39% 44% 45%
<CAPTION>
PRO
FORMA
SIX PRO FORMA
MONTHS TWELVE TWELVE
SIX MONTHS ENDED ENDED MONTHS MONTHS
------------------ AUG. 3, ENDED ENDED
JULY 29, AUG. 3, 1996 AUG. 3, AUG. 3,
1995 1996 <F12> 1996 1996 <F12>
-------- ------- ------- ------- ----------
(26 WEEKS) (26 WEEKS) (26 WEEKS) (53 WEEKS) (53 WEEKS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $700,303 $745,768 $745,768 $1,501,361 $1,501,361
Gross profit, excluding restructuring
expenses <F1>....................... 243,076 276,368 276,368 540,173 540,173
Selling and administrative expenses,
excluding restructuring expenses <F2> 244,841 261,470 261,470 510,227 510,227
Restructuring expenses, net
<F1><F2><F3>........................ 11,122 (4,030) (4,030) (11,142) (11,142)
Interest expense...................... 7,880 9,255 10,701 17,344 20,319
Other (income), excluding
restructuring expenses <F3>......... (828) (140) (140) (1,282) (1,282)
Earnings (loss) from continuing
operations before income taxes and
cumulative effect of accounting
changes............................. (19,939) 9,813 8,367 25,026 22,051
Income tax (provision) benefit........ 7,147 (3,772) (3,223) (5,496) (4,365)
Discontinued operations and effect of
accounting changes, net of income
taxes <F4>.......................... -- -- -- 2,600 2,600
Net earnings (loss)................... (12,792) 6,041 5,144 22,130 20,286
Earnings (loss) per share from
continuing operations before
accounting changes.................. (0.73) 0.34 0.29 1.11 1.00
Ratio of earnings to fixed charges
<F5>................................ .21x 1.37x 1.30x 1.51x 1.42x
OTHER DATA:
EBITDA <F6>........................... $ (62) $ 31,879 $ 31,879 $ 67,011 $ 67,011
EBITDA, as adjusted <F6>.............. 11,060 27,849 27,849 55,869 55,869
Depreciation and amortization......... 11,997 12,811 12,811 24,641 24,641
Capital expenditures:
New stores.......................... 8,914 2,707 2,707 7,078 7,078
Remodels............................ 2,743 3,611 3,611 6,204 6,204
Other <F7>.......................... 5,502 1,497 1,497 4,313 4,313
-------- -------- -------- ---------- ----------
Total............................. 17,159 7,815 7,815 17,595 17,595
Ratio of EBITDA, as adjusted, to
interest expense <F8>............... n/a n/a n/a 3.22x 2.75x
Ratio of total debt to EBITDA, as
adjusted <F9>....................... n/a n/a n/a 4.06x 4.12x
Ratio of total debt to
capitalization...................... 47% 50% 50% 50% 50%
Ratio of net debt to capitalization
<F10>............................... 44% 45% 46% 45% 46%
(continued on next page)
7
<PAGE> 9
<CAPTION>
FISCAL YEARS
---------------------------------------------------- PRO FORMA
1991 1992 1993 1994 1995 1995 <F12>
---- ---- ---- ---- ---- ----------
(52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS) (53 WEEKS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Same-store sales increase (decrease):
<F11>
Famous Footwear..................... 4.2% 13.4% 9.3% 3.3% (3.0%) (3.0%)
Naturalizer......................... 6.1% (0.4%) 1.6% (0.3%) (4.0%) (4.0%)
Canada.............................. (6.1%) 3.0% 6.8% 11.2% (0.6%) (0.6%)
Number of retail stores (at period
end):
Famous Footwear..................... 353 477 567 722 814 814
Naturalizer (U.S. and Canada)....... 457 431 450 418 409 409
Other............................... 279 189 135 18 18 18
---------- ---------- ---------- ---------- ---------- ----------
Total............................. 1,089 1,097 1,152 1,158 1,241 1,241
Number of wholesale pairs sourced or
manufactured (millions)............. 75 89 94 93 76 76
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents............. $ 18,683 $ 21,625 $ 16,892 $ 18,922 $ 35,058 $ 35,058
Working capital....................... 297,239 262,611 240,554 259,178 209,399 306,399
Total assets.......................... 654,696 705,165 739,930 636,515 661,056 661,056
Long-term debt (including current
maturities)......................... 158,809 219,889 143,033 135,276 107,470 207,470
Shareholders' equity.................. 313,387 288,988 233,863 249,727 231,636 229,800
<CAPTION>
PRO
FORMA
SIX PRO FORMA
MONTHS TWELVE TWELVE
SIX MONTHS ENDED ENDED MONTHS MONTHS
------------------ AUG. 3, ENDED ENDED
JULY 29, AUG. 3, 1996 AUG. 3, AUG. 3,
1995 1996 <F12> 1996 1996 <F12>
-------- ------- ------- ------- ----------
(26 WEEKS) (26 WEEKS) (26 WEEKS) (53 WEEKS) (53 WEEKS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Same-store sales increase (decrease):
<F11>
Famous Footwear..................... (0.6%) 0.1% 0.1% n/a n/a
Naturalizer......................... (3.5%) 2.1% 2.1% n/a n/a
Canada.............................. 1.0% 8.8% 8.8% n/a n/a
Number of retail stores (at period
end):
Famous Footwear..................... 797 787 787 787 787
Naturalizer (U.S. and Canada)....... 420 449 449 449 449
Other............................... 18 19 19 19 19
-------- -------- -------- -------- --------
Total............................. 1,235 1,255 1,255 1,255 1,255
Number of wholesale pairs sourced or
manufactured (millions)............. 41 41 41 76 76
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents............. $ 23,016 $ 35,120 $ 35,120 $ 35,120 $ 35,120
Working capital....................... 161,855 206,429 298,429 206,429 298,429
Total assets.......................... 679,701 718,913 718,913 718,913 718,913
Long-term debt (including current
maturities)......................... 110,230 106,022 201,022 106,022 201,022
Shareholders' equity.................. 224,418 230,120 229,223 230,120 228,276
<FN>
- --------------
n/a--not applicable
<F1> Restructuring expenses (income) excluded from gross profit are as
follows:
<CAPTION>
FISCAL YEARS PRO
------------------------------------------------ FORMA
1991 1992 1993 1994 1995 1995
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Gross profit, as reported......................... $385,501 $409,251 $445,596 $512,263 $506,971 $506,971
Restructuring expenses (income)
Inventory markdowns............................. -- 5,760 13,346 -- 2,000 2,000
Termination benefits............................ -- -- 3,100 -- 8,068 8,068
LIFO liquidation................................ -- -- (5,400) -- (10,158) (10,158)
-------- -------- -------- -------- -------- --------
Gross profit excluding restructuring expenses..... $385,501 $415,011 $456,642 $512,263 $506,881 $506,881
======== ======== ======== ======== ======== ========
<CAPTION>
PRO PRO
FORMA FORMA
SIX TWELVE TWELVE
SIX MONTHS ENDED MONTHS MONTHS MONTHS
------------------ ENDED ENDED ENDED
JULY 29, AUG. 3, AUG. 3, AUG. 3, AUG. 3,
1995 1996 1996 1996 1996
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Gross profit, as reported......................... $236,704 $280,398 $280,398 $550,665 $550,665
Restructuring expenses (income)
Inventory markdowns............................. 2,000 -- -- -- --
Termination benefits............................ 8,068 -- -- -- --
LIFO liquidation................................ (3,696) (4,030) (4,030) (10,492) (10,492)
-------- -------- -------- -------- --------
Gross profit excluding restructuring expenses..... $243,076 $276,368 $276,368 $540,173 $540,173
======== ======== ======== ======== ========
<F2> Restructuring expenses excluded from selling and administrative expenses
are $3.0 million related to severance benefits in 1992; $13.0 million in
1993 consisting of $4.9 million in severance benefits, $1.0 million in
accounts receivable provision, and $7.1 million in lease buyouts; $0.5
million in 1995 consisting of severance benefits and $0.5 million for the
six months ended July 29, 1995 related to severance benefits.
<F3> Other Income primarily includes interest and royalty income, and in 1994
recovery of an accrual for countervailing duties on footwear imported
from Brazil. Restructuring expenses excluded from Other Income are $13.6
million, $21.4 million, and $3.6 million in 1992, 1993, and 1995,
respectively, and $4.2 million for the six months ended July 29, 1995.
Such charges were primarily related to fixed asset write-offs, and to a
lesser extent, environmental monitoring costs.
<F4> Net amounts presented consist of earnings from discontinued operations,
cumulative effect of changes in accounting for postemployment benefits in
1993 and postretirement benefits and income taxes in 1991, and disposal
of discontinued operations. See Consolidated Financial Statements.
<F5> The ratio of earnings to fixed charges is computed by dividing fixed
charges into earnings from continuing operations before income taxes and
the effect of accounting changes and discontinued operations plus fixed
charges. Fixed charges include interest, expensed or capitalized,
amortization of debt issuance costs and the estimated interest component
of rent expense. For years 1993, 1995, pro forma 1995 and for the six
months ended July 29, 1995, pre-tax earnings, before fixed charges, were
insufficient to cover fixed charges by $15.2 million, $4.7 million, $7.7
million and $19.9 million, respectively.
(continued on next page)
8
<PAGE> 10
<F6> EBITDA as presented herein represents net earnings before interest
expense, income taxes, depreciation and amortization, the effect of
accounting changes and discontinued operations. EBITDA, as adjusted,
reflects EBITDA before restructuring expenses, net. EBITDA and EBITDA, as
adjusted, are included herein because management believes that certain
investors may find them to be useful tools of measuring a company's
ability to service its debt; however, neither EBITDA nor EBITDA, as
adjusted, represents cash flow from operations, as defined by generally
accepted accounting principles, and should not be considered as a
substitute for net earnings as an indicator of the Company's operating
performance or cash flow as a measure of liquidity. The components of
EBITDA and EBITDA, as adjusted, are as follows:
<CAPTION>
PRO
FISCAL YEARS FORMA
-------------------------------------------- 1995
1991 1992 1993 1994 1995 <F12>
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss)..................... $ 3,764 $ 4,664 $(31,612) $39,398 $ 3,297 $ 1,461
Discontinued operations and effect of
accounting changes, net of income
taxes.................................. 4,498 (1,425) 22,316 (5,832) (2,600) (2,600)
Income taxes............................ 2,771 (401) (5,881) 26,405 (5,423) (6,549)
Interest expense........................ 15,431 16,260 17,334 15,785 15,969 18,931
Depreciation and amortization........... 22,086 20,916 19,852 22,095 23,827 23,827
------- ------- -------- ------- ------- -------
EBITDA................................ 48,550 40,014 22,009 97,851 35,070 35,070
Restructuring expenses, net............. -- 22,360 45,446 -- 4,010 4,010
------- ------- -------- ------- ------- -------
EBITDA, as adjusted................... $48,550 $62,374 $ 67,455 $97,851 $39,080 $39,080
======= ======= ======== ======= ======= =======
<CAPTION>
PRO PRO
FORMA FORMA
SIX TWELVE
SIX MONTHS ENDED MONTHS TWELVE MONTHS
---------------- ENDED MONTHS ENDED
JULY AUG. 3, ENDED AUG. 3,
29, AUG. 3, 1996 AUG. 3, 1996
1995 1996 <F12> 1996 <F12>
---- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net earnings (loss)..................... $(12,792) $ 6,041 $ 5,144 $22,130 $20,286
Discontinued operations and effect of
accounting changes, net of income
taxes.................................. -- -- -- (2,600) (2,600)
Income taxes............................ (7,147) 3,772 3,223 5,496 4,365
Interest expense........................ 7,880 9,255 10,701 17,344 20,319
Depreciation and amortization........... 11,997 12,811 12,811 24,641 24,641
-------- ------- ------- ------- -------
EBITDA................................ (62) 31,879 31,879 67,011 67,011
Restructuring expenses, net............. 11,122 (4,030) (4,030) (11,142) (11,142)
-------- ------- ------- ------- -------
EBITDA, as adjusted................... $ 11,060 $27,849 $27,849 $55,869 $55,869
======== ======= ======= ======= =======
<F7> ``Other'' capital expenditures include expenditures for the Company's
warehouses and distribution centers, manufacturing plants, offices, and
computers and related equipment.
<F8> Represents the ratio of EBITDA, as adjusted, (see note (6) above), to
interest expense. Management believes that the ratio of EBITDA, as
adjusted, to interest expense is an accepted measure of debt service
ability; however, such ratio should not be considered a substitute for
the ratio of earnings to fixed charges as a measure of debt service
ability.
<F9> Total debt includes short-term notes payable, long-term debt, current
maturities thereon, and capitalized lease obligations.
<F10> Net debt consists of total debt less cash and cash equivalents.
<F11> The same-store sales increase percent reflects the change in sales of
stores open in the current and prior comparable period. The same-store
sales increase in the 53-week period of fiscal 1995 and the twelve months
ended August 3, 1996 were calculated on a comparable 52-week basis.
<F12> The pro forma financial data reflects the impact of borrowing $100
million aggregate principal amount of Private Notes at an annual rate of
9 1/2% as of the beginning of the period presented, using $97 million of
the net proceeds therefrom to repay short-term notes payable which had
carried an average interest rate of approximately 6-7% during the period
presented, and drawing $5 million against the revolving credit facility
and using the $5 million to repurchase long-term debt which had carried
an interest rate of 7 1/8%. Approximately $3 million of issuance costs
related to the Private Notes is reflected based on an amortization period
of 10 years.
</TABLE>
9
<PAGE> 11
<TABLE>
THE EXCHANGE OFFER
<S> <C>
THE EXCHANGE OFFER...................... The Company is hereby offering to exchange $1,000 principal
amount of Exchange Notes for each $1,000 principal amount of
Private Notes that are properly tendered and accepted. The
Company will issue Exchange Notes on or as promptly as
practicable after the Expiration Date. As of the date hereof,
there is $100,000,000 aggregate principal amount of Private
Notes outstanding. See ``The Exchange Offer.''
Based on interpretations by the staff of the Commission set
forth in no-action letters issued to third parties, the Company
believes that the Exchange Notes issued pursuant to the Exchange
Offer in exchange for Private Notes may be offered for resale,
resold and otherwise transferred by a holder thereof without
compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that the holder is
acquiring Exchange Notes in the ordinary course of its business,
is not participating and has no arrangement or understanding
with any person to participate in the distribution of the
Exchange Notes and is not an ``affiliate'' of the Company within
the meaning of Rule 405 under the Securities Act. Each
broker-dealer who holds Private Notes acquired for its own
account as a result of market-making or other trading activities
and who receives Exchange Notes pursuant to the Exchange Offer
for its own account in exchange therefor must acknowledge that
it will deliver a prospectus in connection with any resale of
such Exchange Notes.
This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with
resales of Exchange Notes received in exchange for Private Notes
acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Letter of
Transmittal that accompanies this Prospectus states that by so
acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an ``underwriter'' within
the meaning of the Securities Act. Any holder of Private Notes
who tenders in the Exchange Offer with the intention to
participate, or for the purpose of participating, in a
distribution of the Exchange Notes could not rely on the
above-referenced position of the staff of the Commission and, in
the absence of an exemption therefrom, would have to comply with
the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
Failure to comply with such requirements in such instance could
result in such holder incurring liability under the Securities
Act for which the holder is not indemnified by the Company. See
``The Exchange Offer--Resale of the Exchange Notes.''
REGISTRATION RIGHTS AGREEMENT........... The Private Notes were sold by the Company on October 7, 1996 to
Smith Barney Inc., First Chicago Capital Markets, Inc. and
Dillon, Read & Co. Inc. (collectively, the ``Initial
Purchasers'') pursuant to a Purchase Agreement, dated October 1,
1996, by and among the Company and the Initial Purchasers (the
``Purchase Agreement''). Pursuant to the Purchase Agreement, the
Company and the Initial Purchasers entered into a Registration
Rights Agreement, dated as of October 7, 1996 (the
``Registration Rights Agreement''), which grants
10
<PAGE> 12
the holders of the Private Notes certain exchange and
registration rights. The Exchange Offer is intended to satisfy
such rights, which will terminate upon the consummation of the
Exchange Offer. The holders of the Exchange Notes will not be
entitled to any exchange or registration rights with respect to
the Exchange Notes. See ``The Exchange Offer--Termination of
Certain Rights.'' The Company will not receive any proceeds
from, and has agreed to bear the expenses of, the Exchange
Offer.
EXPIRATION DATE......................... The Exchange Offer will expire at 5:00 p.m., New York City time,
on December 10, 1996, unless the Exchange Offer is extended
by the Company in its sole discretion, in which case the term
``Expiration Date'' shall mean the latest date and time to which
the Exchange Offer is extended. See ``The Exchange
Offer--Expiration Date; Extensions; Amendments.''
PROCEDURES FOR TENDERING
PRIVATE NOTES......................... Each holder of Private Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of Transmittal, or
a facsimile thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together with such
Private Notes and any other required documentation to State
Street Bank and Trust Company, as exchange agent (the ``Exchange
Agent''), at the address set forth herein. By executing the
Letter of Transmittal, the holder will represent to and agree
with the Company that, among other things, (i) the Exchange
Notes to be acquired by such holder of Private Notes in
connection with the Exchange Offer are being acquired by such
holder in the ordinary course of its business, (ii) such holder
has no arrangement or understanding with any person to
participate in a distribution of the Exchange Notes, and (iii)
such holder is not an ``affiliate,'' as defined in Rule 405
under the Securities Act, of the Company. If the holder is a
broker-dealer that will receive Exchange Notes for its own
account in exchange for Private Notes that were acquired as a
result of market-making or other trading activities, such holder
will be required to acknowledge in the Letter of Transmittal
that such holder will deliver a prospectus in connection with
any resale of such Exchange Notes; however, by so acknowledging
and by delivering a prospectus, such holder will not be deemed
to admit that it is an ``underwriter'' within the meaning of the
Securities Act. See ``The Exchange Offer--Procedures for
Tendering.''
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS..................... Any beneficial owner whose Private Notes are registered in the
name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender such Private Notes in the
Exchange Offer should contact such registered holder promptly
and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on
such owner's own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and delivering such
owner's Private Notes, either make appropriate arrangements to
register ownership of the Private Notes in such owner's name or
obtain a properly completed bond power from the registered
holder. The transfer of registered ownership may take
considerable time and may not be able to be completed prior to
11
<PAGE> 13
the Expiration Date. See ``The Exchange Offer--Procedures for
Tendering.''
GUARANTEED DELIVERY PROCEDURES.......... Holders of Private Notes who wish to tender their Private Notes
and whose Private Notes are not immediately available or who
cannot deliver their Private Notes, the Letter of Transmittal or
any other documentation required by the Letter of Transmittal to
the Exchange Agent prior to the Expiration Date must tender
their Private Notes according to the guaranteed delivery
procedures set forth under ``The Exchange Offer--Guaranteed
Delivery Procedures.''
ACCEPTANCE OF THE PRIVATE NOTES AND
DELIVERY OF THE EXCHANGE NOTES........ Subject to the satisfaction or waiver of the conditions to the
Exchange Offer, the Company will accept for exchange any and all
Private Notes that are properly tendered in the Exchange Offer
prior to the Expiration Date. The Exchange Notes issued pursuant
to the Exchange Offer will be delivered on the earliest
practicable date following the Expiration Date. See ``The
Exchange Offer--Terms of the Exchange Offer.''
WITHDRAWAL RIGHTS....................... Tenders of Private Notes may be withdrawn at any time prior to
the Expiration Date. See ``The Exchange Offer--Withdrawal of
Tenders.''
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS........................ For a discussion of certain federal income tax considerations
relating to the exchange of the Exchange Notes for the Private
Notes, see ``Certain Federal Income Tax Considerations.''
EXCHANGE AGENT.......................... State Street Bank and Trust Company is serving as the Exchange
Agent in connection with the Exchange Offer. State Street Bank
and Trust Company also serves as trustee under the Indenture.
</TABLE>
THE NOTES
The Exchange Offer applies to $100,000,000 aggregate principal amount of
the Private Notes. The form and terms of the Exchange Notes are identical in
all material respects to the form and terms of the Private Notes except that
the Exchange Notes will not bear legends restricting the transfer thereof and
holders of the Exchange Notes will not be entitled to any of the registration
rights of holders of the Private Notes under the Registration Rights Agreement,
which rights will terminate upon consummation of the Exchange Offer. The
Exchange Notes will evidence the same indebtedness as the Private Notes (which
they replace) and will be issued under, and be entitled to the benefits of, the
Indenture. For further information and for definitions of certain capitalized
terms used below, see ``Description of the Notes.''
<TABLE>
<S> <C>
NOTES................................... $100,000,000 principal amount of 9 1/2% Senior Notes due October
15, 2006.
MATURITY DATE........................... October 15, 2006.
INTEREST PAYMENT DATES.................. April 15 and October 15 of each year, commencing April 15, 1997.
RANKING................................. The Notes are senior unsecured obligations of the Company, rank
pari passu in right of payment with all existing and future
senior unsecured indebtedness of the Company and senior to all
future indebtedness of the Company that is expressly
subordinated in right of payment to the Notes. As of August 3,
1996, the Company had approximately $227 million of outstanding
indebtedness, all of which was senior indebtedness. In addition,
the Company had available $79 million of undrawn borrowings
under its short-term revolving credit facility.
12
<PAGE> 14
OPTIONAL REDEMPTION..................... The Notes are not redeemable at the Company's option prior to
October 15, 2001. Thereafter, the Notes will be redeemable, in
whole or in part, at the option of the Company, at the
redemption prices set forth herein plus accrued interest to the
date of redemption. See ``Description of the Notes--Optional
Redemption.''
CHANGE OF CONTROL....................... In the event of a Change of Control (as defined under
``Description of the Notes''), the Company will be obligated to
make an offer to purchase all of the outstanding Notes at a
redemption price of 101% of the principal amount thereof plus
accrued interest to the date of purchase. See ``Description of
the Notes--Certain Covenants--Change of Control.''
OFFER TO PURCHASE....................... The Company will be required in certain circumstances to make an
offer to purchase Notes, at a purchase price equal to 100% of
the principal amount thereof plus accrued interest to the date
of purchase with the net cash proceeds of certain asset sales.
See ``Description of the Notes--Certain Covenants--Disposition
of Proceeds of Asset Sales.''
CERTAIN COVENANTS....................... The Indenture contains covenants including, but not limited to,
covenants with respect to limitations on the following matters:
(i) the incurrence of additional indebtedness, (ii) restricted
payments, (iii) the creation of liens, (iv) mergers and
consolidations, (v) the sale of assets and subsidiary stock,
(vi) the issuance of preferred stock by subsidiaries, (vii)
transactions with affiliates, (viii) payment restrictions
affecting subsidiaries and (ix) sales and leaseback
transactions. See ``Description of the Notes--Certain
Covenants.'' The Indenture also provides that during any period
of time (i) the ratings assigned to the Notes by both Moody's
and S&P (each as defined under ``Description of the Notes'') are
equal to or higher than Baa3 and BBB or the equivalents thereof,
respectively, and (ii) no Event of Default or Default (each as
defined under ``Description of the Notes'') has occurred and is
continuing, the Company and its Subsidiaries (as defined under
``Description of the Notes'') will not be subject to certain of
the above-referenced covenants.
BOOK-ENTRY, DELIVERY AND FORM........... It is expected that delivery of the Exchange Notes will be made
in book-entry or certificated form. The Company expects that the
Exchange Notes exchanged for Private Notes currently represented
by the Global Notes (as defined under "Description of the Notes")
deposited with, or on behalf of, The Depository Trust Company
(the ``Depository'') and registered in its name or in the name of
Cede & Co., its nominee, will be represented by Global Notes and
deposited upon issuance with the Depository and registered in its
name or the name of its nominee. Beneficial interests in the
Global Note(s) representing the Notes will be shown on, and
transfers thereof will be effected through, records maintained by
the Depository and its participants.
</TABLE>
For additional information regarding the Notes, see ``Description of the
Notes'' and ``Certain United States Federal Income Tax Considerations.''
RISK FACTORS
Prospective investors should carefully consider the matters set forth under
``Risk Factors'' on pages 14 through 17.
13
<PAGE> 15
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered in evaluating the Company
and its businesses before deciding to surrender Private Notes in exchange for
Exchange Notes pursuant to the Exchange Offer. In particular, note that this
Prospectus contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 and that actual results could
differ materially from those contemplated by such statements. The
considerations listed below represent certain important factors the Company
believes could cause such results to differ. These considerations are not
intended to represent a complete list of the general or specific risks that may
affect the Company. It should be recognized that other risks may be
significant, presently or in the future, and the risks set forth below may
affect the Company to a greater extent than indicated.
SHIFT OF FOCUS IN BUSINESS STRATEGY; IMPACT OF RESTRUCTURING
During 1995, the Company completed a series of restructuring programs which
resulted in a shift in its retail focus from leased footwear departments in
department stores to branded footwear stores in strip centers, regional malls
and outlet centers and a shift in its wholesaling focus from manufacturing to
marketing and foreign sourcing. During the restructuring process, the Company
closed a number of retail stores and all of its domestic manufacturing
facilities, divested itself of a number of non-core businesses and reduced
staff levels throughout the Company. The Company also invested substantially in
the Famous Footwear chain of retail stores and expanded the Company's worldwide
footwear sourcing and marketing organization. The Company has not completed a
full fiscal year since the conclusion of the restructuring, and there can be no
assurance that the Company's restructuring programs will have a favorable
impact on the Company's long term business, financial condition or results of
operations.
COMPETITION; CHANGES IN CONSUMER PREFERENCES
Competition is intense in the footwear industry. Certain of the Company's
competitors are larger and have substantially greater resources than the
Company. The Company's success depends upon its ability to remain competitive
in the areas of style, price and quality, among others. The Company's success
also depends in part on its ability to anticipate and respond to changing
merchandise trends and consumer preferences and demands in a timely manner.
Accordingly, any failure by the Company to anticipate and respond to changing
merchandise trends could materially adversely affect consumer acceptance of the
Company's brand names and product lines, which in turn could materially
adversely affect the Company's business, financial condition or results of
operations.
Furthermore, consumer preferences and purchasing patterns may be influenced
by consumers' disposable income. Consequently, the success of the Company's
operations may depend to a significant extent upon a number of factors
affecting disposable income, including economic conditions and factors such as
employment, business conditions, interest rates and taxation. There can be no
assurance that the Company's business, financial condition or results of
operations will not be materially adversely affected by changes in consumer
spending or economic conditions.
RELIANCE ON FOREIGN SOURCES OF PRODUCTION
The Company relies entirely on broad-based foreign sourcing for its
footwear products. The Company sources footwear products from independent
third-party manufacturing facilities located in China, Indonesia, Brazil, and
to a lesser extent from Italy, Taiwan and two Company-owned manufacturing
facilities in Canada. Typically, the Company is a major, and in some cases the
exclusive, customer of these third-party manufacturing facilities. The Company
believes that its relationships with such third-party manufacturing facilities
provide it with a competitive advantage; thus the Company's future results will
partly depend on maintaining its close working relationships with its principal
manufacturers. If the Company's relationship with any of its principal
manufacturers materially deteriorate, there can be no assurance that such
deterioration will not have a material adverse effect on the Company's
business, financial condition or results of operations.
The Company relies heavily on independent third-party manufacturing
facilities located in China. In 1995, the Company sourced approximately 45
million pairs of shoes from China, which represented approximately 65% of total
footwear sourced by the Company. Historically, the trade relationship between
the United States and China has not had a material adverse effect on the
Company's business, financial condition or results of operations. There have
14
<PAGE> 16
been, however, and may in the future be, threats to the trade relationship
between the United States and China, including past and future threats by the
United States to deny Most Favored Nation trade status to China. There can be
no assurance that the trade relationship between the United States and China
will not worsen, and if it does worsen, there can be no assurance that the
Company's business, financial condition or results of operations will not be
materially adversely affected thereby. Further, the Company cannot predict the
effect that changes in the economic and political conditions in China could
have on the economics of doing business with Chinese manufacturers,
particularly in light of the return of Hong Kong to China on July 1, 1997.
Although the Company believes that it could find alternative manufacturing
sources for those products it currently sources from China through its existing
relationships with independent third-party manufacturing facilities, the loss
of a substantial portion of its Chinese manufacturing capacity could have a
material adverse effect on the Company's business, financial condition or
results of operations while transitioning to alternative independent
third-party manufacturing facilities.
As is common in the industry, the Company does not have any long-term
contracts with its independent third-party foreign manufacturers. There can be
no assurance that the Company will not experience difficulties with such
manufacturers, including reduction in the availability of production capacity,
failure to meet production deadlines, or increases in manufacturing costs.
Foreign manufacturing is subject to a number of risks, including work
stoppages, transportation delays and interruptions, political instability,
expropriation, nationalization, foreign currency fluctuations, changing
economic conditions, the imposition of tariffs, import and export controls and
other non-tariff barriers and changes in governmental policies. Any of these
events could have a material adverse effect on the Company's business,
financial condition or results of operations. Although the Company purchases
products from certain foreign manufacturers in United States dollars and
otherwise engages in foreign currency hedging transactions, there can be no
assurance that the Company will not experience foreign currency losses. The
Company cannot predict whether additional United States or foreign customs
quotas, duties, taxes or other charges or restrictions will be imposed upon the
importation of non-domestically produced products in the future or what effect
such actions could have on its business, financial condition or results of
operations.
CUSTOMER CONCENTRATION
The customers of the Company's wholesaling business include department
stores and mass merchandisers. The Company's eight largest customers accounted
for approximately 20% of the Company's net sales in 1995, with the largest
customer accounting for approximately 7%. Several of the Company's customers
control more than one department store and/or mass merchandiser chain. While
the Company believes that purchasing decisions in many cases are made
independently by each department store or mass merchandiser chain under such
common ownership, the trend may be towards more centralized purchasing
decisions. A decision by the controlling owner of a group of department stores
and/or mass merchandisers, or any other significant customer, to decrease the
amount of footwear products purchased from the Company could have a material
adverse effect on the Company's business, financial condition or results of
operations.
The retail industry has periodically experienced consolidation and other
ownership changes, and in the future the Company's wholesale customers may
consolidate, restructure, reorganize or realign, any of which could decrease
the number of stores that carry the Company's products and could have a
material adverse effect on the Company's business, financial condition or
results of operations.
DEPENDENCE ON LICENSES
The success of the Company's Pagoda division has to date been due, in part,
to the Company's ability to attract licensors which have strong,
well-recognized characters and trademarks. The Company's license agreements are
generally for an initial term of two to three years, subject to renewal, but
even where the Company has longer term licenses or has an option to renew a
license, such license is dependent upon the Company achieving certain results
in marketing the licensed material. In 1995, the Company had approximately 20
licensors and approximately 13% of the Company's net sales were of licensed
products. The largest licensor accounted for approximately 5% of the Company's
net sales in 1995, and the five largest licensors accounted for approximately
11% of net sales. While the Company believes that its relationships with its
existing licensors are good and it believes that it will be able to renew its
existing licenses and obtain new licenses in the future, there can be no
assurance that the Company will be able to renew its current licenses or obtain
new licenses to replace lost licenses. To the extent that the Company cannot
renew existing or obtain new licenses, the Company's business, financial
condition or results of operations could be
15
<PAGE> 17
materially adversely affected. In addition, certain of the Company's license
agreements are not exclusive and new or existing competitors may obtain similar
licenses.
DEPENDENCE ON MAJOR BRANDED SUPPLIERS
The Company's Famous Footwear retail business purchased a substantial
portion of its footwear products in 1995 from its ten largest suppliers, and in
1995 approximately 45% of the Company's net sales were from products purchased
from independent branded suppliers. While the Company believes that its
relationship with its existing suppliers is good, the loss of any of its major
suppliers could have a material adverse effect on the Company's business,
financial condition or results of operations. As is common in the industry, the
Company does not have any long-term contracts with its suppliers. In addition,
the Company's financial performance is in part dependent on the ability of
Famous Footwear to obtain product from its suppliers on a timely basis and on
acceptable terms. If Famous Footwear is unable to maintain acceptable terms
with its suppliers, its business, financial condition or results of operations
could be materially adversely affected.
SEASONALITY
The Company's business has been and is expected to be seasonal, due to
consumer spending patterns and higher back-to-school, Easter and holiday season
sales. Traditionally, the third fiscal quarter accounts for a substantial
portion of the Company's operating profits for the year. Due to the seasonality
of the Company's business, the Company's results for interim periods are not
necessarily indicative of its results for the year.
STRUCTURAL SUBORDINATION
The Company conducts a portion of its business through subsidiaries. As a
result of this structure, the creditors of the Company, including any holders
of Notes, will effectively rank junior to all creditors of the Company's
subsidiaries, notwithstanding that the Notes are senior obligations of the
Company. As of August 3, 1996, the aggregate amount of obligations of the
Company's subsidiaries to which the holders of the Notes would be structurally
subordinated was approximately $200 million and the aggregate assets of these
subsidiaries totalled approximately $550 million. These obligations consisted
of trade payables and accrued expenses and no Indebtedness (as defined in
``Description of the Notes'').
LEVERAGE
As of October 25, 1996, the Company had approximately $247.1 million of
senior debt outstanding, including $100.0 million aggregate principal amount of
Private Notes. In addition, the Company had available approximately $104.0
million of undrawn borrowings under its short-term revolving credit facility
and no outstanding subordinated indebtedness. The Company's trailing twelve
month ratio of total debt to earnings before interest expense, income taxes,
depreciation and amortization, restructuring related expenses, and the effect
of accounting changes and discontinued operations (EBITDA, as adjusted), as of
August 3, 1996, on a pro forma basis, after giving effect to the offering of
the Private Notes and the application of the net proceeds therefrom, was
4.12-to-1. The Company's pre-tax earnings, before fixed charges, were
insufficient to cover fixed charges by approximately $15.2 million. $4.7
million and $7.7 million for the years 1993, 1995 and pro forma 1995,
respectively, when extensive restructuring activities were carried out. A
portion of the Company's cash flow from operations will be dedicated to debt
service, thereby reducing funds available for operations, and the indebtedness
and the restrictive covenants to which the Company is subject under the terms
of its indebtedness may make the Company more vulnerable to economic downturns,
may hinder its ability to execute its growth strategy, may reduce its
flexibility to respond to changing business conditions and may limit its
ability to withstand competitive pressures.
The Company's ability to generate sufficient cash to meet its debt service
obligations, including interest payments on the Notes, will depend on its
future operating performance, which will be subject, in part, to factors beyond
its control, including prevailing economic conditions and financial, business
and other factors. While the Company believes that cash flow from operations
will be adequate to meet its debt service obligations for the foreseeable
future, there can be no assurance that the Company will generate cash in
sufficient amounts. In the event the Company's operating cash flow is not
sufficient to fund the Company's expenditures or service its debt, including
16
<PAGE> 18
the Notes, the Company may be required to raise additional financing. There can
be no assurance that the Company will be able to obtain any such additional
financing.
In order to support its importing operations, the Company maintains
uncommitted bank letter of credit facilities with financial institutions with
whom the Company has had longstanding relationships. The Company has maintained
a similar financing structure for over 20 years. While the Company does not
anticipate that its banks would adversely modify or withdraw the existing
letter of credit structure, there can be no assurance that the banks will not
do so. To the extent that such facilities are withdrawn or otherwise modified
in a manner adverse to the Company, there could be a materially adverse effect
on the Company's business, financial condition or results of operations.
NO PRIOR PUBLIC MARKET FOR EXCHANGE NOTES; POSSIBLE VOLATILITY OF MARKET PRICE
OF EXCHANGE NOTES
The NASD has designated the Private Notes as securities eligible for
trading in the PORTAL market of the NASD. However, the Exchange Notes are new
securities for which there is currently no market. While the Company intends to
apply for listing of the Exchange Notes on the New York Stock Exchange, there
can be no assurance that an active trading market for the Exchange Notes will
develop or if such market develops, as to the liquidity or sustainability of
any such market. Historically, the market for non-investment grade debt has
been subject to disruptions that have caused substantial volatility in the
prices of securities similar to the Exchange Notes. There can be no assurance
that, if a market for the Exchange Notes were to develop, such a market would
not be subject to similar disruptions.
FAILURE TO EXCHANGE PRIVATE NOTES
The Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documentation. Therefore, holders of Private Notes desiring to tender such
Private Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Company is under any
duty to give notification of defects or irregularities with respect to tenders
of Private Notes for exchange. Private Notes that are not tendered or are
tendered but not accepted will, following consummation of the Exchange Offer,
continue to be subject to the existing restrictions upon transfer thereof. In
addition, any holder of Private Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes will be
required to comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction. Each
broker-dealer who holds Private Notes acquired for its own account as a result
of market-making or other trading activities and who receives Exchange Notes
for its own account in exchange for such Private Notes pursuant to the Exchange
Offer, must acknowledge that it will deliver a prospectus in connection with
any resale of such Exchange Notes. To the extent that Private Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Private Notes could be adversely affected due to
the limited amount, or ``float,'' of the Private Notes that are expected to
remain outstanding following the Exchange Offer. Generally, a lower ``float''
of a security could result in less demand to purchase such security and could,
therefore, result in lower prices for such security. For the same reason, to
the extent that a large amount of Private Notes are not tendered or are
tendered and not accepted in the Exchange Offer, the trading market for the
Exchange Notes could be adversely affected. See ``Plan of Distribution'' and
``The Exchange Offer.''
17
<PAGE> 19
NO CASH PROCEEDS TO THE COMPANY
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the Exchange Notes offered hereby and has
agreed to pay the expenses of the Exchange Offer. In consideration for issuing
the Exchange Notes as contemplated in this Prospectus, the Company will
receive, in exchange, Private Notes in like principal amount. The form and
terms of the Exchange Notes are identical in all material respects to the form
and terms of the Private Notes, except as otherwise described herein under
``The Exchange Offer--Terms of the Exchange Offer.'' The Private Notes
surrendered in exchange for the Exchange Notes will be retired and cancelled
and cannot be reissued. Accordingly, issuance of the Exchange Notes will not
result in any increase in the outstanding debt of the Company.
DIVIDEND POLICY
The Company has paid quarterly dividends on its Common Stock since 1922. In
September 1995, the Company reduced its regular quarterly dividend from $0.40
per share (which had been paid since the first quarter of 1989) to $0.25 per
share. The Company paid higher dividends in the past to return capital to the
Company's shareholders as the Company was divesting businesses and closing
manufacturing facilities. Although the Company intends to continue to pay
regular quarterly dividends, the payment of any future dividends will depend
upon, among other things, future earnings, operations, capital requirements,
the general financial condition of the Company and general business conditions.
The Indenture will contain, and certain of the Company's other debt instruments
contain, restrictions on the ability of the Company to pay dividends. See
``Description of Certain Indebtedness'' and ``Description of the Notes.''
CAPITALIZATION
The following table sets forth the cash and cash equivalents, short-term
debt and capitalization of the Company as of August 3, 1996 and as adjusted to
give effect to the offering of the Private Notes, the application of the net
proceeds therefrom, and the repurchase of its long-term debt bearing interest
at 7 1/8%. This table should be read in conjunction with ``Management's
Discussion and Analysis of Financial Condition and Results of Operations'' and
the Consolidated Financial Statements, including the Notes thereto, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AUGUST 3, 1996
--------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED
------ -----------
<S> <C> <C>
Cash and cash equivalents......................... $ 35,120 $ 35,120
========= =========
Short-term debt:
Notes payable................................. $ 121,000 $ 29,000
========= =========
Long-term debt including capitalized lease
obligations and current maturities:
9.50% Senior Notes due 2006................... $ -- $ 100,000
7.36% Sinking Fund Debentures, payments of
$10,000,000 due annually beginning 1999..... 50,000 50,000
8.45%-8.6% Debentures due 1999................ 15,000 15,000
7.07%-8.83% Debentures due 2002............... 18,541 18,541
7.125% Debentures due 2003.................... 15,000 10,000
7.375% Sinking Fund Debentures, payments of
$2,000,000 due annually to 1998............. 3,999 3,999
Capitalized lease obligations................. 3,482 3,482
--------- ---------
Total long-term debt.......................... 106,022 201,022
Total shareholders' equity........................ 230,120 230,120
--------- ---------
Total Capitalization.............................. $ 336,142 $ 431,142
========= =========
</TABLE>
18
<PAGE> 20
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on October 7, 1996 (the
``Closing Date'') to the Initial Purchasers pursuant to the Purchase Agreement.
The Initial Purchasers subsequently sold the Private Notes to (i) ``qualified
institutional buyers'' (``QIBs''), as defined in Rule 144A under the Securities
Act (``Rule 144A''), in reliance on Rule 144A and (ii) a limited number of
institutional ``accredited investors'' (``Accredited Institutions''), as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. As a
condition to the sale of the Private Notes, the Company and the Initial
Purchasers entered into the Registration Rights Agreement on October 7, 1996.
Pursuant to the Registration Rights Agreement, the Company agreed that it would
(i) file with the Commission within 45 days after the Closing Date a
registration statement under the Securities Act with respect to the Exchange
Notes and (ii) use its reasonable best efforts to cause such Registration
Statement to become effective under the Securities Act within 90 days after the
Closing Date. The Company agreed to issue and exchange Exchange Notes for all
Private Notes validly tendered and not withdrawn before the expiration of the
Exchange Offer. A copy of the Registration Rights Agreement has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
The Registration Statement is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement and the Purchase Agreement.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to the Expiration Date.
The Company will issue $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of outstanding Private Notes validly
tendered pursuant to the Exchange Offer and not withdrawn prior to the
Expiration Date. Private Notes may be tendered only in integral multiples of
$1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the exchange will be registered under the
Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) holders of the Exchange Notes will
not be entitled to any of the registration rights of holders of Private Notes
under the Registration Rights Agreement, which rights will terminate upon the
consummation of the Exchange Offer. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be issued
under, and be entitled to the benefits of, the Indenture, which also authorized
the issuance of the Private Notes, such that both series of Notes will be
treated as a single class of debt securities under the Indenture.
As of the date of this Prospectus, $100,000,000 in aggregate principal
amount of the Private Notes was outstanding. Approximately $99 million
principal amount of Private Notes are registered in the name of Cede & Co., as
nominee for The Depository Trust Company (the ``Depository'') and the remainder
of the Private Notes are registered in the name of Smith Barney Inc. Only a
registered holder of the Private Notes (or such holder's legal representative
or attorney-in-fact) as reflected on the records of the Trustee under the
Indenture may participate in the Exchange Offer. Solely for reasons of
administration, the Company has fixed the close of business on October 31,
1996 as the record date for the Exchange Offer for purposes of determining the
persons to whom this Prospectus and the Letter of Transmittal will be mailed
initially. There will be no fixed record date for determining registered holders
of the Private Notes entitled to participate in the Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters'
rights under the New York Business Corporation Law or Indenture in connection
with the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the provisions of the Registration Rights Agreement and the
applicable requirements of the Securities Act and the rules and regulations of
the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, and if, the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Private Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See ``--Fees and Expenses.''
19
<PAGE> 21
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term ``Expiration Date'' shall mean 5:00 p.m., New York City time on
December 10, 1996, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term ``Expiration Date'' shall mean the
latest date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time,
on the next business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if, in
the opinion of counsel for the Company, the consummation of the Exchange Offer
would violate any applicable law, rule or regulation or any applicable
interpretation of the staff of the Commission, to terminate or amend the
Exchange Offer by giving oral or written notice of such delay, extension,
termination or amendment to the Exchange Agent. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the registered holders. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders, and
the Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
INTEREST ON THE EXCHANGE NOTES
The Private Notes bear interest and the Exchange Notes will bear interest
at the rate of 9 1/2% per annum, payable semi-annually on April 15 and October
15 of each year, commencing April 15, 1997, to holders of record on the
immediately preceding April 1 and October 1, respectively. Holders of the
Exchange Notes will receive interest on April 15, 1997 from the date of the
initial issuance of the Private Notes. Interest on the Private Notes accepted
for exchange will cease to accrue upon issuance of the respective Exchange
Notes.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon interpretations by the staff
of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder who exchanges Private Notes for
Exchange Notes in the ordinary course of business, who is not participating,
does not intend to participate, and has no arrangement with any person to
participate in a distribution of the Exchange Notes, and who is not an
``affiliate'' of the Company within the meaning of Rule 405 of the Securities
Act, will be allowed to resell Exchange Notes to the public without further
registration under the Securities Act and without delivering to the purchasers
of the Exchange Notes a prospectus that satisfies the requirements of Section
10 of the Securities Act. However, if any holder acquires Exchange Notes in the
Exchange Offer for the purpose of distributing or participating in the
distribution of the Exchange Notes, such holder cannot rely on the position of
the staff of the Commission enumerated in certain no-action letters issued to
third parties and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction,
unless an exemption from registration is otherwise available. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Private Notes acquired by such broker-dealer as a result of market-making or
other trading activities must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an ``underwriter'' within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of any
Exchange Notes received in exchange for Private Notes acquired by such
broker-dealer as a result of market-making or other trading activities.
Pursuant to the Registration Rights Agreement, the Company has agreed to make
this Prospectus, as it may be amended or supplemented from time to time,
available to any such broker-dealer that requests copies of such Prospectus in
the Letter of Transmittal for use in connection with any such resale for a
period of up to 90 days after the Expiration Date. See ``Plan of
Distribution.''
20
<PAGE> 22
PROCEDURES FOR TENDERING
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of
Transmittal, and mail or otherwise deliver such Letter of Transmittal or such
facsimile to the Exchange Agent at the address set forth below under
``--Exchange Agent'' for receipt prior to the Expiration Date. In addition,
either (i) certificates for such Private Notes must be received by the Exchange
Agent along with the Letter of Transmittal, (ii) a timely confirmation of a
book-entry transfer (a ``Book-Entry Confirmation'') of such Private Notes, if
such procedure is available, into the Exchange Agent's account at the
Depository pursuant to the procedure for book-entry transfer described below,
must be received by the Exchange Agent prior to the Expiration Date or (iii)
the holder must comply with the guaranteed delivery procedures described below.
The tender by a holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. DO NOT SEND THE LETTER OF TRANSMITTAL OR ANY
PRIVATE NOTES TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS,
DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE
TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such owner's name or
obtain a properly completed bond power from the registered holder. The transfer
of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see ``--Withdrawal of Tenders''), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Private Notes tendered
pursuant thereto are tendered (i) by a registered holder who has not completed
the box titled ``Special Delivery Instructions'' on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be made by a member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an ``eligible
guarantor institution'' within the meaning of Rule 17Ad-15 under the Exchange
Act which is a member of one of the recognized signature guarantee programs
identified in the Letter of Transmittal (an ``Eligible Institution'').
If the Letter of Transmittal is signed by a person other than the
registered holder of any Private Notes listed therein, such Private Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered holder exactly as such registered holder's name appears on such
Private Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and, unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
The Exchange Agent and the Depository have confirmed that any financial
institution that is a participant in the Depository's system may utilize the
Depository's Automated Tender Offer Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be
determined by the Company in its sole discretion, which determination will be
final
21
<PAGE> 23
and binding. The Company reserves the absolute right to reject any and all
Private Notes not properly tendered or any Private Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Private Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Private Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Private Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Private Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Private Notes that are not tendered pursuant to the
Exchange Offer, the Company reserves the right in its sole discretion to
purchase or make offers for any Private Notes that remain outstanding
subsequent to the Expiration Date and, to the extent permitted by applicable
law, purchase Private Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
By tendering, each holder of Private Notes will represent to the Company
that, among other things, (i) the Exchange Notes to be acquired by such holder
of Private Notes in connection with the Exchange Offer are being acquired by
such holder in the ordinary course of business of such holder, (ii) such holder
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iii) such holder acknowledges and agrees
that any person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purposes of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on
the position of the staff of the Commission set forth in certain no-action
letters, (iv) such holder understands that a secondary resale transaction
described in clause (iii) above and any resales of Exchange Notes obtained by
such holder in exchange for Private Notes acquired by such holder directly from
the Company should be covered by an effective registration statement containing
the selling security holder information required by Item 507 or Item 508, as
applicable, of Regulation S-K of the Commission and (v) such holder is not an
``affiliate,'' as defined in Rule 405 under the Securities Act, of the Company.
If the holder is a broker-dealer that will receive Exchange Notes for such
holder's own account in exchange for Private Notes that were acquired as a
result of market-making activities or other trading activities, such holder
will be required to acknowledge in the Letter of Transmittal that such holder
will deliver a prospectus in connection with any resale of such Exchange Notes;
however, by so acknowledging and by delivering a prospectus, such holder will
not be deemed to admit that it is an ``underwriter'' within the meaning of the
Securities Act.
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are
withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, such unaccepted, withdrawn or non-exchanged Private Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Private Notes tendered by book-entry transfer into the Exchange Agent's
account at the Depository pursuant to the book-entry transfer procedures
described below, such Private Notes will be credited to an account maintained
with the Depository) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depository for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depository's systems may make
book-entry delivery of Private Notes by causing the Depository to transfer such
Private Notes into the Exchange Agent's account at the Depository in accordance
with the Depository's procedures for transfer. However, although delivery of
Private Notes may be effected through book-entry transfer at the Depository,
the Letter of Transmittal or facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address set forth below under
``--Exchange Agent'' on or prior to the Expiration Date or pursuant to the
guaranteed delivery procedures described below.
22
<PAGE> 24
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Private Notes and the
principal amount of Private Notes tendered, stating that the tender is being
made thereby and guaranteeing that, within five New York Stock Exchange trading
days after the Expiration Date, the Letter of Transmittal (or a facsimile
thereof), together with the certificate(s) representing the Private Notes in
proper form for transfer or a Book-Entry Confirmation, as the case may be, and
any other documents required by the Letter of Transmittal, will be deposited by
the Eligible Institution with the Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile thereof), as
well as the certificate(s) representing all tendered Private Notes in proper
form for transfer and all other documents required by the Letter of Transmittal
are received by the Exchange Agent within five New York Stock Exchange trading
days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Private Notes to be withdrawn (the ``Depositor''), (ii) identify the
Private Notes to be withdrawn (including the certificate number or numbers and
principal amount of such Private Notes) and (iii) be signed by the holder in
the same manner as the original signature on the Letter of Transmittal by which
such Private Notes were tendered (including any required signature guarantees).
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company, in its sole
discretion, whose determination shall be final and binding on all parties. Any
Private Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer, and no Exchange Notes will be issued with
respect thereto unless the Private Notes so withdrawn are validly retendered.
Properly withdrawn Private Notes may be retendered by following one of the
procedures described above under ``The Exchange Offer--Procedures for
Tendering'' at any time prior to the Expiration Date.
TERMINATION OF CERTAIN RIGHTS
All registration rights under the Registration Rights Agreement accorded to
holders of the Private Notes (and all rights to receive additional interest in
the event of a Registration Default as defined therein) will terminate upon
consummation of the Exchange Offer except with respect to the Company's
continuing obligation for a period of up to 90 days after the Expiration Date
to keep the Registration Statement effective and to provide copies of the
latest version of the Prospectus to any broker-dealer that requests copies of
such Prospectus in the Letter of Transmittal for use in connection with any
resale by such broker-dealer of Exchange Notes received for its own account
pursuant to the Exchange Offer in exchange for Private Notes acquired for its
own account as a result of market-making or other trading activities.
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
23
<PAGE> 25
<TABLE>
<S> <C> <C>
By Mail: By Facsimile Transmission: By Hand:
State Street Bank and (For Eligible Institutions Only) State Street Bank and
Trust Company (617) 664-5784 Trust Company
P.O. Box 778 Confirm by Telephone: Two International Place--4th Floor
Boston, Massachusetts 02102 (617) 664-5539 Boston, Massachusetts 02110
Attention: Nancy Bowker Attention: Corporate Trust Window
Corporate Trust Department
or
By Overnight Delivery:
State Street Bank and State Street Bank and Trust
Trust Company Company, National Association
Two International Place-- 61 Broadway
4th Floor New York, New York 10006
Boston, Massachusetts 02110 Attention: Corporate Trust
Attention: Nancy Bowker Window--Concourse Level
Corporate Trust Department
</TABLE>
State Street Bank and Trust Company also serves as Trustee under the
Indenture.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, facsimile transmission, telephone or in person by
officers and regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable, out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$100,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Private Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
CONSEQUENCE OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
Private Notes that are not exchanged for the Exchange Notes pursuant to the
Exchange Offer will remain ``restricted securities'' within the meaning of Rule
144(a)(3)(iv) of the Securities Act. Accordingly, such Private Notes may not be
offered, sold, pledged or otherwise transferred except (i) to a person whom the
seller reasonably believes is a ``qualified institutional buyer'' within the
meaning of Rule 144A under the Securities Act purchasing for its own account or
for the account of a qualified institutional buyer in a transaction meeting the
requirements of Rule 144A, (ii) in an offshore transaction complying with Rule
903 or Rule 904 of Regulation S under the Securities Act, (iii) pursuant to an
exemption from registration under the Securities Act provided by Rule 144
thereunder (if available), (iv) pursuant to an effective registration statement
under the Securities Act or (v) to institutional accredited investors in a
transaction exempt from the registration requirements of the Securities Act,
and, in each case, in accordance with all other applicable securities laws.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the remaining term of the Notes.
24
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AND RATIOS)
The following table sets forth Selected Consolidated Financial Data for
Brown Group, Inc. for each of the five fiscal years in the period ended
February 3, 1996, for the six months ended July 29, 1995 and August 3, 1996.
Such information should be read in conjunction with the historical Consolidated
Financial Statements of the Company and the Notes thereto which are included
elsewhere herein and incorporated herein by reference. Selected Consolidated
Financial Data for the Company as of and for the six months ended July 29, 1995
and August 3, 1996 has been derived from the unaudited historical Consolidated
Financial Statements and, in the opinion of management, includes all
adjustments that are considered necessary for a fair presentation of the
financial position and results of operations for such interim periods. Results
for the interim periods are not necessarily indicative of results for full
years.
<TABLE>
SIX MONTHS ENDED
FISCAL YEARS ------------------
------------------------------------------------------- JULY 29, AUG. 3,
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- -------- -------
(52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS) (26 WEEKS) (26 WEEKS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $1,191,591 $1,243,842 $1,361,039 $1,461,637 $1,455,896 $700,303 $745,768
Earnings (loss) from continuing
operations before cumulative effect of
accounting changes..................... 8,262 3,239 (9,296) 33,566 697 (12,792) 6,041
Discontinued operations and effect of
accounting changes, net of income taxes
<F1>................................... (4,498) 1,425 (22,316) 5,832 2,600 -- --
Net earnings (loss)...................... 3,764 4,664 (31,612) 39,398 3,297 (12,792) 6,041
Dividends paid per common share.......... 1.60 1.60 1.60 1.60 1.30 0.80 0.50
Earnings (loss) per share from continuing
operations before accounting changes... 0.48 0.19 (0.54) 1.91 0.04 (0.73) 0.34
Ratio of earnings to fixed charges
<F2>................................... 1.28x 1.07x .65x 2.38x .90x .21x 1.37x
OTHER DATA:
Charges related to restructuring:
Cost of goods sold................... $ -- $ 5,760 $ 16,446 $ -- $ 10,068 $ 10,068 $ --
Selling and administrative
expenses........................... -- 3,000 13,000 -- 500 500 --
Other expenses....................... -- 13,600 21,400 -- 3,600 4,250 --
LIFO liquidation..................... -- -- (5,400) -- (10,158) (3,696) (4,030)
---------- ---------- ---------- ---------- ---------- -------- --------
Restructuring charges, net....... -- 22,360 45,446 -- 4,010 11,122 (4,030)
Capital expenditures:
New stores........................... 6,283 5,569 9,004 12,338 13,285 8,914 2,707
Remodels............................. 2,634 2,739 5,158 4,193 5,336 2,743 3,611
Other <F3>........................... 10,985 9,188 13,045 16,000 8,318 5,502 1,497
---------- ---------- ---------- ---------- ---------- -------- --------
Total............................ 19,902 17,496 27,207 32,531 26,939 17,159 7,815
Depreciation and amortization............ 22,086 20,916 19,852 22,095 23,827 11,997 12,811
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents................ $ 18,683 $ 21,625 $ 16,892 $ 18,922 $ 35,058 $ 23,016 $ 35,120
Working capital.......................... 297,239 262,611 240,554 259,178 209,399 161,855 206,429
Total assets............................. 654,696 705,165 739,930 636,515 661,056 679,701 718,913
Long-term debt (including current
maturities)............................ 158,809 219,889 143,033 135,276 107,470 110,230 106,022
Shareholders' equity..................... 313,387 288,988 233,863 249,727 231,636 224,418 230,120
<FN>
- ----------
<F1> Net amounts presented consist of earnings from discontinued operations,
cumulative effect of changes in accounting for postemployment benefits in
1993 and postretirement benefits and income taxes in 1991, and disposal of
discontinued operations. See Consolidated Financial Statements.
<F2> The ratio of earnings to fixed charges is computed by dividing fixed
charges into earnings from continuing operations before income taxes and
the effect of accounting changes and discontinued operations plus fixed
charges. Fixed charges include interest, expensed or capitalized,
amortization of debt issuance costs and the estimated interest component
of rent expense. For fiscal years 1993 and 1995, and for the six months
ended July 29, 1995, pre-tax earnings, before fixed charges, were
insufficient to cover fixed charges by $15.2 million, $4.7 million, and
$19.9 million, respectively.
<F3> ``Other'' capital expenditures include expenditures for the Company's
warehouses and distribution centers, manufacturing plants, offices, and
computers and related equipment.
</TABLE>
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations contains forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in such forward looking statements as a result
of, among other things, the factors set forth in the section entitled ``Risk
Factors.'' In particular, note the Risk Factors captioned ``Shift of Focus in
Business Strategy; Impact of Restructuring,'' ``Competition; Changes in
Consumer Preferences,'' ``Reliance on Foreign Sources of Production,''
``Customer Concentration,'' ``Dependence on Licenses,'' ``Dependence on Major
Branded Suppliers'' and ``Seasonality.''
GENERAL
The Company, founded in 1878, is one of the nation's leading footwear
retailers and wholesalers, providing a broad offering of branded and private
label casual, athletic and dress footwear products to men, women and children
at a variety of price points through multiple distribution channels both
domestically and internationally. The Company currently operates over 1,200
retail shoe stores in the United States and Canada under the Famous Footwear,
Naturalizer(R) and F.X. LaSalle(R) names. In addition, through its Brown Shoe
Company and Pagoda divisions, the Company designs, sources and markets footwear
to over 8,000 retail stores worldwide, including department stores, mass
merchandisers and specialty shoe stores.
Beginning in the early 1980's, the Company began restructuring its
operations in response to fundamental structural changes in the footwear
industry. These restructuring programs have resulted in a shift in the
Company's retail focus from leased footwear departments in department stores to
branded footwear stores in regional malls, strip centers and outlet centers and
a shift in its wholesaling focus from manufacturing to marketing and foreign
sourcing. In the course of its restructurings, the Company has exited from
businesses which generated an aggregate of over $1.2 billion in annualized net
sales and had over $400 million of assets. These actions included: (i) the
closure of 30 footwear manufacturing facilities, representing all of the
Company's United States based manufacturing capability and sourcing
substantially all of its footwear internationally; (ii) the sale of its
Recreational Products division; (iii) the sale of its Cloth World chain of
retail fabric stores and other specialty retailing operations; (iv) the closure
of over 650 non-performing footwear retail stores operating primarily under the
Connie(R) and Regal(R) names; (v) the sale of Brown Shoe Company's men's shoe
division; (vi) the exit from the leased shoe department and footwear catalog
businesses; and (vii) the aggressive reduction of its corporate and divisional
overhead. During the same period, the Company (i) aggressively expanded its
Famous Footwear retailing operations; (ii) introduced its NaturalSport(R)
brand; (iii) built its international sourcing capabilities through the
establishment of the Brown Group International sourcing division and the
acquisition of Pagoda; (iv) acquired and grew Canadian retail footwear chains;
(v) established Pagoda International to develop international marketing
capability; and (vi) added to its core operations through selective
acquisitions, including the acquisition of the Larry Stuart Collection(R) and
Le Coq Sportif(R) brands in 1995. Management believes that is has completed its
restructuring.
Management continues to focus on increasing sales, improving gross margins
and controlling corporate and divisional expenses to increase operating
profitability. Corporate overhead and divisional expenses are actively
monitored to continue to streamline infrastructure without sacrificing the
capability to achieve future revenue growth. Management believes that the
Company will reduce product costs by approximately $10-$12 million in 1996
through more efficient sourcing, specifically through the elimination of the
Company's remaining domestic manufacturing facilities combined with certain
other divisional cost savings. Management continues to pursue opportunities to
further leverage its existing infrastructure through improved expense controls
and better distribution logistics. The foregoing has contributed to the
Company's net earnings increasing to approximately $6.0 million for the first
six months of 1996, including an aftertax credit of $2.6 million relating to
the LIFO liquidation of footwear manufactured in closed domestic facilities,
from a loss of approximately $12.8 million, including an aftertax net charge of
$7.2 million relating to the closing of the remaining domestic manufacturing
facilities in the prior year period. Management believes there are further
opportunities for improving operating performance, including benefits to be
gained from: (i) store maturation and concentrated operational focus at Famous
Footwear; (ii) the ongoing repositioning of the Company's Naturalizer(R) and
certain other brands to higher quality and moderately higher price points;
(iii) the continued development of new licensed footwear brands; (iv) increased
international penetration of the Company's Pagoda marketing operations; and (v)
improved expense controls and distribution logistics.
26
<PAGE> 28
RESULTS OF OPERATIONS
Six Months ended August 3, 1996 compared to the Six Months ended July 29,
1995
Consolidated net sales for the first half of 1996 were $745.8 million, an
increase of 6.5% from the first six months of 1995 total of $700.3 million.
Net earnings of $6.0 million for the first half of 1996 compare to a loss
of $12.8 million for the first half of 1995. 1995 results include the aftertax
charge of $9.6 million for plant closures, which was partially offset by an
aftertax credit of $2.4 million from liquidation of LIFO inventories.
The year-to-date earnings improvement, excluding the factory closing charge
in 1995, reflects higher operating earnings at each of the Company's operating
divisions. Famous Footwear's 1996 year-to-date operating earnings improved
53.8% to $12.2 million from $7.9 million for the first six months of 1995,
primarily reflecting management's focus on execution, and better leveraging of
expenses, as well as store maturation resulting in higher profitability. Brown
Shoe Company's and Pagoda's operating earnings improved by almost $17 million
over the first six months of 1995 primarily due to higher margins from more
efficient sourcing of Brown Shoe Company's branded products offshore, as well
as the repositioning of the Naturalizer(R) brand to moderately higher price
points and Pagoda's increased sales of licensed products.
Sales from the footwear retailing operations increased 9.7% to $476.3
million from the first half of 1995. Famous Footwear's total sales for the
first six months of 1996 increased 11.1% to $384.2 million, reflecting a 0.1%
increase in same-store sales, with the balance of increased sales attributable
to more units in operation. Naturalizer(R) stores' total sales increased 1.3%
to $68.3 million in the first half of 1996 and 2.1% on a same-store basis.
Sales from the Canadian retailing operation, which consists of 96
Naturalizer(R) and 16 F.X. LaSalle(R) stores, during the first half of 1996
increased 14.5% to $23.7 million, with a same-store sales increase of 8.8% and
four more units than in the six-month period ended July 29, 1995.
Sales from footwear wholesaling businesses for the first six months of 1996
increased 1.2% to $269.5 million from the same period last year. Higher
shipments of Brown Shoe Company's and Pagoda's branded and licensed footwear
during the first half of 1996 were offset by lower shipments of private label
product. The sales from the Canadian wholesale division, which consists of the
Company's Canadian marketing and manufacturing operations, during the first six
months of 1996 increased 20% to $14.5 million from $12.1 million for the first
six months of 1995, in part due to higher sales of children's footwear.
Gross profit as a percent of sales increased to 37.6% for the six-month
period ended August 3, 1996 from 33.8% for the six-month period ended July 29,
1995. This improvement reflects more efficient sourcing resulting from the
shift to foreign sourcing following the closure of the Company's remaining
domestic manufacturing facilities, a pretax LIFO credit of $4.0 million from
the liquidation of footwear manufactured in closed domestic facilities, and the
effect in 1995 of inventory writedowns as a result of the charge to close the
domestic factories.
Selling and administrative expenses as a percent of sales increased to
35.1% for the first six months of 1996 from 35.0% for the first six months of
1995, reflecting higher advertising and marketing expenses at Brown Shoe
Company and a higher percentage of the Company's sales occurring at Famous
Footwear which carries higher expenses as a percent of net sales than the
wholesaling divisions. The selling and administrative expenses as a percent of
sales at Famous Footwear decreased during the six-month period ended August 3,
1996 from the six-month period ended July 29, 1995, as there was better
leveraging of the expense base as newer stores matured.
Other Income was $.1 million in the first half of 1996 compared to Other
Expense of $3.4 million in the first half of 1995, which included plant closing
charges of $4.2 million.
1995 Compared to 1994
The Company's 1995 results were adversely affected by the extremely
difficult apparel and footwear retail environment, which persisted throughout
the year. In the fourth quarter of fiscal 1995 Brown Shoe Company's five
remaining domestic factories were closed, ending an extended period of
restructuring for the Company and its divisions.
27
<PAGE> 29
The Company's sales of $1.456 billion for the 53-week fiscal 1995 were down
slightly from the $1.462 billion in fiscal 1994, which had 52 weeks. The
decrease in sales between years reflect substantially higher sales at Famous
Footwear more than offset by decreased sales at the Company's wholesale
operations and by the closing of under-performing Naturalizer(R) stores.
Earnings from continuing operations of $.7 million in 1995 compare to $33.6
million in fiscal 1994. Earnings from continuing operations in fiscal 1995
include nonrecurring after-tax charges of $1.4 million for the early adoption
of Statement of Financial Accounting Standards (SFAS) No. 121, ``Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of,'' a $2.7 million provision for a valuation reserve related to the Company's
deferred tax assets and $9.2 million for the cost of closing the Company's last
five domestic manufacturing plants. These charges were substantially offset by
an after-tax LIFO recovery of $6.6 million related to the liquidation of
manufacturing inventories and plant closings, and a reversal of a reserve of
$5.8 million resulting from an Appeals Court ruling overturning a Tax Court
decision supporting an Internal Revenue Service assessment against the Company.
Net earnings for fiscal 1995 of $3.3 million compare to $39.4 million for
fiscal 1994. Included in net earnings for 1995 and 1994 are gains of $2.6
million and $4.5 million, respectively, from the reversal of a portion of the
provision for discontinued businesses.
Famous Footwear's sales increased 20% in 1995 to $741.1 million, but
same-store sales declined 3.0% for the year on a comparable 52-week basis. This
was the first same-store sales decline recorded by Famous Footwear in nine
years. Operating earnings declined 51% to $19.6 million as a result of lower
same-store sales, reduced margins and increased expenses. The decrease in
same-store sales and margins was primarily the result of a very difficult
retail market. Increased expenses primarily were related to new stores, the
opening of a second distribution center in Tennessee and the addition of
infrastructure to support the expanded business. Early in 1995, Famous
Footwear's planned rate of expansion was reduced. During the year 92 net stores
were added, down from the 155 added in fiscal 1994. There were 814 stores in
operation at the end of fiscal 1995.
Naturalizer(R) stores' domestic sales decreased 7% and same-store sales
decreased 4.0% on a comparable 52-week basis. Further improvement was made in
gross margins, although not enough to offset the sales decline, additional
under-performing stores were closed and the writedown of assets of stores still
being operated was recorded with the implementation of SFAS No. 121. There was
a net decrease of 14 stores during the year, reducing the total number of
stores to 313. During 1996, the operations of 12 Brown Shoe Company Outlet
stores and 28 Naturalizer(R) Outlet stores in outlet malls were transferred to
the Naturalizer(R) Retail division from Famous Footwear.
The Canadian retail operation's sales increased 5%, but same-store sales
declined .6% for the year on a comparable 52-week basis. Operating profit
increased 3% during fiscal 1995 with lower margins and slightly higher
expenses. The Canadian wholesale operation's sales were flat in fiscal 1995.
Operating earnings decreased 10% as improved margins were more than offset by
an increase in royalty expense.
Sales from footwear wholesale operations--Brown Shoe Company and
Pagoda--declined 17% in fiscal 1995 to $530.9 million. Increased sales in Latin
America and Europe and sales of the new Larry Stuart Collection(R) brand in the
United States were more than offset by decreases in Naturalizer(R) and
Connie(R) branded sales, Dr. Scholl's(R) and The Lion King(R) licensed products
and lower first-cost sales from the Far East and Latin America. As a result, an
operating loss of $4.1 million was reported in fiscal 1995 compared to a profit
of $32.8 million in fiscal 1994. Operating earnings of the Company's Brazilian
and European wholesale operations increased substantially in 1995 due to higher
sales. These gains were partially offset by a reduction in lower-margin,
first-cost sales from Latin America and the Far East. Domestic operating
earnings decreased as a result of lower sales and margins and increased
expenses, primarily related to brand development and marketing. The 1995 loss
included a pretax charge of $14.1 million for the costs of closing the
remaining five domestic manufacturing plants, which was partially offset by a
pretax LIFO gain of $10.1 million from the liquidation of related inventories.
Results for fiscal 1994 included a pretax LIFO gain of $9.8 million from the
liquidation of inventories. In addition, Pagoda has secured the license for
Walt Disney's ``Hunchback of Notre Dame(R)'' movie and the acquisition of the
Le Coq Sportif(R) brand is expected to provide further growth in the foreign
wholesaling operations.
The 1% increase in the Company's interest expense in fiscal 1995 reflects
an increase in the average short-term borrowing rate from 4.5% in fiscal 1994
to 7.0% in fiscal 1995 partially offset by lower average borrowings. The
28
<PAGE> 30
Company's borrowing level increased throughout fiscal 1995 as cash flow,
adversely affected by depressed earnings, was insufficient to fund cash needs.
Other Expense of $1.6 million in 1995 primarily comprises $3.0 million of
royalty income offset by a $3.6 million charge related to factory closings and
a $2.1 million charge from SFAS No. 121. In 1994, Other Income of $12.3 million
reflects a $9.8 million gain from the settlement of Brazilian countervailing
duties and $3.0 million of royalty income.
The Company's tax benefit recorded in fiscal 1995 of $5.4 million, on a
pretax loss of $4.7 million, includes the recovery of $5.8 million, including
interest, resulting from a court ruling overturning an Internal Revenue Service
assessment on a portion of the Company's unremitted foreign earnings. See Note
5 to the Consolidated Financial Statements for a further explanation and a
reconciliation of the effective tax rates to the statutory rates.
The Company had an overall net deferred tax asset of $19.2 million at
February 3, 1996, which relates primarily to differences in book and taxable
income and net operating loss carry forwards. At February 3, 1996, the Company
carried a valuation reserve related to this asset of $3.3 million, of which
$2.7 million was provided in fiscal 1995. Management believes that the deferred
tax asset will be realized through the offset of the deductions against taxable
income produced in the normal course of business in subsequent periods.
Management also has available certain tax planning strategies, which, if
implemented, could fully consume the net deferred tax asset, net of the
valuation reserve. Management will continue to evaluate the realizability of
deferred tax assets.
1994 Compared to 1993
During 1994, the Company completed its program to concentrate in the
footwear industry by selling the Cloth World chain of fabric stores. In
addition to this sale, the Company also adopted a plan to close the Maryland
Square catalog operation, completed its withdrawal from the Wohl Leased Shoe
Department business and made substantial progress on restructuring initiatives
announced at the end of fiscal 1993.
The Company's sales of $1.462 billion in fiscal 1994 were 7% higher than
the $1.361 billion in fiscal 1993. Earnings from continuing operations of $33.6
million in 1994 compare to a loss from continuing operations in 1993 of $9.3
million. Net earnings for 1994 of $39.4 million included earnings from
discontinued operations of $1.3 million from Cloth World and Maryland Square
prior to discontinuance and $4.5 million from the reversal of a portion of the
provision for disposal of Wohl Leased Shoe Departments.
Earnings for 1993 from continuing operations reflected the impact of an
after-tax charge of $29.5 million for restructuring initiatives which included
plant, office and store closures; consolidation of Brown Shoe Company and
Pagoda; and provided for additional environmental monitoring costs at the
Company's closed tannery. Net earnings for 1993 included earnings from
discontinued operations of $4.3 million; an after-tax provision of $24.4
million for withdrawal from the Wohl Leased Shoe Department business; and an
after-tax charge of $2.2 million for the implementation of the Statement of
Financial Accounting Standards (SFAS) No. 112, ``Employers' Accounting for
Postemployment Benefits.''
Famous Footwear's sales increased 26% in 1994 and 3.3% on a same-store
basis. Operating earnings declined 7% to $39.9 million as a result of lower
margins and increased expenses. Substantial investment spending was incurred in
1994 in building the infrastructure at Famous, particularly systems and
distribution capabilities. During 1994, there was a net addition of 155 stores,
bringing the total number of stores to 722.
Naturalizer(R) Stores' domestic sales decreased 2% and were flat on a
same-store basis. This business was unprofitable again in 1994, but a number of
poorly performing stores were closed and gross margins improved. There was a
net decrease of 40 stores during the year, bringing the total number of stores
to 327.
The Canadian retail operation's sales increased 10% and were up 11.2% on a
same-store basis. Operating earnings more than doubled in 1994 as a result of
increased sales, improved gross margins and leveraging of expenses. With the
net addition of seven stores in 1994, this business operated 109 stores at
year-end. The Canadian wholesale operation also had a significant increase in
operating earnings as a result of strong sales of Naturalizer(R) footwear and
reduced expenses.
Sales from footwear wholesale and manufacturing operations--Brown Shoe
Company and Pagoda--were slightly higher than 1993 at $641.6 million. Increased
sales of NaturalSport(R), Life Stride(R), Dr. Scholl's(R) and The Lion King(R)
licensed product were offset by lower sales of Connie(R) and Buster Brown(R),
and by the midyear sale of Brown
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<PAGE> 31
Shoe Company's men's business. Naturalizer's(R) branded sales in 1994 were flat
with 1993. Combined operating earnings for these two businesses were $32.8
million in 1994 compared to a loss of $2.4 million in 1993. Results for 1994
included a pretax LIFO gain of $9.8 million and improved gross margins,
partially offset by higher expenses as a percentage of sales. Only a partial
year effect of overhead reduction was realized and higher costs were incurred
for brand development and marketing which is expected to continue. Included in
1993 results is a pretax restructuring charge of $24.9 million for plant
closures, the consolidation of Brown Shoe Company and Pagoda and environmental
monitoring costs.
The 9% decrease in the Company's interest expense in 1994 reflects higher
interest rates which were more than offset by reduced borrowing levels
throughout most of the year. This was due to the withdrawal from the Wohl
Leased Shoe Department business and the sale of Cloth World stores for $65.7
million, of which $61.0 million was received at the beginning of October and
the balance in fiscal 1995.
Other Income of $12.3 million in 1994 primarily comprises $9.8 million of
income from the settlement of Brazilian countervailing duties and $3.0 million
of royalty income. In 1993, Other Expense of $21.2 million primarily reflected
restructuring charges of $21.4 million, royalty income of $2.7 million, and
other offsetting items.
The nonrecurring gain from settlement of the Brazilian countervailing
duties of $9.8 million ($6.4 million after-tax) was offset by the provision of
$5.8 million for an Internal Revenue Service tax assessment, including
interest, on a portion of the Company's unremitted foreign earnings, which was
in the process of being appealed by the Company. As a result of this
nonrecurring provision, the Company's effective tax rate in 1994 increased to
44.0% compared to 38.7% in 1993. For a reconciliation of the effective tax
rates to the statutory rates, see Note 5 to the Consolidated Financial
Statements.
Restructuring and Factory Closings
In the second quarter of 1995 the Company made a decision to close Brown
Shoe Company's five remaining domestic manufacturing plants and related
facilities. A pretax charge of $14.1 million was recorded to cover the cost of
these closings. This charge included provisions for asset writeoffs, inventory
writedowns, and severance and benefit costs for terminated employees.
In addition to the charge recorded in 1995, $2.6 million of the reserves
established in 1993 were redesignated to cover additional costs associated with
the final factory closings in 1995.
The restructuring initiatives and additional environmental provisions,
which were announced in January 1994, resulted in pretax charges of $45.4
million. These charges consisted of provisions for asset writeoffs associated
with the disposal of manufacturing facilities of Brown Shoe Company and over
150 Connie(R), Regal(R) and Naturalizer(R) shoe stores, lease buyouts and
termination costs for retail store closures and leased machinery from closed
manufacturing facilities, inventory writedowns to liquidate store inventories,
severance and benefit costs for those employees terminated due to plant and
store closures, consolidation of Pagoda and Brown Shoe Company and reduction of
headquarters staffing, and additional environmental monitoring costs at the
Company's closed tannery.
The restructuring reserve activity had a $12.8 million and $20.8 million
negative cash flow impact on 1995 and 1994, respectively. In 1995 this usage
was partially offset and in 1994 this usage was more than offset by positive
cash flow generated from reduced inventories and sales of facilities. As of
February 3, 1996, all of the planned 150 retail store closures were completed
and all domestic manufacturing facilities had been closed. The majority of the
planned employee terminations occurred in 1994 with the remainder occurring in
1995 as part of the final phases of the consolidation of Pagoda, Brown Shoe
Company and headquarters staffs and the exit from domestic manufacturing. The
remaining reserve balance at January, 1996 relates primarily to personnel
severance and benefit costs for 1995 factory closings. These costs will have a
modest negative impact on cash flow throughout 1996.
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FINANCIAL CONDITION
Liquidity and Capital Resources
A summary of key financial data and ratios at the dates indicated is as
follows:
<TABLE>
<CAPTION>
PRO FORMA
AUGUST 3, AUGUST 3,
1991 1992 1993 1994 1995 1996 1996
---- ---- ---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Working Capital (millions)..................... $297.2 $262.6 $240.6 $259.2 $209.4 $206.4 $298.4
Current Ratio.................................. 2.8:1 2.0:1 1.7:1 2.2:1 1.7:1 1.6:1 2.1:1
Total Debt as a Percentage of Total
Capitalization............................... 36% 44% 55% 41% 49% 50% 50%
Net Debt (Total Debt less Cash and Cash
Equivalents) as a Percentage of Total
Capitalization............................... 33% 42% 54% 39% 44% 45% 46%
</TABLE>
The Company's primary source of liquidity is funds provided from
operations. In addition, the Company maintained a $200 million revolving Bank
Credit Agreement until October 16, 1996, when the Company elected to reduce its
availability under the Bank Credit Agreement to $150 million as a result of the
sale of the Private Notes. At October 25, 1996, $46.0 million was borrowed
under the Bank Credit Agreement. The Company has no committed bank term loan
facilities.
In October 1995, the Company refinanced $50 million of 6.47% unsecured
senior notes due in February 1996 with $50 million of 7.36% unsecured senior
notes (the ``Senior Notes''). The Senior Notes require annual principal
payments of $10 million in 1999 through 2003.
The Senior Notes and the Bank Credit Agreement contain covenants which,
among other things, require the maintenance of certain financial ratios related
to fixed charge coverage and long-term debt-to-capital, establish minimum
levels of net worth and working capital, and limit the sale of assets and the
level of liens and certain investments. The Company was in compliance with all
of these covenants at August 3, 1996 and management believes the Company will
continue to be in compliance in 1996 based on current estimates.
The Company believes that cash flow from operations combined with current
borrowing capacity under the Bank Credit Agreement will be adequate to fund its
current operational needs. Capital expenditures were $7.8 million and $17.2
million for the first six months of 1996 and 1995, respectively, and were $26.9
million, $32.5 million, and $27.2 million in 1995, 1994 and 1993, respectively.
The Company estimates that capital expenditures will total approximately $22
million in 1996 and $24 million in 1997 and will be primarily spent on new
retail stores and the remodeling of existing retail stores. There may be an
increase in borrowings in 1996 to fund capital expenditures and provide for
other obligations. The ability of the Company to satisfy its outstanding debt
at maturity and to reduce its ratio of debt to total capitalization will be
primarily dependent upon the future financial and operating performance of the
Company and upon its ability to renew or refinance its borrowings or to raise
additional equity capital.
As of August 3, 1996, after giving effect to the offering of the Private
Notes and the application of the net proceeds therefrom and the repurchase of
$5 million of its long-term debt bearing interest at 7 1/8%, the Company would
have had $230 million of senior indebtedness outstanding including $100 million
aggregate principal amount of the Notes. In addition, the Company would have
had available $176 million of undrawn borrowing under its short-term revolving
credit facility ($121 million after giving effect to the Company's election to
reduce the availability under such facility as of October 16, 1996 and the
repurchase of $5 million of long-term debt on October 21, 1996) and no
outstanding subordinated indebtedness.
Cash flow provided from operating activities for the first six months of
1996 was $8.4 million compared to $10.5 million in the first six months of
1995. The decrease in cash provided by operations resulted from higher
inventory and other working capital requirements partially offset by higher net
earnings. Cash used by investing activities was lower in the first six months
of 1996 than the same period of 1995 reflecting lower capital expenditures
primarily at Famous Footwear due to opening fewer stores in 1996.
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<PAGE> 33
Operating activities generated cash of $15.7 million in 1995 and $48.4
million in 1994, and used cash of $12.7 million in 1993. The decrease in cash
provided from operating activities in 1995 compared to 1994 was primarily due
to lower earnings in 1995 and the proceeds realized in 1994 from the
liquidation of assets from discontinued operations. The improvement in 1994
compared to 1993 was primarily due to higher earnings.
In order to support its importing operations, the Company maintains
uncommitted bank letter of credit facilities with financial institutions with
whom the Company has had longstanding relationships. The Company has maintained
a similar financing structure for over 20 years. While the Company does not
anticipate that its banks would adversely modify or withdraw the existing
letter of credit structure, there can be no assurance that the banks will not
do so. To the extent that such facilities are withdrawn or otherwise modified
in a manner adverse to the Company, there could be a materially adverse effect
on the Company's business, financial condition or results of operations.
A portion of the Company's cash and cash equivalents are held by financial
institutions outside of the United States, and represent a portion of the
accumulated unremitted earnings from the Company's foreign operations. It is
the Company's current intention to reinvest such earnings in its foreign
operations and not remit it to the United States. In the event that the cash
and cash equivalents were remitted to the United States, United States income
taxes would be incurred, which have not been provided. See Note 5 to the
Consolidated Financial Statements.
FINANCIAL INSTRUMENTS
The Company has assets, liabilities, and inventory purchase commitments
outside the United States which are subject to fluctuations in foreign currency
exchange rates. A substantial portion of inventory sourced from foreign
countries, for ultimate sale in the United States, is purchased in United
States dollars and is accordingly not subject to exchange rate fluctuations.
However, where the purchase price is to be paid in the foreign currency, the
Company enters into forward foreign exchange contracts to reduce its economic
exposure to changes in exchange rates. The level of outstanding contracts
during the year is dependent on the seasonality of the Company's business and
on the demand for footwear from various locations throughout the world.
Although the Company purchases products from certain foreign manufacturers in
United States dollars and otherwise engages in foreign currency hedging
transactions, there can be no assurance that the Company will not experience
foreign currency losses.
Assets and liabilities outside the United States are primarily located in
Canada, France, Hong Kong, Brazil, and Mexico. The Company's investments in
foreign subsidiaries with a functional currency other than the United States
dollar are generally considered long-term. As a result, the Company generally
does not hedge these net investments. In Brazil, where the economy is deemed to
be hyperinflationary, the Company hedges the local currency denominated assets
and liabilities and in 1996 entered into a forward exchange contract that is
designed to protect inventory values in the event of a major devaluation. The
effectiveness of this latter hedge will depend on a number of factors,
including the extent and timing of a devaluation and its impact on the
Brazilian economy.
The Company periodically enters into interest rate options and swaps to
reduce its exposure to changing interest rates and to reduce interest costs. In
the future the Company may enter into interest rate swaps to convert floating
rate debt to fixed or fixed rate debt to floating. See Note 11 to the
Consolidated Financial Statements.
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<PAGE> 34
BUSINESS
This section contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in such forward looking statements as a result
of, among other things, the factors set forth in the section entitled ``Risk
Factors.'' In particular, note the Risk Factors captioned ``Shift of Focus in
Business Strategy; Impact of Restructuring,'' ``Competition; Changes in
Consumer Preferences,'' ``Reliance on Foreign Sources of Production,''
``Customer Concentration,'' ``Dependence on Licenses,'' ``Dependence on Major
Branded Suppliers'' and ``Seasonality.''
GENERAL
The Company, founded in 1878, is one of the nation's leading footwear
retailers and wholesalers providing a broad offering of branded and private
label casual, athletic and dress footwear to men, women and children at a
variety of price points through multiple distribution channels both
domestically and internationally. The Company currently operates over 1,200
retail shoe stores in the United States and Canada and through its wholesale
operations designs, sources and markets footwear to over 8,000 retail stores
worldwide, including department stores, mass merchandisers and specialty shoe
stores. The Company, through its Pagoda division, sourced approximately 70
million pairs of shoes in 1995 and believes that it is among the largest
suppliers of footwear in the United States. The Company believes that it
distinguishes itself from its competitors by providing consistent style,
comfort, quality and value in its broad base of footwear offerings. The
Company's net sales and EBITDA, as adjusted, for the twelve-month period ended
August 3, 1996 were approximately $1.5 billion and $55.9 million, respectively.
The Company's net sales for the first six months of 1996 were $745.8 million
compared to $700.3 million for the same period in 1995, while EBITDA, as
adjusted, was $27.8 million and $11.1 million for the same periods,
respectively. Over the past decade, the Company has managed its transition from
a predominantly manufacturing driven concern with multiple specialty retail
concepts into a focused, marketing-oriented footwear company.
The Company's retail operations represented approximately 63% of its net
sales for the twelve-month period ended August 3, 1996. The Company's retail
operations are conducted primarily through the Famous Footwear and
Naturalizer(R) chains. The Company's net sales attributable to its retail
operations increased to $476.3 million for the six-month period ended August 3,
1996 from $434.1 for the six-month period ended July 29, 1995. The Company's
operating profit from its retail operations increased to $14.4 million for the
six-month period ended August 3, 1996 from $9.0 million for the six-month
period ended July 29, 1995.
* Famous Footwear is America's largest retailer of branded footwear for the
entire family, operating through approximately 780 stores in the United
States. Famous Footwear stores feature a wide selection of ``brand names
for less'' and offer a broad assortment of athletic, casual and dress
shoes for men, women and children typically at 10% to 50% off
manufacturers' suggested retail prices. Famous Footwear stores average
approximately 5,000 square feet in size and are primarily located in strip
centers and regional and outlet malls in the United States. Famous
Footwear's branded, full line product offering at discounted prices is
positioned to appeal to the needs of its target customers: value oriented
families.
* The Company's Naturalizer(R) stores are showcases for the Company's
flagship brand of women's shoes. The Company owns and operates through
approximately 450 Naturalizer(R) stores located in regional malls and
shopping centers in the United States and Canada. Naturalizer(R) stores
average approximately 1,300 square feet in size and feature the Company's
Naturalizer(R), NaturalSport(R) and Penaljo(R) brands. These stores are
designed and merchandised to appeal to the Naturalizer(R) target customer
who is a style and comfort conscious woman between 40-60 years old, who
seeks quality and value in her footwear selections.
The Company's wholesale operations represented approximately 37% of its net
sales for the twelve-month period ended August 3, 1996. The Company's wholesale
operations are conducted primarily through its Brown Shoe Company and Pagoda
divisions. The wholesale operations' sales and operating earnings increased to
$269.5 million and $7.4 million, excluding the LIFO recovery related to
liquidation of footwear manufactured in closed domestic facilities,
respectively, for the first six months of 1996 from $266.2 million and a loss
of $5.8 million, excluding the factory closing charges, respectively, for the
same period in 1995.
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* Brown Shoe Company is one of the nation's leading marketers of women's
footwear products. Brown Shoe Company designs and markets the Company's
Naturalizer(R), NaturalSport(R), Life Stride(R), LS Studio(TM), Night
Life(R), Penaljo(R) and Larry Stuart Collection(R) brands. Each of the
Company's distinct brands is targeted to a specific customer segment
representing different footwear styles and taste levels at different price
points. The keystone of the Company's brand portfolio is the
Naturalizer(R) brand, which has a tradition of combining style and
comfort. Introduced over 65 years ago, Naturalizer(R) is one of the
nation's leading women's footwear brands.
* The Company's Pagoda division is one of the nation's leading sourcers and
marketers of footwear. Pagoda consists of (i) Pagoda USA, which markets
branded, licensed and private label footwear to an extensive network of
mass merchandisers, mid-tier and department stores in the United States;
(ii) Pagoda International, which markets the Company's branded and
licensed products for men, women and children to better specialty
retailers in Europe, Latin America and the Far East; and (iii) Pagoda
Trading, which sources footwear globally for Brown Shoe Company, Pagoda
USA and Pagoda International through its offices in China, Taiwan, Hong
Kong, Indonesia, Brazil and Italy.
RESPONSES TO CHANGES IN FOOTWEAR INDUSTRY
According to Footwear Industries of America, the domestic, nonrubber
footwear industry had approximately $32.5 billion in annual revenues with sales
of over 970 million pairs of shoes in 1995. Although the size of the industry
has remained relatively flat over the past several years, the market share of
the discount and self-service shoe segments grew approximately 3.5% between
1991 and 1995. The industry is highly competitive with advantages accruing to
companies which can achieve significant economies of scale in their operations.
The Company is one of the nation's largest retailers and sourcers of footwear
and provided approximately 9% of all nonrubber footwear sold in the United
States in 1995.
Over the past decade the footwear industry has undergone fundamental
structural changes. Primary among these changes have been: (i) the continuing
migration from domestic manufacturing to international sourcing for footwear
products; (ii) the ongoing consolidation of department stores and independent
footwear retailers; and (iii) the shift in consumer preferences favoring
athletic and casual footwear products. The Company has responded to these
fundamental structural changes by: (i) eliminating all domestic manufacturing
facilities and further developing its global design and sourcing capabilities;
(ii) maintaining diversity in distribution through its retail formats and
expanding its domestic and international wholesale operations; (iii) improving
management's responsiveness to shifting consumer preferences for updated
footwear styles; and (iv) improving its position as one of the nation's leading
retailers and wholesalers of athletic and casual footwear products. As a
result, over the past decade the Company has managed its transition from a
predominantly manufacturing driven concern with multiple specialty retail
concepts into a focused marketing-oriented footwear company.
Beginning in the early 1980's, the Company began restructuring its
operations in response to fundamental structural changes in the footwear
industry. These restructuring programs have resulted in a shift in the
Company's retail focus from leased footwear departments in department stores to
branded footwear stores in regional malls, strip centers and outlet centers and
a shift in its wholesaling focus from manufacturing to marketing and foreign
sourcing. In the course of its restructuring, the Company has exited from
businesses which generated an aggregate of over $1.2 billion in annualized net
sales and had over $400 million of assets. These actions included: (i) the
closure of 30 footwear manufacturing facilities, representing all of the
Company's United States based manufacturing capability and sourcing
substantially all of its footwear overseas; (ii) the sale of its Recreational
Products division; (iii) the sale of its Cloth World chain of fabric stores and
other specialty retailing operations; (iv) the closure of over 650 non-
performing retail stores operating primarily under the Connie(R) and Regal(R)
names; (v) the sale of Brown Shoe Company's men's shoe division; (vi) the exit
from the leased shoe department and footwear catalog businesses; and (vii) the
aggressive reduction of its corporate and divisional overhead. During the same
period, the Company (i) aggressively expanded its Famous Footwear retailing
operations; (ii) introduced its NaturalSport(R) brand; (iii) built its
international sourcing capabilities through the acquisition of Pagoda; (iv)
acquired and grew Canadian retail footwear chains; (v) established Pagoda
International to develop international marketing capability; and (vi) added to
its core operations through selective acquisitions, including the acquisition
of the Larry Stuart Collection(R) and Le Coq Sportif(R) brands in 1995.
Management believes that it has completed its restructuring and is now focused
on increasing the sales and profitability of its core operations. The Company's
restructuring and retail focus have contributed to an
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<PAGE> 36
increase in the Company's net sales and EBITDA, as adjusted, to $745.8 million
and $27.8 million, respectively, in the first six months of 1996, from $700.3
million and $11.1 million, respectively, in the same prior year period.
CORPORATE OPERATING STRATEGIES
Focus on Style, Comfort, Quality and Value in Footwear--The Company offers
a broad range of branded and private label products for men, women and children
at various price points through multiple distribution channels both
domestically and internationally. The Company believes that it distinguishes
itself from its competitors by providing consistent style, comfort, quality and
value in its broad base of footwear offerings that appeal to a broad
demographic cross-section of customers. Management believes that the Company's
design, global sourcing and marketing capabilities will continue to allow the
Company to differentiate itself from its competitors.
Marketing-Driven Footwear Product Offerings--Over the past decade, the
Company has managed its transition from a predominantly manufacturing driven
concern with multiple specialty retail concepts into a focused marketing-
oriented footwear company. The Company has continued to respond to changes in
consumer footwear preferences by changing its distribution, sourcing and
footwear styles.
* Distribution--The Company has exited its operation of leased footwear
departments within department stores and closed numerous underperforming
mall-based, full-priced retail stores. Famous Footwear, the Company's
largest retail operation, operates primarily in strip centers, and
regional and outlet malls in the United States. Famous Footwear's
positioning is consistent with recent changes in shopping patterns, value
orientation and demographics that have characterized the Company's target
customer, the value oriented family.
* Sourcing--The Company has closed all of its domestic manufacturing
facilities and has moved substantially all of its product sourcing
off-shore. Management believes that the Company has built the global
sourcing capability required to meet the quality, style, price and time
responsiveness demanded by its customers. Currently, the Company has
sourcing arrangements with independent footwear manufacturers in over 20
countries, and has continued to diversify and strengthen its relations
with independent footwear manufacturers worldwide.
* Style--The Company's design efforts are intended to capture longer term
style trends to create a more consistent brand image and longer lasting
relationship with its customers. Recently, the Company has augmented its
design capabilities to develop and update the styles comprising its broad
product offerings. The Company's augmented design capabilities, combined
with specific attention to consumer feedback have resulted in the
alignment of established styles with current consumer preferences as well
as the introduction of successful new styles.
Improvements in Operating Profitability--Management continues to focus on
increasing sales, improving gross margin and controlling corporate and
divisional expenses to increase operating profitability. In 1996, gross margins
have improved primarily through better product positioning and sourcing cost
savings. Corporate overhead and divisional expenses are actively monitored to
continue to streamline infrastructure without sacrificing the ability to
achieve future revenue growth. For example, in 1996, the elimination of the
Company's remaining domestic manufacturing facilities combined with certain
other divisional cost savings are expected to reduce product costs and increase
annual operating earnings by approximately $10-12 million. Management continues
to pursue opportunities to further leverage its existing infrastructure through
expense controls and distribution logistics.
OPPORTUNITIES FOR IMPROVED DIVISIONAL PERFORMANCE
RETAIL OPERATIONS
Famous Footwear
Focus on Execution--During 1994 and 1995, the Company opened 320 new Famous
Footwear stores on a base of 567 stores, in an effort to capture market share
rapidly. In mid-1995, the Company slowed the pace of its store expansion to
concentrate more intensively on store level execution and in response to a more
competitive retail environment. The Company intends to add approximately 20 net
new stores in each of 1996 and 1997 in existing markets to further increase
penetration in those markets. The slowing of new store openings has enabled
management to concentrate better on improving operational efficiency and
profitability at Famous Footwear. Management
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believes that a number of recently implemented programs designed to better
manage inventory and product selection have contributed to a 3% increase in
sales per square foot, 7% increase in average price per pair and a 4% increase
in average transaction size during the first six months of 1996 compared to the
same period in 1995. In addition, the Company believes it will be able to
continue to improve the efficiency of Famous Footwear's operations by
leveraging centralized infrastructure and controlling costs.
Store Maturation--The Company's strategy of slower expansion will result in
increasing maturation of the Famous Footwear store base. The Company has opened
more than 350 Famous Footwear stores in the last 30 months and for the first
six months of 1996, sales and operating profitability for these stores averaged
$75 per square foot and 1.4% of sales, respectively. Alternatively, the average
annual sales per square foot and operating profitability for the approximately
450 stores over 30 months old for the same time period was $94 and 5.1%,
respectively. Individual Famous Footwear stores have historically experienced
increased sales and profitability with increasing maturity. Management
attributes the growth in sales with store maturation to increasing familiarity
of customers with: (i) the value and quality delivered by Famous Footwear's
``brand names for less'' concept; and (ii) the specific store location as
customers incorporate Famous Footwear into their routine shopping patterns.
Management attributes the growth in profitability with store maturation to the
seasoning of store management which results in the more efficient utilization
of more experienced, productive employees.
Naturalizer(R) Retail
Brand Repositioning--Selected Naturalizer(R) stores are participating in a
repositioning program for the Naturalizer brand designed to communicate and
enhance the brand's competitive advantage: style with comfort. This store
program has included ``updated'' design and environment, new signage and
display, improved visual merchandising and training and sales incentives for
store managers and sales associates. Management believes that these store
programs have contributed to the first six months of 1996 domestic same-store
sales increases of 2.1% and to the ability to maintain an increase in average
selling prices.
WHOLESALE OPERATIONS
Brown Shoe Company
Product Improvements--The closure of the Company's remaining domestic
manufacturing facilities in 1995 enabled Brown Shoe Company to fully utilize
the broad flexibility of the Company's global sourcing capabilities. Through
the Company's global sourcing, management believes that Brown Shoe Company is
able to secure a wide range of quality footwear products at competitive prices.
In addition, the Company recently augmented its design department to enhance
its capabilities for developing and updating the styles comprising its broad
offering of footwear products. The Company's augmented design capabilities,
combined with specific attention to consumer feedback have resulted in the
alignment of established styles with current consumer preferences as well as
the introduction of successful new styles increasing the breadth of the
Company's product offerings.
Intensified Marketing--The Company continues to build on its strong
heritage and consumer recognition of its Company-owned brands such as the
Naturalizer(R) brand, one of the nation's leading women's footwear brands. In
addition, the Company is strengthening and more clearly defining the
independent brand images of its Naturalizer(R), NaturalSport(R), Life
Stride(R), LS Studio(TM), Night Life(R) and Larry Stuart Collection(R) brands.
As part of its marketing program, the Company continues to conduct consumer
research designed to identify opportunities to strengthen each of the Company's
brands. The Company estimates it will invest $17 million in 1996 in market
research, product development and marketing communications, compared to $14
million in 1995. Recently, in conjunction with the Company's consumer-oriented
marketing programs, the Company has repositioned certain of its brands with
improved styling and better quality, thereby enabling the Company to realize
modestly higher price points.
Profitability Improvement--Management believes that it has the opportunity
to continue to increase its profitability by increasing Brown Shoe Company's
sales as a result of its intensified marketing and product improvements, while
maintaining its recently improved gross profit margins. In addition, management
believes it can maintain Brown Shoe Company's improved gross profits which
management attributes to more efficient sourcing and the repositioning of
certain brands. Management believes it can sustain the 8% increase in the
average selling price per pair achieved through the first six months of 1996 as
compared to the prior year period which management attributes to the
strengthening and repositioning of its brands.
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Pagoda Division
Develop New and Existing Licenses--Management believes that branded
wholesale footwear provides the Company with opportunities to achieve better
margins than the highly competitive private label wholesale footwear business.
Over the past four years, the Company has been successful in increasing the
proportion of branded net sales to total wholesale net sales. In 1995,
Company-owned or licensed brand net sales represented approximately 56% of
Pagoda's domestic wholesale sales, up from approximately 14% in 1991.
Company-owned or licensed brands represent substantially all of the Company's
international wholesale net sales. Management intends to continue to increase
the proportion of branded to total wholesale sales primarily through: (i) the
ongoing enhancement and repositioning of Company-owned brands; (ii) the
continued development of existing footwear licenses; and (iii) the selective
acquisition of additional footwear licenses and brands. Management has recently
entered into license agreements enabling the Company to offer Penn(R),
Russell(R) and additional Disney footwear.
International Growth--Management believes that there are significant
opportunities for the Company to increase its sales to the large and growing
international market for footwear. The Company plans to increase its
penetration of existing international markets, which include Latin America,
Europe, and the Far East. Management believes that the Company is well
positioned to increase international footwear sales because of: (i) the
strength of its internationally recognized brands and licenses including
Naturalizer(R), Le Coq Sportif(R), Dr. Scholl's(R), Buster Brown(R) and Disney;
(ii) its extensive experience in selling footwear in international markets; and
(iii) its specific knowledge of international patterns of footwear supply and
demand as a result of its global sourcing expertise. In 1995, the Company
acquired Le Coq Sportif(R), which has significant brand awareness in Latin
America and Europe, as part of its continuing efforts to increase its
international sales. Over the past five years, the Company has been successful
in increasing international net sales at a faster rate than total wholesale
sales. As a result, for the first six months of 1996, international net sales
represented approximately 14% of the Company's aggregate wholesale net sales,
up from 12% in 1995.
RETAIL OPERATIONS
OVERVIEW
Famous Footwear
Famous Footwear is America's largest retailer of branded footwear for the
entire family. Founded over 30 years ago, Famous Footwear was purchased by the
Company in 1981 as a 32 store chain, and has grown to include over 780 family
footwear stores located primarily in strip centers and regional and outlet
malls in the United States. Famous Footwear stores offer a broad assortment of
athletic, casual and dress shoes for men, women and children typically at 10%
to 50% off manufacturers' suggested retail prices. Famous Footwear's branded,
full-line product offering at discounted prices is positioned to appeal to the
needs of its target customers: value-oriented families. Famous Footwear stores
average approximately 5,000 square feet in size and feature a wide selection of
``brand names for less.'' Management attributes the recent increase in
operating productivity at Famous Footwear in part to leveraging expenses as
well as store maturity.
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<PAGE> 39
The following is an overview of the locations of the Company's Famous
Footwear stores:
[MAP OF FAMOUS FOOTWEAR STORES]
Naturalizer Retail(R)
The Company operates over 450 Naturalizer(R) stores, averaging
approximately 1,300 square feet in size, located in regional malls and shopping
centers in the United States and Canada. The stores offer a complete selection
of women's footwear styles, including dress, casual and athletic shoes, through
the Naturalizer(R), NaturalSport(R) and Penaljo(R) brands in a wide array of
sizes and widths. As a result of its recent repositioning of the Naturalizer(R)
brand, which includes the upgrading of certain of its store locations, domestic
same-store annual sales increased 2.1% for the six-month period ended August 3,
1996. The Company also operates 16 F.X. LaSalle(R) stores, primarily in the
Montreal, Canada market, which sell better-grade men's and women's footwear
brands.
The following is an overview of the locations of the Company's Naturalizer
stores:
[MAP OF NATURALIZER STORES]
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<PAGE> 40
PRODUCTS
Famous Footwear
Famous Footwear's product offering is crafted to satisfy the footwear needs
of the entire family, by offering an extensive selection of athletic, casual
and dress merchandise for women, men and children at competitive prices.
Footwear brands include Nike, Reebok, Dexter, Naturalizer(R), Keds, Rockport,
Nunn Bush, Converse, Adidas, Vans, KSwiss and Buster Brown(R). The Company
continually works with its suppliers to expand its brand mix and product
offerings to ensure that consumers' favorite brand names and styles are
available at Famous Footwear.
Famous Footwear has grown to become one of the nation's leading footwear
retailers. As such, Famous Footwear has become an increasingly meaningful
customer for the leading branded footwear suppliers. Management believes Famous
Footwear's size and reputation enable it to benefit from strong brand buying
power with its large vendor base. The Company has developed mutually beneficial
relationships with many of its largest suppliers, which enable Famous Footwear
to receive its product selections on a timely basis, to continually expand its
brand and product mix to best serve its customers' changing needs and to ensure
that its customers can find their favorite brands and styles and sizes in its
stores. Management believes that Famous Footwear will be able to continue to
provide competitively priced branded footwear while maintaining its gross
margins.
Management continues to be focused on improving inventory management to
maximize Famous Footwear's in-stock position. Specifically, Famous Footwear
continually refines its store model stock to replenish the stores to reflect
more accurately consumer demand and historical preferences for brands, styles
and sizes and to account for store location and promotional opportunities.
Concurrently, management has focused on managing its product mix, particularly
promotional products, to optimize its gross margins. As part of its efforts to
improve inventory management, and as a result of its growth in 1995, Famous
Footwear opened an additional regional distribution center to augment its
distribution capabilities in the southern United States.
Famous Footwear's advanced distribution systems allow for fresh merchandise
to be delivered every week. In addition to the delivery of new styles, these
systems provide item replenishment of the prior week's sales as well as
redistribution of product to stores demonstrating the greatest item
sell-through from stores with lower item sell-through. Management believes that
these systems of replenishment and distribution result in lower markdowns and
increased gross margins and profitability. This capability also ensures greater
integrity of the product offering to the customer and assists in the effort to
ensure that the right product is at the right place at the right time.
Naturalizer Retail(R)
The Company's Naturalizer(R) stores are showcases for the Company's
flagship brand of women's shoes. Naturalizer(R) stores offer a complete
selection of women's footwear styles, including dress, casual and athletic
shoes, primarily under the Naturalizer(R) brand, but also under the
NaturalSport brand walking and casual shoes and the Penaljo brand. The
Naturalizer(R) brand is one of the nation's leading women's footwear brands
providing comfort and quality in a variety of styles and sizes. Management
believes that the repositioning of the Company's brands combined with the
upgrading of the shopping environment of its Naturalizer(R) stores has
increased the appeal of the product offering with its target customer who is a
style and comfort conscious woman between 40-60 years old, who seeks quality
and value in her footwear selections.
SALES AND MARKETING
Famous Footwear
Famous Footwear stores feature a wide selection of ``brand names for
less,'' by offering brand name footwear at prices which typically represent 10%
to 50% savings off of manufacturers' suggested retail prices. Famous Footwear
supports its competitive prices on brand name footwear with excellent service
and a strong marketing campaign reinforcing Famous Footwear's value image with
its target customer base of value-oriented families. In 1995, management
invested over $25 million to communicate Famous Footwear's ``brand names for
less'' image to target consumers, typically, on a weekly basis. Famous
Footwear's marketing program includes television and newspaper advertising,
in-store signage and database marketing, all of which are designed to further
develop and reinforce the Famous Footwear concept with the target customer. In
addition, the Company continues to invest in training to produce a
knowledgeable and motivated salesforce.
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<PAGE> 41
Naturalizer(R) Retail
The Naturalizer(R) brand and stores have been repositioned to appeal to
style and comfort conscious women. Marketing programs for the Naturalizer(R)
stores have complemented the Company's Naturalizer(R) brand advertising,
building on the brand's strong consumer recognition and reinforcing the brand's
added focus on style and quality. Similarly, the Company is in the process of
upgrading its Naturalizer(R) stores to produce an inviting and comfortable
shopping environment featuring new signage and displays as well as a renewed
focus on visual presentation and the training and motivation of store managers
and sales associates. In addition, the Company has invested in additional
Naturalizer(R) salesforce training commensurate with the repositioned brand
image of style, quality and comfort. Management believes that the repositioning
of the Company's brands combined with the upgrading of the shopping environment
of its Naturalizer(R) stores has increased the appeal of the product offering
with its target customer. The Company plans to continue to remodel selected
Naturalizer(R) stores.
The Naturalizer(R) store product offering is typically priced between $50
and $85 per pair. Management believes these price points, which were increased
concurrently with the repositioning of the Naturalizer(R) brand, reflect
significant value for the style, quality and comfort which the Naturalizer(R)
brand conveys. To support the Company's repositioning of its Naturalizer(R)
brand, the Company has implemented a database marketing program which targets
and rewards frequent customers.
WHOLESALE OPERATIONS
OVERVIEW
Brown Shoe Company
Brown Shoe Company is one of the nation's leading marketers of women's
footwear products. Brown Shoe Company designs and markets the Company's
NaturalSport(R), Life Stride(R), LS Studio(TM), Night Life(R), Penaljo(R) and
Larry Stuart Collection(R) brands. Each of the Company's distinct brands is
targeted to a specific customer segment representing different footwear styles
at different price points. The keystone of the Company's brand portfolio is the
Naturalizer(R) brand, which has a tradition of combining style and comfort.
Introduced over 65 years ago, Naturalizer(R) is one of the nation's leading
women's footwear brands.
Recently, the Company believes it has achieved improved customer acceptance
by repositioning certain of the Brown Shoe Company brands with improved styling
and better quality, thereby enabling the Company to realize modestly higher
price points. Management believes that Brown Shoe Company is successfully
positioned as a supplier of premium footwear brands to department and specialty
stores nationwide as well as the Company's Naturalizer(R) retail stores.
Pagoda Division
The Pagoda division is one of the nation's leading sourcers and marketers
of footwear. Pagoda's operations consist of: (i) Pagoda USA, which markets
branded, licensed and private label athletic, casual and dress footwear
products to men, women and children at a variety of price points to an
extensive network of mass merchandisers, mid-tier and department stores in the
United States; (ii) Pagoda International, which markets the Company's branded
and licensed athletic, casual and dress footwear for men, women and children,
typically at moderate price points primarily to better specialty retailers in
Europe, Latin America and the Far East; and (iii) Pagoda Trading, which sources
footwear globally for Brown Shoe Company, Pagoda USA and Pagoda International
through offices in China, Taiwan, Hong Kong, Indonesia, Brazil and Italy.
Pagoda USA, which is a leading private label footwear resource for many of
the nation's leading mass merchandisers, including WalMart, Kmart and Target,
provided its wholesale customers with over 48 million pairs of shoes in 1995.
Pagoda International, which commenced operations in 1989, has rapidly grown to
sales of approximately $83 million in 1995, as the Company continues to
increase its penetration of international footwear markets. Pagoda Trading,
which sourced over 70 million pairs of shoes in 1995, has developed a flexible,
diversified global sourcing capability through its strong, established
relationships with multiple third-party independent footwear manufacturers.
40
<PAGE> 42
PRODUCTS
Brown Shoe Company
Brown Shoe Company designs, sources and markets products for women under
the Company's well-recognized Naturalizer(R), NaturalSport(R), Life Stride(R),
LS Studio(TM), Night Life(R), Penaljo(R) and Larry Stuart Collection(R) brands.
The following table provides an overview of the Brown Shoe Company products by
brand:
<TABLE>
<CAPTION>
NATURALIZER GROUP LIFE STRIDE GROUP
------------------------------------------- -----------------------------------
LIFE NIGHT LARRY STUART
NATURALIZER(R) NATURALSPORT(R) PENALJO(R) STRIDE(R) LIFE(R) LS STUDIO(TM) COLLECTION(R)
-------------- -------------- ---------- --------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dress & Walking & Dress & Dress & Special Sophisticated European
Type of Footwear.............. Casual Active Casual Casual Occasion Contemporary Inspired
Retail Price Range Per Pair... $50-65 $55-85 $50-65 $30-40 $40-50 $35-50 $80-100
</TABLE>
Naturalizer(R), NaturalSport(R) and Penaljo(R) products emphasize style,
comfort, quality and value. These brands provide a wide range of quality casual
and dress footwear products which combine comfort and fit with classic,
relevant and up-to-date styling. Naturalizer(R) is one of the nation's most
recognized women's footwear brands. NaturalSport(R) provides functional walking
shoes, sandals and clogs. The Life Stride Group, anchored by the Life Stride(R)
brand, is the nation's leading, entry-level price point, women's brand in
department stores, offering fashion-right styling. The Larry Stuart
Collection(R) brand offers stylish, sophisticated European-inspired footwear
for women.
Pagoda Division
Pagoda USA and Pagoda International design and market a broad offering of
branded footwear for department stores, specialty footwear stores and other
retailers, domestically and internationally, respectively. Pagoda USA is one of
the nation's leading suppliers of children's footwear, with popular brands
including Buster Brown(R), Playskool(R) and assorted Disney characters.
Although the Company owns the rights to many of its brands, the Company
does license certain brand names. The following summarizes Pagoda USA and
Pagoda International's brands:
<TABLE>
<CAPTION>
ADULT BRANDS CHILDREN'S BRANDS
- ---------------------------- ----------------------------
COMPANY-OWNED LICENSED COMPANY-OWNED LICENSED
- ------------- -------- ------------- --------
<S> <C> <C> <C>
Air Step(R) Brittania(R) Buster Brown(R) Barbie(R)
Connie(R) Dr. Scholl's(R) Wildcats(R) Candies(R)
DeLiso(R) Mickey Unlimited(R) Casper(R)
Fanfares(R) Penn(R) Disney <F1>
Le Coq Sportif(R) Remington(R) Hello Kitty(R)
Maserati(R) Union Bay(R) Kazaam(R)
Nature Sole(R) Nerf(R)
Regal(R) Playskool(R)
Revelations(R) Sailor Moon(R)
U.S. 101(R) Tonka(R)
<FN>
- --------
<F1> Disney children's licenses include 101 Dalmatians(R), Disney Babies(R),
The Hunchback of Notre Dame(R), The Lion King(R) and Mickey's Stuff for
Kids(R).
</TABLE>
Management believes that branded and licensed footwear provides the Company
with opportunities to achieve better margins than private label footwear. Over
the past several years, Pagoda USA and Pagoda International have been
successful in increasing their proportion of branded and licensed wholesale
sales. In 1995, branded and licensed footwear represented approximately 56% of
Pagoda USA's sales, up from approximately 14% in 1991. Company-owned or
licensed brands represent substantially all of Pagoda International's sales.
Pagoda USA and Pagoda International continuously seek opportunities to
develop additional brands through selective acquisitions or licenses. Recently,
the Company acquired the Le Coq Sportif(R) brand, which has significant
consumer recognition in Europe and Latin America, as part of its continuing
efforts to increase international sales.
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<PAGE> 43
Similarly, Pagoda USA and Pagoda International recently entered into a long term
licensing agreement which is renewable through 2014 to market the popular Dr.
Scholl's(R) brand of affordable, high quality casual and work shoes for men and
women both domestically and internationally. Recently, management has entered
into additional license agreements enabling Pagoda USA and Pagoda International
to offer Penn(R), Russell(R) and additional Disney footwear.
In addition to its branded and licensed footwear marketing, Pagoda USA
executes private label programs for many of the nation's leading mass
merchandisers, including Kmart, Payless ShoeSource, Target and WalMart,
typically for children's shoes. The majority of this private label footwear is
designed to provide these retailers with entry level price point footwear.
SALES AND MARKETING
Brown Shoe Company
The Brown Shoe Company brands are sold in department stores, multi-line
shoe stores and branded specialty stores. Consistent with the repositioning of
certain of the brands to higher style and quality levels and modestly higher
price points, the Company has been selectively upgrading its wholesale customer
base, with particular focus on expanding its penetration of the major
department stores. Currently the Company sells footwear products to
substantially all the nation's major department store companies, including
Dayton-Hudson, Dillard's, Federated, the May Company, Mercantile and Nordstrom.
Brown Shoe Company maintains an independent sales force to market its
Naturalizer(R), NaturalSport(R), Life Stride(R), LS Studio(TM), Night Life(R)
and Larry Stuart Collection(R) brands primarily to department and specialty
footwear stores domestically. The Brown Shoe Company sales force is responsible
for developing and implementing marketing programs for each brand, planning
promotional events, assisting in product development and managing the Company's
relationships with its wholesale customers.
Recently, the Company has intensified its marketing efforts by augmenting
its market research, product development and marketing communications. The
Company continues to build on and take advantage of the strong heritage and
consumer recognition of its traditional brands, and it also is more clearly
defining the independent brand images of certain other brands. Guided by market
research, during 1995, Brown Shoe Company invested over $14 million in direct
to consumer advertising in support of the repositioning of certain of its
brands. Management estimates it will invest an additional $17 million in Brown
Shoe Company's marketing programs in 1996. Management attributes the strong
consumer recognition of its brands in part to the continued success of its
marketing programs.
Pagoda Division
Pagoda USA and Pagoda International maintain independent sales forces to
market their branded and private label products. Domestically, Pagoda USA
markets branded, licensed and private label footwear to an extensive network of
mass merchandisers, mid-tier and department stores in the United States. In
1995, Pagoda USA sold over 48 million pairs of shoes to its domestic wholesale
customers. Internationally, Pagoda International markets branded and licensed
footwear to better specialty footwear retailers. Pagoda International maintains
sales offices in Brazil, France and Hong Kong. In 1995, Pagoda International's
sales to its wholesale customers were approximately $83 million. Both sales
forces are responsible for developing and implementing marketing programs,
planning promotional events, assisting in product development and managing the
Company's relationships with its wholesale customers. During 1995, Pagoda USA
and Pagoda International invested over $6 million in direct to consumer
marketing. Management estimates it will invest $7 million in Pagoda USA and
Pagoda International's marketing programs in 1996.
SOURCING
The Company obtains footwear products from leading branded footwear
suppliers, primarily for its Famous Footwear retail operations, as well as from
its Pagoda Trading operations.
Through its Famous Footwear retail operations, the Company is a meaningful
customer for many leading branded footwear manufacturers. Management believes
that the scale of its purchases from these leading branded footwear
manufacturers typically enables the Company to secure competitive purchasing
terms.
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<PAGE> 44
Pagoda Trading sources essentially all of the footwear for the Company's
Brown Shoe Company, Pagoda USA, Pagoda International and Naturalizer(R) retail
operations. In addition, Pagoda Trading sources a limited amount of footwear
for Famous Footwear. Management believes that Pagoda Trading has developed a
flexible, diversified global sourcing capability through its strong,
established relationships with multiple third-party independent footwear
manufacturers. Management attributes its ability to achieve consistent quality,
competitive prices and on-time delivery to the breadth of its established
relationships.
The Company currently maintains sourcing offices in Brazil, Italy, China,
Hong Kong, Taiwan and Indonesia. Management believes this diverse structure
enables the Company to source footwear at virtually any price level from any
significant shoe manufacturing region of the world. The following table
provides an overview of the Company's foreign sourcing activities in 1995:
<TABLE>
<CAPTION>
MILLIONS
COUNTRY OF PAIRS
- ------- --------
<S> <C>
China........................................ 45.5
Indonesia.................................... 12.6
Brazil....................................... 5.6
Italy........................................ 2.9
Taiwan....................................... 1.1
All Other.................................... 2.3
----
Total........................................ 70.0
====
</TABLE>
The Company maintains two Company-owned manufacturing facilities in Canada
which have the capacity to produce approximately one million pairs annually,
primarily serving the Canadian market.
QUALITY CONTROL
The Company monitors the quality components of its footwear products prior
to production and inspects prototypes of each footwear product before
production runs are commenced. The Company also performs random in-line quality
control checks during and after production before footwear leaves the
manufacturing facility. Final quality control inspections take place at the
Company's distribution centers. The Company has approximately 40 full-time
personnel engaged in quality control in the Far East, Brazil and Italy.
DESIGN
The Company recently augmented its design capabilities for developing and
updating the styles comprising its broad footwear offering. The Company
maintains separate design teams for each of its brands and the Company
maintains a staff of approximately 30 footwear designers which are responsible
for the creation and development of new product styles. The Company's augmented
design capabilities, combined with specific attention to consumer feedback have
resulted in the alignment of established styles with current consumer
preferences as well as the introduction of successful new styles increasing the
breadth of the Company's product offerings. The Company's designers constantly
monitor trends in apparel and footwear fashion and work closely with retailers
to identify consumer footwear preferences. Once a new style is created, the
Company's designers work closely with independent footwear manufacturers to
translate their designs into new footwear styles.
DISTRIBUTION
The Company operates an efficient, sophisticated distribution system which
provides for the timely delivery of footwear products to the Company's retail
stores and wholesale customers. The Company's distribution systems consist of
four separate distribution centers located strategically in the United States.
The Company's distribution centers are linked by computer to the Company's
executive offices, enabling management to maintain up-to-date information on
the availability of inventory at all locations.
A majority of the Company's footwear products are shipped from independent
manufacturers to one of the Company's distribution centers, except for footwear
sourced for domestic mass merchandisers and some international wholesale
customers which may be shipped direct to the customer. At the Company's
distribution centers, the Company processes and ships its products by contract
and common carriers and, to a lesser extent Company-owned
43
<PAGE> 45
vehicles, to its retail stores and wholesale customers. The Company's retail
stores typically receive shipments once per week under the Company's auto-
replenishment program. In aggregate, the Company maintains approximately a one
to two month supply of footwear product at its distribution centers.
In 1995, the Company opened a new 800,000 square foot leased distribution
center for its Famous Footwear retail operation in Lebanon, Tennessee.
Management believes the Tennessee facility will improve the efficiency of
inventory management at Famous Footwear. Management believes that its current
distribution system will enable it to continue to serve its retail stores and
wholesale customers for the foreseeable future.
INFORMATION SYSTEMS
The Company continues to invest in its computer hardware, software and
network systems to: (i) enhance the speed and efficiency of certain areas of
its business such as product design, order entry, distribution and financial
reporting; (ii) improve the efficiency and coordination of its international
sourcing operations; and (iii) provide timely inventory and retail sales
information. Over the last five years, the Company has invested over $10
million to purchase computer equipment and software.
The Company's retail stores use electronic point-of-sale registers to
capture sales transactions and transmit daily activity each night to the
Company's central computer systems in St. Louis, Missouri and Madison,
Wisconsin. This system enables management to track daily sales by store by
stock keeping unit. An automated reordering system is used to track retail
store inventories and generate distribution center orders to keep the stores
supplied with model stock inventories.
The Company's wholesale businesses use sophisticated systems to support the
sales, merchandising and global sourcing operations. These systems provide
timely information to support selling activities, order flow, inventory receipt
and distribution, and customer service. Electronic data interchange (EDI) is
used with a large number of customers to process customer orders, shifting
notifications and invoices. The Company is in the process of implementing a
comprehensive global system which will track the flow of footwear from the
source of supply at independent manufacturers to the customers. Other new
system development includes a sales force automation system which will allow
salesmen access to current order and product information as well as the ability
to plan and enter customer orders from remote locations.
BACKLOG
The Company generally receives orders for the next season's footwear
products three to six months prior to the time the products are delivered to
wholesale customers. In addition, the Company carries certain footwear in
inventory which is available for immediate shipment to fill retail customers
reorders during the current selling season. At August 3, 1996, the Company's
backlog, excluding intercompany orders, was approximately $186 million, as
compared to approximately $187 million at July 29, 1995. All such orders are
subject to cancellation. The Company's backlog depends on a number of factors,
including the timing of order receipt, which may vary in any year depending on
the Company's marketing programs and selling strategies and other factors
beyond the Company's control. As a consequence, a comparison of backlog from
period to period is not necessarily meaningful and may not be indicative of
eventual shipments. See ``Risk Factors--Seasonality.''
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<PAGE> 46
INTELLECTUAL PROPERTY
The principal trademarks used by the Company to distinguish its brands are:
<TABLE>
<CAPTION>
OWNED LICENSED
----- --------
<S> <C>
Air Step(R) Barbie(R)
Buster Brown(R) Dr. Scholl's(R)
Connie(R) Kazaam(R)
Larry Stuart Collection(R) Mickey Unlimited(R) and numerous other
trademarks under license from
Le Coq Sportif(R) The Walt Disney Company
Life Stride(R) Penn(R)
LS Studioe Playskool(R)
Naturalizer(R) Russell(R)
NaturalSport(R) Union Bay(R)
Night Life(R)
Penaljo(R)
Revelations(R)
</TABLE>
These trademarks are the subject of registrations and pending applications
throughout the world filed by the Company (or its licensors) for use on
footwear. The Company continues to expand its worldwide usage and registration
of related trademarks. The Company regards the licenses to use the trademarks
and its other proprietary rights in and to the trademarks as valuable assets in
the marketing of its products and, on a worldwide basis, vigorously seeks to
protect them against infringement.
COMPETITION
Competition is intense in the footwear industry. Certain of the Company's
competitors are larger and have substantially greater resources than the
Company. The Company's success depends upon its ability to remain competitive
in the areas of style, price and quality, among others. The Company's success
depends in part on its ability to anticipate and respond to changing
merchandise trends and consumer preferences and demands in a timely manner.
Accordingly, any failure by the Company to anticipate and respond to changing
merchandise trends could adversely affect consumer acceptance of the Company's
brand names and product lines, which in turn could adversely affect the
Company's business, financial condition or results of operations.
EMPLOYEES
The Company has approximately 11,000 full and part-time employees.
Approximately 130 employees engaged in one of the Company's domestic
distribution centers are employed under a union contract, which expires in
September 1999. In Canada, approximately 300 factory and warehouse employees
are employed under union contracts which expire in October, 1996 and October,
1997. The Company considers its relations with its employees to be
satisfactory.
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<PAGE> 47
PROPERTIES
Certain information concerning the Company's principal facilities is set
forth below:
<TABLE>
<CAPTION>
LOCATION USE APPROX. SQ. FEET OWNERSHIP
-------- --- ---------------- ---------
<S> <C> <C> <C>
St. Louis, MO Principal Executive, Sales and 265,000 Owned
Administrative Offices
Sikeston, MO Brown Shoe Company Distribution Center 710,000 Owned
Fredericktown, MO Brown Shoe Company Distribution Center 385,000 Owned
Ontario, Canada Canadian Operations 257,000 Owned
Madison, WI Famous Footwear Executive, Sales and 135,000 Leased
Administrative Offices
Madison, WI Famous Footwear Distribution Center 750,000 Leased
Lebanon, TN Famous Footwear Distribution Center 800,000 Leased
</TABLE>
ENVIRONMENTAL
The Company is involved in environmental remediation and ongoing compliance
at several sites. The Company has completed remediation efforts at its closed
New York tannery and two associated landfills. As such, in September 1995,
state environmental authorities reclassified the status of the site to one that
has been properly closed and that requires only continued maintenance and
monitoring, which includes certain limited groundwater sampling at the tannery
site. This change in status has allowed the Company to estimate more reliably
the future liability for monitoring and maintenance, which is required over the
next 28 years, based on a specific site plan. Accordingly, in the third quarter
of 1995, the estimated liability of $5.3 million related to this site was
discounted, using a 6.4% rate, resulting in a $2.0 million reduction in the
previously recorded liability of $4.7 million. The expected payments for the
next five years are approximately $0.2 million per year with the balance due
thereafter.
In 1994, the Company became aware of potential exposure at an owned factory
that is currently leased to another party. Preliminary testing was completed in
late 1994, and remediation work began in 1995. In addition, various federal and
state authorities have identified the Company as a potentially responsible
party for remediation at certain landfills from disposal of solvents and other
by-products from the closed tannery and shoe manufacturing facilities.
Management expects that the remaining costs related to the owned, but leased,
factory and the various landfills will total approximately $0.8 - $1.0 million.
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. At February 3,
1996, the total accrued environmental liabilities of the Company for all sites,
including the above discounted liability, total approximately $3.1 million.
LEGAL PROCEEDINGS
The Company is a party to various claims, complaints and other legal
actions that have arisen in the ordinary course of business from time to time.
Management believes that the outcome of all pending legal proceedings, in the
aggregate, will not have a material adverse effect on the Company's business,
results of operations or financial condition.
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<PAGE> 48
MANAGEMENT
The executive officers of Brown Group, Inc. are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
B. A. Bridgewater, Jr..................... 62 Chairman of the Board, President and Chief Executive Officer; Chairman of
the Executive Committee
Brian C. Cook............................. 57 Vice President, and President, Famous Footwear
Ronald N. Durchfort....................... 43 President, Pagoda International
Ronald A. Fromm........................... 45 Executive Vice President, Famous Footwear
Robert D. Pickle.......................... 59 Vice President, General Counsel and Corporate Secretary
Gary M. Rich.............................. 45 President, Pagoda U.S.A.
Harry E. Rich............................. 56 Director, Executive Vice President, Chief Financial Officer; Member of the
Executive Committee
James M. Roe.............................. 50 Senior Vice President, Sales and Operations, Famous Footwear
Andrew M. Rosen........................... 45 Vice President and Treasurer
Richard C. Schumacher..................... 48 Vice President and Controller
David H. Schwartz......................... 50 President, Pagoda Trading
Mary S. Siverts........................... 36 Vice President, Public Affairs
Thomas A. Williams........................ 47 Vice President, and President, Brown Shoe Company
E. Lee Wyatt, Jr.......................... 43 Senior Vice President, Finance and Administration, Brown Shoe Company
George J. Zelinsky........................ 48 Senior Vice President and General Merchandise Manager, Famous Footwear
</TABLE>
B. A. BRIDGEWATER, JR. has served as Chief Executive Officer of the Company
since 1982 and Chairman of the Company's Board of Directors since 1985. In
addition to his current positions with the Company, Mr. Bridgewater serves as a
director of Boatmen's Bancshares, Inc., ENSERCH Corporation and Enserch
Exploration, Inc., FMC Corporation and McDonnell Douglas Corporation. Mr.
Bridgewater served as President of the Company from 1979 to 1987 and was again
named President in 1990. Prior to his election as President of the Company in
1979, Mr. Bridgewater served as Executive Vice President and a director of
Baxter Travenol Laboratories, Inc. (``Baxter'') from 1975 to 1979. Prior to his
employment with Baxter, Mr. Bridgewater held the position of Director (Senior
Partner) of McKinsey and Company (``McKinsey''), a management consulting firm,
where he was employed from 1964 to 1975. From 1973 to 1974, on leave from
McKinsey, Mr. Bridgewater served as Associate Director, National Security and
International Affairs, of the Office of Management and Budget in the Executive
Office of the President of the United States.
BRIAN C. COOK has served as President of Famous Footwear since 1981 and as
a Vice President of the Company since 1992. Mr. Cook started his career with
Famous Footwear on a full-time basis in 1965. He has held a variety of
positions with Famous Footwear over the years.
RONALD N. DURCHFORT has served as President of Pagoda International since
March 1993. Prior to his current position, he served as General Manager of
Operations of the Paris office of Pagoda International, a position which he
held from 1988 through March 1993. Mr. Durchfort joined Pagoda International in
1986 as its European Sales Coordinator. Prior to joining Pagoda International,
he was self-employed in international trade. Prior to being self-employed, Mr.
Durchfort had held a position in international finance with the Brazilian
government for five years.
RONALD A. FROMM has served as Executive Vice President of Famous Footwear
since September 1992. Prior to his current position, he served as Vice
President and Chief Financial Officer of Famous Footwear, a position which he
held from 1988 to 1992. Mr. Fromm joined Famous Footwear in 1986 as Chief
Financial Director. Prior to joining Famous Footwear, he served as Vice
President of Heath Corporation, where he was employed from 1974 until 1986.
ROBERT D. PICKLE has served as Vice President, General Counsel and
Corporate Secretary of the Company since 1985. He was elected General Counsel
and Corporate Secretary of the Company in 1974. Mr. Pickle joined the
47
<PAGE> 49
Company in 1963, as an attorney. Prior to joining the Company, he served on
active military duty in the United States Army Judge Advocate General's Corps,
as Assistant Staff Judge Advocate of the United States Army Aviation and
Surface Materiel Command.
GARY M. RICH has served as President of Pagoda U.S.A. since March 1993.
Prior to his current position, he served as President of Pagoda Trading
Company, Inc., a position which he held from June 1989 to March 1993. Mr. Rich
held the position of Executive Vice President of Sidney Rich Associates, Inc.,
a subsidiary of the Company, from 1980 to 1989.
HARRY E. RICH has served as Executive Vice President and Chief Financial
Officer of the Company since 1988. He has served on the Company's Board of
Directors since 1985. In addition to being a member of the Company's Board of
Directors, Mr. Rich serves as a director of The Boatmen's National Bank of St.
Louis, General American Capital Company, a registered investment company, and
Walnut Street Funds, Inc. Mr. Rich joined the Company in 1983 as Senior Vice
President and was named Senior Vice President and Chief Financial Officer of
the Company in 1984. Prior to joining the Company in 1983, Mr. Rich held the
position of Group Vice President--Medical Products with Mallinckrodt, Inc.
(``Mallinckrodt''). Before joining Mallinckrodt, Mr. Rich had been employed by
Baxter Laboratories, Inc. (``Baxter'') for 11 years. His last position with
Baxter was President--American Instrument Company.
JAMES M. ROE has served as Senior Vice President of Sales and Operations of
Famous Footwear since 1994. Prior to his current position, he served as Vice
President of Real Estate of Famous Footwear (1992-1994) and as Director of
Strip Center Real Estate of the Company (1987-1992). He was employed by Wohl
Shoe Company from 1963 to 1987.
ANDREW M. ROSEN has served as Vice President and Treasurer of the Company
since January 1992. Mr. Rosen has held a variety of positions since joining the
Company in 1974, including the positions of Manager--Pension Benefits and
Corporate Cash Manager. He was elected Treasurer of the Company in 1983.
RICHARD C. SCHUMACHER has served as Vice President and Controller of the
Company since June 1994. From November 1992 to June 1994, Mr. Schumacher served
as Vice President and Chief Financial Officer of Wohl Shoe Company. In 1985, he
was named Assistant Controller of the Company, a position which he held from
1985 through 1992. Mr. Schumacher joined the Company in 1982 as its Director of
Corporate Accounting. Prior to joining the Company, he had been employed by
Arthur Andersen & Co. for ten years.
DAVID H. SCHWARTZ has served as President of Pagoda Trading since February
1996. Prior to his current position, he served as President of the Men's,
Athletic and Children's Divisions of Pagoda Trading (March 1995 to February
1996) and as President of the Marathon Division of Pagoda Trading (March 1981
to March 1995). Mr. Schwartz joined Pagoda Trading in 1978.
MARY S. SIVERTS has served as Vice President of Public Affairs of the
Company since September 1993. Ms. Siverts joined the Company in 1985 as a
financial analyst and was promoted to Manager of Public Relations in 1987. From
1988 to 1993, she served as Director of Public Relations of the Company.
THOMAS A. WILLIAMS has served as a Vice President of the Company and as
President of Brown Shoe Company since January 1994. He served as Chairman of
Pagoda Trading Company, Inc. from January 1990 to May 1996. Prior to his
current positions, he served as Vice President of International Operations of
the Company and Chairman of Brown Group International, Inc. (March 1993 to
January 1994) and Vice Chairman of Pagoda Trading Company, Inc. (June 1989 to
December 1989). From 1982 to 1990, he held various management positions at
Pagoda Trading Company, Inc. From 1980 through 1982, Mr. Williams was Vice
President of Product Development at Cherokee, Inc. Mr. Williams was employed by
Brown Shoe Company from 1972 to 1980, during which period he worked in product
and sales management positions in the Naturalizer(R) division.
E. LEE WYATT, JR. has served as Senior Vice President of Finance and
Administration of Brown Shoe Company since May 1994. Mr. Wyatt joined the
Company in 1983, after serving as a Tax Manager for Deloitte, Haskins & Sells.
Since joining the Company, he has served as Vice President of Planning and
Controller (March 1994 to May 1994); Vice President of Planning and Taxes
(November 1992 to March 1994); Director of Corporate Planning and Taxes and
Assistant Secretary (June 1990 to November 1992); and Director of Corporate
Planning and Tax (October 1989 to June 1990). Mr. Wyatt held various management
positions with the Company from 1986 to 1989.
48
<PAGE> 50
GEORGE J. ZELINSKY has served as Senior Vice President and General
Merchandise Manager of Famous Footwear since June 1989. He served as Vice
President of the Women's Better Grade Division of Wohl Shoe Company from 1986
to 1989. Mr. Zelinsky joined the Wohl Shoe Company in 1967 and held a variety
of positions at the Company from 1967 through 1986.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to each
person known by the Company, as of April 3, 1996, to beneficially own more than
5% of the Common Stock of the Company:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES OF OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK COMMON STOCK
------------------------------------ ------------ ------------
<S> <C> <C>
John Hancock Mutual Life Insurance Company, through its
indirect, wholly owned Subsidiaries......................... 1,681,698<F1> 9.4%<F1>
John Hancock Place
P.O. Box 111
Boston, Massachusetts 02117
Manning & Napier Advisors, Inc................................ 1,912,312<F2> 10.7%<F2>
1100 Chase Square
Rochester, New York 14604
The State Teachers Retirement Board of Ohio................... 1,081,100<F3> 6.0%<F3>
275 East Broad Street
Columbus, Ohio 43215
<FN>
- --------
<F1> Based on written representations made to the Company by such Shareholder,
the named Shareholder, acting in various fiduciary capacities, possessed
sole voting authority over 769,141 shares and sole investment authority
over 1,681,698 shares.
<F2> Based on written representations made to the Company by such Shareholder,
the named Shareholder, acting in various fiduciary capacities, possessed
sole voting authority over 1,850,662 shares and sole investment authority
over 1,912,312 shares.
<F3> Based on written representations made to the Company by such Shareholder,
the named Shareholder, acting in various fiduciary capacities, possessed
sole voting authority over 1,081,100 shares and sole investment authority
over 1,081,100 shares.
</TABLE>
DESCRIPTION OF THE NOTES
The Private Notes were, and the Exchange Notes will be, issued under that
certain indenture (the ``Indenture'') dated as of October 1, 1996 between the
Company and State Street Bank and Trust Company, as Trustee (the ``Trustee'').
The following summary of certain provisions of the Indenture does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, the Trust Indenture Act of 1939, as amended (the ``TIA''), and to all of
the provisions of the Indenture, including the definitions of certain terms
therein and those terms made a part of the Indenture by reference to the TIA as
in effect on the date of the Indenture. The Indenture is by its terms subject
to and governed by the TIA. Unless otherwise indicated, references under this
caption to ``Section'' are references to the Indenture. A copy of the Indenture
may be obtained from the Company. The definitions of certain capitalized terms
used in the following summary are set forth below under ``--Certain
Definitions''.
GENERAL
The Notes are senior unsecured obligations of the Company and are and will
be issued in fully registered form only, without coupons, in denominations of
$1,000 and integral multiples thereof and will mature on October 15, 2006.
Initially, the Trustee will act as paying agent and registrar for the Notes.
The Notes may be presented for registration of transfer and exchange at the
offices of the registrar, which initially will be the Trustee's corporate trust
office. The Company may change any paying agent and registrar without notice to
the holders of the Notes. The Company will pay principal (and premium, if any)
on the Notes at the Trustee's corporate office in New York, New York. At the
Company's option, interest may be paid at the Trustee's corporate trust office
or by check mailed to the registered
49
<PAGE> 51
addresses of holders of the Notes. Any notes that remain outstanding after the
completion of the Exchange Offer, together with the Exchange Notes issued in
connection with the Exchange Offer, will be treated as a single class of
securities under the Indenture. (Sections 2.01, 2.03 and 4.01)
PRINCIPAL AMOUNT, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $150,000,000 and
will mature on October 15, 2006. Interest on the Notes will accrue at the rate
of 9 1/2% per annum and will be payable semi-annually on each April 15 and
October 15, commencing on April 15, 1997, to the persons who are registered
holders of Notes at the close of business on the April 1 and October 1,
respectively, immediately preceding the applicable interest payment date.
Interest on the Notes will accrue from and including the most recent date to
which interest has been paid or, if no interest has been paid, from and
including the date of issuance. (Sections 2.01, 4.01)
The Notes will not be entitled to the benefit of any mandatory sinking
fund.
FORM, DENOMINATION AND BOOK-ENTRY PROCEDURES
Exchange Notes issued in exchange for the Private Notes currently
represented by one or more fully registered global notes will be represented by
one or more fully registered global notes (collectively, the ``Global Note''),
and will be deposited upon issuance with the Depository or an agent of the
Depository and registered in the name of the Depository or a nominee of the
Depository (the ``Global Note Registered Owner''). Except as set forth below,
the Global Note may be transferred, in whole and not in part, only to another
nominee of the Depository or to a successor of the Depository or its nominee.
(Section 2.15)
Exchange Notes issued in exchange for other Private Notes will be issued in
registered, certificated form without interest coupons.
The Depository has advised the Company that the Depository is a
limited-purpose trust company created to hold securities for its participating
organizations (collectively, the ``Participants'') and to facilitate the
clearance and settlement of transactions in those securities between
Participants through electronic book-entry changes in the accounts of its
Participants. The Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. Access
to the Depository's system is also available to other entities such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the ``Indirect Participants''). Persons who are not Participants or Indirect
Participants may beneficially own securities held by or on behalf of the
Depository only through the Participants or the Indirect Participants. The
ownership interests and transfer of ownership interests of such persons held by
or on behalf of the Depository are recorded on the records of the Participants
and Indirect Participants.
The Depository has also advised the Company that pursuant to procedures
established by it, (i) upon deposit of the Global Note, the Depository will
credit the accounts of its Participants with portions of the principal amount
of the Global Note representing the Exchange Notes issued in exchange for the
Private Notes which each such Participant has instructed the Depository to
surrender for exchange and (ii) ownership of such interests in the Global Note
will be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by the Depository (with respect to the
Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interests in the Global Note).
Except as described below, owners of interests in the Global Note will not
have Notes registered in their names, will not receive physical delivery of
Notes in definitive form and will not be considered the registered owners or
holders thereof under the Indenture for any purpose.
Under the terms of the Indenture, the Company and the Trustee will treat
the persons in whose names the Notes, including the Global Note, are registered
as the owners thereof for the purpose of receiving payments in respect of the
principal of and premium, if any, and interest on any Notes and for any and all
other purposes whatsoever. Payments on any Notes registered in the name of the
Global Note Registered Owner will be payable by the Trustee to the Global Note
Registered Owner in its capacity as the registered holder under the Indenture.
Consequently, neither the Company, the Trustee nor any agent of the Company or
the Trustee has or will have any responsibility or liability for (i) any aspect
of the Depository's records or the records of any Participant or Indirect
Participant relating to or payments made on account of beneficial ownership
interests in the Global Note, or for maintaining, supervising or
50
<PAGE> 52
reviewing any of the Depository's records or records of any Participant or
Indirect Participant relating to the beneficial ownership interests in the
Global Note or (ii) any other matter relating to the actions and practices of
the Depository or any of its Participants or Indirect Participants. The
Depository has advised the Company that its current practice, upon receipt of
any payment in respect of securities such as the Notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in principal amount of beneficial interests in the relevant security as
shown on the records of the Depository unless the Depository has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of Notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of the Depository, the Trustee or the Company. Neither the
Company nor the Trustee will be liable for any delay by the Depository or any of
its Participants or Indirect Participants in identifying the beneficial owners
of the Notes, and the Company and the Trustee may conclusively rely on and will
be protected in relying on instructions from the Global Note Registered Owner
for all purposes.
The Global Note is exchangeable for definitive Notes in registered
certificated form if (i) the Depository (x) notifies the Company that it is
unwilling or unable to continue as Depository for the Global Note and fails to
appoint a successor Depository or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) the Company, at its option, notifies
the Trustee in writing that it elects to cause the issuance of the Notes in
definitive registered certificated form, (iii) there shall have occurred and be
continuing an Event of Default or any event which after notice or lapse of time
or both would be an Event of Default with respect to the Notes or (iv) as
provided in the following paragraph. Such definitive Notes shall be registered
in the names of the owners of the beneficial interests in the Global Note as
provided by the Participants. Notes issued in definitive registered
certificated form will be in fully registered form, without coupons, in
integral multiples of $1,000. Upon issuance of Notes in definitive registered
certificated form, the Trustee is required to register the Notes in the name
of, and cause the Notes to be delivered to, the person or persons (or the
nominee(s) thereof) identified as beneficial owners as the Depository shall
direct.
A Note in definitive registered certificated form will be issued upon the
resale, pledge or other transfer of any Note or interest therein to any person
or entity that does not participate in the Depository.
The information in this section concerning the Depository and the
Depository's book-entry system has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
OPTIONAL REDEMPTION
The Notes will be redeemable at the Company's option in whole at any time
or in part from time to time, on and after October 15, 2001 and prior to
maturity, upon not less than 30 nor more than 60 days' notice to each holder of
Notes, at the following redemption prices (expressed as percentages of the
principal amount thereof) if redeemed during the twelve-month period commencing
on October 15 of the years set forth below, plus, in each case, accrued and
unpaid interest, if any, thereon to but excluding the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001.................................................. 104.750%
2002.................................................. 102.375%
2003.................................................. 101.188%
2004 and thereafter................................... 100.000%
</TABLE>
(Sections 3.01, 3.03 and 3.04)
RANKING
The Notes will be senior unsecured obligations of the Company that will
rank senior in right of payment to all future Indebtedness of the Company that
is expressly by its terms subordinated in right of payment to the Notes. The
Notes will rank pari passu in right of payment with all other Indebtedness of
the Company, including Indebtedness
51
<PAGE> 53
incurred pursuant to the Credit Agreement. As of August 3, 1996, after giving
effect to the offering of the Private Notes and the application of the net
proceeds therefrom, the Company would have had approximately $230 million of
outstanding indebtedness, all of which would have been senior indebtedness. See
``Risk Factors--Structural Subordination.''
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not then listed on a
national securities exchange on a pro rata basis, by lot or by such method as
the Trustee shall deem fair and appropriate; provided, however, that no Notes
of a principal amount of $1,000 or less shall be redeemed in part. Notice of
redemption shall be mailed by first-class mail at least 30 but not more than 60
days before the redemption date to each holder of Notes to be redeemed at its
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof
upon cancellation of the original Note. On and after the redemption date,
interest will cease to accrue on Notes or portions thereof called for
redemption as long as the Company has deposited with the paying agent for the
Notes funds in satisfaction of the applicable redemption price pursuant to the
Indenture. (Sections 3.02, 3.03, 3.05 and 3.06)
HOLDING COMPANY STRUCTURE
The Company conducts a portion of its business through subsidiaries. As a
result of this structure, the creditors of the Company, including any holders
of Notes, will effectively rank junior to all creditors of the Company's
subsidiaries, including trade creditors, notwithstanding that the Notes will be
senior obligations of the Company. There can be no assurance that, after
providing for all prior claims, there would be sufficient assets available from
the Company and its Subsidiaries to satisfy the claims of the holders of Notes.
See ``Risk Factors--Structural Subordination.''
CERTAIN COVENANTS
The Indenture will provide that the covenants set forth herein will be
applicable to the Company, except that during any period of time that (i) the
ratings assigned to the Notes by both Moody's and S&P (collectively the
``Rating Agencies'') are equal to or higher than Baa3 and BBB- or the
equivalents thereof, respectively (the ``Investment Grade Ratings'') and (ii)
no Event of Default or Default has occurred and is continuing, the Company and
its Subsidiaries will not be subject to the provisions of the Indenture
described under ``Limitation on Indebtedness'', ``Limitation on Restricted
Payments'', ``Disposition of Proceeds of Asset Sales'', and clauses (c) and (d)
of ``Merger, Sale of Assets, Etc.'' (collectively, the ``Suspended
Covenants''). In the event that the Company is not subject to the Suspended
Covenants for any period of time as a result of the preceding sentence and,
subsequently, one or both Rating Agencies withdraws its ratings or downgrades
the ratings assigned to the Notes below the required Investment Grade Ratings,
then the Company and its Subsidiaries will again be subject to the Suspended
Covenants and compliance with the Suspended Covenants with respect to
Restricted Payments made after the time of such withdrawal or downgrade will be
calculated in accordance with the terms of the ``Limitation on Restricted
Payments'' covenant as if such covenant had been in effect during the entire
period of time from the date of the Indenture.
Limitation on Indebtedness. The Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or in any manner become directly or indirectly liable, contingently
or otherwise, for the payment of (in each case, to ``incur'') any Indebtedness
(including, without limitation, any Acquired Indebtedness); provided, however,
that the Company will be permitted to incur Indebtedness (including, without
limitation, Acquired Indebtedness) if at the time of such incurrence, and after
giving pro forma effect thereto, the Consolidated Fixed Charge Coverage Ratio
of the Company is at least equal to 2.25 to 1 on or prior to the date which is
two years from the Issue Date and 2.50 to 1 thereafter.
Notwithstanding the foregoing, the Company and its Subsidiaries may, to the
extent specifically set forth below, incur each and all of the following:
(a) Indebtedness of the Company evidenced by the Notes;
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<PAGE> 54
(b) Indebtedness of the Company and its Subsidiaries outstanding on the
Issue Date;
(c) Indebtedness of the Company under any Credit Agreement in an
aggregate principal amount at any one time outstanding not to exceed
$200,000,000 less any permanent repayment thereof made in accordance with
the provisions of the first paragraph of ``Disposition of Proceeds of Asset
Sales";
(d) (i) Interest Rate Protection Obligations of the Company covering
Indebtedness of the Company or a Subsidiary of the Company and (ii)
Interest Rate Protection Obligations of any Subsidiary of the Company
covering Indebtedness of such Subsidiary; provided, however, that, in the
case of either clause (i) or (ii), the notional principal amount of any
such Interest Rate Protection Obligations does not exceed the principal
amount of the Indebtedness to which such Interest Rate Protection
Obligations relate;
(e) Indebtedness of a Wholly-Owned Subsidiary owed to and held by the
Company or another Wholly-Owned Subsidiary, in each case which is not
subordinated in right of payment to any Indebtedness of such Subsidiary,
except that (i) any transfer of such Indebtedness by the Company or a
Wholly-Owned Subsidiary (other than to the Company or to a Wholly-Owned
Subsidiary) and (ii) the sale, transfer or other disposition by the Company
or any Subsidiary of the Company of Capital Stock of a Wholly-Owned
Subsidiary which is owed Indebtedness of another Wholly-Owned Subsidiary
such that it ceases to be a Wholly-Owned Subsidiary of the Company shall,
in each case, be an incurrence of Indebtedness by such Subsidiary subject
to the other provisions of this covenant;
(f) Indebtedness of the Company owed to and held by a Wholly-Owned
Subsidiary of the Company which is unsecured and subordinated in right of
payment to the payment and performance of the Company's obligations under
the Indenture and the Notes except that (i) any transfer of such
Indebtedness by a Wholly-Owned Subsidiary of the Company (other than to
another Wholly-Owned Subsidiary of the Company) and (ii) the sale, transfer
or other disposition by the Company or any Subsidiary of the Company of
Capital Stock of a Wholly-Owned Subsidiary which holds Indebtedness of the
Company such that it ceases to be a Wholly-Owned Subsidiary shall, in each
case, be an incurrence of Indebtedness by the Company, subject to the other
provisions of this covenant;
(g) Indebtedness under Currency Agreements; provided that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and its
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(h) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except
in the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within five business days of the Company's obtaining knowledge
of the incurrence thereof;
(i) Indebtedness of the Company or any of its Subsidiaries represented
by (x) letters of credit for the account of the Company or such Subsidiary,
as the case may be, or (y) other obligations to reimburse third parties
pursuant to any surety bond or other similar arrangement, which letters of
credit or other obligations, as the case may be, are intended to provide
security for workers' compensation claims, payment obligations in
connection with self-insurance or other similar requirements in the
ordinary course of business;
(j) Indebtedness of the Company in addition to that described in
clauses (a) through (i) above, in an aggregate principal amount outstanding
at any time not exceeding $15,000,000; and
(k) (i) Indebtedness of the Company the proceeds of which are used
solely to refinance (whether by amendment, renewal, extension or refunding)
Indebtedness of the Company or any of its Subsidiaries and (ii)
Indebtedness of any Subsidiary of the Company the proceeds of which are
used solely to refinance (whether by amendment, renewal, extension or
refunding) Indebtedness of such Subsidiary, in each case other than
Indebtedness, if any, refinanced, redeemed or retired with net proceeds
from the issuance of the Notes or incurred under clause (c), (d), (e), (f),
(g), (h), (i) or (j) of this covenant; provided, however, that (x) the
principal amount of Indebtedness incurred pursuant to this clause (k) (or,
if such Indebtedness provides for an amount less than the principal amount
thereof to be due and payable upon a declaration of acceleration of the
maturity thereof, the original issue price of such Indebtedness) shall not
exceed the sum of the principal amount of Indebtedness so
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<PAGE> 55
refinanced, plus the amount of any premium required to be paid in connection
with such refinancing pursuant to the terms of such Indebtedness or the
amount of any premium reasonably determined by the Board of Directors of the
Company as necessary to accomplish such refinancing by means of a tender
offer or privately negotiated purchase, plus the amount of expenses in
connection therewith, (y) in the case of Indebtedness incurred by the
Company pursuant to this clause (k) to refinance Subordinated Indebtedness,
such Indebtedness (A) has an Average Life to Stated Maturity greater than
the remaining Average Life to Stated Maturity of the Notes and (B) is
subordinated to the Notes in the same manner and to the same extent that the
Subordinated Indebtedness being refinanced is subordinated to the Notes and
(z) in the case of Indebtedness incurred by the Company pursuant to this
clause (k) to refinance Pari Passu Indebtedness, such Indebtedness (A) has
an Average Life to Stated Maturity greater than the remaining Average Life
to Stated Maturity of the Notes and (B) constitutes Pari Passu Indebtedness
or Subordinated Indebtedness. (Section 4.08)
Limitation on Restricted Payments. The Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly:
(a) declare or pay any dividend or make any other distribution or
payment on or in respect of Capital Stock of the Company or any of its
Subsidiaries or any payment made to the direct or indirect holders (in
their capacities as such) of Capital Stock of the Company or any of its
Subsidiaries (other than (x) dividends or distributions payable solely in
Capital Stock of the Company (other than Redeemable Capital Stock) or in
options, warrants or other rights to purchase Capital Stock of the Company
(other than Redeemable Capital Stock), (y) the declaration or payment of
dividends or other distributions to the extent declared or paid to the
Company or any Subsidiary of the Company and (z) the declaration or payment
of dividends or other distributions by any Subsidiary of the Company to all
holders of Common Stock of such Subsidiary on a pro rata basis),
(b) purchase, redeem, defease or otherwise acquire or retire for value
any Capital Stock of the Company or any of its Subsidiaries (other than any
such Capital Stock owned by the Company or a Wholly-Owned Subsidiary of the
Company),
(c) make any principal payment on, or purchase, defease, repurchase,
redeem or otherwise acquire or retire for value, prior to any scheduled
maturity, scheduled repayment, scheduled sinking fund payment or other
Stated Maturity, any Subordinated Indebtedness (other than any such
Indebtedness owned by the Company or a Wholly-Owned Subsidiary of the
Company), or
(d) make any Investment (other than any Permitted Investment) in any
person
(such payments or Investments described in the preceding clauses (a), (b), (c)
and (d) are collectively referred to as ``Restricted Payments''), unless,
subject to the last sentence of this paragraph, at the time of and after giving
effect to the proposed Restricted Payment (the amount of any such Restricted
Payment, if other than cash, shall be the Fair Market Value on the date of such
Restricted Payment of the asset(s) proposed to be transferred by the Company or
such Subsidiary, as the case may be, pursuant to such Restricted Payment), (A)
no Default or Event of Default shall have occurred and be continuing, (B)
immediately prior to and after giving effect to such Restricted Payment, the
Company would be able to incur $1.00 of additional Indebtedness pursuant to the
first paragraph of the covenant described under ``--Limitation on
Indebtedness'' above (assuming a market rate of interest with respect to such
additional Indebtedness) and (C) the aggregate amount of all Restricted
Payments declared or made from and after the Issue Date would not exceed the
sum of (1) 50% of the aggregate Consolidated Net Income of the Company accrued
on a cumulative basis during the period beginning on the first day of the
fiscal quarter of the Company during which the Issue Date occurs and ending on
the last day of the fiscal quarter of the Company immediately preceding the
date of such proposed Restricted Payment, which period shall be treated as a
single accounting period (or, if such aggregate cumulative Consolidated Net
Income of the Company for such period shall be a deficit, minus 100% of such
deficit) plus (2) the aggregate net cash proceeds received by the Company
either (x) as capital contributions to the Company after the Issue Date from
any person (other than a Subsidiary of the Company) or (y) from the issuance or
sale of Capital Stock (excluding Redeemable Capital Stock, but including
Capital Stock issued upon the conversion of convertible Indebtedness or from
the exercise of options, warrants or rights to purchase Capital Stock (other
than Redeemable Capital Stock)) of the Company to any person (other than to a
Subsidiary of the Company) after the Issue Date plus (3) in the case of the
disposition or repayment of any Investment constituting a Restricted Payment
made after the Issue Date (excluding any Investment described in clause (iv) of
the following paragraph), an amount
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equal to the lesser of the return of capital with respect to such Investment and
the cost of such Investment, in either case, less the cost of the disposition of
such Investment plus (4) $20,000,000. For purposes of the preceding clause
(C)(2), the value of the aggregate net proceeds received by the Company upon the
issuance of Capital Stock upon the conversion of convertible Indebtedness or
upon the exercise of options, warrants or rights will be the net cash proceeds
received upon the issuance of such Indebtedness, options, warrants or rights
plus the incremental cash amount received by the Company upon the conversion or
exercise thereof. Notwithstanding the foregoing, with respect to any Restricted
Payment consisting solely of a dividend on the Company's Common Stock, the
Company need not comply with the restrictions contained in the foregoing clause
(B).
None of the foregoing provisions will prohibit (i) the payment of any
dividend within 60 days after the date of its declaration, if at the date of
declaration such payment would be permitted by the foregoing paragraph; (ii) so
long as no Default or Event of Default shall have occurred and be continuing,
the redemption, repurchase or other acquisition or retirement of any shares of
any class of Capital Stock of the Company or any Subsidiary of the Company in
exchange for, or out of the net cash proceeds of, a substantially concurrent
(x) capital contribution to the Company from any person (other than a
Subsidiary of the Company) or (y) issue and sale of other shares of Capital
Stock (other than Redeemable Capital Stock) of the Company to any person (other
than to a Subsidiary of the Company); provided, however, that the amount of any
such net cash proceeds that are utilized for any such redemption, repurchase or
other acquisition or retirement shall be excluded from clause (C)(2) of the
preceding paragraph; (iii) so long as no Default or Event of Default shall have
occurred and be continuing, any redemption, repurchase or other acquisition or
retirement of Subordinated Indebtedness by exchange for, or out of the net cash
proceeds of, a substantially concurrent (x) capital contribution to the Company
from any person (other than a Subsidiary of the Company) or (y) issue and sale
of (1) Capital Stock (other than Redeemable Capital Stock) of the Company to
any person (other than to a Subsidiary of the Company); provided, however, that
the amount of any such net cash proceeds that are utilized for any such
redemption, repurchase or other acquisition or retirement shall be excluded
from clause (C)(2) of the preceding paragraph; or (2) Indebtedness of the
Company issued to any person (other than a Subsidiary of the Company), so long
as such Indebtedness is Subordinated Indebtedness which (x) has no Stated
Maturity earlier than the 91st day after the Final Maturity Date, (y) has an
Average Life to Stated Maturity equal to or greater than the remaining Average
Life to Stated Maturity of the Notes and (z) is subordinated to the Notes in
the same manner and at least to the same extent as the Subordinated
Indebtedness so purchased, exchanged, redeemed, acquired or retired; (iv)
Investments constituting Restricted Payments made as a result of the receipt of
non-cash consideration from any Asset Sale made pursuant to and in compliance
with the covenant described under ``--Disposition of Proceeds of Asset Sales''
below; (v) so long as no Default or Event of Default shall have occurred and be
continuing, repurchases by the Company of Common Stock of the Company from
employees of the Company or any of its Subsidiaries or their authorized
representatives upon the death, disability or termination of employment of such
employees, in an aggregate amount not exceeding $2,000,000 in any calendar
year; and (vi) so long as no Default or Event of Default shall have occurred
and be continuing, Investments in joint ventures, partnerships or other persons
that are not Wholly-Owned Subsidiaries and that are engaged in a business
similar or complementary to the business of the Company on the Issue Date;
provided, however, that the aggregate amount of such net Investments
outstanding at any such time shall not exceed $8,000,000 and the aggregate
amount of any such Investments made during any consecutive twelve month period
shall not exceed $4,000,000. In computing the amount of Restricted Payments
previously made for purposes of clause (C) of the preceding paragraph,
Restricted Payments made under the preceding clauses (i) and (v) shall be
included and clauses (ii), (iii), (iv) and (vi) shall not be so included.
(Section 4.09)
Limitation on Liens. The Company will not, and will not permit any of its
Subsidiaries to, create, incur, assume or suffer to exist any Liens of any kind
against or upon any of its property or assets, or any proceeds therefrom unless
(x) in the case of Liens securing Subordinated Indebtedness, the Notes are
secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens and (y) in all other cases, the Company or any of its
Subsidiaries, as the case may be, secures the Notes on an equal and ratable
basis, except for (a) Liens existing as of the Issue Date; (b) Liens securing
the Notes; (c) Liens in favor of the Company; (d) Liens securing Indebtedness
which is incurred to refinance Indebtedness which has been secured by a Lien
permitted under the Indenture and which has been incurred in accordance with
the provisions of the Indenture; provided, however, that such Liens do not
extend to or cover any property or assets of the Company or any of its
Subsidiaries not securing the Indebtedness so refinanced and (e) Permitted
Liens. (Section 4.11)
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Change of Control. Upon the occurrence of a Change of Control, the Company
shall be obligated to make an offer to purchase (a ``Change of Control
Offer''), and shall purchase, on a business day (the ``Change of Control
Purchase Date'') not more than 60 nor less than 30 days following the
occurrence of the Change of Control, all of the then outstanding Notes at a
purchase price (the ``Change of Control Purchase Price'') equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the
Change of Control Purchase Date. The Company shall be required to purchase all
Notes properly tendered into the Change of Control Offer and not withdrawn. The
Change of Control Offer is required to remain open for at least 20 business
days and until the close of business on the Change of Control Purchase Date.
In order to effect such Change of Control Offer, the Company shall, not
later than the 30th day after the occurrence of the Change of Control, mail to
each holder of Notes notice of the Change of Control Offer, which notice shall
govern the terms of the Change of Control Offer and shall state, among other
things, the procedures that holders of Notes must follow to accept the Change
of Control Offer.
The Company shall not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements
applicable to a Change of Control Offer made by the Company and purchases all
Notes validly tendered and not withdrawn under such Change of Control Offer.
The Company will comply with Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that a Change of Control occurs and
the Company is required to purchase Notes as described above. (Section 4.12)
Disposition of Proceeds of Asset Sales. The Company will not, and will not
permit any of its Subsidiaries to, make any Asset Sale unless (a) the Company
or such Subsidiary, as the case may be, receives consideration at the time of
such Asset Sale at least equal to the Fair Market Value of the shares or assets
sold or otherwise disposed of and (b) at least 75% of such consideration
consists of cash or Cash Equivalents. To the extent the Net Cash Proceeds of
any Asset Sale are not required to be applied to repay, and permanently reduce
the commitments under, the Credit Agreement (as required by the terms thereof),
or are not so applied, the Company or such Subsidiary, as the case may be, may,
within 180 days of such Asset Sale, apply such Net Cash Proceeds to an
investment in properties and assets that replace the properties and assets that
were the subject of such Asset Sale or in properties and assets that will be
used in the business of the Company and its Subsidiaries existing on the Issue
Date or in businesses reasonably related thereto (``Replacement Assets''). Any
Net Cash Proceeds from any Asset Sale that are neither used to repay, and
permanently reduce the commitments under, the Credit Agreement nor invested in
Replacement Assets within the 180 day period described above constitute
``Excess Proceeds'' subject to disposition as provided below.
When the aggregate amount of Excess Proceeds equals or exceeds $10,000,000,
the Company shall make an offer to purchase (an ``Asset Sale Offer''), from all
holders of the Notes, not more than 40 Business Days thereafter, an aggregate
principal amount of Notes equal to such Excess Proceeds, at a price in cash
equal to 100% of the outstanding principal amount thereof plus accrued and
unpaid interest, if any, to the purchase date; provided, however, that the
Company may, at the time that it makes any such Asset Sale Offer, also offer to
purchase, at a price in cash equal to 100% of the outstanding principal amount
thereof plus accrued and unpaid interest, if any, to the purchase date, any
Pari Passu Indebtedness which was outstanding on the Issue Date (a ``Pari Passu
Asset Sale Offer.'') and to the extent the Company so elects to make a Pari
Passu Asset Sale Offer, Notes and Pari Passu Indebtedness shall be purchased
pursuant to such Asset Sale Offer and Pari Passu Asset Sale Offer,
respectively, on a pro rata basis based on the aggregate principal amount of
such Notes and Pari Passu Indebtedness then outstanding. To the extent that the
aggregate principal amount of Notes tendered pursuant to an Asset Sale Offer is
less than the Excess Proceeds or, to the extent the Company elects to make a
Pari Passu Asset Sale Offer, the Notes' pro rata share of such Excess Proceeds,
the Company may use such deficiency for general corporate purposes. To the
extent that the aggregate principal amount of Pari Passu Indebtedness tendered
pursuant to a Pari Passu Asset Sale Offer is less than such Pari Passu
Indebtedness' pro rata share of such Excess Proceeds, the Company shall use
such remaining Excess Proceeds to purchase any Notes validly tendered and not
withdrawn pursuant to such Asset Sale Offer. If the aggregate principal amount
of Notes validly tendered and not withdrawn by holders thereof exceeds the
Excess Proceeds or, to the extent the Company elects to make a Pari Passu Asset
Sale Offer, the Notes' pro rata share of such Excess Proceeds, Notes to be
purchased will be selected on a pro rata basis. Upon completion of such Asset
Sale Offer, the amount of Excess Proceeds shall be reset to zero.
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The Company will comply with Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that an Asset Sale occurs and the
Company is required to purchase Notes as described above. (Section 4.13)
Limitation on Issuances and Sale of Preferred Stock by Subsidiaries. The
Company (a) will not permit any of its Subsidiaries to issue any Preferred
Stock (other than to the Company or a Wholly-Owned Subsidiary of the Company)
and (b) will not permit any person (other than the Company or a Wholly-Owned
Subsidiary of the Company) to own any Preferred Stock of any Subsidiary of the
Company; provided, however, that this covenant shall not prohibit the issuance
and sale of (x) all, but not less than all, of the issued and outstanding
Capital Stock of any Subsidiary of the Company owned by the Company or any of
its Subsidiaries in compliance with the other provisions of the Indenture or
(y) directors' qualifying shares or investments by foreign nationals mandated
by applicable law. (Section 4.10)
Limitation on Transactions with Interested Persons. The Company will not,
and will not permit any of its Subsidiaries to, directly or indirectly, enter
into or suffer to exist any transaction or series of related transactions
(including, without limitation, the sale, transfer, disposition, purchase,
exchange or lease of assets, property or services) with, or for the benefit of,
any Affiliate of the Company or any beneficial owner (determined in accordance
with the Indenture) of 5% or more of the Company's outstanding Common Stock
(``Interested Persons''), unless (a) such transaction or series of related
transactions is on terms that are no less favorable to the Company or such
Subsidiary, as the case may be, than those which could have been obtained in a
comparable transaction at such time from persons who are not Affiliates of the
Company or Interested Persons, (b) with respect to a transaction or series of
transactions involving aggregate payments or value equal to or greater than
$5,000,000, the Company has obtained a written opinion from an Independent
Financial Advisor stating that the terms of such transaction or series of
transactions are fair to the Company or its Subsidiary, as the case may be,
from a financial point of view and (c) with respect to a transaction or series
of transactions involving aggregate payments or value equal to or greater than
$1,000,000, the Company shall have delivered an officer's certificate to the
Trustee certifying that such transaction or series of transactions complies
with the preceding clause (a) and, if applicable, certifying that the opinion
referred to in the preceding clause (b) has been delivered and that such
transaction or series of transactions has been approved by a majority of the
Board of Directors of the Company; provided, however, that this covenant will
not restrict the Company from (i) paying dividends in respect of its Capital
Stock permitted under the covenant described under ``--Limitation on Restricted
Payments'' above, (ii) paying reasonable and customary fees to directors of the
Company who are not employees of the Company, (iii) making loans or advances to
officers, employees or consultants of the Company and its Subsidiaries
(including travel and moving expenses) in the ordinary course of business for
bona fide business purposes of the Company or such Subsidiary not in excess of
$2,000,000 in the aggregate at any one time outstanding or (iv) making loans to
Wholly-Owned Subsidiaries in the ordinary course of business and consistent
with past business practices and making loans to joint ventures, partnerships
or other persons that are not Wholly-Owned Subsidiaries pursuant to and in
accordance with the ``Limitation on Restricted Payments'' covenant.
(Section 4.14)
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any of its Subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction on the ability of any
subsidiary of the Company to (a) pay dividends, in cash or otherwise, or make
any other distributions on or in respect of its Capital Stock or any other
interests or participation in, or measured by, its profits, (b) pay any
Indebtedness owed to the company or any other Subsidiary of the Company, (c)
make loans or advances to, or any investment in, the Company or any other
Subsidiary of the Company, (d) transfer any of its properties or assets to the
Company or any other Subsidiary of the Company or (e) guarantee any
Indebtedness of the Company or any other Subsidiary of the Company, except for
such encumbrances or restrictions existing under or by reason of (i) applicable
law, (ii) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of the Company or any Subsidiary of the company,
(iii) customary restrictions on transfers of property subject to a Lien
permitted under the Indenture which could not materially adversely affect the
company's ability to satisfy its obligations under the Indenture and the Notes,
(iv) any agreement or other instrument of a person acquired by the company or
any Subsidiary of the Company (or a Subsidiary of such person) in existence at
the time of such acquisition (but not created in contemplation thereof), which
encumbrance of restriction is not applicable to any person, or the properties
or assets of any person, other than the person, or the properties or assets of
the person so acquired, (v) provisions contained in agreements or instruments
relating to
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Indebtedness which prohibit the transfer of all or substantially all of the
assets of the obligor thereunder unless the transferee shall assume the
obligations of the obligor under such agreement or instrument and (vi)
encumbrances and restrictions under the Credit Agreement or the Note Agreement
between the Company and The Prudential Insurance Company of America (the ``Note
Agreement''), each as in effect on the Issue Date, and encumbrances and
restrictions in permitted refinancings or replacements thereof which are no
less favorable to the holders of the Notes than those contained in the Credit
Agreement or the Note Agreement, each as in effect on the Issue Date.
(Section 4.15)
Limitation on Sale-Leaseback Transactions. The Company will not, and will
not permit any of its Subsidiaries to, enter into any Sale-Leaseback
Transaction with respect to any property of the Company or any of its
Subsidiaries (whether such property is owned on, or acquired or constructed
after, the Issue Date) provided that the Company or any of its Subsidiaries may
enter a Sale-Leaseback Transaction if (i) the Company could have (A) incurred
Indebtedness in an amount equal to the Attributable Value relating to such
Sale-Leaseback Transaction pursuant to the Consolidated Fixed Charge Coverage
Ratio test set forth in the covenant entitled ``Limitation on Indebtedness''
and (B) secured a Lien on such Indebtedness pursuant to the covenant entitled
``Limitation on Liens,'' (ii) the value (considering the proceeds therefrom and
any other benefits or options granted to the Company in connection therewith)
of such Sale-Leaseback Transaction is at least equal to the Fair Market Value
of the property that is the subject of such Sale-Leaseback Transaction and
(iii) the Company shall apply or cause to be applied the Net Cash Proceeds of
such transaction in compliance with the covenant entitled ``Disposition of
Proceeds of Asset Sales.'' (Section 4.16)
Limitation on Guarantees by Subsidiaries. The Indenture will provide that
the Company will not permit any Subsidiary, directly or indirectly, to assume,
guarantee or in any other manner become liable with respect to any Indebtedness
of the Company unless such Subsidiary simultaneously executes and delivers a
supplemental indenture providing for the guarantee of payment of the Notes by
such Subsidiary on the same terms as such Subsidiary's assumption or guarantee
of such Indebtedness.
Notwithstanding the foregoing, upon any sale or disposition (by merger or
otherwise) of any Subsidiary that has guaranteed (a ``Guarantee'') the
Indebtedness of the Company hereunder (a ``Guarantor'') by the Company or a
Subsidiary of the Company to any person that is not an Affiliate of the Company
or any of its Subsidiaries which is otherwise in compliance with the terms of
the Indenture, such Guarantor will be deemed to be released from all
obligations under its Guarantee; provided, however, that each such Guarantor is
sold or disposed of in accordance with the Indenture and the guarantee by such
Guarantor of such other Indebtedness of the Company is simultaneously released;
and provided, further, that the foregoing proviso shall not apply to the sale
or disposition of a Guarantor in a foreclosure to the extent that such proviso
will be inconsistent with the requirements of the Uniform Commercial Code.
(Section 4.17)
Reporting Requirements. The Company will file with the Commission the
annual reports, quarterly reports and other documents required to be filed with
the Commission pursuant to Sections 13 and 15 of the Exchange Act, whether or
not the Company has a class of securities registered under the Exchange Act.
The Company will be required to file with the Trustee within 15 days after it
files them with the Commission (or if any such filing is not permitted under
the Exchange Act, 15 days after the Company would have been required to make
such filing) copies of such reports and documents. To the extent the Company is
not permitted to file such reports or other documents with the Commission it
shall provide or cause the Trustee to provide them to each registered holder of
Notes within 15 days after the Company would have been required to file such
reports or other documents with the Commission. In addition, the Company shall
provide any such report or document to any holder or prospective purchaser of
Notes who so requests. (Section 4.07)
MERGER, SALE OF ASSETS, ETC.
The Company will not, in any transaction or series of transactions, merge
or consolidate with or into, or sell, assign, convey, transfer, lease or
otherwise dispose of all or substantially all of its properties and assets as
an entirety to, any person or persons, and the Company will not permit any of
its Subsidiaries to enter into any such transaction or series of transactions
if such transaction or series of transactions, in the aggregate, would result
in a sale, assignment, conveyance, transfer, lease or other disposition of all
or substantially all of the properties and assets of the Company or the Company
and its Subsidiaries, taken as a whole, to any other person or persons, unless
at the time of and after giving effect thereto (a) either (i) if the
transaction or series of transactions is a merger or consolidation, the
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Company shall be the surviving person of such merger or consolidation, or (ii)
the person formed by such consolidation or into which the Company or such
Subsidiary is merged or to which the properties and assets of the Company or
such Subsidiary, as the case may be, are transferred (any such surviving person
or transferee person being the ``Surviving Entity'') shall be a corporation
organized and existing under the laws of the United States of America, any
state thereof or the District of Columbia and shall expressly assume by a
supplemental indenture executed and delivered to the Trustee, in form
reasonably satisfactory to the Trustee, all the obligations of the Company
under the Notes and the Indenture, and in each case, the Indenture shall remain
in full force and effect; (b) immediately before and immediately after giving
effect to such transaction or series of transactions on a pro forma basis
(including, without limitation, any Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction or series of
transactions), no Default or Event of Default shall have occurred and be
continuing; (c) the Company or the Surviving Entity, as the case may be, after
giving effect to such transaction or series of transactions on a pro forma
basis (including, without limitation, any Indebtedness incurred or anticipated
to be incurred in connection with or in respect of such transaction or series
of transactions), could incur $1.00 of additional Indebtedness pursuant to the
first paragraph of the covenant described under ``--Certain Covenants
- --Limitation on Indebtedness'' above (assuming a market rate of interest with
respect to such additional Indebtedness); and (d) immediately after giving
effect to such transaction or series of transactions on a pro forma basis
(including, without limitation, any Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction or series of
transactions), the Consolidated Net Worth of the Company or the Surviving
Entity, as the case may be, is at least equal to the Consolidated Net Worth of
the Company immediately before such transaction or series of transactions.
In connection with any consolidation, merger, transfer, lease, assignment
or other disposition contemplated hereby, the Company shall deliver, or cause
to be delivered, to the Trustee, in form and substance reasonably satisfactory
to the Trustee, an officer's certificate and an opinion of counsel, each
stating that such consolidation, merger, transfer, lease, assignment or other
disposition and the supplemental indenture in respect thereof comply with the
requirements under the Indenture; provided, however, that solely for purposes
of computing amounts described in subclause (C) of the covenant described under
``--Limitation on Restricted Payments'' above, any such successor person shall
only be deemed to have succeeded to and be substituted for the Company with
respect to periods subsequent to the effective time of such merger,
consolidation or transfer of assets.
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company in accordance with the foregoing, in which the
Company is not the continuing corporation, the successor corporation formed by
such a consolidation or into which the Company is merged or to which such
transfer is made shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indenture with the same effect
as if such successor corporation had been named as the Company therein.
(Section 5.01)
EVENTS OF DEFAULT
The following will be ``Events of Default'' under the Indenture:
(i) default in the payment of the principal of or premium, if any, on
any of the Notes when the same becomes due and payable (upon Stated
Maturity, acceleration, optional redemption, required purchase, scheduled
principal payment or otherwise); or
(ii) default in the payment of an installment of interest on any of the
Notes, when the same becomes due and payable, which default continues for a
period of 30 days; or
(iii) failure to perform or observe any other term, covenant or
agreement contained in the Notes or the Indenture (other than a default
specified in clause (i) or (ii) above) and such default continues for a
period of 30 days after written notice of such default requiring the
Company to remedy the same shall have been given (x) to the Company by the
Trustee or (y) to the Company and the Trustee by holders of 25% in
aggregate principal amount of the Notes then outstanding; or
(iv) default or defaults under one or more agreements, instruments,
mortgages, bonds, debentures or other evidences of Indebtedness under which
the Company or any Subsidiary of the Company then has outstanding
Indebtedness in excess of $10,000,000, individually or in the aggregate,
and either (a) such Indebtedness is
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already due and payable in full or (b) such default or defaults have
resulted in the acceleration of the maturity of such Indebtedness; or
(v) one or more judgments, orders or decrees of any court or
regulatory or administrative agency of competent jurisdiction for the
payment of money in excess of $10,000,000, either individually or in the
aggregate, shall be entered against the Company or any Subsidiary of the
Company or any of their respective properties and shall not be discharged or
fully bonded and there shall have been a period of 60 days after the date on
which any period for appeal has expired and during which a stay of
enforcement of such judgment, order or decree shall not be in effect; or
(vi) certain events of bankruptcy, insolvency or reorganization with
respect to the Company or any Significant Subsidiary of the Company shall
have occurred. (Section 6.01)
If an Event of Default (other than as specified in clause (vi) above) shall
occur and be continuing, the Trustee, by notice to the Company, or the holders
of at least 25% in aggregate principal amount of the Notes then outstanding, by
notice to the Trustee and the Company, may declare the principal of, premium,
if any, and accrued and unpaid interest, if any, on all of the outstanding
Notes due and payable immediately, upon which declaration, all amounts payable
in respect of the Notes shall be immediately due and payable. If an Event of
Default specified in clause (vi) above occurs and is continuing, then the
principal of, premium, if any, and accrued and unpaid interest, if any, on all
of the outstanding Notes shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
holder of Notes. (Section 6.03)
After a declaration of acceleration under the Indenture, but before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Company and the Trustee, may
rescind such declaration if (a) the Company has paid or deposited with the
Trustee a sum sufficient to pay (i) all sums paid or advanced by the Trustee
under the Indenture and the reasonable compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel, (ii) all overdue interest
on all Notes, (iii) the principal of and premium, if any, on any Notes which
have become due otherwise than by such declaration of acceleration and interest
thereon at the rate borne by the Notes, and (iv) to the extent that payment of
such interest is lawful, interest upon overdue interest and overdue principal
at the rate borne by the Notes which has become due otherwise than by such
declaration of acceleration; (b) the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction; and (c) all Events of
Default, other than the non-payment of principal of, premium, if any, and
interest on the Notes that have become due solely by such declaration of
acceleration, have been cured or waived. (Section 6.02)
The holders of not less than a majority in aggregate principal amount of
the outstanding Notes may on behalf of the holders of all the Notes waive any
past defaults. under the Indenture, except a default in the payment of the
principal of, premium, if any, or interest on any of the Notes, or in respect
of a covenant or provision which under the Indenture cannot be modified or
amended without the consent of the holder of each of the Notes outstanding.
(Section 6.04)
No holder of any of the Notes has any right to institute any proceeding
with respect to the Indenture or the Notes or any remedy thereunder, unless the
holders of at least 25% in aggregate principal amount of the outstanding Notes
have made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding as Trustee under the Notes and the Indenture, the
Trustee has failed to institute such proceeding within 30 days after receipt of
such notice and the Trustee, within such 30-day period, has not received
directions inconsistent with such written request by holders of a majority in
aggregate principal amount of the outstanding Notes. Such limitations do not
apply, however, to a suit instituted by a holder of any of the Notes for the
enforcement of the payment of the principal of, premium, if any, or interest on
any of such Notes on or after the respective due dates expressed in such Note.
(Section 6.06)
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, whether or not an Event of Default shall occur and be continuing, the
Trustee under the Indenture is not under any obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
holders unless such holders shall have offered to the Trustee reasonable
security or indemnity. Subject to certain provisions concerning the rights of
the Trustee, the holders of not less than a majority
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in aggregate principal amount of the outstanding Notes have the right to direct
the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred on the
Trustee under the Indenture. (Sections 6.05, 7.01)
If a Default or an Event of Default occurs and is continuing and is known
to the Trustee, the Trustee shall mail to each holder of the Notes notice of
the Default or Event of Default within 30 days after obtaining knowledge
thereof. Except in the case of a Default or an Event of Default in payment of
principal of premium, if any, or interest on any Notes, the Trustee may
withhold the notice to the holders of such Notes if a committee of its trust
officers in good faith determines that withholding the notice is in the
interest of the holders of the Notes. (Section 7.05)
The Company is required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company of its obligations under the
Indenture and as to any default in such performance. The Company is also
required to notify the Trustee within five days of any event which is, or after
notice or lapse of time or both would become, an Event of Default.
(Section 4.06)
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate the obligations
of the Company with respect to the outstanding Notes (``defeasance''). Such
defeasance means that the Company shall be deemed to have paid and discharged
the entire Indebtedness represented by the outstanding Notes, except for (i)
the rights of holders of outstanding Notes to receive payment in respect of the
principal of, premium, if any, and interest on such Notes when such payments
are due, (ii) the Company's obligations to issue temporary Notes, register the
transfer or exchange of any Notes, replace mutilated, destroyed, lost or stolen
Notes and maintain an office or agency for payments in respect of the Notes,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and
(iv) the defeasance provisions of the Indenture. In addition, the Company may,
at its option and at any time, elect to terminate the obligations of the
Company with respect to certain covenants that are set forth in the Indenture,
some of which are described under ``--Certain Covenants'' above (including the
covenant described under ``--Certain Covenants--Change of Control'' above) and
any subsequent failure to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes (``covenant
defeasance'').
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Notes, cash in United States dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants, to pay the principal of, premium, if any,
and interest on the outstanding Notes to redemption or maturity (except lost;
stolen or destroyed Notes which have been replaced or paid); (ii) the Company
shall have delivered to the Trustee an opinion of counsel to the effect that
the holders of the outstanding Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
defeasance or covenant defeasance had not occurred (in the case of defeasance,
such opinion must refer to and be based upon a ruling of the Internal Revenue
Service or a change in applicable federal income tax laws); (iii) no Default or
Event of Default shall have occurred and be continuing on the date of such
deposit; (iv) such defeasance or covenant defeasance shall not cause the
Trustee to have a conflicting interest with respect to any securities of the
Company; (v) such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, any material agreement
or instrument to which the Company is a party or by which it is bound; (vi) the
Company shall have delivered to the Trustee an opinion of counsel to the effect
that after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights and (vii) the Company shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that all conditions precedent under the Indenture to either
defeasance or covenant defeasance, as the case may be, have been complied with.
(Section 8.02)
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes
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which have been replaced or repaid and Notes for whose payment money has
theretofore been deposited in trust or segregated and held in trust by the
Company and thereafter repaid to the Company or discharged from such trust)
have been delivered to the Trustee for cancellation or (b) all Notes not
theretofore delivered to the Trustee for cancellation (except lost, stolen or
destroyed Notes which have been replaced or paid) have been called for
redemption pursuant to the terms of the Notes or have otherwise become due and
payable and the Company has irrevocably deposited or caused to be deposited
with the Trustee funds in an amount sufficient to pay and discharge the entire
Indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, for principal of, premium, if any, and interest on the Notes to
the date of deposit together with irrevocable instructions from the Company
directing the Trustee to apply such funds to the payment thereof at maturity or
redemption, as the case may be; (ii) the Company has paid all other sums
payable under the Indenture by the Company; (iii) there exists no Default or
Event of Default under the Indenture; and (iv) the Company has delivered to the
Trustee an officers' certificate and an opinion of counsel stating that all
conditions precedent under the Indenture relating to the satisfaction and
discharge of the Indenture have been complied with.
AMENDMENTS AND WAIVERS
From time to time, the Company, when authorized by a resolution of its
Board of Directors, and the Trustee may, without the consent of the holders of
any outstanding Notes, amend, waive or supplement the Indenture or the Notes
for certain specified purposes, including, among other things, curing
ambiguities, defects or inconsistencies, qualifying, or maintaining the
qualification of, the Indenture under the Trust Indenture Act of 1939 or making
any other change that does not adversely affect the rights of any holder of
Notes; provided, however, that the Company has delivered to the Trustee an
opinion of counsel stating that such change does not adversely affect the
rights of any holder of Notes. Other amendments and modifications of the
Indenture or the Notes may be made by the Company and the Trustee with the
consent of the holders of not less than a majority of the aggregate principal
amount of the outstanding Notes; provided, however, that no such modification
or amendment may, without the consent of the holder of each outstanding Note
affected thereby, (i) reduce the principal amount of, extend the fixed maturity
of or alter the redemption provisions of, the Notes, (ii) change the currency
in which any Notes or any premium or the interest thereon is payable or make
the principal of, premium, if any, or interest on any Note payable in money
other than that stated in the Note, (iii) reduce the percentage in principal
amount of outstanding Notes that must consent to an amendment, supplement or
waiver or consent to take any action under the Indenture or the Notes, (iv)
impair the right to institute suit for the enforcement of any payment on or
with respect to the Notes, (v) waive a default in payment with respect to the
Notes, (vi) amend, change or modify the obligations of the Company to make and
consummate a Change of Control Offer in the event of a Change of Control or
make and consummate the offer with respect to any Asset Sale or modify any of
the provisions or definitions with respect thereto, (vii) reduce or change the
rate or time for payment of interest on the Notes, (viii) modify or change any
provision of the Indenture to affect the ranking of the Notes in a manner
adverse to the holders of the Notes or (ix) release any Guarantor from any of
its obligations under its Guarantee other than in compliance with the
Indenture. (Sections 9.01, 9.02)
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee thereunder will perform only such duties as are
specifically set forth in the Indenture. If an Event of Default has occurred
and is continuing, the Trustee will exercise such rights and powers vested in
it under the Indenture and use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs. (Section 7.01)
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee thereunder, should it become a creditor of the Company, to obtain
payment of claims in certain cases or to realize on certain property received
by it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions; provided, however, that if it
acquires any conflicting interest (as defined in such Act) it must eliminate
such conflict or resign. (Sections 7.03, 7.12)
GOVERNING LAW
The Indenture and the Notes will be governed by the laws of the State of
New York, without regard to the principles of conflicts of law. (Section 10.07)
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CERTAIN DEFINITIONS (SECTION 1.01)
``Acquired Indebtedness'' means Indebtedness of a person (a) assumed in
connection with an Asset Acquisition from such person or (b) existing at the
time such person becomes a Subsidiary of any other person.
``Affiliate'' means, with respect to any specified person, any other person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified person.
``Asset Acquisition'' means (a) an Investment by the Company or any
Subsidiary of the Company in any other person pursuant to which such person
shall become a Subsidiary of the Company, or shall be merged with or into the
Company or any Subsidiary of the Company, (b) the acquisition by the Company or
any Subsidiary of the Company of the assets of any person (other than a
Subsidiary of the Company) which constitute all or substantially all of the
assets of such person or (c) the acquisition by the Company or any Subsidiary
of the Company of any division or line of business of any person (other than a
Subsidiary of the Company).
``Asset Sale'' means any direct or indirect sale, issuance, conveyance,
transfer, lease or other disposition to any person other than the Company or a
Wholly-Owned Subsidiary of the Company, in one or a series of related
transactions, of (a) any Capital Stock of any Subsidiary of the Company (other
than in respect of director's qualifying shares or investments by foreign
nationals mandated by applicable law); (b) all or substantially all of the
properties and assets of any division or line of business of the Company or any
Subsidiary of the Company; or (c) any other properties or assets of the Company
or any Subsidiary of the Company other than in the ordinary course of business
and consistent with past business practices. For the purposes of this
definition, the term ``Asset Sale'' shall not include (i) any sale, transfer or
other disposition of equipment, tools or other assets (including Capital Stock
of any Subsidiary of the Company) by the Company or any of its Subsidiaries in
one or a series of related transactions in respect of which the Company or such
Subsidiary receives cash or property with an aggregate Fair Market Value of
$5,000,000 or less; and (ii) any sale, issuance, conveyance, transfer, lease or
other disposition of properties or assets that is governed by the provisions
described under ``--Merger, Sale of Assets, Etc.'' above.
``Attributable Value'' means, as to any particular lease under which any
person is at the time liable other than a Capitalized Lease Obligation, and at
any date as of which the amount thereof is to be determined, the total net
amount of rent required to be paid by such person under such lease during the
initial term thereof as determined in accordance with GAAP, discounted from the
last date of such initial term to the date of determination at a rate per annum
equal to the discount rate which would be applicable to a Capitalized Lease
Obligation with a like term in accordance with GAAP. The net amount of rent
required to be paid under any such lease for any such period shall be the
aggregate amount of rent payable by the lessee with respect to such period
after excluding amounts required to be paid on account of insurance, taxes,
assessments, utility, operating and labor costs and similar charges. In the
case of any lease which is terminable by the lessee upon the payment of a
penalty, such net amount shall also include the amount of such penalty, but no
rent shall be considered as required to be paid under such lease subsequent to
the first date upon which it may be so terminated. ``Attributable Value''
means, as to a Capitalized Lease Obligation under which any person is at the
time liable and at any date as of which the amount thereof is to be determined,
the capitalized amount thereof that would appear on the face of a balance sheet
of such person in accordance with GAAP.
``Average Life to Stated Maturity'' means, with respect to any
Indebtedness, as at any date of determination, the quotient obtained by
dividing (i) the sum of the products of (a) the number of years (or any
fraction thereof) from such date to the date or dates of each successive
scheduled principal payment (including, without limitation, any sinking fund
requirements) of such Indebtedness multiplied by (b) the amount of each such
principal payment by (ii) the sum of all such principal payments.
``Capital Stock'' means, with respect to any person, any and all shares,
interests, participations, rights in or other equivalents (however designated)
of such person's capital stock, and any rights (other than debt securities
convertible into capital stock), warrants or options exchangeable for or
convertible into such capital stock.
``Capitalized Lease Obligation'' means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real,
personal or mixed) that is required to be classified and accounted for as a
capital lease obligation under GAAP, and, for the purpose of the Indenture, the
amount of such obligation at any date shall be the capitalized amount thereof
at such date, determined in accordance with GAAP.
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``Cash Equivalents'' means, at any time, (i) any evidence of Indebtedness
with a maturity of 180 days or less issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality
thereof (provided that the full faith and credit of the United States of
America is pledged in support thereof); (ii) certificates of deposit,
acceptances or time deposits with a maturity of 180 days or less of any
financial institution that is a member of the Federal Reserve System having
combined capital and surplus and undivided profits of not less than
$500,000,000; (iii) certificates of deposit or time deposits with a maturity of
180 days or less of any financial institution that is not organized under the
laws of the United States, any state thereof or the District of Columbia that
are rated at least A-1 by S&P or at least P-1 by Moody's or at least an
equivalent rating category of another nationally recognized securities rating
agency; (iv) repurchase agreements and reverse repurchase agreements relating
to marketable direct obligations issued or unconditionally guaranteed by the
government of the United States of America or issued by any agency thereof and
backed by the full faith and credit of the United States of America, in each
case maturing within 180 days from the date of acquisition; provided that the
terms of such agreements comply with the guidelines set forth in the Federal
Financial Agreements of Depository Institutions With Securities Dealers, and
Others, as adopted by the Comptroller of the Currency on October 31, 1985 and
(v) commercial paper with a maturity of 180 days or less that is rated at least
A-1 by S&P or at least P-1 by Moody's.
``Change of Control'' means the occurrence of any of the following events:
(a) any ``person'' or ``group'' (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the ``beneficial owner'' (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be
deemed to have ``beneficial ownership'' of all securities that such person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time, upon the happening of an event or otherwise),
directly or indirectly, of more than 35% of the total Voting Stock of the
Company; (b) the Company consolidates with, or merges with or into, another
person or sells, assigns, conveys, transfers, leases or otherwise disposes of
all or substantially all of its assets to any person, or any person
consolidates with, or merges with or into, the Company, in any such event
pursuant to a transaction in which the outstanding Voting Stock of the Company
is converted into or exchanged for cash, securities or other property, other
than any such transaction where (i) the outstanding Voting Stock of the Company
is converted into or exchanged for (1) Voting Stock (other than Redeemable
Capital Stock) of the surviving or transferee corporation or (2) cash,
securities and other property in an amount which could then be paid by the
Company as a Restricted Payment under the Indenture, or a combination thereof,
and (ii) immediately after such transaction no ``person'' or ``group'' (as such
terms are used in Sections 13(d) and 14(d) of the Exchange Act), is the
``beneficial owner'' (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that a person shall be deemed to have ``beneficial ownership'' of
all securities that such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time, upon the happening
of an event or otherwise), directly or indirectly, of more than 35% of the
total Voting Stock of the surviving or transferee corporation; (c) at any time
during any consecutive two-year period, individuals who at the beginning of
such period constituted the Board of Directors of the Company (together with
any new directors whose election by such Board of Directors or whose nomination
for election by the stockholders of the Company was approved by a vote of
66 2/3% of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company then in office; or (d) the Company is
liquidated or dissolved or adopts a plan of liquidation.
``Common Stock'' means, with respect to any person, any and all shares,
interests or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of, such person's common stock, whether
outstanding at the Issue Date or issued after the Issue Date, and includes,
without limitation, all series and classes of such common stock.
``Consolidated Cash Flow Available for Fixed Charges'' means, with respect
to any person for any period, the sum of, without duplication, the amounts for
such period, taken as a single accounting period, of (a) Consolidated Net
Income, (b) Consolidated Non-cash Charges, (c) Consolidated Interest Expense,
and (d) Consolidated Income Tax Expense less (B) any non-cash items increasing
Consolidated Net Income for such period.
``Consolidated Fixed Charge Coverage Ratio'' means, with respect to any
person, the ratio of the aggregate amount of Consolidated Cash Flow Available
for Fixed Charges of such person for the four full fiscal quarters immediately
preceding the date of the transaction (the ``Transaction Date'') giving rise to
the need to calculate the Consolidated Fixed Charge Coverage Ratio (such four
full fiscal quarter period being referred to herein as the ``Four Quarter
Period'') to the aggregate amount of Consolidated Fixed Charges of such person
for the Four Quarter
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Period. In addition to and without limitation of the foregoing, for purposes of
this definition, ``Consolidated Cash Flow Available for Fixed Charges'' and
``Consolidated Fixed Charges'' shall be calculated after giving effect on a pro
forma basis for the period of such calculation to, without duplication, (a) the
incurrence of any Indebtedness of such person or any of its Subsidiaries (and
the application of the net proceeds thereof) during the period commencing on
the first day of the Four Quarter Period to and including the Transaction Date
(the ``Reference Period''), including, without limitation, the incurrence of
the Indebtedness giving rise to the need to make such calculation (and the
application of the net proceeds thereof), as if such incurrence (and
application) occurred on the first day of the Reference Period, and (b) any
Asset Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of
such person or one of its Subsidiaries (including any person who becomes a
Subsidiary as a result of the Asset Acquisition) incurring, assuming or
otherwise being liable for Acquired Indebtedness) occurring during the
Reference Period, as if such Asset Sale or Asset Acquisition occurred on the
first day of the Reference Period. Furthermore, in calculating ``Consolidated
Fixed Charges'' for purposes of determining the denominator (but not the
numerator) of this ``Consolidated Fixed Charge Coverage Ratio'' (i) interest on
outstanding Indebtedness determined on a fluctuating basis as of the
Transaction Date and which will continue to be so determined thereafter shall
be deemed to have accrued at a fixed rate per annum equal to the rate of
interest on such Indebtedness in effect on the Transaction Date; and (ii) if
interest on any Indebtedness actually incurred on the Transaction Date may
optionally be determined at an interest rate based upon a factor of a prime or
similar rate, a eurocurrency interbank offered rate, or other rates, then the
interest rate in effect on the Transaction Date will be deemed to have been in
effect during the Reference Period. If such person or any of its Subsidiaries
directly or indirectly guarantees Indebtedness of a third person, the above
clause shall give effect to the incurrence of such guaranteed Indebtedness as
if such person or such Subsidiary had directly incurred or otherwise assumed
such guaranteed Indebtedness.
``Consolidated Fixed Charges'' means, with respect to any person for any
period, the sum of, without duplication, the amounts for such period of (i)
Consolidated Interest Expense and (ii) the product of (a) the aggregate amount
of dividends and other distributions paid or accrued during such period in
respect of Preferred Stock and Redeemable Capital Stock of such person and its
Subsidiaries on a consolidated basis and (b) a fraction, the numerator which is
one and the denominator of which is one minus the then current combined
federal, state and local statutory tax rate of such person.
``Consolidated Income Tax Expense'' means, with respect to any person for
any period, the provision for federal, state, local and foreign income taxes of
such person and its Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
``Consolidated Interest Expense'' means, with respect to any person for any
period, without duplication, the sum of (i) the interest expense of such person
and its Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Protection Obligations, (c)
the interest portion of any deferred payment obligation, (d) all commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing and (e) all accrued interest and (ii) the
interest component of Capitalized Lease Obligations paid, accrued and/or
scheduled to be paid or accrued by such person and its Subsidiaries during such
period as determined on a consolidated basis in accordance with GAAP.
``Consolidated Net Income'' means, with respect to any person, for any
period, the consolidated net income (or loss) of such person and its
Subsidiaries for such period as determined in accordance with GAAP, adjusted,
to the extent included in calculating such net income, by excluding, without
duplication, (i) all extraordinary gains or losses, (ii) the portion of net
income (but not losses) of such person and its Subsidiaries allocable to
minority interests in unconsolidated persons to the extent that cash dividends
or distributions have not actually been received by such person or one of its
Subsidiaries, (iii) net income (or loss) of any person combined with such
person or one of its Subsidiaries on a ``pooling of interests'' basis
attributable to any period prior to the date of combination, (iv) any gain or
loss realized upon the termination of any employee pension benefit plan, on an
after-tax basis, (v) gains or losses in respect of any Asset Sales by such
person or one of its Subsidiaries and (vi) the net income of any Subsidiary of
such person to the extent that the declaration of dividends or similar
distributions by that Subsidiary of that income is not at the time permitted,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or its stockholders.
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``Consolidated Net Tangible Assets'' means the book value of the assets of
the Company and its Subsidiaries (other than patents, patent rights,
trademarks, trade names, franchises, copyrights, licenses, permits, goodwill
and other intangible assets classified as such in accordance with GAAP) after
all applicable deductions in accordance with GAAP (including, without
limitation, reserves for doubtful receivables, obsolescence, depreciation and
amortization) less all liabilities of the Company and its Subsidiaries
determined in accordance with GAAP.
``Consolidated Net Worth'' means, with respect to any person at any date,
the consolidated stockholders' equity of such person less the amount of such
stockholders' equity attributable to Redeemable Capital Stock of such person
and its Subsidiaries, as determined in accordance with GAAP.
``Consolidated Non-cash Charges'' means, with respect to any person for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such person and its Subsidiaries reducing Consolidated Net Income of such
person and its Subsidiaries for such period, determined on a consolidated basis
in accordance with GAAP (excluding any such charges constituting an
extraordinary item or loss or any such charge which required an accrual of or a
reserve for cash charges for any future period).
``Credit Agreement'' means one or more credit agreements as any such credit
agreement may be amended, supplemented or otherwise modified from time to time,
including all exhibits and schedules thereto.
``Currency Agreement'' means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its Subsidiaries against fluctuations in currency values.
``Default'' means any event that is, or after notice or passage of time or
both would be, an Event of Default.
``Event of Default'' has the meaning set forth under ``Events of Default''
herein.
``Exchange Act'' means the Securities Exchange Act of 1934, as amended.
``Fair Market Value'' means, with respect to any assets, the price, as
determined by the Board of Directors of the Company, acting in good faith which
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of which is under
pressure or compulsion to complete the transaction; provided, however, that,
with respect to any transaction which involves an asset or assets in excess of
$5,000,000, such determination shall be evidenced by resolutions of the Board
of Directors of the Company delivered to the Trustee.
``Final Maturity Date'' shall be the date fixed in the Indenture for the
final payment of principal on the Notes.
``GAAP'' means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States of America, which are applicable from time to
time and are consistently applied.
``Guarantee'' means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
``Indebtedness'' means, with respect to any person, without duplication,
(a) all liabilities of such person for borrowed money or for the deferred
purchase price of property or services, including, without limitation, all
obligations, contingent or otherwise, of such person in connection with any
letters of credit, banker's acceptance or other similar credit transaction,
excluding any trade payables and other accrued current liabilities incurred in
the ordinary course of business and which are not overdue by more than 90 days,
any trade letters of credit incurred in the ordinary course of business
provided that the reimbursement obligations with respect thereto are
extinguished within 30 days of the incurrence thereof and any obligation to pay
for utilities incurred in the ordinary course of business, (b) all obligations
of such person evidenced by bonds, notes, debentures or other similar
instruments, (c) all indebtedness created or arising under any conditional sale
or other title retention agreement with respect to property acquired by
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such person (even if the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), but excluding trade accounts payable arising in the ordinary course
of business, (d) all Capitalized Lease Obligations and Operating Lease
Obligations of such person, (e) all Indebtedness referred to in the preceding
clauses of other persons and all dividends of other persons, the payment of
which is secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien upon
property (including, without limitation, accounts and contract rights) owned by
such person, even though such person has not assumed or become liable for the
payment of such Indebtedness (the amount of such obligation being deemed to be
the lesser of the value of such property or asset or the amount of the
obligation so secured), (f) all guarantees of Indebtedness referred to in this
definition by such person, (g) all Redeemable Capital Stock of such person
valued at the greater of its voluntary or involuntary maximum fixed repurchase
price plus accrued dividends, (h) all obligations under or in respect of
Currency Agreements and Interest Rate Protection Obligations of such person,
(i) any Preferred Stock of any Subsidiary of such person valued at the sum of
(without duplication) (A) the liquidation preference thereof, (B) any mandatory
redemption payment obligations in respect thereof and (C) accrued dividends
thereon, and (j) any amendment, supplement, modification, deferral, renewal,
extension or refunding of any liability of the types referred to in clauses (a)
through (i) above. For purposes hereof, the ``maximum fixed repurchase price''
of any Redeemable Capital Stock which does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Redeemable Capital
Stock as if such Redeemable Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture, and
if such price is based upon, or measured by, the fair market value of such
Redeemable Capital Stock, such fair market value shall be determined in good
faith by the board of directors of the issuer of such Redeemable Capital Stock.
``Independent Financial Advisor'' means a firm (i) which does not, and
whose directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified
to perform the task for which it is to be engaged.
``Interest Rate Protection Agreement'' means any arrangement with any other
person whereby, directly or indirectly, such person is entitled to receive from
time to time periodic payments calculated by applying either a floating or a
fixed rate of interest on a stated notional amount in exchange for periodic
payments made by such person calculated by applying a fixed or a floating rate
of interest on the same notional amount and shall include without limitation,
interest rate swaps, caps, floors, collars and similar agreements.
``Interest Rate Protection Obligations'' means the obligations of any
person pursuant to an Interest Rate Protection Agreement.
``Investment'' means, with respect to any person, any direct or indirect
loan or other extension of credit or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others and including, without limitation, a
guarantee), or any purchase or acquisition by such person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness
issued by, any other person. In addition, the Fair Market Value of the assets
of any Subsidiary of the Company at the time that such Subsidiary is designated
as an Unrestricted Subsidiary shall be deemed to be an Investment made by the
Company in such Unrestricted Subsidiary at such time. ``Investments'' shall
exclude extensions of trade credit by the Company and its Subsidiaries in the
ordinary course of business in accordance with normal trade practices of the
Company or such Subsidiary, as the case may be.
``Issue Date'' means the original issue date of the Notes.
``Lien'' means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind. A person shall be deemed to own subject to a Lien any property which such
person has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement.
``Maturity Date'' means, with respect to any Note, the date on which any
principal of such Note becomes due and payable as therein or herein provided,
whether at the Stated Maturity with respect to such principal or by declaration
of acceleration, call or redemption or purchase or otherwise.
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``Moody's'' means Moody's Investors Service, Inc. and its successors.
``Net Cash Proceeds'' means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect
of deferred payment obligations when received in the form of cash or Cash
Equivalents (except to the extent that such obligations are financed or sold
with recourse to the Company or any Subsidiary of the Company) net of (i)
brokerage commissions and other fees and expenses (including, without
limitation, fees and expenses of legal counsel and investment bankers) related
to such Asset Sale, (ii) provisions for all taxes payable as a result of such
Asset Sale, (ii) amounts required to be paid to any person (other than the
Company or any Subsidiary of the Company) owning a beneficial interest in the
assets subject to the Asset Sale and (iv) appropriate amounts to be provided by
the Company or any Subsidiary of the Company, as the case may be, as a reserve
required in accordance with GAAP against any liabilities associated with such
Asset Sale and retained by the Company or any Subsidiary of the Company, as the
case may be, after such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as reflected in an officers' certificate delivered to the
Trustee.
``Operating Lease Obligation'' means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real,
personal or mixed) that is not required to be classified and accounted for as a
capital lease obligation under GAAP, and, for the purpose of the Indenture, the
amount of such obligation at any date shall be the Attributable Value with
respect to such lease at such date.
``Pari Passu Indebtedness'' means Indebtedness of the Company which ranks
pari passu in right of payment with the Notes.
``Permitted Investments'' means any of the following: (i) Investments in
any Wholly-Owned Subsidiary of the Company (including any person that pursuant
to such Investment becomes a Wholly-Owned Subsidiary of the Company) and any
person that is merged or consolidated with or into, or transfers or conveys all
or substantially all of its assets to, the Company or any Wholly-Owned
Subsidiary of the Company at the time such Investment is made; (ii) Investments
in Cash Equivalents; (iii) Investments in deposits with respect to leases or
utilities provided to third parties in the ordinary course of business; (iv)
Investments in the Notes; (v) Investments in Currency Agreements on
commercially reasonable terms entered into by the Company or any of its
Subsidiaries in the ordinary course of business in connection with the
operations of the business of the Company or its Subsidiaries to hedge against
fluctuations in foreign exchange rates; (vi) loans or advances to officers,
employees or consultants of the Company and its Subsidiaries in the ordinary
course of business for bona fide business purposes of the Company and its
Subsidiaries (including travel and moving expenses) not in excess of $2,000,000
in the aggregate at any one time outstanding; (vii) Investments in evidences of
Indebtedness, securities or other property received from another person by the
Company or any of its Subsidiaries in connection with any bankruptcy proceeding
or by reason of a composition or readjustment of debt or a reorganization of
such person or as a result of foreclosure, perfection or enforcement of any
Lien in exchange for evidences of Indebtedness, securities or other property of
such person held by the Company or any of its Subsidiaries, or for other
liabilities or obligations of such other person to the Company or any of its
Subsidiaries that were created, in accordance with the terms of the Indenture;
(viii) Investments in Interest Rate Protection Agreements on commercially
reasonably terms entered into by the Company or any of its Subsidiaries in the
ordinary course of business in connection with the operations of the business
of the Company or its Subsidiaries to hedge against fluctuations in interest
rates and (ix) loans or advances made to customers in the ordinary course of
business; provided, however, that the net proceeds of such loans or advances
are used to purchase footwear products from the Company and the aggregate
principal amount of such loans and advances outstanding at any time shall not
exceed $8,000,000.
``Permitted Liens'' means the following types of Liens:
(a) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or any of its Subsidiaries shall
have set aside on its books such reserves as may be required pursuant to
GAAP;
(b) statutory or other similar Liens of landlords and Liens of
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and
other Liens imposed by law and incurred in the ordinary course of business
for sums not yet delinquent or being contested in good faith, if such
reserve or other appropriate provision, if any, as shall be required by
GAAP shall have been made in respect thereof;
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(c) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, governmental
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(d) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(e) Easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Subsidiaries;
(f) any interest or title of a lessor under any Capitalized Lease
Obligation or operating lease;
(g) purchase money Liens to finance the acquisition or construction of
property or assets of the Company or any Subsidiary of the Company acquired
or constructed in the ordinary course of business; provided, however, that
(i) the related purchase money Indebtedness shall not be secured by any
property or assets of the Company or any Subsidiary of the Company other
than the property and assets so acquired or constructed and (ii) the Lien
securing such Indebtedness either (x) exists at the time of such
acquisition or construction or (y) shall be created within 90 days of such
acquisition or construction;
(h) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(i) Liens on inventory securing the Company's reimbursement obligations
under a trade letter of credit entered into to finance the purchase of such
inventory; provided, however, that such Liens are released no later than
fifteen days after the draw down on such trade letter of credit used to
finance the purchase of such inventory; and
(j) Liens on tangible assets securing Indebtedness representing the
Attributable Value of a Sale-Leaseback Transaction provided that the
aggregate fair market value (valued in good faith by the Board of Directors
of the Company) of such tangible assets subject to such Liens shall not
exceed on the date of creation of any such Lien 5% of the Consolidated Net
Tangible Assets of the Company.
``Person'' means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust, charitable
foundation, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
``Preferred Stock'' means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of such
person's preferred or preference stock, whether now outstanding or issued after
the date of the Indenture, and including, without limitation, all classes and
series of preferred or preference stock of such person.
``Redeemable Capital Stock'' means any shares of any class or series of
Capital Stock, that, either by the terms thereof, by the terms of any security
into which it is convertible or exchangeable or by contract or otherwise, is or
upon the happening of an event or passage of time would be, required to be
redeemed prior to the Stated Maturity with respect to the principal of any Note
or is redeemable at the option of the holder thereof at any time prior to any
such Stated Maturity date, or is convertible into or exchangeable for Notes at
any time prior to any such Stated Maturity.
``Sale-Leaseback Transaction'' of any person means an arrangement with any
lender or investor or to which such lender or investor is a party providing for
the leasing by such person of any property or asset of such person which has
been or is being sold or transferred by such person after the acquisition
thereof or the completion of construction or commencement of operation thereof
to such lender or investor or to any person to whom funds have been or are to
be advanced by such lender or investor on the security of such property or
asset. The stated maturity of such arrangement shall be the date of the last
payment of rent or any other amount due under such arrangement prior to the
first date on which such arrangement may be terminated by the lessee without
payment of a penalty.
``Significant Subsidiary'' shall have the same meaning as in Rule 1.02(v)
of Regulation S-X under the Securities Act.
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``S & P'' means Standard & Poor's Corporation, and its successors.
``Stated Maturity'' means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable, and when used with respect to any other Indebtedness, means the
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness, or any installment of interest
thereon, is due and payable.
``Subordinated Indebtedness'' means Indebtedness of the Company which is
expressly subordinated in right of payment to the Notes.
``Subsidiary'' means, with respect to any person, (i) a corporation a
majority of whose Voting Stock is at the time, directly or indirectly, owned by
such person, by one or more Subsidiaries of such person or by such person and
one or more Subsidiaries thereof and (ii) any other person (other than a
corporation), including, without limitation, a joint venture, in which such
person, one or more Subsidiaries thereof or such person and one or more
Subsidiaries thereof, directly or indirectly, at the date of determination
thereof, has at least majority ownership interest entitled to vote in the
election of directors, managers or trustees thereof (or other person performing
similar functions). For purposes of this definition, any directors' qualifying
shares or investments by foreign nationals mandated by applicable law shall be
disregarded in determining the ownership of a Subsidiary. Notwithstanding the
foregoing, an Unrestricted Subsidiary shall not be deemed a Subsidiary of the
Company under the Indenture, other than for purposes of the definition of an
Unrestricted Subsidiary, unless the Company shall have designated an
Unrestricted Subsidiary as a ``Subsidiary'' by written notice to the Trustee
under the Indenture, accompanied by an Officers' Certificate as to compliance
with the Indenture; provided, however, that the Company shall not be permitted
to designate any Unrestricted Subsidiary as a Subsidiary unless, after giving
pro forma effect to such designation, (i) the Company would be permitted to
incur $1.00 of additional Indebtedness under the first paragraph of the
covenant described under ``--Limitation on Indebtedness'' above (assuming a
market rate of interest with respect to such Indebtedness) and (ii) all
Indebtedness and Liens of such Unrestricted Subsidiary would be permitted to be
incurred by a Subsidiary of the Company under the Indenture. A designation of
an Unrestricted Subsidiary as a Subsidiary may not thereafter be rescinded.
``Unrestricted Subsidiary'' means a Subsidiary of the Company other than a
Guarantor (i) none of whose properties or assets were owned by the Company or
any of its Subsidiaries prior to the Issue Date, other than any such assets as
are transferred to such Unrestricted Subsidiary in accordance with the covenant
described under ``--Limitation on Restricted Payments", (ii) whose properties
and assets, to the extent that they secure Indebtedness, secure only
Non-Recourse Indebtedness and (iii) which has no Indebtedness other than
Non-Recourse Indebtedness. As used above, ``Non-Recourse Indebtedness'' means
Indebtedness as to which (i) neither the Company nor any of its Subsidiaries
(other than the relevant Unrestricted Subsidiary or another Unrestricted
Subsidiary) (1) provides credit support (including any undertaking, agreement,
or instrument which would constitute Indebtedness), (2) guarantees or is
otherwise directly or indirectly liable or (3) constitutes the lender (in each
case, other than pursuant to and in compliance with the covenant described
under ``--Limitation on Restricted Payments'') and (ii) no default with respect
to such Indebtedness (including any rights which the holders thereof may have
to take enforcement action against the relevant Unrestricted Subsidiary or its
assets) would permit (upon notice, lapse of time or both) any holder of any
other Indebtedness of the Company or its Subsidiaries (other than Unrestricted
Subsidiaries) to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity.
``Voting Stock'' means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any person (irrespective of whether or not, at the time, Capital
Stock of any other class or classes shall have, or might have, voting power by
reason of the happening of any contingency).
``Wholly-Owned Subsidiary'' means any Subsidiary of the Company of which
100% of the outstanding Capital Stock is owned by the Company, one or more
Wholly-Owned Subsidiaries of the Company or by the Company and one or more
Wholly-Owned Subsidiaries of the Company. For purposes of this definition, any
directors' qualifying shares or investments by foreign nationals mandated by
applicable law shall be disregarded in determining the ownership of a
Subsidiary.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following descriptions are summaries of the Company's material debt
agreements, and all such descriptions are qualified by reference to the
complete copies of such agreements which are incorporated by reference into
this Prospectus. Capitalized terms not defined herein shall have the meanings
set forth in the applicable debt agreement.
THE BANK CREDIT AGREEMENT
On December 22, 1993, the Company entered into a credit agreement with The
First National Bank of Chicago, as Agent for certain Lenders and The Boatmen's
National Bank of St. Louis and Citibank, N.A., as Co-Agents of such Lenders (as
amended to date, the ``Bank Credit Agreement'').
The Bank Credit Agreement provided the Company an unsecured $200 million
revolving line of credit with a termination date of December 31, 1999, which
the Company elected to reduce to $150 million effective October 16, 1996 as a
result of the sale of the Private Notes. The Company's availability under the
Bank Credit Agreement is not subject to a borrowing base. Interest on
borrowings under the Bank Credit Agreement is at varying rates based on one of
the following: a Eurodollar Rate with a margin of up to 1.25% over the
Eurodollar Base Rate, a Competitive Bid Loan rate offered by any Lender, the
Corporate Base Rate of The First National Bank of Chicago or the Federal Funds
rate plus 0.50%. The Company may elect which rate shall apply to a borrowing.
The Company must pay administration fees to the Agent, a commitment fee of up
to 0.25% on the unused portion of the Bank Credit Agreement, and certain other
fees as described in the Bank Credit Agreement.
The Bank Credit Agreement contains covenants that, among other things,
place restrictions on the Company's ability to (i) incur subsidiary debt, (ii)
merge or consolidate with another entity, (iii) engage in certain sales of
assets, (iv) engage in certain sales of account, (v) make certain investments,
(vi) enter into guarantees or incur other contingent obligations, (vii) incur
liens on its property, (viii) become obligated under letters of credit and (ix)
engage in certain transactions with its affiliates. In addition, the Bank
Credit Agreement contains the following financial covenants: (a) maximum Ratio
of Long Term Debt to Consolidated Capitalization, (b) minimum Consolidated
Tangible Net Worth and (c) minimum Fixed Charge Coverage.
The Bank Credit Agreement contains events of default, including, without
limitation, (i) failure to pay principal or interest when due, (ii) material
inaccuracy of any representation or warranty, (iii) breach of covenants, (iv) a
cross default to indebtedness of $10 million or more, (v) certain events of
bankruptcy or insolvency, (vi) loss or seizure of a material part of its
assets, (vii) any judgment in excess of $5 million if not paid, bonded, stayed
or discharged within 30 days after entry thereof, (viii) certain ERISA related
events, (ix) certain events or proceedings related to hazardous waste, (x) a
Change in Control and (xi) default under a Rate Hedging Obligation.
The Bank Credit Agreement ranks pari passu in right of payment with the
Senior Notes, the Sinking Fund Debentures and the Medium-Term Notes discussed
below. As of August 3, 1996, $121.0 million principal indebtedness was
outstanding under the Bank Credit Agreement, and after application of the net
proceeds of the sale of Private Notes and the repurchase of $5 million of its
7 1/8% Medium-Term Notes, $29.0 million would have been outstanding under the
Bank Credit Agreement.
SENIOR NOTES
On January 28, 1993, the Company entered into an agreement (the ``Note
Agreement'') with the Prudential Insurance Company of America (``Prudential'')
pursuant to which Prudential purchased the Company's 6.47% unsecured senior
notes due February 8, 1996 in the original principal amount of $50 million (the
``Senior Notes''). On October 24, 1995, the Company refinanced the Senior Notes
with $50 million of 7.36% unsecured Senior Notes due October 15, 2003. The
Senior Notes, as amended, require annual principal payments of $10 million
beginning in 1999. The Senior Notes may be prepaid, but such prepayment is
subject to payment of a Yield-Maintenance Amount to the then noteholder.
The Senior Notes rank pari passu in right of payment with the Bank Credit
Agreement, the Sinking Fund Debentures and the Medium-Term Notes discussed
below. Under certain circumstances described in the Note Agreement, if the
Company incurs indebtedness secured by assets of the Company or its
subsidiaries, it must cause the Senior Notes to be secured equally and ratably
with such other secured debt.
The Note Agreement contains covenants that, among other things, place
restrictions on the Company's ability to (i) incur liens on its property, (ii)
enter into guarantees or incur other contingent liabilities, (iii) make certain
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investments, loans or advances, (iv) issue or sell stock or debt, (v) merge or
consolidate with another entity, and (vi) sell a material part of its assets.
In addition, the Note Agreement contains the following financial covenants: (a)
maximum ratio of Long Term Debt to Consolidated Capitalization, (b) minimum
Fixed Charge Coverage, (c) minimum Working Capital and (d) minimum Tangible Net
Worth. Furthermore, the Company is prohibited from incurring indebtedness in
excess of $5 million under an agreement that contains financial covenants more
restrictive than those in the Note Agreement, unless the Company first offers
to amend the financial covenants in the Note Agreement to make them at least as
restrictive as those under the other agreement.
The Note Agreement contains events of default, including, without
limitation, (i) failure to pay any principal, interest or Yield-Maintenance
Amount when due, (ii) a cross default to indebtedness of $10 million or more,
(iii) material inaccuracy of any representation or warranty, (iv) breach of
covenants, (v) certain events of bankruptcy or insolvency, (vi) final judgments
in excess of $10 million in the aggregate are not stayed or discharged within
60 days after entry thereof, and (vii) certain ERISA related events.
SINKING FUND DEBENTURES
Under an Indenture dated as of January 15, 1973 (the ``Sinking Fund
Indenture''), the Company issued 7 3/8% unsecured sinking fund debentures in
the aggregate principal amount of $40 million (the ``Sinking Fund
Debentures''). Annual Sinking Fund payments of $2 million, which began on
January 15, 1979, are applied to the annual redemption of at least $2 million,
but not more than $4 million, principal amount of the Sinking Fund Debentures,
plus interest. The Sinking Fund Debentures are also subject to redemption in
whole or in part at any time, at a price of 100% of the principal amount, plus
interest accrued to the date fixed for redemption. As of August 3, 1996, the
total principal amount of the Sinking Fund Debentures outstanding was $4
million. Of the $4 million of principal outstanding, $2 million is a short-term
obligation of the Company and $2 million is a long-term obligation of the
Company.
Pursuant to the Sinking Fund Indenture, if the Company incurs indebtedness
secured by certain assets of the Company or a Domestic Subsidiary, the Company
must cause the Sinking Fund Debentures to be secured equally and ratably with
(or prior to) such indebtedness by such assets.
The Sinking Fund Indenture contains covenants, including, without
limitation, restrictions on the Company's ability to (i) incur liens on its
property and (ii) engage in sale and leaseback transactions. The Sinking Fund
Indenture also contains events of default, including, without limitation, (a)
failure to pay principal, interest or a Sinking Fund payment when due, (b)
breach of covenants, (c) a cross default to other indebtedness of the Company
without a threshold dollar amount and (d) certain events of bankruptcy and
insolvency. The Sinking Fund Debentures rank pari passu in right of payment
with the Bank Credit Agreement, the Senior Notes and the Medium-Term Notes
discussed below.
MEDIUM-TERM NOTES
Pursuant to an Indenture dated as of April 2, 1986, as supplemented by a
First Supplemental Indenture dated as of April 25, 1988, between the Company
and Citibank, N.A., as Trustee (collectively, the ``MTN Indenture''), the
Company is authorized to offer from time to time an unlimited amount of its
Medium-Term Notes (the ``Medium-Term Notes''). The Company may set the terms of
the Medium-Term Notes at the time of issuance, including, without limitation,
terms with respect to (i) any limit on the aggregate principal amount of the
Medium-Term Notes to be issued, (ii) the date or dates principal will be
payable, (iii) the rate of interest to be paid and the interest payment dates,
(iv) redemption and sinking fund provisions, and (v) any other terms.
The Medium-Term notes rank pari passu in right of payment with the Bank
Credit Agreement, the Sinking Fund Debentures and the Senior Notes. Pursuant to
the MTN Indenture, if the Company incurs indebtedness secured by certain assets
of the Company or a Domestic Subsidiary, the Company must cause the Medium-Term
Notes to be secured equally and ratably with (or prior to) such indebtedness by
such assets.
The MTN Indenture also contains covenants, including, without limitation,
restrictions on the Company's ability to (i) incur liens on its property and
(ii) engage in sale and leaseback transactions. The MTN Indenture also contains
events of default, including, without limitation, (a) failure to pay principal,
interest or a Sinking Fund payment when due, (b) breach of covenants, (c) a
cross default to other indebtedness of the Company in an aggregate amount
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exceeding $5 million, (d) certain events of bankruptcy and insolvency and (e)
any other event of default in connection with any particular series of
Medium-Term Notes.
The Company has filed a registration statement with the Commission under
which the Company may issue from time to time its Medium-Term Notes due from
nine months to thirty years from the date of issue at an aggregate initial
public offering price not to exceed $100 million. As of August 3, 1996, the
Company has issued an aggregate principal amount of $70 million of its
Medium-Term Notes pursuant to the MTN Indenture. Of the Medium-Term Notes
issued, $20 million of the Medium-Term Notes have matured and been paid. In
April 1996, the Company repurchased Medium-Term Notes with a face value of
$1.45 million and in October 1996, the Company repurchased Medium-Term Notes
with a face value of $5.0 million. The following table reflects the principal
amount, the interest rate per annum and the maturity date of the Medium-Term
Notes outstanding that have not yet matured:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT INTEREST RATE PER ANNUM YEAR OF MATURITY
--------- ----------------------- ----------------
<S> <C> <C>
$15 million 8.45%-8.60% 1999
$18.54 million 7.07%-8.83% 2002
$10 million 7.125% 2003
</TABLE>
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary describes certain United States federal income tax
consequences associated with the exchange of the Private Notes for Exchange
Notes and with the ownership of Notes as of the date hereof. Except where
noted, it deals only with Notes held as capital assets by United States Holders
and does not deal with special situations, such as those of dealers in
securities or currencies, financial institutions, life insurance companies,
persons holding Notes as part of a hedging or conversion transaction or a
straddle or United States Holders whose ``functional currency'' is not the U.S.
dollar. Furthermore, the discussion below is based on the provisions of the
Internal Revenue Code of 1986, as amended, and regulations, rulings and
judicial decisions thereunder as of the date hereof and such authorities may be
repealed, revoked, or modified so as to result in federal income tax
consequences different from those discussed below. The discussion below is also
based on there not being original issue discount with respect to the original
issuance of the Notes. PERSONS CONSIDERING THE EXCHANGE OF PRIVATE NOTES FOR
EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL
INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
THE EXCHANGE
The exchange of Private Notes for Exchange Notes should not be treated as a
taxable transaction for federal income tax purposes because the Exchange Notes
will not be considered to differ materially in kind or extent from the Private
Notes. Rather, the Exchange Notes received by a holder of Private Notes should
be treated as a continuation of the Private Notes in the hands of such holder.
As a result, there should be no material federal income tax consequences to
holders exchanging Private Notes for Exchange Notes.
PAYMENTS OF INTEREST
Interest on a Note will generally be taxable to a United States Holder as
ordinary income from domestic sources at the time it is paid or accrued in
accordance with the United States Holder's method of accounting for tax
purposes. As used herein, a ``United States Holder'' of a Note means a holder
that is a citizen or resident of the United States, a corporation, partnership
or other entity created or organized in or under the laws of the United States
or any political subdivision thereof, or an estate or trust the income of which
is subject to United States federal income taxation regardless of its source.
MARKET DISCOUNT
If a United States Holder purchases a Note for an amount that is less than
its principal amount (generally other than at its original issue), the amount
of the difference will be treated as ``market discount'' for federal income tax
purposes, unless such difference is less than a specified de minimis amount.
Under the market discount rules, a United States Holder will be required to
treat any principal payment on, or any gain on the sale, exchange, retirement
or other disposition of, a Note as ordinary income to the extent of the accrued
market discount which has not previously been included in income at the time of
such payment or disposition. In addition, the United States Holder may be
required to defer, until the maturity of the Note or its earlier disposition in
a taxable transaction, the deduction of all or a portion of the interest
expense of any indebtedness incurred or continued to purchase or carry such
Note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Note, unless the
United States Holder elects to accrue the market discount on a constant
interest method. A United States Holder of a Note may elect to include market
discount in income currently as it accrues (on either a ratable or constant
interest method) in which case the rule described above regarding deferral of
interest deductions will not apply. This election to include market discount in
income currently, once made, applies to all market discount obligations
acquired on or after the first taxable year to which the election applies and
may not be revoked without the consent of the Internal Revenue Service.
AMORTIZABLE PREMIUM
A United States Holder who purchases a Note for an amount in excess of its
stated redemption price at maturity will be considered to have purchased the
Note at a ``premium.'' A United States Holder generally may elect to amortize
the premium on the constant yield to maturity method. The amount amortized in
any year will be treated as
74
<PAGE> 76
a reduction of the United States Holder's interest income from the Note. The
premium on a Note held by a United States Holder that does not make such an
election will decrease the gain or increase the loss otherwise recognized on
disposition or retirement of the Note. The election to amortize the premium on
a constant yield to maturity method once made applies to all debt obligations
held or subsequently acquired by the electing holder on or after the first day
of the first taxable year to which the election applies and may not be revoked
without the consent of the Internal Revenue Service.
SALE, EXCHANGE AND RETIREMENT OF NOTES
A United States Holder's tax basis in a Note will, in general, be the
United States Holder's cost thereof, increased by market discount previously
included in income by the United States Holder and reduced by any amortized
premium and any cash payments on the Note other than qualified stated interest.
Upon the sale, exchange or retirement of a Note, a United States Holder will
recognize gain or loss equal to the difference between the amount realized upon
the sale, exchange or retirement (less any accrued qualified stated interest,
which will be taxable as such) and the adjusted tax basis of the Note. Except
with respect to market discount, such gain or loss will be capital gain or loss
and will be long-term capital gain or loss if at the time of the sale, exchange
or retirement the Note has been held for more than one year. Under current law,
net capital gains of individuals are, under certain circumstances, taxed at
lower rates than items of ordinary income. The deductibility of capital losses
is subject to limitations.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to certain
payments of principal, interest and premium paid on Notes and to the proceeds
of sale of a Note made to United States Holders other than certain exempt
recipients (such as corporations). A 31% backup withholding tax will apply to
such payments if the United States Holder fails to provide a taxpayer
identification number or certification of foreign or other exempt status or
fails to report in full dividend and interest income. The amount of any backup
withholding from a payment to a United States Holder will be allowed as a
credit against the holder's federal income tax liability.
75
<PAGE> 77
PLAN OF DISTRIBUTION
This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of any Exchange Notes
received in exchange for Private Notes acquired by such broker-dealer as a
result of market-making or other trading activities. Each broker-dealer that
receives Exchange Notes for its own account in exchange for such Private Notes
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Company
has agreed that for a period of up to 90 days after the Expiration Date, it
will make this Prospectus, as amended or supplemented, available to any such
broker-dealer that requests copies of this Prospectus in the Letter of
Transmittal for use in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers or any other persons. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market,
in negotiated transactions or through the writing of options on the Exchange
Notes, or a combination of such methods of resale, at market prices prevailing
at the time of resale or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer in exchange for Private Notes acquired
by such broker-dealer as a result of market-making or other trading activities
and any broker-dealer that participates in a distribution of such Exchange
Notes may be deemed to be an ``underwriter'' within the meaning of the
Securities Act and any profit on any such resale of Exchange Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
``underwriter'' within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders of Private Notes (including any broker-dealers), and
certain parties related to such holders, against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Company by
Bryan Cave LLP, St. Louis, Missouri.
EXPERTS
The Consolidated Financial Statements of the Company and its subsidiaries
as of February 3, 1996 and January 28, 1995 and for each of the three years in
the period ended February 3, 1996, appearing in and incorporated by reference
(including the Financial Statement Schedule) in this Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and
incorporated by reference herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
76
<PAGE> 78
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
PAGE
----
<S> <C>
Annual Financial Statements
Report of Independent Auditors................................................... F-2
Consolidated Balance Sheets as of February 3, 1996 and January 28, 1995.......... F-3
Consolidated Earnings for the years ended February 3, 1996, January 28, 1995 and
January 29, 1994............................................................... F-4
Consolidated Cash Flows for the years ended February 3, 1996, January 28, 1995
and January 29, 1994............................................................ F-5
Consolidated Shareholders' Equity for the years ended February 3, 1996, January
28, 1995 and January 29, 1994................................................... F-6
Notes to Consolidated Financial Statements....................................... F-7
Interim Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of August 3, 1996 and July 29, 1995
(unaudited) and February 3, 1996................................................ F-22
Condensed Consolidated Statements of Earnings for the three months ended August
3, 1996 and July 29, 1995 and the six months ended August 3, 1996 and July 29,
1995 (unaudited)................................................................ F-23
Condensed Consolidated Statements of Cash Flows for the six months ended August
3, 1996 and July 29, 1995 (unaudited)........................................... F-24
Notes to Condensed Consolidated Financial Statements............................. F-25
</TABLE>
F-1
<PAGE> 79
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Brown Group, Inc.
We have audited the accompanying consolidated balance
sheets of Brown Group, Inc. as of February 3, 1996 and January
28, 1995, and the related statements of consolidated earnings,
shareholders' equity, and cash flows for each of the three
years in the period ended February 3, 1996. These financial
statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Brown Group, Inc. at February 3, 1996 and
January 28, 1995, and the consolidated results of its
operations and its cash flows for each of the three years in
the period ended February 3, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 8 to the consolidated financial
statements, in 1995 the company changed its method of
accounting for the impairment of long-lived assets and in 1993,
as discussed in Note 4, changed its method of accounting for
postemployment benefits.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
St. Louis, Missouri
March 6, 1996
F-2
<PAGE> 80
<TABLE>
BROWN GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
FEBRUARY 3, 1996 JANUARY 28, 1995
---------------- ----------------
(THOUSANDS, EXCEPT NUMBER OF SHARES)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................................................. $ 35,058 $ 18,922
Receivables, net of allowance of $11,267 in 1995 and $11,664 in 1994.................. 86,417 98,079
Inventories, net of adjustment to last-in, first-out cost of $27,672 in 1995 and
$37,286 in 1994...................................................................... 342,282 322,029
Deferred income taxes................................................................. 26,734 23,350
Prepaid expenses and other current assets............................................. 14,847 16,580
-------- --------
Total Current Assets.............................................................. 505,338 478,960
Other Assets
Prepaid pension costs................................................................. 33,077 34,793
Other assets.......................................................................... 34,921 29,858
Property and equipment, net........................................................... 87,720 92,904
-------- --------
$661,056 $636,515
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable......................................................................... $112,000 $ 41,085
Trade accounts payable................................................................ 106,113 85,045
Employee compensation and benefits.................................................... 28,448 37,394
Other accrued expenses................................................................ 43,043 54,837
Income taxes.......................................................................... 4,335 (642)
Current maturities of long-term debt.................................................. 2,000 2,063
-------- --------
Total Current Liabilities......................................................... 295,939 219,782
Other Liabilities
Long-term debt, including capitalized lease obligations............................... 105,470 133,213
Deferred income taxes................................................................. 10,806 12,734
Other liabilities..................................................................... 17,205 21,059
-------- --------
Total Other Liabilities........................................................... 133,481 167,006
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value, 1,000,000 shares authorized; no shares outstanding.. -- --
Common stock, $3.75 par value, 100,000,000 shares authorized; 17,930,977 and
17,969,892 shares outstanding........................................................ 67,242 67,388
Additional capital.................................................................... 46,015 46,957
Cumulative translation adjustment..................................................... (4,913) (5,556)
Unamortized value of restricted stock................................................. (7,822) (10,878)
Retained earnings..................................................................... 131,114 151,816
-------- --------
Total Shareholders' Equity........................................................ 231,636 249,727
-------- --------
$661,056 $636,515
======== ========
See notes to consolidated financial statements.
</TABLE>
F-3
<PAGE> 81
<TABLE>
BROWN GROUP, INC.
CONSOLIDATED EARNINGS
<CAPTION>
1995 1994 1993
---- ---- ----
(THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C>
Net Sales............................................................................ $1,455,896 $1,461,637 $1,361,039
Cost of goods sold................................................................... 948,925 949,374 915,443
---------- ---------- ----------
Gross profit......................................................................... 506,971 512,263 445,596
---------- ---------- ----------
Selling and administrative expenses.................................................. 494,098 448,827 422,248
Interest expense..................................................................... 15,969 15,785 17,334
Other expense (income)--net.......................................................... 1,630 (12,320) 21,191
---------- ---------- ----------
Earnings (Loss) From Continuing Operations Before Income Taxes and Cumulative Effect
of Accounting Change............................................................... (4,726) 59,971 (15,177)
Income tax (provision) benefit....................................................... 5,423 (26,405) 5,881
---------- ---------- ----------
Earnings (Loss) From Continuing Operations Before Cumulative
Effect of Accounting Change........................................................ 697 33,566 (9,296)
Cumulative effect of change in accounting for postemployment
benefits........................................................................... -- -- (2,214)
Discontinued operations:
Earnings from operations, net of taxes........................................... -- 1,282 4,298
(Provision) credit for disposal, net of taxes.................................... 2,600 4,550 (24,400)
---------- ---------- ----------
Net Earnings (Loss).................................................................. $ 3,297 $ 39,398 $ (31,612)
========== ========== ==========
Earnings (Loss) Per Common Share:
Continuing operations before cumulative effect of accounting change.................. $ .04 $ 1.91 $ (.54)
Cumulative effect of change in accounting for postemployment
benefits........................................................................... -- -- (.13)
Discontinued operations:
Earnings from operations......................................................... -- .07 .25
(Provision) credit for disposal.................................................. .15 .26 (1.41)
---------- ---------- ----------
Net Earnings (Loss).................................................................. $ .19 $ 2.24 $ (1.83)
========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE> 82
<TABLE>
BROWN GROUP, INC.
CONSOLIDATED CASH FLOWS
<CAPTION>
1995 1994 1993
---- ---- ----
(THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)................................................................... $ 3,297 $ 39,398 $(31,612)
Adjustments to reconcile net earnings (loss) to net cash provided (used) by continuing
operating activities:
Cumulative effect of change in accounting for postemployment benefits............. -- -- 2,214
Discontinued operations........................................................... (2,600) (5,832) 20,102
Depreciation and amortization..................................................... 23,827 22,095 19,852
Loss on disposal or impairment of facilities and equipment........................ 6,477 103 12,236
Provision for losses on accounts receivable....................................... 5,101 6,442 5,043
Changes in operating assets and liabilities:
Receivables................................................................... 6,561 5,304 (826)
Inventories................................................................... (20,253) (35,037) (33,406)
Prepaid expenses and other current assets..................................... (3,051) 26,212 (30,880)
Trade accounts payable and accrued expenses................................... 2,672 (7,972) 27,082
Income taxes.................................................................. 4,977 (4,430) (1,285)
Other, net.................................................................... (8,548) (6,577) (1,397)
-------- --------- --------
Net Cash Provided (Used) by Operating Activities of:
Continuing operations................................................................. 18,460 39,706 (12,877)
Discontinued operations............................................................... (2,755) 8,677 180
-------- --------- --------
Net Cash Provided (Used) by Operating Activities...................................... 15,705 48,383 (12,697)
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................................. (26,939) (32,531) (27,207)
Proceeds from sales of fixed assets................................................... 5,408 4,226 1,407
Proceeds from sales of assets of discontinued operations.............................. 2,444 118,532 --
-------- --------- --------
Net Cash Provided (Used) by Investing Activities...................................... (19,087) 90,227 (25,800)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term notes payable....................................... 45,915 (105,005) 134,445
Principal payments of long-term debt and capitalized leases........................... (2,812) (7,764) (97,102)
Additions to long-term debt........................................................... -- -- 20,000
Proceeds from issuance of common stock................................................ 564 5,901 4,400
Payments for purchases of treasury stock.............................................. (824) (1,102) --
Dividends paid........................................................................ (23,325) (28,610) (27,979)
-------- --------- --------
Net Cash Provided (Used) by Financing Activities...................................... 19,518 (136,580) 33,764
-------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................................... 16,136 2,030 (4,733)
Cash and Cash Equivalents at Beginning of Year........................................ 18,922 16,892 21,625
-------- --------- --------
Cash and Cash Equivalents at End of Year.............................................. $ 35,058 $ 18,922 $ 16,892
======== ========= ========
See notes to consolidated financial statements.
</TABLE>
F-5
<PAGE> 83
<TABLE>
BROWN GROUP, INC.
CONSOLIDATED SHAREHOLDERS' EQUITY
<CAPTION>
UNAMORTIZED
COMMON STOCK CUMULATIVE VALUE OF
------------------- ADDITIONAL TRANSLATION RESTRICTED RETAINED
SHARES DOLLARS CAPITAL ADJUSTMENT STOCK EARNINGS
------ ------- ---------- ----------- ----------- --------
(THOUSANDS, EXCEPT NUMBER OF SHARES)
<S> <C> <C> <C> <C> <C> <C>
Balance January 30, 1993.......................... 17,318,883 $64,947 $28,264 $(1,571) $ (4,166) $201,514
Net loss.......................................... (31,612)
Dividends ($1.60 per share)....................... (27,979)
Stock issued under employee benefit plans......... 168,385 631 3,769
Currency translation adjustment................... (1,716)
Stock issued under restricted stock plan, net..... 132,500 497 3,946 (4,443)
Amortization of deferred compensation under
restricted stock plan........................... 1,782
---------- ------- ------- ------- -------- --------
Balance January 29, 1994.......................... 17,619,768 66,075 35,979 (3,287) (6,827) 141,923
Net earnings...................................... 39,398
Dividends ($1.60 per share)....................... (28,610)
Stock issued under employee benefit plans......... 217,924 817 5,084
Purchase of common stock for treasury............. (35,800) (134) (73) (895)
Currency translation adjustment................... (2,269)
Stock issued under restricted stock plan, net..... 168,000 630 5,967 (6,597)
Amortization of deferred compensation under
restricted stock plan........................... 2,546
---------- ------- ------- ------- -------- --------
Balance January 28, 1995.......................... 17,969,892 67,388 46,957 (5,556) (10,878) 151,816
Net earnings...................................... 3,297
Dividends ($1.30 per share)....................... (23,325)
Stock issued under employee benefit plans......... 23,760 89 475
Purchase of common stock for treasury............. (25,800) (97) (53) (674)
Currency translation adjustment................... 643
Stock issued under restricted stock plan, net..... (36,875) (138) (1,364) 1,502
Amortization of deferred compensation under
restricted stock plan........................... 1,554
---------- ------- ------- ------- -------- --------
Balance February 3, 1996 17,930,977 $67,242 $46,015 $(4,913) $ (7,822) $131,114
========== ======= ======= ======= ======== ========
See notes to consolidated financial statements.
</TABLE>
F-6
<PAGE> 84
BROWN GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The corporation operates in the Footwear industry. Current activities
include the operation of retail shoe stores and the importing, foreign
sourcing, and wholesaling of women's, men's and children's footwear. The
corporation's retail operations comprise 1,241 retail footwear stores in the
United States and Canada. Footwear is distributed by the corporation's
wholesaling operations to department stores, mass merchandisers, and
independent retailers in the United States, Canada, Europe, South America and
the Far East and to affiliates. Wholesale footwear sales carry corporate brand
names, brand names licensed by the corporation, and private label footwear.
Through the sourcing activities of its Pagoda organization, the corporation
sources a wide variety of footwear from a number of independently owned and
operated factories primarily in China and other Far Eastern countries and to a
lesser extent Brazil and Italy, for affiliates and for outside customers, which
primarily consist of large discount store operations. See Note 6 for additional
information regarding the corporation's business segment and operations by
geographic area.
CONSOLIDATION
The consolidated financial statements include the accounts of Brown Group,
Inc. and its majority-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
ACCOUNTING PERIOD
The corporation's fiscal year is the 52 or 53-week period ending the
Saturday nearest to January 31. Fiscal years 1995, 1994 and 1993 ended on
February 3, 1996, January 28, 1995 and January 29, 1994, respectively. Fiscal
year 1995 included 53 weeks and fiscal years 1994 and 1993 each included 52
weeks.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INVENTORIES
All inventories are valued at the lower of cost or market, with 86% of
consolidated inventories using the last-in, first-out (LIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment are provided over the estimated useful lives of the
assets, or the remaining term of leases where applicable, using the
straight-line method.
INCOME TAXES
Provision is made for the tax effects of timing differences between
financial and tax reporting. These differences relate principally to
depreciation, employee benefit plans, facility closing and restructuring
reserves, bad debt reserves and inventory.
EARNINGS PER SHARE
Earnings per share of Common Stock are computed by dividing net earnings by
the weighted average number of shares outstanding during the year. The dilutive
effect of stock options is not significant and is therefore excluded from the
calculation.
F-7
<PAGE> 85
BROWN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PRE-OPENING AND CLOSING EXPENSES
Pre-opening expenses of new facilities are charged to operations when
incurred. Costs of closing facilities, including capital asset disposition
losses, lease termination costs, and inventory liquidation costs, are accrued
when management makes the decision to close such facilities.
STOCK BASED COMPENSATION
The corporation accounts for stock based compensation in accordance with
APB Opinion No. 25, ``Accounting for Stock Issued to Employees,'' and,
accordingly recognizes compensation expense related to stock appreciation units
and restricted stock grants. No compensation expense is recorded for stock
options granted at market value.
CASH AND EQUIVALENTS
The corporation considers all short-term investments with maturities of
three months or less to be cash equivalents.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of subsidiaries, other than those located in highly
inflationary countries, are translated at the rate of exchange in effect on the
balance sheet date; income and expenses are translated at the average rates of
exchange prevailing during the year. The related translation adjustments are
reflected in the cumulative translation adjustment section of the Consolidated
Statement of Shareholders' Equity. Foreign currency gains and losses resulting
from transactions and the translation of financial statements of subsidiaries
in highly inflationary countries are included in results of operations.
FINANCIAL INSTRUMENTS
The corporation's policy is to use financial derivatives only to manage
exposure to fluctuations in interest and foreign currency exchange rates.
Gains and losses realized and premiums paid on interest rate hedges, are
deferred and amortized to interest expense over the life of the underlying
hedged instrument, or immediately if the underlying hedged instrument is
settled.
Gains and losses on contracts that hedge specific foreign currency
commitments, which are primarily for inventory purchases, are deferred and
included in the basis of the transaction when it is consummated. Material gains
and losses on forecasted inventory purchases are recorded in income in the
period the value of the contract changes. Gains and losses on contracts which
hedge foreign currency assets or liabilities in highly inflationary economies
are recognized in income as incurred. Such amounts effectively offset gains and
losses on the assets or liabilities that are hedged.
NOTE 2: RESTRUCTURING CHARGES
Included in results from continuing operations for fiscal 1995 is a pretax
charge of $14.1 million to provide for the cost of closing the corporation's
five remaining United States footwear manufacturing plants and several related
facilities. Approximately 2,400 factory positions were eliminated and the
corporation's headquarters support staff was reduced by 60 positions. The cost
of termination benefits included in cost of sales is $8.0 million and an
additional $.5 million of termination benefits is included in selling and
administrative expense. Costs to liquidate raw material inventories of $2.0
million also were included in cost of sales. The estimated asset writeoffs of
$3.6 million associated with the closings are included in other expense. The
total charge, net of the related tax benefit, resulted in a reduction in
earnings from continuing operations of $9.2 million, or $.52 per share for
fiscal 1995.
At February 3, 1996, $4.0 million remains from the manufacturing plant
closing charges recorded in fiscal 1995 and includes $2.6 million redesignated
from the 1993 restructuring reserve. The remaining liability relates primarily
to
F-8
<PAGE> 86
BROWN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
personnel severance and pension settlement costs. To date, $12.7 million of the
factory closing reserves have been utilized: $2.2 million for asset writeoffs,
$5.9 million for inventory liquidation costs, and $4.6 million for personnel
severance costs.
Included in results from continuing operations for fiscal 1993 is a pretax
restructuring charge of $45.4 million, of which $11.0 million was charged to
cost of goods sold and an additional $13.0 million was charged to selling and
administrative expenses with the remaining $21.4 million charged to other
expense. This charge covered the closing of five shoe factories, the closing of
over 150 shoe stores, personnel severance costs associated with a reduction in
headquarters administrative staffing and consolidation of the corporation's
Brown Shoe and Pagoda divisions, and a provision for additional environmental
monitoring costs related to the corporation's closed tannery. The restructuring
charge, net of the related tax benefit, resulted in a reduction of $29.5
million, or $1.71 per share, in earnings from continuing operations for fiscal
1993.
At February 3, 1996, no balance remains from restructuring charges recorded
in fiscal 1993 excluding environmental reserves discussed in Note 14. To date,
$40.4 million of the reserves which were established by the 1993 restructuring
charges have been utilized: $12.2 million for asset writeoffs, $11.6 million
for lease termination costs, $6.9 million for inventory liquidation costs, $7.1
million for personnel severance costs, net of pension and postretirement gains
of $3.6 million, and $2.6 million was utilized in the closing of all remaining
factories in 1995. The balance of the 1993 restructuring reserve at January 28,
1995 was $10.7 million excluding environmental reserves discussed in Note 14.
NOTE 3: DISCONTINUED OPERATIONS
During the third quarter of fiscal 1994, the corporation announced the sale
of its Cloth World chain of fabric stores to Fabri-Centers of America, Inc. The
sale was completed on October 2, 1994 for $65.7 million in cash. In addition,
as of the end of the third quarter of 1994, the corporation adopted a plan to
close the Maryland Square catalog operation. The closure of this business was
substantially completed in the fourth quarter of fiscal 1994.
In 1993, the corporation adopted a formal plan to withdraw from the Wohl
Leased Shoe Department business, which involved the management of shoe
departments in department stores. The corporation completed its withdrawal from
the last Wohl Leased Shoe Department at the end of October 1994.
The corporation established reserves of $34.8 million in fiscal 1993 for
the costs associated with the withdrawal from the Wohl Leased Shoe Department
business. Due to earlier-than-expected withdrawals from leased departments at
better-than-expected terms, $9.8 million of this reserve was redesignated to
cover the exit costs associated with the Cloth World sale and the closure of
the Maryland Square catalog operation, previously discussed, and an additional
$7.0 and $4.0 million of the reserve was reversed to income in the fourth
quarter of 1994 and 1995, respectively.
Summarized results of these businesses are shown separately as Discontinued
Operations in the accompanying consolidated financial statements. Operating
results of these businesses are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Net sales................................................................ $148,980 $529,617
======== ========
Earnings before income taxes............................................. $ 1,650 $ 6,253
Income taxes............................................................. 368 1,955
-------- --------
Earnings from operations................................................. $ 1,282 $ 4,298
======== ========
</TABLE>
NOTE 4: RETIREMENT AND OTHER BENEFIT PLANS
The corporation's pension plan covers substantially all full-time United
States employees. Under the plan, salaried and management employees' pension
benefits are based on the employee's highest consecutive five years of
compensation during the ten years before retirement; hourly employees' and
union members' benefits are based on stated amounts for each year of service.
The corporation's funding policy for all plans is to make the minimum annual
F-9
<PAGE> 87
BROWN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contributions required by applicable regulations. The corporation also
participates in a multiemployer plan, which provides defined benefits to
certain of the corporation's union employees.
The following table sets forth the plan's funded status at the December 31,
1995 and 1994 measurement dates, and amounts recognized in the corporation's
Consolidated Balance Sheet at February 3, 1996 and January 28, 1995 (in
thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation...................................................... $109,461 $ 90,514
======== ========
Accumulated benefit obligation................................................. $110,646 $ 92,336
======== ========
Projected benefit obligation................................................... $118,635 $100,526
Plan assets at fair value...................................................... 154,026 132,266
-------- --------
Excess of plan assets over projected benefit obligation........................ 35,391 31,740
Unrecognized net loss.......................................................... 905 2,540
Unrecognized prior service costs............................................... (782) 3,864
Unrecognized net transition asset.............................................. (2,437) (3,351)
-------- --------
Prepaid pension cost recognized in the balance sheet........................... $ 33,077 $ 34,793
======== ========
</TABLE>
Pension plan assets are invested primarily in listed stocks and bonds. The
plan assets are valued using the current market value for bonds and a five-year
moving average for equities.
Prior service costs are amortized over the average remaining service period
of employees expected to receive benefits under the plan. Pension costs
included the following components (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost............................................................................ $ 4,306 $ 5,828 $ 6,180
Interest cost........................................................................... 8,638 9,957 9,532
Actual return on plan assets............................................................ (41,055) 20,269 (30,847)
Net amortization and deferral........................................................... 28,207 (37,823) 12,864
Multiemployer plan...................................................................... 23 78 143
-------- -------- --------
Total pension (income) expense.......................................................... $ 119 $ (1,691) $ (2,128)
======== ======== ========
Actuarial assumptions used were:
Discount rate....................................................................... 7.00% 8.75% 7.25%
Expected return on plan assets...................................................... 9.50% 9.50% 9.50%
Compensation increase............................................................... 4.50% 5.00% 5.00%
</TABLE>
In addition, the corporation recognized net curtailment/settlement gains
(losses) in fiscal 1995 and 1994 of ($1.8) million and $3.4 million,
respectively, related to employee terminations due to personnel reductions as
part of the corporation's restructuring, factory closures and discontinued
operations. These net gains (losses) affected restructuring, factory closure
and discontinued operations reserves originally established in fiscal 1995 and
1993.
The corporation's defined contribution 401(k) plan covers salaried,
management and certain hourly employees who have at least one year of service
and who are at least 21 years of age. Company contributions represent a partial
matching of employee contributions generally up to a maximum of 3.5% of the
employee's salary. The corporation's expense for this plan was $2.3 million in
1995, $2.5 million in 1994 and $3.4 million in 1993.
In addition to providing pension benefits, the corporation sponsors
unfunded defined benefit postretirement health and life insurance plans that
cover both salaried employees who had become eligible for benefits by January
1, 1995, and hourly employees. The postretirement health care plans are offered
on a shared-cost basis only to employees electing early retirement. This
coverage ceases when the employee reaches age 65 and becomes eligible for
F-10
<PAGE> 88
BROWN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Medicare. The retirees' contributions are adjusted annually and the corporation
intends to continue to increase retiree contributions in the future. The life
insurance plans provide coverage ranging from $1,000 to $38,000 for qualifying
retired employees.
The following tables set forth the plans' funded status reconciled with the
amounts in the corporation's Consolidated Balance Sheet at February 3, 1996 and
January 28, 1995 (in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------- --------------------
LIFE LIFE
HEALTH INSURANCE HEALTH INSURANCE
PLANS PLANS PLANS PLANS
------ --------- ------- ---------
<S> <C> <C> <C> <C>
Accumulated postretirement benefit obligations:
Retirees........................................................ $3,604 $5,071 $ 3,379 $4,850
Active participants............................................. 472 100 1,861 165
------ ------ ------- ------
4,076 5,171 5,240 5,015
Plan assets..................................................... -- -- -- --
------ ------ ------- ------
Accumulated obligation in excess of plan assets................. 4,076 5,171 5,240 5,015
Unrecognized net gain (loss).................................... 4,640 (211) 4,804 (23)
------ ------ ------- ------
Accrued postretirement benefit cost............................. $8,716 $4,960 $10,044 $4,992
====== ====== ======= ======
</TABLE>
Net postretirement benefit cost for 1995, 1994, and 1993 included the
following components (in thousands):
<TABLE>
<CAPTION>
LIFE
HEALTH INSURANCE
PLANS PLANS
------ ---------
<S> <C> <C>
1995
Service cost............................................................... $ 162 $ 5
Interest cost.............................................................. 407 385
Net amortization cost...................................................... (878) --
------- ----
Postretirement benefit cost (income)....................................... $ (309) $390
======= ====
1994
Service cost............................................................... $ 266 $ 15
Interest cost.............................................................. 443 397
Net amortization cost...................................................... (845) 7
------- ----
Postretirement benefit cost (income)....................................... $ (136) $419
======= ====
1993
Service cost............................................................... $ 534 $ 25
Interest cost.............................................................. 667 387
Net amortization cost...................................................... (2,088) --
------- ----
Postretirement benefit cost (income)....................................... $ (887) $412
======= ====
</TABLE>
In addition to the net postretirement benefit expense, the corporation
recognized net curtailment gains in fiscal 1995 and 1994 of $.7 million and $.6
million, respectively, related to employee terminations due to personnel
reductions as part of the corporation's restructuring, plant closures and
discontinued operations. These net gains increased the restructuring, factory
closure and discontinued operations reserves originally established in fiscal
1995 and 1993.
In the fourth quarter of 1993, the corporation terminated postretirement
health care coverage for salaried employees who were not eligible by January 1,
1995. The effect of this change was the recognition of a pretax gain of $1.8
million.
F-11
<PAGE> 89
BROWN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Actuarial assumptions used were (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Projected health care cost trend rate <FA>............................................................ 7.50% 8.75% 9.00%
Ultimate trend rate <FA>.............................................................................. 5.00% 5.75% 5.00%
Year ultimate trend rate is achieved.................................................................. 2001 2001 2001
Effect of a 1% point increase in the health care cost trend rate on the postretirement benefit
obligation.......................................................................................... $132 $193 $309
Effect of a 1% point increase in the health care cost trend rate on the aggregate of service and
interest cost....................................................................................... $ 26 $ 34 $ 84
Discount rate......................................................................................... 7.00% 8.75% 7.25%
<FN>
- --------
<FA> The health care cost trend rate assumption has a significant effect on the amounts reported. Rates
listed above represent assumed increases in per capita cost of covered health care benefits for 1995,
1994 and 1993, respectively. For future years the rate was assumed to decrease gradually and remain at
the ultimate trend rate thereafter.
</TABLE>
In the fourth quarter of 1993, the corporation adopted, retroactive to
January 31, 1993, the Statement of Financial Accounting Standards (SFAS) No.
112, ``Employers' Accounting for Postemployment Benefits.'' Prior to 1993,
expenses related to postemployment medical benefits were recognized on a
pay-as-you-go basis. The corporation elected to immediately recognize the
cumulative effect of the change in accounting for postemployment benefits of
$3.4 million. On an aftertax basis, this charge was $2.2 million or $.13 per
share. The effect of this change on 1993 operating results was not material.
NOTE 5: INCOME TAXES
The components of earnings from continuing operations before income taxes
and cumulative effect of accounting change consisted of Domestic earnings
(loss) before taxes of ($18.6) million, $46.5 million, and ($29.1) million in
1995, 1994, and 1993, respectively, and Foreign earnings before taxes of $13.9
million, $13.5 million, and $13.9 million in 1995, 1994, and 1993,
respectively.
The components of income tax (income) expense are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal
Currently payable........................................................................... $(7,220) $(8,389) $ 2,777
Deferred.................................................................................... (2,485) 29,732 (14,215)
------- ------- --------
(9,705) 21,343 (11,438)
State....................................................................................... (399) 355 3,390
Foreign..................................................................................... 4,681 4,707 2,167
------- ------- --------
Total income tax expense (benefit) on earnings (loss) from continuing operations before
cumulative effect of accounting changes................................................... (5,423) 26,405 (5,881)
Tax benefit of cumulative effect of accounting changes...................................... -- -- (1,192)
Tax expense (benefit) of discontinued operations:
Results of operations................................................................... -- 368 1,955
(Provision) credit for disposal......................................................... 1,400 2,450 (10,454)
------- ------- --------
Total income tax expense (benefit).......................................................... $(4,023) $29,223 $(15,572)
======= ======= ========
</TABLE>
The corporation received income tax refunds, net of payments, of $9.8
million and $1.2 million in fiscal 1995 and 1994. Cash payments of income taxes
for fiscal 1993 were $12.9 million.
F-12
<PAGE> 90
BROWN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The differences between the tax expense (benefit) from continuing
operations reflected in the financial statements and the amounts calculated at
the federal statutory income tax rate of 35% are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income taxes at statutory rate.................................................. $(1,654) $20,990 $(5,312)
State income taxes, net of federal tax benefit.................................. (259) 231 2,203
Foreign tax in excess of (less than) domestic rate.............................. 337 55 (2,056)
Effect of revaluation of net deferred tax assets due to 1993 increase in federal
tax rate from 34% to 35%...................................................... -- -- (422)
Provision for (recovery of) tax assessment <FA>................................. (5,837) 5,837 --
Valuation of temporary differences.............................................. 2,700 -- --
Other........................................................................... (710) (708) (294)
------- ------- -------
$(5,423) $26,405 $(5,881)
======= ======= =======
<FN>
- --------
<FA> Represents tax and interest (net of tax) related to an Internal Revenue Service assessment on a portion
of the corporation's unremitted foreign earnings. In January 1995, the U.S. Tax Court issued a judgment
in favor of the Internal Revenue Service; however, this judgment was reversed by an Appeals Court
ruling in fiscal 1995. The IRS has appealed the most recent ruling, but the corporation believes it
will prevail.
</TABLE>
Significant components of the corporation's deferred income tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets
Employee benefits, compensation, and insurance.......................... $ 8,667 $ 8,589
Allowance for doubtful accounts......................................... 3,818 3,484
Inventory capitalization and inventory reserves......................... 4,456 1,940
Discontinued operations, restructuring, and store closing reserves...... 3,511 6,669
Postretirement and postemployment benefit plans......................... 5,581 5,991
Tax loss carryforward................................................... 14,037 8,631
Other................................................................... 8,840 6,856
-------- --------
Total deferred tax assets........................................... 48,910 42,160
Deferred tax liabilities
Excess depreciation..................................................... (7,347) (9,633)
Retirement plans........................................................ (11,626) (11,481)
LIFO inventory valuation................................................ (7,753) (8,807)
Other................................................................... (2,956) (1,623)
-------- --------
Total deferred tax liabilities...................................... (29,682) (31,544)
Valuation allowance..................................................... (3,300) --
-------- --------
Net deferred income tax asset........................................... $ 15,928 $ 10,616
======== ========
</TABLE>
The corporation provided a deferred tax asset valuation allowance of $2.7
million in fiscal 1995, bringing the total valuation reserve balance to $3.3
million. The valuation provision in fiscal 1995 was the result of decreased
domestic earnings of the corporation. Based on management's assessment, it is
more likely than not that all the net deferred tax assets will be realized
through future taxable earnings or alternative tax strategies.
At February 3, 1996, the corporation has net operating loss carryforwards
for federal income tax purposes of $40.1 million which are available to offset
future federal taxable income through fiscal 2010.
F-13
<PAGE> 91
BROWN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of February 3, 1996, there are approximately $37.0 million of
accumulated unremitted earnings from the corporation's Canadian subsidiary and
approximately $62.0 million from other foreign entities on which deferred taxes
have not been provided. Based on the current United States and Canadian income
tax rates, it is anticipated that no additional United States tax would be
incurred if the accumulated Canadian earnings were distributed. In the event
that the other foreign entities' earnings were distributed, it is estimated
that U.S. taxes, net of foreign tax credits, of approximately $21.0 million
would be due.
NOTE 6: BUSINESS SEGMENT INFORMATION
The corporation operates in the Footwear industry throughout the world.
Operations include the sourcing, wholesale distribution, and retailing of
women's, men's and children's foot-wear. In 1995, approximately 62% of the
corporation's sales were at retail, compared to 54% in 1994 and 52% in 1993.
The corporation conducts foreign operations in the Far East, South America
and Europe where footwear is sourced for sale primarily to United States
customers and to a lesser extent European, Latin American and Asian Pacific
customers, and in Canada, where there are both manufacturing and retailing
operations. A summary of the corporation's operations by geographic area
follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net Sales
United States................................................................... $1,065,143 $1,030,315 $ 965,423
Far East........................................................................ 282,580 310,902 291,106
Canada.......................................................................... 69,244 67,225 66,107
Latin America, Europe and Other................................................. 78,697 90,417 71,082
Inter-Area Transfers............................................................ (39,768) (37,222) (32,679)
---------- ---------- ----------
$1,455,896 $1,461,637 $1,361,039
========== ========== ==========
Operating Income
United States<FA><FB>........................................................... $ 8,741 $ 64,472 $ (1,283)
Far East........................................................................ 748 5,972 9,992
Canada.......................................................................... 6,358 6,565 3,330
Latin America, Europe and Other................................................. 8,251 1,621 1,516
Less corporate, interest and other (expense).................................... (28,824) (18,659) (28,732)
---------- ---------- ----------
$ (4,726) $ 59,971 $ (15,177)
========== ========== ==========
Identifiable Assets
United States................................................................... $ 511,435 $ 504,026 $ 607,138
Far East........................................................................ 55,754 59,660 70,097
Canada.......................................................................... 45,674 41,909 39,487
Latin America, Europe and Other................................................. 48,193 30,920 23,208
---------- ---------- ----------
$ 661,056 $ 636,515 $ 739,930
========== ========== ==========
<FN>
- --------
Inter-area transfers to affiliates are generally priced to recover cost plus an appropriate margin for profit.
Identifiable foreign assets consist primarily of cash items, receivables and inventories.
<FA> 1995 includes a charge of $14.1 million for the costs of closing the remaining five Brown Shoe Company
domestic manufacturing plants, partially offset by a LIFO recovery of $10.1 million from the
liquidation of related inventories.
<FB> 1993 includes charges totaling $45.4 million to establish reserves for the closing of retail stores,
factory closings, inventory liquidation associated with the store closings and additional costs for
environmental monitoring related to U.S. footwear operations.
</TABLE>
F-14
<PAGE> 92
BROWN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: INVENTORIES
Inventories are valued at the lower of cost or market determined
principally by the last-in, first-out (LIFO) method and consist of the
following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
Finished goods......................................................... $329,184 $298,235
Work-in-progress....................................................... 1,843 4,193
Raw materials and supplies............................................. 11,255 19,601
-------- --------
$342,282 $322,029
======== ========
</TABLE>
If the first-in, first-out (FIFO) cost method had been used, inventories
would have been $27.7 million and $37.3 million higher at February 3, 1996 and
January 28, 1995, respectively.
During fiscal 1995 and 1994, certain inventories were reduced at Brown Shoe
Company and other of the corporation's divisions, which resulted in a
liquidation of LIFO inventory layers carried at lower costs which prevailed in
prior years. On an aftertax basis, the effect of this liquidation was to
increase 1995 and 1994 net income by $6.6 and $6.7 million, respectively.
NOTE 8: PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
Land and buildings..................................................... $ 29,721 $ 35,528
Leasehold improvements................................................. 41,903 35,829
Furniture, fixtures, and equipment..................................... 119,833 131,870
--------- ---------
191,457 203,227
Allowances for depreciation and amortization........................... (103,737) (110,323)
--------- ---------
$ 87,720 $ 92,904
========= =========
</TABLE>
In fiscal 1995, the corporation adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, ``Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.'' SFAS No.
121 requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. An evaluation of the fair value of the assets associated with
the corporation's retail store operations resulted in the determination that
certain store assets were impaired. The impaired assets were written down by
$2.1 million. Fair value was based on estimated future cash flows to be
generated by these retail stores, discounted at a market rate of interest. This
writedown is included in the ``Other Expense (Income)'' amount for fiscal 1995
on the Statement of Consolidated Earnings. Due to the large number of new
retail stores opened by the corporation in the last several years, it is
possible that the estimate of undiscounted cash flows may change as these
stores mature, potentially resulting in the need to write-down those assets to
fair value.
F-15
<PAGE> 93
BROWN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: LONG-TERM AND SHORT-TERM FINANCING ARRANGEMENTS
Long-term debt, including capitalized lease obligations, net of unamortized
discounts and current maturities, consists of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
7.36% Sinking Fund Debentures, payments of $10,000 due annually
beginning 1999....................................................... $ 50,000 $ --
8.45%-8.6% Debentures due 1999......................................... 15,000 15,000
7.07%-8.83% Debentures due 2002........................................ 19,990 19,988
7.125% Debentures due 2003............................................. 15,000 15,000
7.375% Sinking Fund Debentures, payments of $2,000 due annually to
1998................................................................. 1,999 3,997
Capitalized lease obligations.......................................... 3,481 3,479
Commercial paper....................................................... -- 25,000
6.47% Senior notes due 1996............................................ -- 50,000
Other.................................................................. -- 749
-------- --------
$105,470 $133,213
======== ========
</TABLE>
Maturities of long-term debt and capitalized lease obligations for 1996
through 2000 are: 1996--$2.0 million; 1997--$2.0 million; 1998--$0; 1999--$25.0
million; and 2000--$10.0 million.
In 1995, the corporation refinanced $50.0 million of 6.47% unsecured Senior
notes due in February 1996 with $50.0 million of 7.36% unsecured Senior notes.
The agreement requires annual payments of $10.0 million beginning in 1999.
Additionally in 1995, the corporation amended certain terms of its $200.0
million revolving bank Credit Agreement, which will now expire in December
1999. Interest on borrowings under this agreement is at varying rates and at
the corporation's option, based on one of the following: the Eurodollar rate,
the competitive bid rate, the First National Bank of Chicago's corporate base
rate or the Federal funds rate. A commitment fee of .25% is payable on the
unused portion of the agreement.
The Senior notes and Credit Agreement contain covenants which, among other
things, require the maintenance of certain financial ratios related to fixed
charge coverage and long-term debt-to-capital, establish minimum levels of net
worth and working capital, and limit the sale of assets and the level of liens
and certain investments.
The corporation maintains short-term lines of credit (including the
revolving bank Credit Agreement) which total approximately $207.8 million at
February 3, 1996. The maximum amount of short-term borrowings (under these
arrangements and in the form of commercial paper) at the end of any month was
$121.5 million in 1995 and $190.3 million in 1994. The average short-term
borrowings during the year were $92.4 million in 1995 and $130.5 million in
1994. The weighted average interest rates approximated 7.0% and 4.5% in 1995
and 1994, respectively.
In December 1992, the corporation entered into a three-year interest rate
swap agreement, for which cash consideration of $3.2 million was received in
1992. Under the agreement, the corporation is paying a fixed rate of 8 1/8% on
a notional amount of $75.0 million and is receiving a fixed rate of 6.47% on a
notional amount of $50.0 million and a floating rate based on LIBOR on the
remaining notional amount of $25.0 million. The cash consideration received on
the swap has been deferred and is being amortized as an offset to interest
expense over the life of the agreement, which expires in April 1996.
Cash payments of interest for fiscal 1995, 1994, and 1993 were $16.0
million, $15.8 million, and $18.4 million, respectively.
F-16
<PAGE> 94
BROWN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: LEASES
The corporation leases substantially all of its retail locations and
certain other equipment and facilities. More than half of the retail store
leases are subject to renewal options for varying periods.
In addition to minimum rental payments, certain of the retail store leases
require contingent payments based on sales levels.
Rent expense from continuing operations for operating leases amounted to
(in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Minimum payments............................................ $77,814 $67,199 $63,644
Contingent payments......................................... 3,303 2,871 2,194
------- ------- -------
$81,117 $70,070 $65,838
======= ======= =======
</TABLE>
Future minimum payments under noncancelable operating leases with an
initial term of one year or more were as follows at February 3, 1996 (in
thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1996................................................... $ 83,091
1997................................................... 76,049
1998................................................... 63,707
1999................................................... 50,241
2000................................................... 35,598
Thereafter............................................. 116,120
--------
Total minimum lease payments........................... $424,806
========
</TABLE>
The corporation is contingently liable for lease commitments of
approximately $77.9 million which primarily relate to the Cloth World and Meis
specialty retailing chains which were sold.
NOTE 11: FINANCIAL INSTRUMENTS
The corporation utilizes derivative financial instruments only to reduce
its exposure to market risks from changes in interest rates and foreign
exchange rates. The instruments primarily used are interest rate swaps,
interest rate futures, options on interest rate futures, and foreign exchange
contracts. The corporation is exposed to credit related losses in the event of
nonperformance by counterparties to these financial instruments. Counterparties
to these agreements generally are major international financial institutions,
and the risk of loss due to nonperformance is believed to be minimal. The
corporation does not hold or issue financial instruments for trading purposes.
The corporation enters into foreign exchange contracts to hedge foreign
currency transactions on a continuous basis for periods consistent with its
committed exposures. The terms of these exchange contracts are generally less
than a year. The primary purpose of the foreign currency hedging activities is
to protect the corporation from the risk that the eventual cash outflows
resulting from the purchases of inventory from foreign suppliers will be
adversely affected by changes in exchange rates. In addition, the corporation
also hedges certain foreign currency assets and liabilities through the use of
non-deliverable foreign exchange contracts.
F-17
<PAGE> 95
BROWN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The United States dollar equivalent of contractual amounts of the
corporation's forward exchange contracts consist of the following (in
thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
Deliverable Contracts
Italian Lira....................................................... $12,600 $10,500
French Francs...................................................... 8,600 2,000
Canadian Dollars................................................... 4,400 2,600
Other Currencies................................................... 2,000 2,600
Non-Deliverable Contracts
New Taiwanese Dollars.............................................. 6,900 --
Brazilian Real..................................................... 4,900 --
Other Currencies................................................... 1,500 --
------- -------
$40,900 $17,700
======= =======
</TABLE>
The unrealized gains related to these contracts, based on dealer-quoted
prices, were $535,000 at February 3, 1996 and $114,000 at January 28, 1995.
Realized gains and losses on foreign exchange contracts used as hedges of
inventory purchases are included in the basis of the inventory and are
recognized in income as a component of cost of goods sold in the period in
which the related inventory is sold. Material gains and losses on foreign
exchange contracts hedging forecasted purchases are recorded in income in the
period the value of the contracts change. Gains and losses on foreign exchange
contracts which hedge foreign currency assets or liabilities in highly
inflationary economies are recognized in income as incurred.
The corporation periodically purchases interest rate futures and options on
interest rate futures, which effectively serve as interest rate caps, to reduce
the impact of potential increases in interest rates on its floating-rate debt.
At January 28, 1995, the corporation had several options on interest rate
futures, which entitled the corporation to receive from a counterparty the
amount, if any, by which the interest payments on up to $35 million of
floating-rate debt exceeds 7 percent for the period ending December 1995. The
premium paid for these options is included in other assets and is being
amortized to interest expense over the term of the underlying hedged
instrument. The amount of unamortized premium included in other assets and the
unrealized gain on these options at January 28, 1995, was not material. Amounts
received under these options are recognized as adjustments to interest expense
over the life of the related debt. At February 3, 1996, the corporation held no
interest rate futures or options.
In 1992, the corporation entered into a three-year interest rate swap
agreement which is discussed in Note 9. The purpose of entering into this
agreement was to reduce the interest cost of $75 million of long-term debt.
NOTE 12: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the company's financial instruments
at February 3, 1996 and January 28, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- --------- -----
<S> <C> <C> <C> <C>
Liabilities
Long-Term Debt....................................................... $107,470 $109,626 $135,276 $132,374
Interest Rate Swap................................................... 202 635 1,272 1,491
</TABLE>
F-18
<PAGE> 96
BROWN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Carrying amounts reported on the balance sheet for Cash, Cash Equivalents,
Receivables and Notes Payable approximate fair value due to the short-term
maturity of these instruments.
The fair value of the corporation's long-term debt and interest rate swap
was based upon the borrowing rates currently available to the corporation for
financing arrangements with similar terms and maturities.
NOTE 13: CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the company to significant
concentration of credit risk consist primarily of cash, cash equivalents and
trade accounts receivable.
The corporation maintains cash and cash equivalents and certain other
financial instruments with various financial institutions. The financial
institutions are located throughout the world, and the corporation's policy is
designed to limit exposure to any one institution or geographic region. The
corporation's periodic valuations of the relative credit standing of these
financial institutions are considered in the corporation's investment strategy.
The corporation's footwear wholesaling businesses sell primarily to
department stores, mass merchandisers, and independent retailers across the
United States, Canada, and throughout the world. Receivables arising from these
sales are not collateralized, however, a portion are covered by documentary
letters of credit. Credit risk is affected by conditions or occurrences within
the economy and the retail industry. The corporation establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
specific customers, historical trends and other information.
NOTE 14: COMMITMENTS AND CONTINGENCIES
The corporation is involved in environmental remediation and ongoing
compliance at several sites. The corporation has completed remediation efforts
at its closed New York tannery and two associated landfills. As such, in
September 1995, state environmental authorities reclassified the status of the
site to one that has been properly closed and that requires only continued
maintenance and monitoring. This change in status has allowed the corporation
to reliably estimate the future liability for monitoring and maintenance, which
is required over the next 28 years, based on a specific site plan. Accordingly,
in the third quarter of 1995, the estimated liability of $5.3 million related
to this site was discounted, using a 6.4% rate, resulting in a $2.0 million
reduction in the previously recorded liability of $4.7 million. This increase
in earnings was included in ``Other Expense (Income)'' on the Consolidated
Statements of Earnings. Charges related to the New York tannery site were $1.7
million in fiscal 1992 and an additional $6.6 million in fiscal 1993 due to a
change in the expected holding period of the property. The 1993 charge included
$5.0 million recorded in conjunction with restructuring charges in January
1994.
The expected payments for the next five years are approximately $.2 million
per year with the balance due thereafter.
In 1994, the corporation became aware of potential exposure at an owned
factory that is currently leased to another party. Preliminary testing was
completed in late 1994, and remediation work began in 1995. In addition,
various federal and state authorities have identified the corporation as a
potentially responsible party for remediation at certain landfills from
disposal of solvents and other by-products from the closed tannery and shoe
manufacturing facilities. The expected remaining costs related to the owned,
but leased, factory and the various landfills total $.8 - $1.0 million. At
February 3, 1996, the total accrued environmental liabilities for all sites,
including the above discounted liability, total $3.1 million.
NOTE 15: CAPITAL STOCK
COMMON STOCK
The corporation's Common Stock has a par value of $3.75 per share and
100,000,000 shares are authorized. At February 3, 1996 and January 28, 1995,
there were 17,930,977 shares and 17,969,892 shares, net of 4,074,920 shares and
F-19
<PAGE> 97
BROWN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4,036,005 shares held in treasury, outstanding, respectively. The stock is
listed and traded on the New York and Chicago Stock Exchanges (symbol BG).
There were approximately 6,000 shareholders of record at March 1, 1996.
In March 1996, the corporation replaced its previous Shareholder Rights
Plan, which had expired, with a comparable plan. Under the plan, each
outstanding share of the corporation's common stock carries one Common Stock
Purchase Right. The rights may only become exercisable under certain
circumstances involving acquisition of the corporation's common stock by a
person or group of persons without the prior written consent of the
corporation. Depending on the circumstances, if the rights become exercisable,
the holder may be entitled to purchase shares of the corporation's common stock
or shares of common stock of the acquiring person at discounted prices. The
rights will expire on March 18, 2006 unless they are earlier exercised,
redeemed or exchanged.
PREFERRED STOCK
The corporation has 1,000,000 authorized shares of $1 par value Preferred
Stock. None has been issued.
NOTE 16: STOCK OPTION AND STOCK RELATED PLANS
The corporation has stock option, stock appreciation and restricted stock
plans under which certain officers and employees are participants.
All stock options are granted at market value. Stock appreciation units may
also be granted in tandem with options. Such units entitle the participant to
receive an amount, in cash and/or stock, equal to the difference between the
current market value of a share of stock at the exercise date and the option
price of such share of stock. The options and appreciation units become
exercisable one year from the date of the grant at a rate of 25% per year and
are exercisable for up to 10 years from date of grant. Since the stock
appreciation rights are issued in tandem with stock options, the exercise of
either cancels the other.
Options for 427,797 and 575,560 shares were exercisable as of February 3,
1996 and January 28, 1995, respectively, at prices ranging from $23 to $39.
Under the plan 42,950 and 484,500 additional shares of common stock were
available to be granted in the form of options or restricted stock as of
February 3, 1996 and January 28, 1995, respectively.
The following summary sets forth the activity for the three years ended
February 3, 1996:
<TABLE>
<CAPTION>
NUMBER OF
---------------------------
OPTION APPRECIATION GRANT
SHARES UNITS PRICES
------ ------------ ------
<S> <C> <C> <C>
Outstanding January 30, 1993....................... 1,210,353 63,893 $23 to $41
Granted............................................ 10,000 -- 32 to 34
Exercised.......................................... (208,054) -- 23 to 33
Terminated......................................... (101,781) (8,748) 23 to 41
--------- -------
Outstanding January 29, 1994....................... 910,518 55,145 23 to 39
Granted............................................ 48,500 -- 30 to 38
Exercised.......................................... (265,893) (14,548) 23 to 35
Terminated......................................... (59,815) -- 23 to 39
--------- -------
Outstanding January 28, 1995....................... 633,310 40,597 23 to 39
Granted............................................ 413,000 30,158 14 to 24
Exercised.......................................... (18,225) -- 23 to 26
Terminated......................................... (154,663) (3,059) 23 to 39
--------- -------
Outstanding February 3, 1996....................... 873,422 67,696 $14 to $39
========= =======
</TABLE>
F-20
<PAGE> 98
BROWN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the corporation's restricted stock program, common stock of the
corporation may be granted at no cost to certain officers and key employees.
Plan participants are entitled to cash dividends and to vote their respective
shares. Restrictions limit the sale or transfer of these shares during an
eight-year period whereby the restrictions lapse on 50% of these shares after 4
years, 25% after 6 years and the remaining 25% after 8 years. Upon issuance of
stock under the plan, unearned compensation equivalent to the market value at
the date of grant is charged to shareholders' equity and subsequently amortized
to expense over the eight-year restriction period.
Restricted shares forfeited exceeded net grants by 36,875 shares in 1995.
Net shares granted in 1994 and 1993 were 168,000 and 132,500, respectively.
NOTE 17: SUPPLEMENTARY INFORMATION
BALANCE SHEET
Cash equivalents of $22.3 million and $17.4 million at February 3, 1996 and
January 28, 1995, respectively, are stated at cost which approximates fair
value.
STATEMENT OF CONSOLIDATED EARNINGS
Advertising costs totaled $51.8 million, $44.2 million, and $42.6 million
in 1995, 1994, and 1993, respectively.
Other expense (income) consisted of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income............................................ $(1,762) $ (1,521) $(1,499)
Restructuring charges...................................... 3,600 -- 21,400
Royalty income............................................. (2,996) (3,003) (2,711)
Countervailing duty........................................ -- (9,819) --
Other, net................................................. 2,788 2,023 4,001
------- -------- -------
Total...................................................... $ 1,630 $(12,320) $21,191
======= ======== =======
</TABLE>
F-21
<PAGE> 99
<TABLE>
BROWN GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
(UNAUDITED)
------------------------
AUGUST 3, JULY 29, FEBRUARY 3,
1996 1995 1996
--------- -------- -----------
(THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents.......................................................... $ 35,120 $ 23,016 $ 35,058
Receivables, net of allowances of $10,723 at August 3, 1996, $11,582 at July 29,
1995, and $11,267 at February 3, 1996............................................ 77,760 86,250 86,417
Inventories, net of adjustment to last-in, first-out cost of $22,835
at August 3, 1996, $32,824 at July 29, 1995, and $27,672
at February 3, 1996.............................................................. 410,282 368,981 342,282
Other Current Assets............................................................... 41,724 48,177 41,581
--------- --------- ---------
Total Current Assets........................................................... 564,886 526,424 505,338
Property and Equipment................................................................. 199,279 211,634 191,457
Less allowances for depreciation and amortization.................................. (114,981) (118,066) (103,737)
--------- --------- ---------
84,298 93,568 87,720
Other Assets........................................................................... 69,729 59,709 67,998
--------- --------- ---------
$ 718,913 $ 679,701 $ 661,056
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes Payable...................................................................... $ 121,000 $ 91,571 $ 112,000
Accounts Payable................................................................... 157,015 135,080 106,113
Accrued Expenses................................................................... 72,739 80,046 71,491
Income Taxes....................................................................... 5,703 5,109 4,335
Current Maturities of Long-Term Debt............................................... 2,000 52,763 2,000
--------- --------- ---------
Total Current Liabilities...................................................... 358,457 364,569 295,939
Long-Term Debt and Capitalized
Lease Obligations.................................................................. 104,022 57,467 105,470
Other Liabilities...................................................................... 26,314 33,247 28,011
Shareholders' Equity
Common Stock....................................................................... 67,376 67,286 67,242
Additional Capital................................................................. 46,467 46,519 46,015
Cumulative Translation Adjustment.................................................. (4,829) (4,710) (4,913)
Unamortized Value of Restricted Stock.............................................. (7,075) (8,668) (7,822)
Retained Earnings.................................................................. 128,181 123,991 131,114
--------- --------- ---------
230,120 224,418 231,636
--------- --------- ---------
$ 718,913 $ 679,701 $ 661,056
========= ========= =========
See notes to condensed consolidated financial statements.
</TABLE>
F-22
<PAGE> 100
<TABLE>
BROWN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
AUGUST 3, JULY 29, AUGUST 3, JULY 29,
1996 1995 1996 1995
--------- -------- --------- --------
(THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C>
Net Sales..................................................................... $389,983 $342,861 $745,768 $700,303
Cost of Goods Sold............................................................ 245,462 226,352 465,370 463,599
-------- -------- -------- --------
Gross Profit.................................................................. 144,521 116,509 280,398 236,704
-------- -------- -------- --------
Selling and Administrative Expenses........................................... 130,786 121,425 261,470 245,341
Interest Expense.............................................................. 4,522 3,964 9,255 7,880
Other (Income) Expense........................................................ 261 4,030 (140) 3,422
-------- -------- -------- --------
Earnings (Loss) Before Income Taxes........................................... 8,952 (12,910) 9,813 (19,939)
Income Tax (Provision) Benefit................................................ (3,438) 4,529 (3,772) 7,147
-------- -------- -------- --------
Net Earnings (Loss)........................................................... $ 5,514 $ (8,381) $ 6,041 $(12,792)
======== ======== ======== ========
Net Earnings (Loss) Per Common Share.......................................... $ .31 $ (.48) $ .34 $ (.73)
======== ======== ======== ========
Weighted Average Number of Outstanding Shares
of Common Stock............................................................. 17,367 17,578 17,626 17,593
Dividends Per Common Share.................................................... $ .25 $ .40 $ .50 $ .80
======== ======== ======== ========
See notes to condensed consolidated financial statements.
</TABLE>
F-23
<PAGE> 101
<TABLE>
BROWN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
SIX MONTHS ENDED
-----------------------
AUGUST 3, JULY 29,
1996 1995
--------- --------
<S> <C> <C>
(THOUSANDS)
Net Cash Provided by Operating Activities........................... $ 8,357 $10,484
Investing Activities:
Capital expenditures............................................ (7,815) (17,159)
Other........................................................... 944 88
------- -------
Net Cash (Used) by Investing Activities............................. (6,871) (17,071)
Financing Activities:
Increase in short-term notes payable............................ 9,000 25,486
Principal payments of long-term debt............................ (1,450) (49)
Dividends paid.................................................. (8,974) (14,359)
Payments for purchase of treasury stock......................... -- (824)
Proceeds from issuance of common stock.......................... -- 427
------- -------
Net Cash Provided (Used) by Financing Activities.................... (1,424) 10,681
------- -------
Increase in Cash and Cash Equivalents............................... 62 4,094
Cash and Cash Equivalents at Beginning of Period.................... 35,058 18,922
------- -------
Cash and Cash Equivalents at End of Period.......................... $35,120 $23,016
======= =======
See notes to condensed consolidated financial statements.
</TABLE>
F-24
<PAGE> 102
BROWN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and reflect all
adjustments which management believes necessary (which include only normal
recurring accruals and the effect on LIFO inventory valuation of estimated
annual inflationary cost increases and year-end inventory levels) to present
fairly the results of operations. These statements, however, do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flow in conformity with generally
accepted accounting principles.
The Corporation's business is subject to seasonal influences, and interim
results may not necessarily be indicative of results which may be expected for
any other interim period or for the year as a whole.
For further information refer to the consolidated financial statements and
footnotes included in the Corporation's Annual Report and Form 10-K for the
period ended February 3, 1996.
NOTE B: EARNINGS PER SHARE
Net earnings per share of Common Stock is computed by dividing net earnings
by the weighted average number of shares outstanding. The dilutive effect of
stock options is not significant and is therefore excluded from the
calculation.
NOTE C: INVENTORIES
The components of inventory are as follows ($000):
<TABLE>
<CAPTION>
AUGUST 3, JULY 29, FEBRUARY 3,
1996 1995 1996
--------- -------- -----------
<S> <C> <C> <C>
Finished Goods........................... $402,955 $353,586 $329,184
Work in Process.......................... 1,762 2,354 1,843
Raw Materials and Supplies............... 5,565 13,041 11,255
-------- -------- --------
$410,282 $368,981 $342,282
======== ======== ========
</TABLE>
During fiscal 1995 and 1996, the remaining domestically manufactured
footwear at Brown Shoe Company is being sold resulting in a liquidation of LIFO
inventory layers. The effect of this liquidation was to increase pretax income
in the second quarter 1995 by $3.7 million, first quarter 1996 by $3.1 million
and second quarter 1996 by $.9 million.
NOTE D: INCOME TAXES
In July 1996, the Internal Revenue Service declined to appeal an Appeals
Court ruling overturning a Tax Court decision supporting an Internal Revenue
Service assessment against the Corporation on a portion of its unremitted
foreign earnings and accordingly has no further right of appeal. The
Corporation had recorded the recovery of the related $5.8 million reserve in
fiscal 1995. Accordingly, no adjustment to the tax accounts or income tax
expense will result from the resolution of this matter which now has become
final.
NOTE E: FINANCIAL INSTRUMENTS
In the second quarter of fiscal 1996, the Corporation placed a
nondeliverable forward exchange contract maturing in June 1997 to purchase
notional $17 million in Brazilian Real. This contract is designed to protect
inventory values of the Corporation's Brazilian subsidiary in the event of a
major devaluation in the Brazilian currency. Many complex factors, in addition
to currency devaluation, may impact the effectiveness of this contract,
including the extent and timing of a devaluation, a devaluation's impact on the
Brazilian economy, inflationary factors, and footwear market conditions. This
forward contract does not qualify as a hedge for financial reporting purposes;
therefore, gains and losses on this contract are included in income. At August
3, 1996, the Corporation had an immaterial gain on this contract. The
counterparty to this agreement is a major financial institution; therefore,
management believes the risk of incurring losses related to credit risk is
remote.
F-25
<PAGE> 103
================================================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE MAKING OF THE
EXCHANGE OFFER PURSUANT TO THIS PROSPECTUS NOR THE ACCEPTANCE OF PRIVATE NOTES
FOR SURRENDER FOR EXCHANGE PURSUANT THERETO SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................... 2
Incorporation of Certain Documents by Reference............ 3
Prospectus Summary......................................... 4
Risk Factors............................................... 14
No Cash Proceeds to the Company............................ 18
Dividend Policy............................................ 18
Capitalization............................................. 18
The Exchange Offer......................................... 19
Selected Consolidated Financial Data....................... 25
Management's Discussion and Analysis of Financial Condition
and Results of Operation................................. 26
Business................................................... 33
Management................................................. 47
Principal Shareholders..................................... 49
Description of the Notes................................... 49
Description of Certain Indebtedness........................ 71
Certain United States Federal Income Tax
Consequences............................................. 74
Plan of Distribution....................................... 76
Legal Matters.............................................. 76
Experts.................................................... 76
Index to Financial Statements.............................. F-1
</TABLE>
================================================================================
================================================================================
[LOGO] BROWN GROUP, INC.
---------------------------
OFFER TO EXCHANGE
---------------------------
9 1/2% Senior Notes
due October 15, 2006
for
all outstanding
9 1/2% Senior Notes
due October 15, 2006
NOVEMBER 12, 1996
================================================================================
<PAGE> 104
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation, as amended, provides that a
director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Also, Article V, Section 2, of the Company's Bylaws, as amended, provides that
the Company shall indemnify a director or officer of the Company against any
claim, liability or expense incurred as a result of the director's or officer's
service to the Company, to the maximum extent permitted by law.
Sections 721 through 726 of the New York Business Corporation Law (the
``NYBCL'') provide for indemnification of directors and officers. Section 723
provides that a director or officer who is successful on the merits or
otherwise in a legal proceeding must be indemnified to the extent such director
or officer was successful. Also, indemnification is generally permitted in both
third-party and derivative suits provided a director or officer acted in good
faith or for a purpose he or she reasonably believed was in the best interest
of the corporation. With respect to any criminal action, indemnification is
permitted only if the director or officer had no reasonable cause to believe
his or her conduct was unlawful. Section 721 expressly provides that the power
to indemnify authorized under the NYBCL is not exclusive of any rights granted
under a corporation's certificate of incorporation or bylaws.
Section 726 of the NYBCL authorizes the purchase of indemnification
insurance for directors and officers. The Company currently maintains
directors' and officers' liability insurance policies.
The preceding discussion of Sections 721 through 726 of the NYBCL and the
Company's Certificate of Incorporation and Bylaws is not intended to be
exhaustive and is qualified in its entirety by the NYBCL and the Company's
Certificate of Incorporation and Bylaws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
See Index to Exhibits.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
Company's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in this Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim of indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
II-1
<PAGE> 105
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described under Item 15 above or otherwise,
the Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is therefore unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted against the Company by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-2
<PAGE> 106
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of St. Louis, State of
Missouri, on November 12, 1996.
BROWN GROUP, INC.
By: /s/ HARRY E. RICH
---------------------------------
Name: Harry E. Rich
Title: Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on November 12, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
<F*>/s/ B. A. BRIDGEWATER, JR. Chairman of the Board of Directors, President and
- ------------------------------------------------ Chief Executive Officer (Principal Executive Officer)
B. A. Bridgewater, Jr.
/s/ HARRY E. RICH Director, Executive Vice President and Chief
- ------------------------------------------------ Financial Officer (Principal Financial Officer)
Harry E. Rich
<F*>/s/ RICHARD C. SCHUMACHER Vice President and Controller
- ------------------------------------------------ (Principal Accounting Officer)
Richard C. Schumacher
<F*>/s/ JOSEPH L. BOWER Director
- ------------------------------------------------
Joseph L. Bower
<F*>/s/ JULIE C. ESREY Director
- ------------------------------------------------
Julie C. Esrey
<F*>/s/ RICHARD A. LIDDY Director
- ------------------------------------------------
Richard A. Liddy
II-3
<PAGE> 107
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
<F*>/s/ JOHN PETERS MACCARTHY Director
- ------------------------------------------------
John Peters MacCarthy
<F*>/s/ JOHN D. MACOMBER Director
- ------------------------------------------------
John D. Macomber
<F*>/s/ WILLIAM E. MARITZ Director
- ------------------------------------------------
William E. Maritz
<F*>/s/ GENERAL EDWARD C. MEYER, RETIRED Director
- ------------------------------------------------
General Edward C. Meyer, Retired
<F*>/s/ JERRY E. RITTER Director
- ------------------------------------------------
Jerry E. Ritter
<F*>/s/ DANIEL R. TOLL Director
- ------------------------------------------------
Daniel R. Toll
<FN>
<F*>By: /s/ HARRY E. RICH
-----------------------------------------
Harry E. Rich
Attorney-In-Fact
</TABLE>
II-4
<PAGE> 108
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
4.1 Form of Exchange Note (included in Exhibit 4.2).
4.2 Indenture dated as of October 1, 1996 between the Company and State Street Bank and Trust Company,
as Trustee (incorporated by reference to Exhibit 4.1 to the Company's Report on Form 8-K (File No.
1-2191) filed by the Company with the Commission on October 21, 1996).
4.3 Registration Rights Agreement dated as of October 7, 1996 between the Company and Smith Barney Inc.,
First Chicago Capital Markets, Inc. and Dillon, Read & Co. Inc., as Initial Purchasers (incorpo-
rated by reference to Exhibit 4.2 to the Company's Report on Form 8-K (File No. 1-2191) filed by
the Company with the Commission on October 21, 1996).
4.4 Indenture dated as of January 15, 1973 between the Company and First National City Bank
(incorporated by reference to Exhibit 2 of Amendment No. 1 to the Company's Registration Statement
on Form S-7 (No. 2-46627) originally filed by the Company with the Commission on January 16,
1973).
4.5 First Supplemental Indenture dated as of April 25, 1988 between the Company and Citibank, N.A., as
Trustee (incorporated by reference to Exhibit 4(b) of the Company's Registration Statement on Form
S-3 (No. 33-21477) originally filed by the Company with the Commission on April 26, 1988).
4.7 Senior Note Agreement dated as of October 24, 1995 between the Company and Prudential Insurance
Company of America (incorporated by reference to Exhibit 4(a) of the Form 10-Q for the quarter
ended August 3, 1996 of the Company (File No. 1-2191)).
4.8 Bank Credit Agreement, as amended, dated as of December 22, 1993 between the Company and The First
National Bank of Chicago, as Agent for certain Lenders and The Boatmen's National Bank of St.
Louis and Citibank, N.A., as Co-Agents of such Lenders (incorporated by reference to Exhibit 4(b)
of the Form 10-Q for the quarter ended August 3, 1996 of the Company (File No. 1-2191)).
5.1 Opinion of Bryan Cave LLP regarding the validity of the Exchange Notes
8.1 Tax Opinion of Bryan Cave LLP (included in Exhibit 5.1)
<F*>12.1 Statement Re Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Bryan Cave LLP (included in Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
<F*>24.1 Power of Attorney (included on signature page)
25.1 Statement of Eligibility of State Street Bank and Trust Company, as Trustee
<F*>99.1 Form of Letter of Transmittal
<F*>99.2 Form of Notice of Guaranteed Delivery
<F*>99.3 Form of Exchange Agent Agreement
<FN>
- --------
<F*>Previously filed.
</TABLE>
II-5
<PAGE> 1
BRYAN CAVE LLP
ONE METROPOLITAN SQUARE
211 NORTH BROADWAY, SUITE 3600
ST. LOUIS, MISSOURI 63102-2750
(314) 259-2000
FACSIMILE: (314) 259-2020
November 12, 1996
Board of Directors
Brown Group, Inc.
8300 Maryland Avenue
St. Louis, Missouri 63105
Ladies and Gentlemen:
We are acting as special counsel for Brown Group, Inc.,
a New York corporation (the "Company"), in connection with
various legal matters relating to the filing with the Securities
and Exchange Commission of a Registration Statement on Form S-4
(the "Registration Statement") under the Securities Act of 1933,
as amended (the "Act"), covering an offer to exchange (the
"Exchange Offer") $1,000 principal amount of the Company's 9 1/2%
Senior Notes due October 15, 2006 (the "Exchange Notes") for each
$1,000 principal amount of its outstanding 9 1/2% Senior Notes
due October 15, 2006 (the "Private Notes"), of which $100,000,000
aggregate principal amount is outstanding on the date hereof.
The Exchange Notes are to be issued pursuant to an Indenture,
dated as of October 1, 1996 (the "Indenture"), between the
Company and State Street Bank and Trust Company, as Trustee,
which is filed as an exhibit to the Registration Statement.
In connection herewith, we have examined and relied
without independent investigation as to matters of fact upon such
certificates of public officials, such statements and
certificates of officers of the Company and originals or copies
certified to our satisfaction of the Registration Statement, the
Indenture, the Registration Rights Agreement, dated as of October
7, 1996, between the Company and Smith Barney Inc., First Chicago
Capital Markets, Inc. and Dillon, Read & Co. Inc., the
Certificate of Incorporation and Bylaws of the Company,
proceedings of the Board of Directors of the Company and such
other corporate records, documents, certificates and instruments
as we have deemed necessary or appropriate in order to enable us
to render the opinions expressed below. In rendering this
opinion, we have assumed the genuineness of all signatures on all
documents examined by us, the authenticity of all documents
submitted to us as originals and the conformity to authentic
originals of all documents submitted to us as certified or
photostatted copies.
<PAGE> 2
Brown Group, Inc.
November 12, 1996
Page 2
We express no opinion as to the applicability or effect
of (i) any bankruptcy, insolvency, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights
generally, or (ii) general principles of equity, including,
without limitation, concepts of reasonableness, materiality, good
faith and fair dealing and the possible unavailability of
specific performance, injunctive relief or other equitable
remedies, regardless of whether enforceability is considered in a
proceeding in equity or at law.
Based upon the foregoing and in reliance thereon and
subject to the qualifications and limitations stated herein, we
are of the opinion that:
(1) The Company is a corporation validly existing in good
standing under the laws of the State of New York;
(2) When,
(i) the Registration Statement, including any
amendments thereto, shall have become
effective under the Act;
(ii) the Indenture has been duly qualified under
the Trust Indenture Act of 1939, as amended;
and
(iii) the Exchange Notes shall have been duly
executed and authenticated in accordance with
the provisions of the Indenture and duly
delivered to the holders thereof in exchange
for the Private Notes;
then the Exchange Notes will be valid and binding
obligations of the Company.
(3) The material federal income tax consequences of the
Exchange Offer are accurately set forth under the
heading "Certain Federal Income Tax Considerations" in
the Preliminary Prospectus dated October 30, 1996
included in the Registration Statement.
In rendering the opinion expressed in clause (3) above,
we have relied upon the facts as set forth in the Registration
Statement. Any variation or difference in the facts from those
set forth in the Registration Statement could affect our opinion.
Such opinion is also based on various statutory provisions,
<PAGE> 3
Brown Group, Inc.
November 12, 1996
Page 3
regulations promulgated thereunder and interpretations thereof by
the Internal Revenue Service and the courts having jurisdiction
over such matters, all of which are subject to change either
prospectively or retroactively.
This opinion is not rendered with respect to any laws
other than the New York Business Corporation Law of New York and
the federal laws of the United States.
We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement and to the reference to our
firm under the caption "Legal Matters" in the Prospectus included
as a part thereof. We also consent to your filing copies of this
opinion as an exhibit to the Registration Statement with agencies
of such states as you deem necessary in the course of complying
with the laws of such states regarding the Exchange Offer. In
giving this consent, we do not admit that we are in the category
of persons whose consent is required under Section 7 of the Act
or the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
/s/ Bryan Cave LLP
Bryan Cave LLP
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts", to the
incorporation by reference of our report dated March 6, 1996 with respect
to the consolidated financial statements of Brown Group, Inc. incorporated
by reference in its Annual Report (Form 10-K) for the year ended February 3,
1996 and the related financial statement schedule included therein, filed
with the Securities and Exchange Commission, and to the use of our report
dated March 6, 1996 in the Registration Statement (Form S-4 No. 333-15101)
and related Prospectus of Brown Group, Inc. for the registration of
$100,000,000 of debt securities.
/s/ Ernst & Young LLP
St. Louis, Missouri
November 8, 1996
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM T-1
---------
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an Application to Determine Eligibility
of a Trustee Pursuant to Section 305(b)(2) --
STATE STREET BANK AND TRUST COMPANY
(EXACT NAME OF TRUSTEE AS SPECIFIED IN ITS CHARTER)
Massachusetts 04-1867445
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification No.)
225 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
John R. Towers, Esq. Senior Vice President and Corporate Secretary
225 Franklin Street, Boston, Massachusetts 02110
(617)654-3253
(Name, address and telephone number of agent for service)
---------------------
BROWN GROUP, INC.
-----------------
(EXACT NAME OF OBLIGOR AS SPECIFIED IN ITS CHARTER)
NEW YORK 43-0197190
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8300 MARYLAND AVENUE
ST. LOUIS, MO 63105
(Address of principal executive offices) (Zip Code)
--------------------
9 1/2% SENIOR NOTES DUE OCTOBER 15, 2006
(Title of indenture securities)
<PAGE> 2
GENERAL
ITEM 1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY
AUTHORITY TO WHICH IT IS SUBJECT.
Department of Banking and Insurance of The
Commonwealth of Massachusetts, 100 Cambridge Street,
Boston, Massachusetts.
Board of Governors of the Federal Reserve System,
Washington, D.C., Federal Deposit Insurance
Corporation, Washington, D.C.
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Trustee is authorized to exercise corporate trust
powers.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE
EACH SUCH AFFILIATION.
The obligor is not an affiliate of the trustee or
of its parent, State Street Boston Corporation.
(See note on page 2.)
ITEM 3. THROUGH ITEM 15. NOT APPLICABLE.
ITEM 16. LIST OF EXHIBITS.
LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT
OF ELIGIBILITY.
1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE
TRUSTEE AS NOW IN EFFECT.
A copy of the Articles of Association of the trustee,
as now in effect, is on file with the Securities and Exchange
Commission as Exhibit 1 to Amendment No. 1 to the Statement of
Eligibility and Qualification of Trustee (Form T-1) filed with
the Registration Statement of Morse Shoe, Inc. (File No.22-17940)
and is incorporated herein by reference thereto.
2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE
TRUSTEE TO COMMENCE BUSINESS, IF NOT CONTAINED IN THE
ARTICLES OF ASSOCIATION.
A copy of a Statement from the Commissioner of Banks
of Massachusetts that no certificate of authority for the trustee
to commence business was necessary or issued is on file with the
Securities and Exchange Commission as Exhibit 2 to Amendment No.
1 to the Statement of Eligibility and Qualification of Trustee
(Form T-1) filed with the Registration Statement of Morse Shoe,
Inc. (File No. 22-17940) and is incorporated herein by reference
thereto.
3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO
EXERCISE CORPORATE TRUST POWERS, IF SUCH AUTHORIZATION
IS NOT CONTAINED IN THE DOCUMENTS SPECIFIED IN
PARAGRAPH (1) OR (2), ABOVE.
A copy of the authorization of the trustee to
exercise corporate trust powers is on file with the Securities
and Exchange Commission as Exhibit 3 to Amendment No. 1 to the
Statement of Eligibility and Qualification of Trustee (Form T-1)
filed with the Registration Statement of Morse Shoe, Inc. (File
No. 22-17940) and is incorporated herein by reference thereto.
4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR
INSTRUMENTS CORRESPONDING THERETO.
A copy of the by-laws of the trustee, as now in
effect, is on file with the Securities and Exchange Commission as
Exhibit 4 to the Statement of Eligibility and Qualification of
Trustee (Form T-1) filed with the Registration Statement of
Eastern Edison Company (File No. 33-37823) and is incorporated
herein by reference thereto.
1
<PAGE> 3
5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE
OBLIGOR IS IN DEFAULT.
Not applicable.
6. THE CONSENTS OF UNITED STATES INSTITUTIONAL
TRUSTEES REQUIRED BY SECTION 321(b) OF THE ACT.
The consent of the trustee required by Section 321(b)
of the Act is annexed hereto as Exhibit 6 and made a part hereof.
7. A COPY OF THE LATEST REPORT OF CONDITION OF THE
TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS
OF ITS SUPERVISING OR EXAMINING AUTHORITY.
A copy of the latest report of condition of the
trustee published pursuant to law or the requirements of its
supervising or examining authority is annexed hereto as Exhibit 7
and made a part hereof.
NOTES
In answering any item of this Statement of Eligibility which relates
to matters peculiarly within the knowledge of the obligor or any underwriter
for the obligor, the trustee has relied upon information furnished to it by
the obligor and the underwriters, and the trustee disclaims responsibility
for the accuracy or completeness of such information.
The answer furnished to Item 2. of this statement will be amended, if
necessary, to reflect any facts which differ from those stated and which
would have been required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company, a corporation
organized and existing under the laws of The Commonwealth of Massachusetts,
has duly caused this statement of eligibility to be signed on its behalf by
the undersigned, thereunto duly authorized, all in the City of Boston and The
Commonwealth of Massachusetts, on the 6th day of November, 1996.
STATE STREET BANK AND TRUST COMPANY
By: /s/ { Jill Olson }
------------------------------------
Jill Olson
Assistant Vice President
2
<PAGE> 4
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939, as amended, in connection with the proposed issuance by BROWN
GROUP, INC.. of its 9 1/2% SENIOR NOTES DUE OCTOBER 15, 2006, we
hereby consent that reports of examination by Federal, State, Territorial or
District authorities may be furnished by such authorities to the Securities
and Exchange Commission upon request therefor.
STATE STREET BANK AND TRUST COMPANY
By: /s/ { Jill Olson }
------------------------------------
Jill Olson
Assistant Vice President
Dated: November 6, 1996
3
<PAGE> 5
EXHIBIT 7
Consolidated Report of Condition of State Street Bank and Trust Company of
Boston, Massachusetts and foreign and domestic subsidiaries, a state banking
institution organized and operating under the banking laws of this
commonwealth and a member of the Federal Reserve System, at the close of
business June 30, 1996, published in accordance with a call made by the
-------------
Federal Reserve Bank of this District pursuant to the provisions of the
Federal Reserve Act and in accordance with a call made by the Commissioner of
Banks under General Laws, Chapter 172, Section 22(a).
<TABLE>
<CAPTION>
Thousands of
ASSETS Dollars
<S> <C> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin 1,787,130
Interest-bearing balances 7,756,486
Securities 8,430,910
Federal funds sold and securities purchased
under agreements to resell in domestic offices
of the bank and its Edge subsidiary 4,090,665
Loans and lease financing receivables:
Loans and leases, net of unearned income 4,426,059
Allowance for loan and lease losses 70,088
Loans and leases, net of unearned income and allowances 4,355,971
Assets held in trading accounts 880,647
Premises and fixed assets 367,731
Other real estate owned 1,067
Investments in unconsolidated subsidiaries 65,772
Customers' liability to this bank on acceptances outstanding 33,530
Intangible assets 68,505
Other assets 1,002,465
----------
Total assets 28,840,879
==========
LIABILITIES
Deposits:
In domestic offices 7,531,683
Noninterest-bearing 5,387,924
Interest-bearing 2,143,759
In foreign offices and Edge subsidiary 12,050,265
Noninterest-bearing 46,768
Interest-bearing 12,003,497
Federal funds purchased and securities sold under
agreements to repurchase in domestic offices of
the bank and of its Edge subsidiary 5,337,231
Demand notes issued to the U S Treasury and Trading Liabilities 871,847
Other borrowed money 794,349
Bank's liability on acceptances executed and outstanding 33,530
Other liabilities 665,616
----------
Total liabilities 27,284,521
----------
EQUITY CAPITAL
Common stock 29,931
Surplus 276,915
Undivided profits 1,247,942
Cumulative foreign currency translation adjustments 1,570
----------
Total equity capital 1,556,358
----------
Total liabilities and equity capital 28,840,879
==========
</TABLE>
4
<PAGE> 6
I, Rex S. Schuette, Senior Vice President and Comptroller of the above named
bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Rex S. Schuette
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true
and correct.
David A. Spina
Marshall N. Carter
Charles F. Kaye
5
