SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
1996 FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the fiscal year ended February 1, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ____________ to __________
Commission file number 1-2191
BROWN GROUP, INC.
(Exact name of registrant as specified in its charter)
New York 43-0197190
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
8300 Maryland Avenue
St. Louis, Missouri 63105
(Address of principal executive offices) (Zip Code)
(314) 854-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- -------------------------------------- -------------------------
Common Stock - par value $3.75 a share New York Stock Exchange
with Common Stock Purchase Rights Chicago Stock Exchange
7-3/8% Sinking Fund Debentures due New York Stock Exchange
January 15, 1998
9-1/2% Senior Notes due October 15, 2006 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ x ]
As of April 5, 1997, 18,029,927 common shares were outstanding, and the
aggregate market value of the common shares held by non-affiliates of the
registrant was approximately $297 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended February 1, 1997,
are incorporated by reference into Parts I and II.
Portions of the proxy statement for the annual meeting of shareholders to be
held May 22, 1997, are incorporated by reference into Part III.
<PAGE>
PART I
ITEM 1 - BUSINESS
- -----------------
The Company, founded in 1878 and incorporated in 1913, operates in the
Footwear industry. Current activities include the operation of retail shoe
stores and foreign sourcing and marketing of footwear for women, men and
children. During 1996, categories of footwear sales were approximately 59%
women's footwear, 23% men's footwear and 18% children's footwear. This
composition has remained relatively constant over the past few years.
Approximately 63% of 1996 footwear sales were made at retail compared to 62%
in 1995 and 54% in 1994. See Note 6 of Notes to Consolidated Financial
Statements on page 28 of the Annual Report to Shareholders for the year ended
February 1, 1997, which is incorporated herein by reference, for additional
information regarding the Company's business segment and operations by
geographic area.
The Company's business is somewhat seasonal in nature due to consumer
spending patterns and higher back-to-school, Easter and Christmas holiday
season sales. Traditionally, the third fiscal quarter accounts for a
substantial portion of the Company's operating earnings for the year.
The Company has approximately 11,500 full and part-time employees.
Approximately 130 employees engaged in the warehousing of footwear in the
United States are employed under a union contract, which will expire in
September, 1999. In Canada, approximately 300 factory and warehouse employees
are employed under union contracts, which expire in October, 1997 and October,
1998.
Retail Operations
- -----------------
The Company's retail operations currently include 1,256 retail shoe
stores in the United States and Canada under the Famous Footwear, Naturalizer
and F.X. LaSalle names. A portion of the retail sales carries Company-owned
and licensed brand names with the footwear manufactured under contract to its
specifications by foreign suppliers.
In retail sales of footwear, the Company competes in a highly fragmented
market with many organizations of various sizes operating retail shoe stores
and departments. Competitors include local, regional and national shoe store
chains, department stores, discount stores and numerous independent retail
operators of various sizes. Quality, customer service, store location,
merchandise selection and pricing are important components of retail
competition.
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 794 stores in the
United States as of the end of fiscal 1996. Famous Footwear stores feature a
wide selection of "brand names for less" of athletic, casual and dress shoes
for women, men and children typically priced 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 product
offering at discounted prices is designed to appeal to the needs of its target
customers - value-oriented families.
<PAGE>
ITEM 1 - BUSINESS (Continued)
- -----------------
Famous Footwear's product offering is intended to address the footwear
needs of the entire family, by offering a selection of athletic, casual and
dress merchandise for women, men and children at competitive prices. Footwear
brands include Nike, Reebok, Dexter, Naturalizer, Keds, Rockport, Nunn Bush,
Converse, Adidas, Fila, What's What, Connie and Buster Brown.
Famous Footwear has developed a store model stock which reflects
consumer demand, historical brand preferences, styles and sizes. This model
is adjusted based upon store location and promotional opportunities. Product
and promotional mix are managed to control gross margins. As part of its
efforts to improve inventory management, and as a result of its growth, Famous
Footwear opened a second regional distribution center, located in Lebanon,
Tennessee, in 1995 to augment its distribution capabilities in the southern
United States.
Famous Footwear's distribution systems allow for 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 and
redistribution of product to stores demonstrating the greatest item sell-
through from stores with lower item sell-through. These systems of
replenishment and distribution are designed to ensure that the right product
is at the right place at the right time, and to control markdowns and gross
margins.
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 1996, management invested over $25 million to communicate
Famous Footwear's "brand names for less" image to target consumers, typically,
on a weekly basis.
Naturalizer
- -----------
The Company's Naturalizer stores are showcases for the Company's
flagship brand of women's shoes. The Company owns and operates 346
Naturalizer stores located in regional and outlet malls and shopping centers
in the United States and 100 stores in Canada. Naturalizer stores average
approximately 1,300 square feet in size. These stores are designed and
merchandised to appeal to the Naturalizer 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 Naturalizer stores offer a selection of
women's footwear styles, including dress, casual and athletic shoes, primarily
under the Naturalizer brand, but also under the NaturalSport brand of walking
and casual shoes. The Naturalizer brand is one of the nation's leading
women's footwear brands, providing comfort and quality in a variety of styles
and sizes. The Naturalizer store product offering is typically priced between
$50 and $85 per pair.
Marketing programs for the Naturalizer stores have complemented the
Company's Naturalizer brand advertising, building on the brand's consumer
recognition and reinforcing the brand's added focus on style and quality.
Similarly, the Company is in the process of upgrading certain of its
Naturalizer stores to feature new signage and displays as well as a renewed
focus on visual presentation, and the training and motivation of store
managers and sales associates. The Company has invested in additional
Naturalizer sales force training commensurate with the brand image of style,
quality and comfort. In addition, the Company has implemented a database
marketing program which targets and rewards frequent customers.
<PAGE>
ITEM 1 - BUSINESS (Continued)
- -----------------
The Canadian retailing division operates 16 F.X. LaSalle stores,
primarily in the Montreal, Canada market, which sell better-grade men's and
women's footwear brands. This footwear, primarily imported from Italy,
retails at price points ranging from $100 to $250. These stores average
approximately 2,500 square feet.
A summary of retail footwear stores operated by the Company at the prior
three fiscal year-ends is as follows:
Company-Owned Retail Footwear Stores
1996 1995 1994
---- ---- ----
Famous Footwear
Family footwear stores which feature "brand names
for less"; located in strip centers and regional
and outlet malls. 794 814 722
Naturalizer
Stores selling the Naturalizer and NaturalSport
brands of women's footwear; located in major
malls, shopping centers and outlet centers
throughout the U.S. and Canada. 446 409 418
F. X. LaSalle
Stores selling men's and women's better grade
branded footwear in major malls in Canada. 16 15 14
Other Family Footwear Stores
Selling men's, women's and children's footwear. 0 3 4
----- ----- -----
Total 1,256 1,241 1,158
===== ===== =====
At the beginning of fiscal 1996, 40 stores that were operated by Famous
Footwear under the Naturalizer Outlet name were transferred to the Naturalizer
Retail division of Brown Shoe Company.
Wholesale Operations
- --------------------
Footwear is distributed by Brown Shoe Company's Branded Marketing and
Pagoda divisions to approximately 10,000 retailers including department
stores, mass merchandisers and independent retailers in the United States,
Europe, South America and the Far East, and to affiliates. Footwear is
distributed in Canada by the Company's Canadian Wholesale division, which
produces footwear in two Company-owned manufacturing facilities in Canada and
which also imports certain footwear. Most of the Company's wholesale
customers also sell shoes bought from competing footwear suppliers.
The footwear industry in the United States continues to experience the
migration from domestic manufacturing to international sourcing. Consistent
with the adverse economics of maintaining domestic shoe manufacturing
facilities, the Company closed its five remaining United States manufacturing
facilities in 1995. The loss of production from the closure of these
facilities has been made up by an increase in sourcing from the Company's
Pagoda division.
<PAGE>
ITEM 1 - BUSINESS (Continued)
- -----------------
The nature of the Company's wholesale shoe business is such that orders
for shoes are solicited by the Company's sales force primarily during two
selling seasons in each year, spring and fall. Orders placed as a result of
these sales efforts are taken before the shoes are sourced with delivery
generally within three to four months thereafter. Footwear is sold to
wholesale customers on both a first-cost and landed basis. First-cost sales
are those sales in which the Company obtains title to footwear from its
overseas suppliers and typically relinquishes title to customers at a
designated overseas port. Landed sales are those sales in which the Company
obtains title to footwear from its overseas suppliers and maintains title
until the footwear is inside the United States borders. After importing, the
footwear may be sold directly to customers; certain high volume styles are
inventoried to allow prompt shipment on reorder.
At March 1, 1997, the Company's wholesale operations had a backlog of
unfilled orders of approximately $168 million compared to approximately the
same amount on March 2, 1996. Higher orders for women's footwear by
department stores from the Brown Branded division in 1997 were offset by lower
orders at the Pagoda division. This decrease is due to nonreplacement of the
1996 major Disney movie license, Hunchback of Notre Dame, with the comparable
Disney license in 1997. Most orders are for delivery within the next 90-120
days, and although orders are subject to cancellation, the Company has not
experienced significant cancellations in the past. The backlog at a
particular time is affected by a number of factors, including seasonality and
the scheduling of the manufacturing and shipment of products. Accordingly, a
comparison of backlog from period to period is not necessarily meaningful and
may not be indicative of eventual actual shipments.
Branded Marketing Division
- --------------------------
The Brown Shoe Company's Branded Marketing division is one of the
nation's leading marketers of women's footwear. This division designs and
markets the Company's Naturalizer, NaturalSport, Life Stride, LS Studio, Night
Life, Penaljo, Larry Stuart Collection and The Original Dr. Scholl's brands.
Each of the Company's 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
brand, which has a tradition of combining style and comfort. Introduced over
65 years ago, Naturalizer is one of the nation's leading women's footwear
brands.
Naturalizer, NaturalSport and Penaljo products emphasize style, comfort,
quality and value. These brands provide a wide range of casual and dress
footwear products, which combine comfort and fit with classic, relevant and
up-to-date styling. NaturalSport provides functional walking shoes, sandals
and clogs. The Life Stride Group, anchored by the Life Stride brand, is a
leading entry-level price point, women's brand in department stores, offering
fashion-right styling. The Larry Stuart Collection brand offers stylish,
sophisticated European-inspired footwear for women. The division began
marketing The Original Dr. Scholl's Exercise Sandal to department stores and
specialty retailers in 1996, with an expanded collection of colors and styles
to be introduced in 1997.
The division's brands are sold in department stores, multi-line shoe
stores and branded specialty 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.
<PAGE>
ITEM 1 - BUSINESS (Continued)
- -----------------
Brown's Branded Marketing division maintains an independent sales force
to market its Naturalizer, NaturalSport, Life Stride, LS Studio, Night Life
and Larry Stuart Collection brands primarily to department and specialty
footwear stores domestically. The 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 heritage and consumer
recognition of its traditional brands, and it also is more clearly defining
the independent brand images of certain other brands. During 1996, the
division invested over $16 million in advertising and marketing in support of
certain of its brands. Management estimates it will invest approximately $21
million in marketing programs in 1997.
Pagoda Division
- ---------------
The Pagoda division is a leading sourcer and marketer 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 mass merchandisers,
mid-tier retailers, chains 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's Branded Marketing division, the Naturalizer
Retail division, Pagoda USA and Pagoda International through its international
offices.
Pagoda USA, which is a leading private label footwear resource for many
of the nation's retailers, including Wal-Mart, Kmart, Target and Payless Shoe
Source, provided its wholesale customers with over 49 million pairs of shoes
in 1996, and is a leading supplier of children's footwear. Pagoda
International, which commenced operations in 1989, and currently has sales
offices in Brazil, France and Hong Kong, has grown to sales of approximately
$93 million in 1996 as the Company continues to increase its penetration of
international footwear markets. Pagoda Trading, which in 1996 sourced 78
million pairs of shoes for Brown's Branded Marketing division, the Naturalizer
Retail division, Pagoda USA, Pagoda International and Famous Footwear, has
developed a global sourcing capability through its relationships with multiple
third-party independent footwear manufacturers.
Pagoda USA and Pagoda International design and market a broad offering of
branded and licensed footwear for department stores, specialty footwear stores
and other retailers, domestically and internationally, respectively. The
major brand names of the Pagoda division's footwear include the following:
Women's: Air Step
Brittania (under license from Brittania Sportswear, Ltd.)
Connie
Dr. Scholl's (under license from Schering-Plough HealthCare
Products, Inc. and Scholl Latin America Ltd.)
Fanfares
le coq sportif
Mickey Unlimited (under license from The Walt Disney Company)
Nature Sole
Penn (under license from Penn Racquet Sports)
Revelations
<PAGE>
ITEM 1 - BUSINESS (Continued)
- -----------------
Men's: Brittania (under license from Brittania Sportswear, Ltd.)
Cedar Trail
Dr. Scholl's (under license from Schering-Plough HealthCare
Products, Inc. and Scholl Latin America Ltd.)
le coq sportif
Penn (under license from Penn Racquet Sports)
Regal
Remington (under license from Remington Arms Company, Inc.)
Russell (under license from Russell Corporation)
U.S. 101
UnionBay (under license from Seattle Pacific Industries, Inc.)
Children's Anastasia (under license from Twentieth Century Fox)
Barbie (under license from Mattel, Inc.)
Batman (under license from Warner Bros. Consumer Products, France)
Buster Brown
Casper (under license from MCA/Universal Merchandising, Inc.)
101 Dalmatians (under license from The Walt Disney Company)
Disney Babies (under license from The Walt Disney Company)
Doug (under license from The Walt Disney Company)
Fanfares
Hello Kitty (under license from Sanrio, Inc.)
The Hunchback of Notre Dame (under license from The Walt Disney
Company)
Kazaam (under license from Interscope Communications, Inc.)
The Lion King (under license from The Walt Disney Company)
Looney Tunes (under license from Warner Bros. Consumer Products,
France)
Mickey & Co. (Under license from The Walt Disney Company)
Mickey for Kids (under license from The Walt Disney
Company)
Nerf (under license from Hasbro, Inc.)
Playskool (under license from Hasbro, Inc.)
Pocahontas (under license from The Walt Disney Company)
Remington (under license from Remington Arms Company, Inc.)
Sailor Moon (under license from DIC Entertainment, L.P.)
Space Jam (under license from Warner Bros. Consumer Products,
France)
Star Wars (under license from Lucasfilm, Ltd.)
That's Donald (under license from The Walt Disney Company)
Tonka (under license from Hasbro, Inc.)
UnionBay (under license from Seattle Pacific Industries, Inc.)
Wildcats
Wishbone (under license from Lyrick Studios)
YDS (under license from Schering-Plough HealthCare
Products, Inc.)
Pagoda USA and Pagoda International seek opportunities to develop
additional brands through selective acquisitions or licenses. Products sold
under license agreements, which are generally for an initial term of two to
three years and subject to renewal, were responsible for approximately 13%,
13% and 17% in 1996, 1995, and 1994, respectively, of consolidated sales. In
1995, the Company acquired the le coq sportif brand, which has broad consumer
recognition in Europe and Latin America, as part of its efforts to increase
international sales. Similarly, Pagoda USA and Pagoda International entered
into a long-term licensing agreement which is renewable through 2014 to market
the Dr. Scholl's 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 to offer Star Wars
domestically and internationally, and Batman, Space Jam and Looney Tunes
footwear internationally.
<PAGE>
ITEM 1 - BUSINESS (Continued)
- -----------------
Pagoda Trading sources essentially all of the footwear for the Company's
Brown Branded Marketing division, the Naturalizer Retail division, Pagoda USA
and Pagoda International operations. In addition, Pagoda Trading sources a
limited amount of footwear for Famous Footwear. 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. This structure enables the Company to source
footwear at various price levels from significant shoe manufacturing regions
of the world. In 1996, over half of the footwear sourced by Pagoda Trading
was from manufacturing facilities in China. The Company has the ability to
shift sourcing to alternative countries, over time, based upon trade
conditions, economic advantages, production capabilities and other factors, if
conditions warrant. The following table provides an overview of the Company's
foreign sourcing in 1996:
Country Millions of Pairs
------- -----------------
China 53.4
Indonesia 10.1
Brazil 7.5
Italy 4.0
Taiwan 0.8
All Other 2.2
----
Total 78.0
====
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.
The Company recently augmented its design capabilities for developing and
updating the styles comprising its broad footwear offering. Separate design
teams are maintained for each of its brands and the Company maintains a staff
of footwear designers who are responsible for the creation and development of
new product styles. The Company's designers monitor trends in apparel and
footwear fashion and work closely with retailers to identify consumer footwear
preferences. When a new style is created, the Company's designers work
closely with independent footwear manufacturers to translate their designs
into new footwear styles.
ITEM 2 - PROPERTIES
- -------------------
The principal executive, sales and administrative offices of the Company
are located in Clayton (St. Louis), Missouri, and consist of an owned office
building.
The Company's wholesale footwear operations are carried out at two
distribution centers located in Missouri and two manufacturing and one
distribution facility located in Ontario, Canada. All of the facilities are
owned.
<PAGE>
ITEM 2 - PROPERTIES (Continued)
- -------------------
The Company's retail footwear operations are conducted throughout the
United States and Canada and involve the operation of 1,256 shoe stores,
including 116 in Canada. All store locations are leased with more than half
having renewal options. In addition, Famous Footwear has leased office space,
a leased 750,000 square foot distribution center, including a mezzanine level,
in Madison, Wisconsin, and a leased 800,000 square foot distribution center,
including mezzanine levels, in Lebanon, Tennessee, which began operations in
November 1995.
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
The Company is a party to several uninsured lawsuits arising in the
ordinary course of business. While the Company is unable to predict the
ultimate outcome of these actions, it believes that their final resolution
will not result in any materially adverse effect on the Company's financial
position.
The Company is involved in environmental remediation and ongoing
compliance at several sites, including its closed New York tannery and at an
owned manufacturing facility that is leased to another party, In addition,
the Company has been identified by various governmental authorities as a
potentially responsible party at certain landfills from disposal of solvents
and other by-products from the closed tannery and shoe manufacturing
facilities. See pages 18 and 31 of the Annual Report to Shareholders for the
year ended February 1, 1997, which is incorporated herein by reference, for a
discussion of the financial statement impact of environmental issues on the
Company. Federal, State, and local provisions for environmental protection
have not had, nor are they anticipated to have, a material effect on the
Company's capital expenditures, financial position or competitive position.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matter was submitted to a vote of shareholders during the fourth
quarter of fiscal 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
The following is a list of the names and ages of the executive officers
of the registrant and of the offices held by each such person. There is no
family relationship between any of the named persons. The terms of the
following executive officers will expire May, 1997.
Name Age Current Position
- ---- --- ----------------
B. A. Bridgewater, Jr. 63 Chairman of the Board, President, Chief
Executive Officer and Chairman of the
Executive Committee
Brian C. Cook 57 Vice President, Brown Group, Inc. and
President, Famous Footwear
Ronald N. Durchfort 43 President, Pagoda International
Ronald A. Fromm 46 Executive Vice President, Famous Footwear
J. Martin Lang 40 Vice President and Chief Financial Officer,
Famous Footwear
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
- ------------------------------------
Robert D. Pickle 59 Vice President, General Counsel and
Corporate Secretary
Gary M. Rich 46 President, Pagoda U.S.A.
Harry E. Rich 57 Director, Executive Vice President,
Chief Financial Officer and Member of the
Executive Committee
James M. Roe 51 Senior Vice President, Sales and Operations,
Famous Footwear
Andrew M. Rosen 46 Vice President and Treasurer
Richard C. Schumacher 49 Vice President and Controller
David H. Schwartz 52 President, Pagoda Trading
Mary Sylvia Siverts 37 Vice President, Public Affairs
Thomas A. Williams 48 Director, Vice President, Brown Group, Inc.
and President, Brown Shoe Company
E. Lee Wyatt, Jr. 44 Senior Vice President, Finance and
Administration, Brown Shoe Company
George J. Zelinsky 48 Senior Vice President and General Merchandise
Manager, Famous Footwear
The period of service of each officer in the positions listed and other
business experience are set forth below.
B. A. Bridgewater, Jr., Chairman of the Board and Chief Executive Officer of
the registrant since 1985. President of the registrant prior to 1987 and
since 1990.
Brian C. Cook, Vice President of the registrant since March 1992; President of
Famous Footwear since 1981.
Ronald N. Durchfort, President of Pagoda International since March 1993.
General Manager of Operations, France Office, from 1988 through March 1993.
Ronald A. Fromm, Executive Vice President, Famous Footwear since September
1992. Vice President and Chief Financial Officer of Famous Footwear from 1988
to 1992.
J. Martin Lang, Vice President and Chief Financial Officer, Famous Footwear
since October 1995. From 1991 to 1995, served United States Shoe Corporation
as Vice President of Finance -- Footwear Group from 1993 to 1995 and as Vice
President and Chief Financial Officer - Footwear Retailing Group from 1991 to
1993.
Robert D. Pickle, Vice President, General Counsel and Corporate Secretary of
the registrant since 1985.
Gary M. Rich, President of Pagoda U.S.A. since March 1993. President, Pagoda
Trading Company, Inc. from June 1989 through March 1993. Executive Vice
President, Sidney Rich Associates, Inc. from December 1980 through June 1989.
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
- ------------------------------------
Harry E. Rich, Executive Vice President and Chief Financial Officer of the
registrant since 1988. Senior Vice President and Chief Financial Officer of
the registrant from 1984 to 1988.
James M. Roe, Senior Vice President, Sales and Operations, Famous Footwear
since December 1994. Vice President, Real Estate, Famous Footwear from
January 1992 to 1994. Director, Strip Center Real Estate of the registrant
from 1987 to 1992.
Andrew M. Rosen, Vice President and Treasurer of the registrant since January
1992. Treasurer of the registrant from 1983 to 1992.
Richard C. Schumacher, Vice President and Controller of the registrant since
June 1994. Vice President and Chief Financial Officer of Wohl Shoe Company
from November 1992 to June 1994. Assistant Controller of the registrant from
1985 to 1992.
David H. Schwartz, President, Pagoda Trading since February 1996. President,
Men's, Athletic and Children's Divisions from March 1995 to February 1996.
President, Marathon Division, Pagoda from March 1981 to March 1995.
Mary Sylvia Siverts, Vice President, Public Affairs since September 1993.
Director of Public Relations from 1988 to 1993.
Thomas A. Williams, Vice President, Brown Group, Inc. and President, Brown
Shoe Company since May 1996. Vice President, Footwear Wholesaling; President,
Brown Shoe Company; and Chairman, Pagoda since January 1994. Chairman, Pagoda
Trading Company, Inc., since January 1990. Vice President, International
Operations of the registrant and Chairman, Brown Group International, Inc.,
from March 1993 to January 1994. Vice Chairman of Pagoda Trading Company from
June 1989 to December 1989. Other management positions at Pagoda Trading
Company from 1982 to 1990.
E. Lee Wyatt, Jr., Senior Vice President of Finance and Administration, Brown
Shoe Company since May 1994. Vice President, Planning and Controller of the
registrant from March 1994 to May 1994. Vice President, Planning and Taxes of
the registrant from November 1992 to March 1994. Director, Corporate Planning
and Taxes and Assistant Secretary from June 1990 to November 1992. Director,
Corporate Planning and Tax from October 1989 to June 1990. Other management
positions with the registrant from 1986 to 1989.
George J. Zelinsky, Senior Vice President and General Merchandise Manager,
Famous Footwear since June 1989. Vice President, Women's Better Grade
Division, Wohl Shoe Company from 1986 to 1989.
<PAGE>
PART II
ITEM 5 -MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
-------------------------------------------------
Common Stock market prices and dividends on page 39 of the Annual Report
to Shareholders and the number of shareholders of record on page 41 of the
Annual Report to Shareholders for the year ended February 1, 1997, are
incorporated herein by reference.
ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
Selected Financial Data on page 19 of the Annual Report to Shareholders
for the year ended February 1, 1997, is incorporated herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------------
Management's Discussion and Analysis of Operations and Financial
Condition on pages 14 through 18 of the Annual Report to Shareholders for the
year ended February 1, 1997, is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The consolidated financial statements of the Company and its subsidiaries
on pages 20 through 38, and the supplementary financial information on page 39
of the Annual Report to Shareholders for the year ended February 1, 1997, are
incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
- ------------------------------------------------------
None.
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information regarding Directors of the Company on pages 3 through 11 of
the Proxy Statement for the Annual Meeting of Shareholders to be held
May 22, 1997, is incorporated herein by reference. Information regarding
Executive Officers of the Company is included in Part I of this Form 10-K
following Item 4.
ITEM 11 - EXECUTIVE COMPENSATION
- --------------------------------
Information regarding Executive Compensation on pages 23 through 25 and
12 through 20 of the Proxy Statement for the Annual Meeting of Shareholders to
be held May 22, 1997, is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Security Holdings of Directors and Management on pages 3 and 4 of the
Proxy Statement for the Annual Meeting of Shareholders to be held May 22,
1997, is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
None.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
- ------------------------------------------------------
(a) (1) and (2) The response to this portion of Item 14
is submitted as a separate section of
this report.
(a) (3) Exhibits
Exhibit No.:
3.(i) (a) Certificate of Incorporation of the Company
as amended through February 16, 1984,
incorporated herein by reference to Exhibit 3
to the Company's Report on Form 10-K for the
fiscal year ended November 1, 1986.
(i) (b) Amendment of Certificate of Incorporation of
the Company filed February 20, 1987,
incorporated herein by reference to Exhibit 3
to the Company's Report on Form 10-K for the
fiscal year ended January 30, 1988.
<PAGE>
(ii) Bylaws of the Company as amended through
February 1, 1997, filed herewith.
4. (a) Rights Agreement dated as of March 7, 1996
between the Company and Boatmen's Trust
Company, which includes as Exhibit A the form
of Rights Certificate evidencing the
Company's Common Stock Purchase Rights,
incorporated herein by reference to Form 8-K
dated March 7, 1996.
(b) (i) 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).
(b) (ii) Credit Agreement dated as of January 9, 1997,
between the Company and the Lenders named
therein, The Boatmen's National Bank of St.
Louis, as Agent, and First Chicago Capital
Markets, Inc., as Syndication Agent,
incorporated herein by reference to Form 8-K
dated January 17, 1997.
(b) (iii) Indenture dated as of October 1, 1996,
between the Company and State Street Bank and
Trust Company, as Trustee, incorporated
herein by reference to Form 8-K dated
October 7, 1996.
(c) Senior Note Agreement, dated as of
October 24, 1995, between the Company
and Prudential Insurance Company of
America, as amended, filed herewith.
(d) Certain instruments with respect to
the long-term debt of the Company are
omitted pursuant to Item
601(b)(4)(iii) of Regulation S-K
since the amount of debt authorized
under each such omitted instrument
does not exceed 10 percent of the
total assets of the Company and its
subsidiaries on a consolidated basis.
The Company hereby agrees to furnish a
copy of any such instrument to the
Securities and Exchange Commission
upon request.
10. (a)* Stock Option and Restricted Stock Plan
of 1987, as amended, incorporated
herein by reference to Exhibit 3 to
the Company's definitive proxy
statement dated April 26, 1988.
(b)* Stock Option and Restricted Stock Plan of
1994, incorporated herein by reference to
Exhibit 3 to the Company's definitive proxy
statement dated April 20, 1994.
11. Computation of earnings per share.
13. Annual Report to Shareholders of Brown
Group, Inc. for the fiscal year ended
February 1, 1997. Such report, except
for portions incorporated by reference
herein, is furnished for the
information of the SEC and is not
"filed" as part of this report.
21. Subsidiaries of the registrant.
23. Consent of Independent Auditors.
24. Power of attorney (contained on signature page).
27. Financial Data Schedule
99.1 Safe Harbor For Forward Looking Statements;
Certain Risk Factors That Could Affect the Company's
Operating Results
(b) Reports on Form 8-K:
The Company filed a current report on Form
8-K dated November 19, 1996, which announced
its results for the quarter ended November 2,
1996, and for the nine months ended November
2, 1996.
The Company filed a current report on Form
8-K dated January 17, 1997, which announced
the placement of a new revolving bank Credit
Agreement in the amount of $155 million for a
three-year term; and announced that the
Company had entered into a first supplemental
indenture supplementing the Indenture dated
October 1, 1996 (related to the 9-1/2% Senior
Notes due 2006) whereby certain wholly-owned
subsidiaries unconditionally guaranteed the
9-1/2% Senior Notes due 2006.
(c) Exhibits:
Exhibits begin on page 22 of this Form 10-K.
On request copies of any exhibit will be furnished to
shareholders upon payment of the Company's reasonable
expenses incurred in furnishing such exhibits.
(d) Financial Statement Schedule.
*Denotes management contract or compensatory plan arrangements.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
DATE: April 16, 1997 BROWN GROUP, INC.
(Registrant)
By Harry E. Rich /s/
--------------------------------
Executive Vice President and
on behalf of the Company as
Principal Financial Officer
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Harry E. Rich his true and lawful attorney in
fact and agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and
all amendments to this Annual Report on Form 10-K, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney in fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney in fact and agent or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on April 16, 1997, by the following persons on
behalf of the Registrant and in the capacities indicated.
Signatures Title
---------- -----
B. A. Bridgewater, Jr. /s/ Chairman of the Board of Directors
- -------------------------------- President and Chief Executive
Officer and on behalf of the Company
as Principal Executive Officer
Harry E. Rich /s/ Director, Executive Vice President
- --------------------------------- and Chief Financial Officer
Richard C. Schumacher /s/ Vice President and Controller and
- ---------------------------------- on behalf of the Company as
Principal Accounting Officer
<PAGE>
Signature Title
--------- -----
Richard A. Liddy /s/ Director and Chairman of
- ---------------------------------- Audit Committee
John Peters MacCarthy /s/ Director
- -----------------------------------
William E. Maritz /s/ Director
- -----------------------------------
Jerry E. Ritter /s/ Director
- ------------------------------------
Thomas A. Williams /s/ Director
- -------------------------------------
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 14 (a) (1) and (2), and (d)
LIST OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED FEBRUARY 1, 1997
BROWN GROUP, INC.
ST. LOUIS, MISSOURI
<PAGE>
FORM 10-K - ITEM 14 (a) (1) and (2), and (d)
BROWN GROUP, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Brown Group, Inc. and
subsidiaries included in the annual report of the registrant to shareholders
for the year ended February 1, 1997, are incorporated by reference in Item 8:
Consolidated Balance Sheets - February 1, 1997, and February 3, 1996.
Consolidated Earnings - Years ended February 1, 1997, February 3, 1996,
and January 28, 1995.
Consolidated Cash Flows - Years ended February 1, 1997, February 3, 1996,
and January 28, 1995.
Consolidated Shareholders' Equity - Years ended February 1, 1997, February
3, 1996, and January 28, 1995.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
The following consolidated financial statement schedule of Brown Group, Inc.
and subsidiaries is included in Item 14(d):
Schedule VIII - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
<PAGE>
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
BROWN GROUP, INC.
- -------------------------------------------------------------------------------
COL. A. COL. B COL. C COL. D COL. E
- -------------------------------------------------------------------------------
ADDITIONS
----------------------
(1) (2)
Balance Charged to
at Charged to Other Balance
Beginning Costs and Accounts- Deductions- at End
of Period Expenses Describe Describe of Period
- -------------------------------------------------------------------------------
(Thousands)
YEAR ENDED FEBRUARY 1, 1997
Deducted from assets:
For doubtful accounts
and discounts $11,267 $5,982 $7,046-A $10,203
YEAR ENDED FEBRUARY 3, 1996
Deducted from assets:
For doubtful accounts
and discounts 11,664 5,101 5,498-A 11,267
YEAR ENDED JANUARY 28, 1995
Deducted from assets:
For doubtful accounts
and discounts 10,817 6,442 5,595-A 11,664
A. Accounts written off, net of recoveries
and discounts taken.
<PAGE>
BROWN GROUP, INC.
ANNUAL REPORT TO SHAREHOLDERS ON FORM 10-K
INDEX TO EXHIBITS
Page of Sequential
Exhibit Numbering System
------- ------------------
3.(ii) Bylaws as amended through February 1, 1997
4.(c) Senior Note Agreement, dated as of October 24,
1995, between the Company and Prudential
Insurance Company of America, as amended.
11. Computation of earnings per share
13. 1996 Annual Report to Shareholders of
Brown Group, Inc.
21. Subsidiaries of the registrant
23. Consent of Independent Auditors
24. Power of Attorney (see signature page)
27. Financial Data Schedule
99.1 Safe Harbor for Forward-Looking Statements;
Certain Risk Factors That Could Affect
the Company's Operating Results
<PAGE>
EXHIBIT 3.(ii)
BROWN GROUP, INC.
A NEW YORK CORPORATION
BYLAWS
ADOPTED BY THE STOCKHOLDERS
JANUARY 11, 1946
AMENDED THROUGH FEBRUARY 1, 1997
<PAGE>
BYLAWS
OF
BROWN GROUP, INC.
------------------
ARTICLE I.
Meetings of Stockholders.
SECTION 1. Annual Meeting. The annual meeting of the Stockholders
shall be held at such place within or without the State of New York as
may from time to time be fixed by resolution of the Board of Directors
on the fourth Thursday in May in each and every year (or if said day be
a legal holiday, then on the next succeeding day not a legal holiday),
at eleven o'clock in the forenoon, for the purpose of electing
directors and of transacting only such other business as may be
properly brought before the meeting. To be properly brought before an
annual meeting, business must be (a) specified in the notice of meeting
(or any supplement thereto) given by or at the direction of the Board
of Directors, the Chairman of the Board, or the President, (b)otherwise
properly brought before the meeting by or at the direction of the Board
of Directors, the Chairman of the Board, or the President, or (c),
subject to ARTICLE II, Section 8 hereof, otherwise properly brought
before the meeting by a stockholder. For business to be properly
brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the
Company. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Company,
not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or
prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so
received not later than the close of business on the 10th day following
the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made. A stockholder's notice to
the Secretary shall set forth as to each matter the stockholder
proposes to bring before the annual meeting (a) a brief description of
the business desired to be brought before the annual meeting and the
reasons for conducting such business at the annual meeting, (b) the
name and address, as they appear on the Company's books, of the
stockholder proposing such business, (c) the class and number of shares
of the Company which are beneficially owned by the stockholder, and (d)
any material interest of the stockholder in such business.
Notwithstanding anything in the Bylaws to the contrary, but subject to
ARTICLE II, Section 8 hereof, no business shall be conducted at an
annual meeting except in accordance with the procedures set forth in
this Section 1. The Chairman of an annual meeting shall, if the facts
warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions
of this Section 1, and if he should so determine, he shall so declare
to the meeting and any such business not properly brought before the
meeting shall not be transacted. The meeting may be adjourned from
time to time until its business is completed.
SECTION 2. Special Meetings. Special meetings of the stockholders
may be held upon call by the majority of the Board of Directors, the
Chairman of the Board, or the President, at such time as may be fixed
by the Board of Directors, the Chairman of the Board, or the President,
and at such place within or without the State of New York as may be
stated in the call and notice. The meeting may be adjourned from time
to time until its business is completed.
SECTION 3. Notice of Meetings. Written notice of the time, place and
purpose or purposes of every meeting of stockholders, signed by the
Chairman of the Board or the President or a Vice-President or the
Secretary or an Assistant Secretary, shall be served either personally
or by mail, not less than ten days nor more than fifty days before the
meeting, upon each stockholder of record entitled to vote at such
meeting and upon each other stockholder of record who, by reason of any
action proposed at such meeting, would be entitled to have his stock
appraised if such action were taken.
If mailed, such notice shall be directed to each such stockholder at
his address as it appears on the stock book unless he shall have filed
with the Secretary of the Company a written request that notices
intended for him be mailed to some other address, in which case it
shall be mailed to the address designated in such request. Such
further notice shall be given by mail, publication or otherwise, as may
be required by the Certificate of Incorporation of the Company or by
law.
SECTION 4. Quorum. At every meeting of the stockholders, the holders
of record of shares entitled in the aggregate to a majority of the
number of votes which could at the time be cast by the holders of all
shares of the capital stock of the Company then outstanding and
entitled to vote if all such holders were present or represented at the
meeting, shall constitute a quorum. If at any meeting there shall be
no quorum, the holders of a majority of the shares of stock entitled to
vote so present or represented may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until such
quorum shall have been obtained, when any business may be transacted
which might have been transacted at the meeting as first convened had
there been a quorum.
SECTION 5. Voting. At all meetings of the stockholders, each holder
of record of outstanding shares of stock of the Company, entitled to
vote thereat, may so vote either in person or by proxy appointed by
instrument in writing executed by such holder or by his duly authorized
attorney. No proxy shall be valid after the expiration of eleven
months from the date of its execution unless the stockholder executing
it shall have specified therein a longer time during which it is to
continue in force.
SECTION 6. Record of Stockholders. The Board of Directors may
prescribe a period, not exceeding fifty days nor less than ten days
prior to any meeting of the stockholders, during which no transfer of
stock on the books of the company may be made. In lieu of prohibiting
the transfer of stock as aforesaid, the Board of Directors may fix a
day or hour, not more than fifty days prior to the day of holding any
meeting of stockholders, as the time as of which stockholders entitled
to notice of and to vote at such meeting shall be determined, and all
persons who were holders of record of voting stock at such time, and no
others, shall be entitled to notice of and to vote at such meeting.
SECTION 7. Inspectors of Election. At all elections of directors by
the stockholders, the chairman of the meeting shall appoint two
Inspectors of Election. Before entering upon the discharge of his
duties, each such inspector shall take and subscribe an oath or
affirmation faithfully to execute the duties of inspector at such
meeting as provided by law with strict impartiality and according to
the best of his ability and thereupon the inspectors shall take charge
of the polls and after the balloting shall make a certificate of the
result of the vote taken. No director or candidate for the office of
director shall be appointed such inspector.
ARTICLE II.
SECTION 1. Number. The number of directors within the maximum and
minimum limits provided for in the Certificate of Incorporation may be
changed from time to time by the stockholders or by the Board of
Directors by an amendment to these Bylaws. Subject to amendment of
these Bylaws, as aforesaid, the number of directors of the Corporation
shall be twelve. Such directors shall be classified in respect of the
time for which they shall severally hold office, by dividing them into
three classes consisting of four directors each. At each annual
election, the successors of the directors of the class whose term shall
expire in that year, shall be elected to hold office for the term of
three years so that the term of office of one class of directors shall
expire in each year. The Board of Directors shall not choose as a
director to fill a temporary vacancy any person over the age of seventy
years, and shall not recommend to the stockholders any person for
election as a director for a term extending beyond the Annual Meeting
of Stockholders following the end of the calendar year during which he
attains his seventieth birthday, provided, however, that this shall not
apply to directors elected or holding office, at the time of the Annual
Meeting of Stockholders in 1967; and provided further, that this shall
not prevent the designation by the Board of such person as an Honorary
Director, to serve without vote.
SECTION 2. Meetings of the Board. Meetings of the Board of Directors
shall be held at such place within or without the State of New York as
may from time to time be fixed by resolution of the Board, or as may be
specified in the call of any meeting. Regular meetings of the Board of
Directors shall be held at such times as may from time to time be fixed
by resolution of the Board. Notice need not be given of the regular
meetings of the Board held at times fixed by resolution of the Board.
Special meetings of the Board may be held at any time upon the call of
the Chairman of the Board or the President or any two directors by
telegraphic or written notice, duly served on or sent or mailed to each
director not less than three days before such meeting. Special
meetings of the Board of Directors may be held without notice, if all
of the directors are present or if those not present waive notice of
the meeting in writing or by telegraph. Any one or more of the
directors may participate in a meeting of the Board of Directors by
means of a conference telephone or similar communications equipment
allowing all persons participating in the meeting to hear each other at
the same time. Participation by such means shall constitute presence
in person at a meeting.
SECTION 3. Quorum. The attendance of a majority of the Board of
Directors shall be necessary to constitute a quorum for the transaction
of business.
SECTION 4. Vacancies. Vacancies in the Board of Directors may be
filled by a vote of a majority of the directors in office even though
less than a quorum; provided that, in case of an increase in the number
of directors pursuant to an amendment of these Bylaws made by the
stockholders, the stockholders may fill the vacancy or vacancies so
created at the meeting at which the bylaw amendment is effected. The
directors so chosen shall hold office, unless they are removed
therefrom by the stockholders, for the unexpired portion of the term of
the directors whose place shall be vacant and until the election of
their successors.
SECTION 5. Resignations. Any director of the Company may resign at
any time by giving written notice to the President or to the Secretary
of the Company. Such resignation shall take effect at the time
specified therein; and unless otherwise specified therein the
acceptance of such resignation shall not be necessary to make it
effective.
<PAGE>
SECTION 6. Organization. The Board of Directors shall have general
power to direct the management of the business and affairs of the
Company, and may adopt such rules and regulations as they shall deem
proper, not inconsistent with law or with these Bylaws, for the conduct
of their meetings and for the management of the business and affairs of
the Company. Directors need not be stockholders.
SECTION 7. Compensation. Directors, as such, shall not receive any
stated salary for their services, but by resolution of the Board, a
fixed sum and expenses of attendance, if any, may be allowed for
attendance at each regular or special meeting of the Board, and
directors shall be entitled to compensation other than a stated salary
in such form and in such amounts as the Board may determine. However,
this Bylaw shall not be construed to preclude any director from serving
in any other capacity and receiving compensation therefor. Members of
the Executive Committee and all other committees may be allowed a fixed
sum and expenses of attendance, if any, for attendance at committee
meetings.
SECTION 8. Notice and Qualification of Stockholder Nominees to Board
of Directors. Only persons who are nominated in accordance with
procedures set forth in this Section 8 shall be qualified for election
as Directors. Nominations of persons for election to the Board of
Directors of the Company may be made at a meeting of stockholders by or
at the direction of the Board of Directors or by any stockholder of the
Company entitled to vote for the election of Directors at the meeting
who complies with the procedures set forth in this Section 8. In order
for persons nominated to the Board of Directors, other than those
persons nominated by or at the direction of the Board of Directors, to
be qualified to serve on the Board of Directors, such nomination shall
be made pursuant to timely notice in writing to the Secretary of the
Company. To be timely, stockholder's notice shall be delivered to or
mailed and received at the principal executive offices of the Company
not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or
prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so
received not later than the close of business on the 10th day following
the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate
for election or re-election as a Director (i) the name, age, business
address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of
shares of the Company which are beneficially owned by such person and
(iv) any other information relating to such person that is required to
be disclosed in solicitation of proxies for election of Directors, or
is otherwise required, in each case pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended from time to time
(including without limitation such person's written consent to be named
in the proxy statement as a nominee and to serving as a Director if
elected); and (b) as to the stockholder giving the notice (i) the name
and address, as they appear on the Company's books, of such stockholder
and (ii) the class and number of shares of the Company which are
beneficially owned by such stockholder. At the request of the Board of
Directors, any person nominated by the Board of Directors for election
as a Director shall furnish to the Secretary of the Company that
information required to be set forth in a stockholder's notice of
nomination which pertains to the nominee. No person shall be qualified
for election as a Director of the Company unless nominated in
accordance with the procedure set forth in this Section 8. The
Chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in
accordance with procedures prescribed by the Bylaws, and if he should
so determine, he shall so declare to the meeting, and the defective
nomination shall be disregarded.
ARTICLE III.
Committees.
SECTION 1. Executive Committee. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate an
Executive Committee to consist of three or more of the directors,
including the President ex officio, one of whom shall be designated
Chairman of the Executive Committee. The Executive Committee shall
have and may exercise, so far as may be permitted by law, all of the
powers of the Board in the direction of the management of the business
and affairs of the Company during the intervals between meetings of the
Board of Directors, and shall have power to authorize the seal of the
Company to be affixed to all papers which may require it; but the
Executive Committee shall not have the power to fill vacancies in the
Board, or to change the membership of, or to fill vacancies in, the
Executive Committee, or to make or amend bylaws of the Company. The
Board shall have the power at any time to fill vacancies in, to change
the membership of, or to dissolve, the Executive Committee. The
Executive Committee may hold meetings and make rules for the conduct of
its business and appoint such committees and assistants as it shall
from time to time deem necessary. A majority of the members of the
Executive Committee shall constitute a quorum. All action of the
Executive Committee shall be reported to the Board at its meeting next
succeeding such action. Any one or more members of the Executive
Committee may participate in a meeting of the Executive Committee by
means of a conference telephone or similar communications equipment
allowing all persons participating in the meeting to hear each other at
the same time. Participation by such means shall constitute presence
in person at a meeting.
<PAGE>
SECTION 2. Other Committees. The Board of Directors may, in its
discretion, by resolution, appoint other committees, composed of two or
more members, which shall have and may exercise such powers as shall be
conferred or authorized by the resolution appointing them. A majority
of any such committee may determine its action and fix the time and
place of its meetings, unless the Board of Directors shall otherwise
provide. The Board shall have power at any time to change the
membership of any such committee, to fill vacancies, and to discharge
any such committee.
ARTICLE IV.
Officers.
SECTION 1. Officers. The Board of Directors, as soon as may be after
the election of directors held in each year, shall elect a Chairman of
the Board of Directors, a President of the Company, one or more Vice-
Presidents, a Secretary, and a Treasurer, and from time to time may
appoint such Assistant Secretaries, Assistant Treasurers and such other
officers, agents and employees as it may deem proper. Any two of such
offices, except that of President and Secretary, may be held by the
same person. The Chairman of the Board and the President shall be
chosen from among the directors, but no other officer need be a
director.
SECTION 2. Term of Office. The term of office of all officers shall
be one year or until their respective successors are chosen and
qualified; but at any meeting the Board may, by a three-fourths vote of
its entire number, suspend or remove any one or more of the officers
for a cause satisfactory to the Board, and the action thus taken shall
be conclusive. Previous notice of five days of such intended action
shall be given to the person affected thereby. In the event of the
suspension of an officer, the Board shall fix the term of such
suspension.
SECTION 3. Powers and Duties. The officers, agents and employees of
the Company shall each have such powers and duties in the management of
the property and affairs of the Company, subject to the control of the
Board of Directors, as generally pertain to their respective offices,
as well as such powers and duties as from time to time may be
prescribed by the Board of Directors. The Board of Directors may
require any such officer, agent or employee to give security for the
faithful performance of his duties.
<PAGE>
ARTICLE V.
Powers to Contract; Indemnification
SECTION 1. Contracts. All contracts and agreements purporting to be
the act of this Company shall be signed by the President, or by a Vice-
President, or by such other officer or other person as may be
designated by the Board of Directors or Executive Committee in order
that the same shall be binding upon the Company.
SECTION 2. Indemnification.
a. Actions Involving Directors and Officers. The Company shall
indemnify each person who at any time is serving or has served as a
director or officer of the Company or at the request of the Company is
serving or has served as a director or officer (or in a similar
capacity) of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against any claim, liability
or expense incurred as a result of such service, to the maximum extent
permitted by law.
b. Actions Involving Employees or Agents
1. The Company may, if it deems appropriate, indemnify any
person who at any time is or has been an employee or agent of the
Company or who at the request of the Company is or has been an employee
or agent of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against any claim, liability
or expense incurred as a result of such service, to the maximum extent
permitted by law or to such lesser extent as the Company, in its
discretion, may deem appropriate.
2. To the extent that any person referred to in subsection 2(b)
of this Section 2 has been successful, on the merits or otherwise, in
the defense of a civil or criminal proceeding arising out of the
services referred to therein, he shall be entitled to indemnification
as authorized in such subsection.
c. Advance Payment of Expenses. Expenses incurred by a person who
is or was a director or officer of the Company or who is or was at the
request of the Company serving as a director or officer (or in a
similar capacity) of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, in defending a civil
or criminal action or proceeding shall be paid by the Company in
advance of the final disposition of such action or proceeding, and
expenses incurred by a person who is or was an employee or agent of the
Company or who is or was at the request of the Company serving as an
employee or agent of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, in defending a civil
or criminal action or proceeding may be paid by the Company in advance
of the final disposition of such action or proceeding as authorized by
the Board of Directors, in either case upon receipt of an undertaking
by or on behalf of the director, officer, employee or agent to repay
such amounts as, and to the extent, required by law.
d. Not Exclusive. The indemnification and advancement of expenses
provided or permitted by this Section 2 shall not be deemed exclusive
of any other rights to which any person who is or was a director,
officer, employee or agent of the Company or who is or was at the
request of the Company serving as a director or officer (or in a
similar capacity), employee or agent of any other corporation,
partnership, joint venture, trust, employee benefit plan or other
enterprise may be entitled, whether pursuant to the Company's
Certificate of Incorporation, Bylaws, the terms of any resolution of
the shareholders or Board of Directors of the Company, any agreement or
contract or otherwise, both as to action in an official capacity and as
to action in another capacity while holding such office.
e. Indemnification Agreements Authorized. Without limiting the
other provisions of this Section 2, the Company is authorized from time
to time to enter into agreements with any director, officer, employee
or agent of the Company or with any person who at the request of the
Company is serving as a director or officer (or in a similar capacity),
employee or agent of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, providing such rights
of indemnification as the Board of Directors may deem appropriate, up
to the maximum extent permitted by law; provided that any such
agreement with a director or officer of the Company shall not provide
for indemnification of such director or officer if a judgment or other
final adjudication adverse to the director or officer establishes that
his acts were committed in bad faith or were the result of active and
deliberate dishonesty and were material to the cause of action so
adjudicated, or that he personally gained in fact a financial profit or
other advantage to which he was not legally entitled. Any such
agreement entered into by the Company with a director may be authorized
by the other directors, and such authorization shall not be invalid on
the basis that similar agreements may have been or may thereafter be
entered into with such other directors.
f. Insurance. The Company may purchase and maintain insurance to
indemnify itself or any person who is or was a director, officer,
employee or agent of the Company or who is or was at the request of the
Company serving as a director or officer (or in a similar capacity),
employee or agent of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, to the maximum extent
allowed by law, whether or not the Company would have the power to
indemnify such person under the provisions of this Section 2.
g. Certain Definitions. For the purposes of this Section 2:
1. Any director or officer of the Company who shall serve as a
director or officer (or in a similar capacity), employee or agent of
any other corporation, partnership, joint venture, trust or other
enterprise of which the Company, directly or indirectly, is or was the
owner of a majority of either the outstanding equity interests or the
outstanding voting stock (or comparable interests) shall be deemed to
be serving as such director or officer (or in a similar capacity),
employee or agent at the request of the Company, unless the Board of
Directors of the Company shall determine otherwise. In all other
instances where any person shall serve as a director or officer (or in
a similar capacity), employee or agent of another corporation,
partnership, joint venture, trust or other enterprise of which the
Company is or was a stockholder or creditor, or in which it is or was
otherwise interested, if it is not otherwise established that such
person is or was serving as such director or officer (or in a similar
capacity), employee or agent at the request of the Company, the Board
of Directors of the Company may determine whether such service is or
was at the request of the Company, and it shall not be necessary to
show any actual or prior request for such service.
2. A corporation shall be deemed to have requested a person to
serve an employee benefit plan where the performance by such person of
his duties to the corporation also imposes duties on, or otherwise
involves services by, such person to the plan or participants or
beneficiaries of the plan; excise taxes assessed on a person with
respect to an employee benefit plan pursuant to applicable law shall be
considered fines; and action taken or omitted by a person with respect
to an employee benefit plan in the performance of such person's duties
for a purpose reasonably believed by such person to be in the interest
of the participants and beneficiaries of the plan shall be deemed to be
for a purpose which is not opposed to the best interests of the
corporation.
3. References to a corporation include all constituent
corporations absorbed in a consolidation or merger as well as the
resulting or surviving corporation so that any person who is or was a
director, officer, employee or agent of such a constituent corporation
or is or was serving at the request of such constituent corporation as
a director or officer (or in a similar capacity), employee or agent of
another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise shall stand in the same position under
the provisions of this Section 2 with respect to the resulting or
surviving corporation as he would if he had served the resulting or
surviving corporation in the same capacity.
<PAGE>
h. Survival. Any indemnification rights provided under or granted
pursuant to this Section 2 shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
Indemnification rights provided under or granted pursuant to this
Section 2 shall survive amendment or repeal of this Section 2 with
respect to any acts or omissions occurring prior to such amendment or
repeal and persons to whom such indemnification rights are given shall
be entitled to rely upon such indemnification rights as a binding
contract with the Company.
ARTICLE VI.
Capital Stock.
SECTION 1. Stock Certificates. The interest of each stockholder
shall be evidenced by a certificate or certificates for shares of stock
of the Company in such form as the Board of Directors may from time to
time prescribe. The certificates of stock shall be signed by the
Chairman of the Board or the President or a Vice-President and the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary and sealed with the seal of the Company, and shall be
countersigned and registered in such manner, if any, as the Board may
by resolution prescribe; provided that, in case such certificates are
required by such resolution to be signed by a Transfer Agent or
Transfer Clerk and by a Registrar, the signatures of the Chairman of
the Board or the President or a Vice-President and the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary and the
seal of the Company upon such certificates may be facsimiles, engraved
or printed.
SECTION 2. Transfers. Shares in the capital stock of the Company
shall be transferred only on the books of the Company, by the holder
thereof in person or by his attorney, upon surrender for cancellation
of certificates for the same number of shares, with an assignment and
power of transfer endorsed thereon or attached thereto, duly executed,
with such proof of the authenticity of the signature as the Company or
its agents may reasonably require.
SECTION 3. Lost or Destroyed Stock Certificates. No certificates for
shares of stock of the Company shall be issued in place of any
certificate alleged to have been lost, stolen or destroyed, except upon
production of such evidence of the loss, theft or destruction and upon
indemnification of the Company and its agents to such extent and in
such manner as the Board of Directors may from time to time prescribe.
<PAGE>
ARTICLE VII.
Checks, Notes, etc.
All checks and drafts on the Company's bank accounts and all bills of
exchange and promissory notes and all acceptances, obligations and
other instruments for the payment of money, shall be signed by the
President, or a Vice-President, or the Treasurer, or by such other
officer or officers or agent or agents as shall be thereunto authorized
from time to time by the Board of Directors.
ARTICLE VIII.
Fiscal Year.
The fiscal year of the Company shall be determined as ending on the
Saturday nearest to each January thirty-first, and each ensuing fiscal
year shall commence on the day following the ending date of the
immediately preceding fiscal year as so determined.
ARTICLE IX.
Corporate Seal.
The corporate seal shall have inscribed thereon the name of the
Company and the words "New York", arranged in a circular form around
the words and figures "Corporate Seal 1913". In lieu of the corporate
seal, when so authorized by the Board of Directors or a duly empowered
committee thereof, a facsimile thereof may be impressed or affixed or
reproduced.
ARTICLE X.
Amendments.
The Bylaws of the Company may be amended, added to, rescinded or
repealed at any meeting of the stockholders by the vote of the holders
of record of shares entitled in the aggregate to more than a majority
of the number of votes which could at the time be cast by the holders
of all shares of the capital stock of the Company then outstanding and
entitled to vote if all such holders were present or represented at the
meeting, provided notice of the proposed change is given in the notice
of the meeting. The Board of Directors may from time to time, by vote
of a majority of the Board, amend these Bylaws or make additional
bylaws for the Company at any regular or special meeting at which
notice of the proposed change is given, subject, however, to the power
of the stockholders to alter, amend, or repeal any bylaws made by the
Board of Directors.
Exhibit 4(c)
[EXECUTION COPY]
AMENDMENT NO. 1
January 17, 1997
The Prudential Insurance Company
of America
Pruco Life Insurance Company
c/o Prudential Capital Group
2200 Ross Avenue, Suite 4200E
Dallas, Texas 75201
Ladies and Gentlemen:
We refer to the Note Agreement dated as of October 24,
1995 (the "Agreement") among the undersigned, Brown Group, Inc.
(the "Company") and you. Unless otherwise defined herein, the
terms defined in the Agreement shall be used herein as therein
defined.
The Company has entered into a Credit Agreement dated as
of January 9, 1997 with certain lenders named therein and
Boatmen's National Bank of St. Louis, as Agent, and First Chicago
Capital Markets, Inc., as Syndication Agent (the "Credit
Agreement"). Certain of the covenants contained in the Credit
Agreement are more restrictive than the covenants contained in
the Agreement. Pursuant to paragraph 11P of the Agreement, the
Company has offered to amend the Agreement to incorporate such
covenants. In addition, for ease of administration, the Company
has requested that the holders of the Notes incorporate certain
other covenants from the Credit Agreement. Finally, the Credit
Agreement requires the Company to deliver guarantees from certain
Subsidiaries of the Company. The holders of the Notes and the
Lenders and the Agent under the Credit Agreement have entered
into a Sharing Agreement. The Company and the Guarantors are
entering into this Amendment to incorporate the Guarantee of the
Guarantors into the Agreement. The Company and the holders of
the Notes have agreed to amend the Agreement to accomplish these
objectives. Accordingly, it is hereby agreed by you and us as
follows:
<PAGE>
Section 1. Amendments to Agreement. The Agreement is,
effective the date first above written, hereby amended as
follows:
Section 1.01. Paragraph 5. Affirmative Covenants.
Paragraph 5 is amended by adding at the end thereof a new
paragraph 5G to read as follows:
"5G. Additional Credit Parties.
(i) Domestic Subsidiaries. At any time any Person
becomes a Domestic Subsidiary having assets in excess of
$5,000,000, the Company will promptly notify the holders of
the Notes thereof and cause such Domestic Subsidiary to
become a Guarantor hereunder by (i) execution of a Joinder
Agreement, and (ii) delivery of supporting resolutions,
incumbency certificates, corporation formation and
organizational documentation and opinions of counsel as the
Required Holders may reasonably request.
(ii) Foreign Subsidiaries. At any time any Person
becomes a Foreign Subsidiary having assets in excess of
$5,000,000, the Company will promptly notify the holders of
the Notes thereof and cause delivery of supporting
resolutions, incumbency certificates, corporation formation
and organizational documentation and opinions of counsel as
the Required Holders may reasonably request."
Section 1.02. Paragraph 6. Negative Covenants.
Paragraph 6 is amended in full to read as follows:
"6. NEGATIVE COVENANTS. So long as any Note shall remain unpaid,
the Company covenants that:
6A. Consolidated Leverage Ratio. The Company will not
permit, at any time, the Consolidated Leverage Ratio to be
greater than:
From the Closing Date
to April 30, 1999 .55 to 1.0
May 1, 1999 and
thereafter .50 to 1.0
<PAGE>
6B. Consolidated Fixed Charge Coverage. The Company will
not permit, as at the end of each of its fiscal quarters ending
during the periods set forth below, the Consolidated Fixed Charge
Coverage Ratio to be less than the ratio set forth below opposite
each such period:
Period Ratio
January 9, 1997 to August 2, 1997 1.30:1.0
August 3, 1997 through and including
August 1, 1998 1.35:1.0
August 2, 1998 through and including
July 31, 1999 1.40:1.0
August 1, 1999 and thereafter 1.45:1.0
6C. Consolidated Tangible Net Worth. The Company will not
permit, at any time and on any date of determination,
Consolidated Tangible Net Worth less than the sum of (i)
$177,000,000 plus (ii) an amount equal to 50% of the Consolidated
Net Income (if positive), for each full fiscal quarter of the
Company from and including the fiscal quarter beginning August 4,
1996 through and including the Company's fiscal quarter then most
recently ended on or prior to such date of determination plus
(iii) an amount equal to 100% of the Net Proceeds from any Equity
Transaction occurring after January 9, 1997.
6D. Restricted Payments. The Company will not make or
permit any Restricted Payment to occur, except that so long as no
Default or Event of Default shall exist immediately prior to or
after giving effect thereto, the Company may make Restricted
Payments in an aggregate amount not to exceed the sum of
(A) $20,000,000 plus
(B) an amount equal to 50% of cumulative Consolidated
Net Income (but only to the extent positive) accrued
quarterly from the beginning of the Company's fiscal quarter
beginning August 4, 1996 as reduced by the cumulative amount
of Restricted Payments made since August 4, 1996.
6E. Indebtedness. The Company will not, and will not permit
any of its Subsidiaries to create, incur or suffer to exist any
Indebtedness, except:
(i) Indebtedness arising or existing under this
Agreement and the Notes;
<PAGE>
(ii) Indebtedness set forth in Schedule 6E, and
renewals, refinancing and extensions thereof (and which in
the case of the Indebtedness of the Company under the Credit
Agreement shall not have a maturity prior to January 9, 2000
and shall be on terms and conditions consistent with those
prevailing in the bank market at such time);
(iii) Capitalized Lease Obligations and Indebtedness
incurred, in each case, to provide all or a portion of the
purchase price or costs of construction of an asset, provided
that (i) such Indebtedness when incurred shall not exceed the
purchase price or cost of construction of such asset or, in
the case of a sale/leaseback transaction, the fair market
value of such asset, and (ii) no such Indebtedness shall be
refinanced for a principal amount in excess of the principal
balance outstanding thereon at the time of such refinancing;
(iv) Indebtedness and obligations owing under Rate
Hedging Obligations relating to the obligations under the
Credit Agreement and under interest rate, commodities and
foreign currency exchange protection agreements entered into
in the ordinary course of business to manage existing or
anticipated risks;
(v) unsecured intercompany Indebtedness as permitted
under paragraph 6G;
(vi) other unsecured Funded Debt of
(A) the Company to the extent that upon the
incurrence thereof no Default or Event of Default
shall exist immediately prior to or after giving
effect thereto on a Pro Forma Basis; and
(B) Subsidiaries of the Company which in the
aggregate does not exceed (I) $5,000,000 with
respect to that credit facility extended by The
First National Bank of Chicago in favor of Brown
Group Dublin Limited, as amended, modified,
supplemented, extended and replaced, and (II)
$5,000,000, in all other cases;
(vii) commercial letters of credit outside of the
Credit Agreement supporting the importation of goods in the
ordinary course of business not to exceed in the aggregate at
any time outstanding $30,000,000 until September 15, 1997 and
$10,000,000 thereafter; and
<PAGE>
(viii) Guaranty Obligations of Indebtedness permitted
under clauses (i) through (vii) of this paragraph 6E provided
that (a) the beneficiary of any Guaranty Obligation of a
Subsidiary is a party to and bound by the Sharing Agreement
or (b) such Guaranty Obligation is made by a Foreign
Subsidiary and the beneficiary thereof is not a party to and
bound by the Sharing Agreement ("Foreign non-Shared
Obligation"), and the sum of (I) all such Foreign non-Shared
Obligations plus (II) all Indebtedness permitted under
paragraph 6E(iii) plus (III) all Indebtedness of the Company
and its Subsidiaries secured by Liens permitted under
paragraph 6F(vii) shall not at any time exceed an amount
equal to 10% of Consolidated Tangible Net Worth.
6F. Liens. The Company will not and will not permit any
Subsidiary to create, assume or suffer to exist any Lien upon or
with respect to any of its properties or assets, whether now
owned or hereafter acquired, or any income or profits therefrom
(whether or not provision is made for the equal and ratable
securing of the Notes in accordance with the provisions of
paragraph 5D), except
(i) Liens for taxes, assessments or governmental
charges or levies on its Property if the same shall not at
the time be delinquent or thereafter can be paid without
penalty, or are being contested in good faith and by
appropriate proceedings and for which adequate reserves in
accordance with generally accepted principles of accounting
shall have been set aside on its books;
(ii) Liens imposed by law, such as carriers',
warehousemen's and mechanics' liens and other similar liens
arising in the ordinary course of business which secure
payment of obligations not more than 60 days past due or
which are being contested in good faith by appropriate
proceedings and for which adequate reserves shall have been
set aside on its books;
(iii) Liens arising out of pledges or deposits
under worker's compensation laws, unemployment insurance,
old age pensions, or other social security or retirement
benefits, or similar legislation;
<PAGE>
(iv) Utility easements, building restrictions and such
other encumbrances or charges against real property as are
of a nature generally existing with respect to properties of
a similar character and which do not in any material way
affect the marketability of the same or interfere with the
use thereof in the business of the Company or the
Subsidiaries;
(v) Liens granted in connection with sales by Foreign
Subsidiaries, with recourse or with limited recourse, of
accounts receivable in an amount not to exceed $10,000,000
in any year that are otherwise permitted under paragraph 6I;
(vi) Liens on goods shipped under commercial letters of
credit, provided such Liens do not secure in excess of an
aggregate of $80,000,000 face amount of letters of credit at
any time;
(vii) Other statutory Liens or Liens created by
operation of law incidental to the conduct of its business
or the ownership of its property and assets which are not
incurred in connection with the borrowing of money or the
obtaining of advances or credit or guaranteeing the
obligations of a Person (including landlord liens) and
contractual landlord liens in jurisdictions that do not
provide for statutory landlord liens, and which do not in
the aggregate materially detract from the value of its
property or assets or materially impair the use thereof in
the operation of its business; and
(viii) Other Liens securing Indebtedness of the
Company or any Subsidiary provided that the sum of (a) all
Indebtedness permitted under paragraph 6E(iii) plus (b) all
Indebtedness of the Company and such Subsidiaries secured by
such Liens plus (c) all Foreign non-Shared Obligations shall
not at any time exceed an amount equal to 10% of
Consolidated Tangible Net Worth.
6G. Investments and Acquisitions. The Company will not,
nor will it permit any Subsidiary to, make or suffer to exist any
Investments (including without limitation, loans and advances to,
and other Investments in, Subsidiaries), or commitments therefor,
or create any Subsidiary or become or remain a partner in any
partnership or joint venture, or make any Acquisition of any
Person, except:
(i Short-term obligations of, or fully guaranteed by,
the United States of America;
<PAGE>
(ii Commercial paper rated A-l or better by Standard
and Poor's Corporation or P-l or better by Moody's
Investors Service, Inc.;
(iii) Demand deposit accounts maintained in the
ordinary course of business;
(iv) Certificates of deposit issued by and time
deposits (a) with Shanghai Commercial Bank in an aggregate
amount not exceeding $10,000,000 and (b) with commercial
banks (whether domestic or foreign) having capital and
surplus in excess of $100,000,000;
(v) Investments in Domestic Credit Parties (including
the creation of Subsidiaries);
(vi) Investments in existence on January 9, 1997 and
described in Schedule 6G hereto;
(vii) Acquisitions of entities engaged in, or
supporting, substantially the same lines of business as
the Company and its Subsidiaries provided (a) if such
acquisition is of the capital stock or equity interests of
a Person, such Person shall (after giving effect to such
acquisition of capital stock or equity interests) be a
Subsidiary of the purchaser, (b) the Board of Directors of
the company which is the subject of the Acquisition shall
have approved the Acquisition, and (c) no Default or Event
of Default would exist after giving effect to such
Acquisition on a Pro Forma Basis;
(viii) Loans, advances or accounts receivable on
non-customary terms to independent retailers of the
products of the Company or any Subsidiary not in excess of
$15,000,000 in principal amount at any one time outstanding
with no more than an aggregate amount of $5,000,000 in
principal amount at any one time outstanding with any one
retailer;
(ix) promissory notes or deferred payment obligations
received in connection with permitted asset sales;
(x) securities received in connection with the
reorganization of a debtor, and/or any of its subsidiaries;
(xi) Investments by Foreign Subsidiaries in Foreign or
Domestic Subsidiaries (including the creation of
Subsidiaries); and
<PAGE>
(xii) Investments in Persons (including the
creation of Subsidiaries) which are not otherwise permitted
by the terms of this paragraph 6G provided (a) the
aggregate outstanding amount of all such Investments shall
not at any time exceed an amount equal to $30,000,000 minus
the aggregate amount of the then outstanding Investments in
unconsolidated Subsidiaries, and (b) the aggregate amount
of all such Investments which are in different lines of
business than those conducted by the Company and its
Subsidiaries on January 9, 1997 shall not any time exceed
$10,000,000.
6H. Merger. The Company and any Subsidiary may merge into
or consolidate with any of themselves or any other Person, may
dissolve or liquidate into any of themselves or any other Person,
or may sell or transfer any of their assets to any of themselves
or any other Person, provided that (A) if the Company is a party
to a merger or consolidation it shall be the surviving
corporation, (B) if a Credit Party other than the Company is a
party to a merger or consolidation it shall be the surviving
corporation and if a Domestic Credit Party is a party to such a
merger or consolidation it shall be the surviving corporation,
(C) if the Company is a party to a dissolution or liquidation, it
shall receive the assets of the same and may not itself dissolve
or liquidate, (D) if a Credit Party other than the Company is a
party to a dissolution or liquidation it shall receive the assets
of the same, (E) no sale or transfer of any assets of any Credit
Party shall be made to any Person other than to another Credit
Party except as and to the extent allowed under paragraph 6G
below or as may be allowed elsewhere in this Agreement or except
upon good consideration received, and (F) immediately after the
completion of any merger, consolidation, dissolution, liquidation
or sale or transfer of any assets as described above in this
paragraph 6H, no Default or Event of Default shall have occurred
and be continuing on a Pro Forma Basis.
6I. Sale of Assets. The Company will not, nor will it
permit any Subsidiary to, lease, sell or otherwise dispose of its
Property, to any other Person except:
(i) Sales of inventory in the ordinary course of
business.
<PAGE>
(ii) Leases, sales or other dispositions of its
Property that, together with all other Property of the Company
and its Subsidiaries previously leased, sold or disposed of as
permitted by this paragraph 6I during the twelve-month period
ending with the month in which any such lease, sale or other
disposition occurs, do not constitute a Substantial Portion of
the Property of the Company and its Subsidiaries.
6J. Affiliates. The Company will not, and will not permit
any Credit Parties to, enter into any transaction (including,
without limitation, the purchase or sale of any Property or
service) with, or make any payment or transfer to, any Affiliate
except in the ordinary course of business and pursuant to the
reasonable requirements of the Company's or such Credit Party's
business and upon fair and reasonable terms no less favorable to
the Company or such Credit Party than the Company or such Credit
Party would obtain in a comparable arms-length transaction.
6K. Capital Expenditures. The Company will not permit
Capital Expenditures (inclusive of acquisitions otherwise
permitted under the terms of this Agreement) for the Company and
its Subsidiaries as a group during any fiscal year to exceed the
sum of (i) $25,000,000 plus (ii) the unused portion of permitted
Capital Expenditures for the immediately preceding fiscal year
(excluding amounts carried-over from prior years).
6L. Investments and Loans. The Company will not permit any
of its Subsidiaries to lend money or extend credit or make
advances to any Person, or purchase or acquire any stock,
obligations or securities of, or any other interest in, or make
any capital contribution to, or otherwise make an Investment in,
any Person except as permitted pursuant to paragraph 6G.
6M. Fiscal Year. The Company will not change its fiscal
year, nor will it permit any Subsidiary to change its financial
reporting year.
6N. Borrowing Base. The Company will not permit (i) the
aggregate principal amount of the Bank Obligations under the
Credit Agreement to exceed the Borrowing Base or the aggregate
amount of LOC Obligations to exceed the LOC Committed Amount (as
defined in the Credit Agreement) or (ii) the Borrowing Base to be
less than $100,000,000."
<PAGE>
Section 1.03. Paragraph 7A. Acceleration. Paragraph 7A is
amended:
(I) by amending clauses (iv), (v) and (vi) in their entirety
to read as follows:
"(iv) any representation or warranty made by any Credit
Party herein or by any Credit Party or any of its officers in any
writing furnished in connection with or pursuant to this Agreement
shall be false in any material respect on the date as of which
made; or
(v) the Company fails to perform or observe any agreement
contained in paragraph 6 other than clause (ii) of paragraph 6N; or
(vi) any Credit Party fails to perform or observe any
other agreement, term or condition contained herein and such
failure shall not be remedied within 30 days after any Responsible
Officer obtains knowledge thereof; or"
(II) by adding at the end thereof new Events of Default (xv)
through (xviii) to read as follows:
"(xv) any court, government or governmental agency shall
condemn, seize or otherwise appropriate, or take custody or control
of (each a "Condemnation"), all or any portion of the Property of
the Company and its Subsidiaries which, when taken together with
all other Property of the Company and its Subsidiaries so
condemned, seized, appropriated, or taken custody or control of,
during the twelve-month period ending with the month in which any
such Condemnation occurs, constitutes a Substantial Portion; or
(xvi) the Company or any of its Subsidiaries shall be the
subject of any proceeding or investigation pertaining to the
release by the Company or any of its Subsidiaries, or any other
Person of any toxic or hazardous waste or substance into the
environment, or any violation of any federal, state or local
environmental, health or safety law or regulation, which, in
either case, has a substantial likelihood of having a Material
Adverse Effect; or
(xvii) the Company shall fail to pay any Rate Hedging
Obligation with net liability in excess of $100,000 or the
Company shall breach of any term, provision or condition
contained in any agreement, device or arrangement giving rise to
any Rate Hedging Obligation (taking into account any applicable
grace periods and notice provisions); or
<PAGE>
(xviii) except as to a Guarantor which is dissolved,
released or merged out of existence as permitted by the terms of
this Agreement, the guaranty given by any Guarantor hereunder or
any material provision thereof shall cease to be in full force and
effect, or any Guarantor hereunder or any Person acting by or on
behalf of such Guarantor shall deny or disaffirm such Guarantor's
obligations under such guaranty, or any Guarantor shall default in
the due performance or observance of any term, covenant or
agreement on its part to be performed or observed pursuant to any
guaranty;"
(III) by amending clause "(x)" of the proviso in the
remedies paragraph at the end of paragraph 7A that begins with
word "then" to read as follows:
"such event is an Event of Default specified in any of
clauses (i) to (vi), inclusive, or (xv) to (xviii), inclusive, in
this paragraph 7A."
Section 1.04. Paragraph 10B. Other Terms. Paragraph 10 is
amended (I) by deleting the definitions of "Capital Expenditures",
"Capitalized Lease Obligation", "Cash Flow Available for Fixed
Charges", "Consolidated Capitalization", "Consolidated Net
Earnings", "Consolidated Tangible Net Worth", "Current Assets",
"Current Liabilities", "Extraordinary Cash Gains", "Extraordinary
Non-Cash Losses", "Fixed Charges", "Foreign Working Capital",
"Foreign Subsidiary of the Company", "Guarantee", "Indebtedness",
"Interest Expense", "Long-Term Debt", "Non-Recourse Obligations",
"Pre-tax Income", and "Subsidiary", and (II) by adding thereto the
following definitions in alphabetical order:
"'Acquisition' shall mean any transaction, or any series of
related transactions, consummated on or after January 9, 1997 by
which the Company or any of its Subsidiaries (i) acquires any
going concern, business or all or substantially all of the assets
of any firm, corporation or division thereof, or limited liability
company, whether through purchase of assets, merger or otherwise
or (ii) directly or indirectly acquires (in one transaction or as
the most recent transaction in a series of transactions) at least
a majority (in number of votes) of the securities of a corporation
which have ordinary voting power for the election of directors
(other than securities having such power only by reason of the
happening of a contingency) or a majority (by percentage or voting
power) of the outstanding partnership interests of a partnership.
'Additional Credit Party' shall mean each Person that
becomes a Guarantor after January 9, 1997 by execution of a
Joinder Agreement.
<PAGE>
'Attributed Principal Amount' shall mean, on any day, with
respect to any Securitization Transaction entered into by the
Company or any of its Subsidiaries, the aggregate amount (with
respect to any such transaction, the "Invested Amount") paid to,
or borrowed by, such Person as of such date under such
Securitization Transaction, minus the aggregate amount received by
the applicable Receivables Financier and applied to the reduction
of the Invested Amount under such Securitization Transaction.
'Bank Obligations' shall mean, collectively, the Revolving
Loans (as defined in the Credit Agreement) and the LOC Obligations
(as defined in the Credit Agreement).
'Borrowing Base' shall have the meaning specified in the
Credit Agreement.
'Capital Expenditures' shall mean all expenditures which in
accordance with GAAP would be classified as capital expenditures.
'Capitalized Lease' of a Person shall mean any lease of
Property by such Person as lessee which would be capitalized on a
balance sheet of such Person prepared in accordance with GAAP.
'Capitalized Lease Obligations' of a Person shall mean the
amount of the obligations of such Person under Capitalized Leases
which would be shown as a liability on a balance sheet of such
Person prepared in accordance with GAAP.
'Consolidated Adjusted EBITDAR' shall mean for any period
for the Company and its Subsidiaries, the sum of Consolidated
EBITDA plus rent expense, in each case on a consolidated basis
determined in accordance with GAAP applied on a consistent basis.
Except as expressly provided otherwise, the applicable period
shall be for the four consecutive quarters ending as of the date
of determination.
'Consolidated Capitalization' shall mean, at any date of
determination, the sum of (i) Consolidated Net Worth plus (ii)
Consolidated Funded Debt.
'Consolidated EBITDA' shall mean for any period for the
Company and its Subsidiaries, the sum of Consolidated Net Income
plus Consolidated Interest Expense plus all provisions for any
Federal, state or other domestic and foreign income taxes plus
depreciation and amortization, in each case on a consolidated
basis determined in accordance with GAAP applied on a consistent
basis. Except as expressly provided otherwise, the applicable
<PAGE>
period shall be for the four consecutive quarters ending as of the
date of determination.
'Consolidated Fixed Charges' shall mean for any period for
the Company and its Subsidiaries, the sum of Consolidated Interest
Expense plus rent expense, in each case on a consolidated basis
determined in accordance with GAAP applied on a consistent basis.
Except as expressly provided otherwise, the applicable period
shall be for the four consecutive quarters ending as of the date
of determination.
'Consolidated Fixed Charge Coverage Ratio' shall mean the
ratio of Consolidated Adjusted EBITDAR to Consolidated Fixed
Charges.
'Consolidated Funded Debt' shall mean Funded Debt of the
Company and its Subsidiaries determined on a consolidated basis in
accordance with GAAP applied on a consistent basis.
'Consolidated Intangible Assets' shall mean, for the Company
and its Subsidiaries on a consolidated basis, the amount (to the
extent reflected in determining such consolidated stockholders'
equity) of (i) all write-ups (other than write-ups resulting from
foreign currency translations and write-ups of assets of a going
concern business made within twelve months of acquisition)
subsequent to January 9, 1997 in the book value of any asset owned
by the Company or a Subsidiary and (ii) all unamortized debt
discount and expense, unamortized deferred charges (other than
prepaid expenses and net pension assets recognized on the
Company's consolidated balance sheet), goodwill, patents,
trademarks, service marks, trade names, copyrights, organization
or developmental expenses and other items treated as intangibles
under GAAP.
'Consolidated Interest Expense' shall mean for any period
for the Company and its Subsidiaries, all interest expense,
including the amortization of debt discount and premium, the
interest component under Capitalized Leases and the implied
interest component under Securitization Transactions, in each case
on a consolidated basis determined in accordance with GAAP applied
on a consolidated basis. Except as expressly provided otherwise,
the applicable period shall be for the four consecutive quarters
ending as of the date of determination.
'Consolidated Leverage Ratio' shall mean, as of any day, the
ratio of Consolidated Funded Debt to Consolidated Capitalization.
<PAGE>
'Consolidated Net Income' shall mean for any period, the net
income of the Company and its Subsidiaries on a consolidated basis
determined in accordance with GAAP applied on a consistent basis,
but excluding for purposes of determining the Consolidated Fixed
Charge Coverage Ratio, any extraordinary gains or losses, and any
non-recurring non-cash gains and losses, and any taxes on such
excluded gains and losses and any tax deductions or credits on
account of any such excluded gains and losses.
'Consolidated Net Worth' shall mean total stockholders'
equity for the Company and its Subsidiaries on a consolidated
basis as determined in accordance with GAAP applied on a
consistent basis.
'Consolidated Tangible Net Worth' shall mean total
stockholders' equity minus Consolidated Intangible Assets, in each
case for the Company and its Subsidiaries on a consolidated basis
as determined in accordance with GAAP applied on a consistent
basis.
'Credit Agreement' shall mean the $155,000,000 Credit
Agreement dated as of January 9, 1997 among the Company and
certain of its Subsidiaries, as Guarantors, and the lenders named
therein and the Boatmen's National Bank of St. Louis, as Agent,
and First Chicago Capital Markets, Inc., as Syndication Agent, as
amended from time to time.
'Credit Party' shall mean each of the Company and the
Guarantors.
'Domestic Credit Party' shall mean any Credit Party which is
incorporated or organized under the laws of any State of the
United States or the District of Columbia.
'Domestic Subsidiary' shall mean any Subsidiary which is
incorporated or organized under the laws of any State of the
United States or the District of Columbia.
'Equity Transaction' shall mean, with respect to the Company
or any of its Subsidiaries, any issuance of shares of its capital
stock or other equity interest; provided that any Equity
Transaction shall not include any such issuance to the Company or
its Subsidiaries.
'Foreign non-Shared Obligation' shall have the meaning
specified in paragraph 6E(viii).
<PAGE>
'Foreign Subsidiary' shall mean a Subsidiary which is not a
Domestic Subsidiary.
'Funded Debt' shall mean, with respect to any Person,
without duplication, (i) all Indebtedness of such Person for
borrowed money, (ii) all purchase money Indebtedness of such
Person, including without limitation the principal portion of all
obligations of such Person under Capitalized Leases, (iii) all
Guaranty Obligations of such Person with respect to Funded Debt of
another Person, (iv) the maximum available amount of all standby
letters of credit or acceptances issued or created for the account
of such Person, (v) all Funded Debt of another Person secured by a
Lien on any Property of such Person, whether or not such Funded
Debt has been assumed, provided that for purposes hereof the
amount of such Funded Debt shall be limited to the greater of (A)
the amount of such Funded Debt as to which there is recourse to
such Person and (B) the fair market value of the property which is
subject to the Lien, (vi) the outstanding Attributed Principal
Amount under any Securitization Transaction, and (vii) the
principal balance outstanding under any synthetic lease, tax
retention operatng lease, off-balance sheet loan or similar
off-balance sheet financing product to which such Person is a party,
where such transaction is considered borrowed money indebtedness
for tax purposes but is classified as an operating lease in
accordance with GAAP. The Funded Debt of any Person shall include
the Funded Debt of any partnership or joint venture in which such
Person is a general partner or joint venturer, but only to the
extent to which there is recourse to such Person for the payment
of such Funded Debt.
'Governmental Authority' shall mean any Federal, state,
local or foreign court or governmental agency, authority,
instrumentality or regulatory body.
'Guaranteed Obligations' shall mean, as to each Guarantor,
without duplication, (i) all obligations of the Company to the
holders of the Notes, whenever arising, under this Agreement or
the Notes relating to the obligations hereunder including, without
limitation, the principal of, Yield-Maintenance Amount, if any,
and interest on, and any other amounts due under, the Notes, and
(ii) all liabilities and obligations, whenever arising, owing from
the Company to any holder of a Note or any Affiliate of a holder
of a Note, arising under any Hedging Agreement relating to the
Notes.
<PAGE>
'Guarantor' shall mean the Company and each of those other
Persons identified as a "Guarantor" on the signature pages hereto,
and each Additional Credit Party which may hereafter execute a
Joinder Agreement, together with their successors and permitted
assigns.
'Guaranty Obligations' shall mean, with respect to any
Person, without duplication, any obligations of such Person (other
than endorsements in the ordinary course of business of negotiable
instruments for deposit or collection) guaranteeing or intended to
guarantee any Indebtedness of any other Person in any manner,
whether direct or indirect, and including without limitation any
obligation, whether or not contingent, (i) to purchase any such
Indebtedness or any Property constituting security therefor, (ii)
to advance or provide funds or other support for the payment or
purchase of any such Indebtedness or to maintain working capital,
solvency or other balance sheet condition of such other Person
(including without limitation keep well agreements, maintenance
agreements, comfort letters or similar agreements or arrangements)
for the benefit of any holder of Indebtedness of such other
Person, (iii) to lease or purchase Property, securities or
services primarily for the purpose of assuring the holder of such
Indebtedness, or (iv) to otherwise assure or hold harmless the
holder of such Indebtedness against loss in respect thereof. The
amount of any Guaranty Obligation hereunder shall (subject to any
limitations set forth therein) be deemed to be an amount equal to
the outstanding principal amount (or maximum principal amount, if
larger) of the Indebtedness in respect of which such Guaranty
Obligation is made.
'Hedging Agreements' shall mean any interest rate protection
agreement or foreign currency exchange agreement between the
Company and any holder of Notes or any affiliate of a holder.
'Indebtedness' of any Person shall mean (i) all obligations
of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or similar
instruments, or upon which interest payments are customarily made,
(iii) all obligations of such Person under conditional sale or
other title retention agreements relating to Property purchased by
such Person (other than customary reservations or retentions of
title under agreements with suppliers entered into in the ordinary
course of business), (iv) all obligations of such Person issued or
assumed as the deferred purchase price of Property or services
purchased by such Person (other than trade debt incurred in the
ordinary course of business and due within six months of the
incurrence thereof) which would appear as liabilities on a balance
<PAGE>
sheet of such Person, (v) all obligations of such Person under
take-or-pay or similar arrangements or under commodities
agreements, (vi) all Indebtedness of others secured by (or for
which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien on, or payable
out of the proceeds of production from, Property owned or acquired
by such Person, whether or not the obligations secured thereby
have been assumed, provided that for purposes hereof the amount of
such Indebtedness shall be limited to the greater of (A) the
amount of such Indebtedness as to which there is recourse to such
Person and (B) the fair market value of the property which is
subject to the Lien, (vii) all Guaranty Obligations of such
Person, (viii) the principal portion of all obligations of such
Person under Capitalized Leases, (ix) the net liabilities in
respect of Rate Hedging Obligations having a term in excess of one
year from the date of the creation thereof, to the extent that the
aggregate amount of such net liabilities exceeds $5,000,000, (x)
the maximum amount of all standby letters of credit issued or
bankers' acceptances facilities created for the account of such
Person and, without duplication, all drafts drawn thereunder (to
the extent unreimbursed), (xi) all preferred stock issued by such
Person and required by the terms thereof to be redeemed, or for
which mandatory sinking fund payments are due, by a fixed date,
(xii) the outstanding Attributed Principal Amount under any
Securitization Financing and (xiii) the principal balance
outstanding under any synthetic lease, tax retention operating
lease, off-balance sheet loan or similar off-balance sheet
financing product to which such Person is a party, where such
transaction is considered borrowed money indebtedness for tax
purposes but is classified as an operating lease in accordance
with GAAP. The Indebtedness of any Person shall include the
Indebtedness of any partnership or joint venture in which such
Person is a general partner or a joint venturer, but only to the
extent to which there is recourse to such Person for payment of
such Indebtedness.
'Investment' of a Person shall mean any loan, advance (other
than commission, travel and similar advances to officers and
employees made in the ordinary course of business), extension of
credit (other than accounts receivable, notes receivable and
prepaid expenses arising in the ordinary course of business on
terms customary in the trade), deposit account or contribution of
capital by such Person to any other Person or any investment in,
or purchase or other acquisition of, the stock, partnership
interests, joint venture interests, notes, debentures or other
securities of any other Person made by such Person.
<PAGE>
'Joinder Agreement' shall mean a Joinder Agreement
substantially in the form of Exhibit C hereto, executed and
delivered by a Guarantor after January 9, 1997 in accordance with
the provisions of paragraph 5G.
'Material Adverse Effect' shall mean a material adverse
effect on (i) the business, Property, condition (financial or
otherwise), results of operation, or prospects of the company and
its Subsidiaries taken as a whole, (ii) the ability of the Credit
Parties, as a group, to perform their obligations under this
Agreement or the Notes, or (iii) the validity or enforceability of
this Agreement of the Notes or the rights or remedies of the
holders of the Notes.
'Net Proceeds' shall mean gross cash proceeds (including any
cash received by way of deferred payment pursuant to a promissory
note, receivable or otherwise, but only as and when received)
received in connection with an Equity Transaction net of (i)
reasonable transaction costs, including underwriting discounts and
commissions, and (ii) estimated taxes payable in connection
therewith.
'Pro Forma Basis' shall mean, with respect to any
transaction, that such transaction shall be deemed to have
occurred as of the first day of the four fiscal-quarter period
ending as of the most recent fiscal quarter end preceding the date
of such transaction with respect to which the holders of the Notes
have received the officer's certificate in accordance with the
provisions of the penultimate paragraph of paragraph 5A. As used
herein, "Transaction" shall mean (i) the incurrence of Funded Debt
in accordance with the provisions of paragraph 6E(vi), and (ii)
any corporate merger or consolidation as referred to in paragraph
6H and any Acquisition referred to in paragraph 6G.
'Property' of a Person shall mean any and all property,
whether real, personal, tangible, intangible, or mixed, of such
Person, or other assets owned, leased or operated by such Person.
'Receivables' shall mean any right of payment from or on
behalf of any obligor, whether constituting an account, chattel
paper, instrument, general intangible or otherwise, arising from
the sale by the Company or any of its Subsidiaries of merchandise
or services, and monies due thereunder, security in the
merchandise and services financed thereby, records related
thereto, and the right to payment of any interest or finance
charges and other obligations with respect thereto, proceeds from
claims on insurance policies related thereto, any other proceeds
related thereto, and any other related rights.
<PAGE>
'Receivables Financier' shall mean, in connection with a
Securitization Transaction, the Person which provides financing
for such transaction whether by purchase, loan or otherwise in
respect of Receivables.
'Restricted Payment' shall mean (i) any dividend or other
distribution, direct or indirect, on account of any shares of any
class of stock now or hereafter outstanding, except (A) a dividend
payable solely in shares of that class to the holders of that
class and (B) dividends and other distributions payable to a
Credit Party, (ii) any redemption, retirement, sinking fund or
similar payment, purchase or other acquisition for value, direct
or indirect, of any shares of any class of stock now or hereafter
outstanding, and (iii) any payment made to retire, or to obtain
the surrender of, any outstanding warrants, options or other
rights to acquire shares of any class of stock now or hereafter
outstanding.
'Securitization Transaction' shall mean any financing
transaction or series of financing transactions that have been or
may be entered into by the Company or any of its Subsidiaries
pursuant to which the Company or any such Subsidiary may sell,
convey or otherwise transfer to (i) a Subsidiary or affiliate, or
(ii) any other Person, or may grant a security interest in, any
Receivables or interests therein secured by merchandise or
services financed thereby (whether such Receivables are then
existing or arising in the future) of the Company or any such
Subsidiary, and any assets related thereto, including without
limitation, all security interests in merchandise or services
financed thereby, the proceeds of such Receivables, and other
assets which are customarily sold or in respect of which security
interests are customarily granted in connection with
securitization transactions involving such assets.
'Sharing Agreement' shall mean the Sharing Agreement in the
form attached hereto as Exhibit D.
'Subsidiary' of a Person shall mean (i) any corporation more
than 50% of the outstanding securities having ordinary voting
power of which shall at the time be owned or controlled, directly
of indirectly, by such Person or by one or more of its
Subsidiaries or by such Person and one or more of its
Subsidiaries, (ii) any partnership, association, joint venture or
similar business organization more than 50% of the ownership
interests having ordinary voting power of which shall at the time
be so owned or controlled, or (iii) any other entity the accounts
of which would be consolidated with those of such person in such
<PAGE>
Person's consolidated financial statements. Unless otherwise
expressly provided, all references herein to a "Subsidiary" shall
mean a Subsidiary of the Company.
'Substantial Portion' shall mean, with respect to the
Property of the Company and its Subsidiaries, Property which (i)
in any fiscal year represents more than 10% of the consolidated
assets of the Company and its Subsidiaries as of the date of the
most recent annual financial statements delivered in accordance
with paragraph 5A(ii) is responsible for more than (a) 10%, of the
consolidated net sales or (b) 10% of the consolidated net income
of the Company and its Subsidiaries, in each case as reflected in
the financial statements referred to in clause (i) above.
Section 1.05. Paragraph 10C. Accounting Principles, Terms
and Determinations. paragraph 10C is amended by amending the
first sentence thereof in full to read as follows:
"All references in this Agreement to "generally accepted
accounting principles" or "GAAP" shall be deemed referred to
generally accepted accounting principles in effect in the United
States at the time of application thereof."
Section 1.06. Paragraph 12. Guaranty. The Agreement is
hereby amended by adding a new paragraph 12 immediately following
paragraph 11 which will read as follows:
"12. GUARANTY
12A. The Guaranty. Each of the Guarantors hereby jointly
and severally, irrevocably and unconditionally, guarantees to each
holder of the Notes, to each affiliate of a holder of the Notes
that enters into a Hedging Agreement the prompt payment of the
Guaranteed Obligations in full when due (whether at stated
maturity, as a mandatory prepayment, by acceleration or otherwise)
strictly in accordance with the terms thereof. The Guarantors
hereby further agree that if any of the Guaranteed Obligations are
not paid in full when due (whether at stated maturity, as a
mandatory prepayment, by acceleration or otherwise), the
Guarantors will, jointly and severally, promptly pay the same,
without any demand or notice whatsoever, and that in the case of
any extension of time of payment or renewal of any of the
Guaranteed Obligations, the same will be promptly paid in full
when due (whether at extended maturity, as a mandatory prepayment,
by acceleration or otherwise) in accordance with the terms of such
extension or renewal.
<PAGE>
Notwithstanding any provision to the contrary contained
herein or in any Notes or Hedging Agreement, to the extent the
obligations of a Guarantor shall be adjudicated to be invalid or
unenforceable for any reason (including, without limitation,
because of any applicable state or federal law relating to
fraudulent conveyances or transfers) then the obligations of each
Guarantor hereunder shall be limited to the maximum amount that is
permissible under applicable law (whether federal or state and
including, without limitation, the Bankruptcy Law). This Guaranty
is a guaranty of payment and not of collection.
12B. Obligations Unconditional. The obligations of the
Guarantors under paragraph 12B hereof are joint and several,
absolute and unconditional, irrespective of the value,
genuineness, validity, regularity or enforceability of this
Agreement or the Notes, the Hedging Agreements, or any other
agreement or instrument referred to herein or therein, or any
substitution, release or exchange of any other guarantee of or
security for any of the Guaranteed Obligations, and, to the
fullest extent permitted by applicable law, irrespective of any
other circumstance whatsoever which might otherwise constitute a
legal or equitable discharge or defense of a surety or guarantor,
it being the intent of this paragraph 12B that the obligations of
the Guarantors hereunder shall be absolute and unconditional under
any and all circumstances. Each Guarantor agrees that such
Guarantor shall have no right of subrogation, indemnity,
reimbursement or contribution against the Company or any other
Guarantor of the Guaranteed Obligations for amounts paid under
this Guaranty until such time as the holder of the Notes (and any
affiliates of holders of the Notes entering into Hedging
Agreements) have been paid in full, and no Person or Governmental
Authority shall have any right to request any return or
reimbursement of funds from the holders of the Notes in connection
with monies received under the this Agreement or the Notes or
Hedging Agreements. Without limiting the generality of the
foregoing, it is agreed that, to the fullest extent permitted by
law, the occurrence of any one or more of the following shall not
alter or impair the liability of any Guarantor hereunder which
shall remain absolute and unconditional as described above:
(i) at any time or from time to time, without notice to
any Guarantor, the time for any performance of or compliance
with any of the Guaranteed Obligations shall be extended, or
such performance or compliance shall be waived;
<PAGE>
(ii) any of the acts mentioned in any of the provisions
of this Agreement or the Notes, any Hedging Agreement or any
other agreement or instrument referred to in the this
Agreement or the Notes or Hedging Agreements shall be done
or omitted;
(iii) the maturity of any of the Guaranteed Obligations
shall be accelerated, or any of the Guaranteed Obligations
shall be modified, supplemented or amended in any respect,
or any right under any of this Agreement or the Notes, any
Hedging Agreement or any other agreement or instrument
referred to in this Agreement or the Notes or Hedging
Agreements shall be waived or any other guarantee of any of
the Guaranteed Obligations or any security therefor shall be
released or exchanged in whole or in part or otherwise dealt
with;
(iv) any Lien granted to, or in favor of, any holder of
the Notes or any affiliate thereof, as security for any of
the Guaranteed Obligations shall fail to attach or be
perfected; or
(v) any of the Guaranteed Obligations shall be
determined to be void or voidable (including, without
limitation, for the benefit of any creditor of any
Guarantor) or shall be subordinated to the claims of any
Person (including, without limitation, any creditor of any
Guarantor).
With respect to its obligations hereunder, each Guarantor hereby
expressly waives acceptance of this guaranty, diligence,
presentment, demand of payment, protest and all notices
whatsoever, and any requirement that any holder of Notes exhaust
any right, power or remedy or proceed against any Person under
any of this Agreement or the Notes, any Hedging Agreement or any
other agreement or instrument referred to in this Agreement or
the Notes or Hedging Agreements, or against any other Person
under any other guarantee of, or security for, any of the
Guaranteed Obligations.
12C. Reinstatement. The obligations of the Guarantors under
this paragraph 12 shall be automatically reinstated if and to the
extent that for any reason any payment by or on behalf of any
Person in respect of the Guaranteed Obligations is rescinded or
must be otherwise restored by any holder of any of the Guaranteed
Obligations, whether as a result of any proceedings in bankruptcy
or reorganization or otherwise, and each Guarantor agrees that it
<PAGE>
will indemnify each holder of the Notes on demand for all
reasonable costs and expenses (including, without limitation,
fees and expenses of counsel) incurred by such holder in
connection with such rescission or restoration, including any
such costs and expenses incurred in defending against any claim
alleging that such payment constituted a preference, fraudulent
transfer or similar payment under any bankruptcy, insolvency or
similar law.
12D. Remedies. The Guarantors agree that, to the fullest
extent permitted by law, as between the Guarantors, on the one
hand, and the holders of the Notes, on the other hand, the
Guaranteed Obligations may be declared to be forthwith due and
payable as provided in paragraph 7A hereof (and shall be deemed
to have become automatically due and payable in the circumstances
provided in said paragraph 7A) for purposes of paragraph 12A
hereof notwithstanding any stay, injunction or other prohibition
preventing such declaration (or preventing the Guaranteed
Obligations from becoming automatically due and payable) as
against any other Person and that, in the event of such
declaration (or the Guaranteed Obligations being deemed to have
become automatically due and payable), the Guaranteed Obligations
(whether or not due and payable by any other Person) shall
forthwith become due and payable by the Guarantors for purposes
of said paragraph 12A.
12E. Rights of Contribution. The Guarantors hereby agree, as
among themselves, that if any Guarantor shall become an Excess
Funding Guarantor (as defined below), each other Guarantor shall,
on demand of such Excess Funding Guarantor (but subject to the
succeeding provisions of this paragraph 12E), pay to such Excess
Funding Guarantor an amount equal to such Guarantor's Pro Rata
Share (as defined below and determined, for this purpose, without
reference to the properties, assets, liabilities and debts of
such Excess Funding Guarantor) of such Excess Payment (as defined
below). The payment obligation of any Guarantor to any Excess
Funding Guarantor under this paragraph 12E shall be subordinate
and subject in right of payment to the prior payment in full of
the obligations of such Guarantor under the other provisions of
this paragraph 12, and such Excess Funding Guarantor shall not
exercise any right or remedy with respect to such excess until
payment and satisfaction in full of all of such obligations. For
purposes hereof, (i) "Excess Funding Guarantor" shall mean, in
respect of any obligations arising under the other provisions of
this paragraph 12 (hereafter, the "Guarantied Obligations"), a
Guarantor that has paid an amount in excess of its Pro Rata Share
of the Guarantied Obligations; (ii) "Excess Payment" shall mean,
<PAGE>
in respect of any Guarantied Obligations, the amount paid by an
Excess Funding Guarantor in excess of its Pro Rata Share of such
Guarantied Obligations; and (iii) "Pro Rata Share", for the
purposes of this paragraph 12E, shall mean, for any Guarantor,
the ratio (expressed as a percentage) of (a) the amount by which
the aggregate present fair saleable value of all of its assets
and properties exceeds the amount of all debts and liabilities of
such Guarantor (including contingent, subordinated, unmatured,
and unliquidated liabilities, but excluding the obligations of
such Guarantor hereunder) to (b) the amount by which the
aggregate present fair saleable value of all assets and other
properties of the Company and all of the Guarantors exceeds the
amount of all of the debts and liabilities (including contingent,
subordinated, unmatured, and unliquidated liabilities, but
excluding the obligations of the Company and the Guarantors
hereunder) of the Company and all of the Guarantors, all as of
January 9, 1997 (if any Guarantor becomes a party hereto
subsequent to January 9, 1997, then for the purposes of this
paragraph 12E such subsequent Guarantor shall be deemed to have
been a Guarantor as of January 9, 1997 and the information
pertaining to, and only pertaining to, such Guarantor as of the
date such Guarantor became a Guarantor shall be deemed true as of
January 9, 1997).
12F. Continuing Guarantee. The guarantee in this paragraph
12 is a continuing guarantee, and shall apply to all Guaranteed
Obligations whenever arising.
12G. Representations and Warranties of the Guarantors. Each
Guarantor represents and warrants as follows:
(a) Incorporation, Good Standing and Location. Each
Guarantor is (i) a corporation duly incorporated, validly
existing and in good standing under the laws of its state of
incorporation, (ii) duly qualified and authorized to do business
and in good standing in every other jurisdiction where the nature
of its business requires such qualification and (iii) has all
requisite corporate power and authority, and all governmental
licenses and permits, to own and operate its properties and to
carry on its business as presently conducted. Each Guarantor has
the requisite corporate power to enter into and perform its
obligations under the guaranty in this paragraph 12.
<PAGE>
(b) Approval and Enforceability of Guaranty. The execution,
delivery and performance of this guaranty have been duly
authorized by all necessary corporate action on the part of each
Guarantor. This guaranty has been duly and validly executed and
delivered and constitutes the legal, valid and binding obligation
of each Guarantor, enforceable against it in accordance with its
terms, subject to applicable bankruptcy, insolvency, moratorium,
reorganization, receivership and similar laws affecting the
rights and remedies of creditors generally.
Section 1.07. Exhibits. The Joinder Agreement in the form
of Exhibit C hereto shall be added to the Agreement as Exhibit C.
The Sharing Agreement in the form of Exhibit D hereto shall be
added to the Agreement as Exhibit D.
Section 2. Conditions to Effectiveness. This Amendment
shall become effective, when and only when,
(a) each of the holder of the Notes shall have received
counterparts of this Amendment which shall have been executed by
the Company, each Guarantor, and each of the holder of the Notes;
(b) each of the holders of the Notes shall have received
certified copies of the resolutions of the Board of Directors of
each Guarantor approving the Agreement, as amended by this
Amendment, and the matters contemplated hereby; and
(c) the Company shall have paid to you by wire transfer
immediately available funds an amendment fee of $300,000 to be
wired to the following account:
The Bank of New York
New York, New York
ABA # 021-000-018
For the Account of The Prudential
Insurance Company of America
Account # 890-0304-391
Section 3. Representations and Warranties. Each Credit
Party hereby represents and warrants that the representations and
warranties contained in paragraph 8 of the Agreement are true and
correct on the date hereof as of made on such date, except that
the references to "this Agreement" shall mean the Agreement as
amended by this Amendment.
Section 4. Miscellaneous.
<PAGE>
4.01. Effect of Amendment. On and after the effective date
of this Amendment, each reference in the Agreement to "this
Agreement", "hereunder", "hereof", or words of like import
referring to the Agreement, and each reference in the Notes to
"the Agreement", "thereunder", "thereof", or words of like import
referring to the Agreement, shall mean the Agreement as amended
by this Amendment. The Agreement, as amended by this Amendment,
is and shall continue to be in full force and effect and is
hereby in all respects ratified and confirmed. The execution,
delivery and effectiveness of this Amendment shall not, except as
expressly provided herein, operate as a waiver of any right,
power or remedy under the Agreement nor constitute a waiver of
any provision of the Agreement.
4.02. Counterparts. This Amendment may be executed in any
number of counterparts and by any combination of the parties
hereto in separate counterparts, each of which counterparts shall
be an original and all of which taken together shall constitute
one and the same Amendment.
<PAGE>
If you agree to the terms and provisions hereof, please
evidence your agreement by executing and returning at least a
counterpart of this Amendment to the Company at its address at
8300 Maryland Ave., St. Louis, Missouri 63105, Attention:
Treasurer.
Very truly yours,
BROWN GROUP, INC.
By /s/ Andrew M. Rosen
Title: Vice President & Treasurer
GUARANTORS
BROWN GROUP INTERNATIONAL, INC.
BROWN GROUP RETAIL, INC.
PAGODA TRADING COMPANY, INC.
SIDNEY RICH ASSOCIATES, INC.
By: /s/ Andrew M. Rosen
Title: Vice President & Treasuer
Agreed as of the date
first above written:
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By:________________________________
Vice President
PRUCO LIFE INSURANCE COMPANY
By:________________________________
Vice President
<PAGE>
EXHIBIT C
Form of Joinder Agreement
THIS JOINDER AGREEMENT (the "Joinder Agreement"), dated as
of _____________, 19__, is by and between
_______________________, a____________________ (the "Applicant
Guarantor"), and _____________________, the holders of the Notes
issued pursuant to the Note Agreement dated as of October 24,
1995 (as amended and modified, the "Agreement") by and among
BROWN GROUP, INC., the Guarantors and The Prudential Insurance
Company of America and Pruco Life Insurance Company. All of the
defined terms in the Agreement are incorporated herein by
reference.
The Applicant Guarantor has indicated its desire to become a
Guarantor or is required by the terms of paragraph 5G of the
Agreement to become a Guarantor under the Agreement.
Accordingly, the Applicant Guarantor hereby agrees as
follows with the holders of the Notes, for the benefit of such
holders:
1. The Applicant Guarantor hereby acknowledges, agrees and
confirms that, by its execution of this Joinder Agreement, the
Applicant Guarantor will be deemed to be a party to the Agreement
and a "Guarantor" for all purposes of the Agreement and the
Notes, and shall have all of the obligations of a Guarantor
thereunder as if it had executed the Agreement. The Applicant
Guarantor agrees to be bound by, all of the terms, provisions and
conditions contained in the Agreement and the Sharing Agreement,
including without limitation (i) all of the affirmative and
negative covenants set forth in paragraphs 5 and 6 of the
Agreement and (ii) all of the undertakings and waivers set forth
in paragraph 12 of the Agreement. Without limiting the
generality of the foregoing terms of this paragraph 1, the
Applicant Guarantor hereby (A) jointly and severally together
with the other Guarantors, guarantees to each holder of Notes as
provided in paragraph 12 of the Agreement, the prompt payment and
performance of the Guaranteed Obligations in full when due
(whether at stated maturity, as a mandatory prepayment, by
acceleration, as a mandatory cash collateralization or otherwise)
strictly in accordance with the terms thereof. and (B) agrees
that if any of the Guaranteed Obligations are not paid or
performed in full when due (whether at stated maturity, as a
mandatory prepayment, by acceleration, as a mandatory cash
collateralization or otherwise), the Applicant Guarantor will,
<PAGE>
jointly and severally together with the other Guarantors,
promptly pay and perform the same, without any demand or notice
whatsoever, and that in the case of any extension of time of
payment or renewal of any of the Guaranteed Obligations, the same
will be promptly paid in full when due (whether at extended
maturity, as a mandatory prepayment, by acceleration or
otherwise) in accordance with the terms of such extension or
renewal.
2. The Applicant Guarantor acknowledges and confirms that
it has received a copy of the Agreement and the Schedules and
Exhibits thereto. The information on the Schedules to the
Agreement are amended to provide the information shown on the
attached Schedule A.
3. The Applicant Guarantor hereby waives acceptance by the
holders of the Notes of the guaranty by the Applicant Guarantor
under paragraph 12 of the Agreement upon the execution of this
Joinder Agreement by the Applicant Guarantor.
4. This Joinder Agreement may be executed in two or more
counterparts, each of which shall constitute an original but all
of which when taken together shall constitute one contract.
5. This Joinder Agreement shall be governed by and
construed and interpreted in accordance with the laws of the
State of New York.
<PAGE>
IN WITNESS WHEREOF, the Applicant Guarantor has caused this
Joinder Agreement to be duly executed by its Responsible
Officers, and each holder has caused the same to be accepted by
its officers, as of the day and year first above written.
[APPLICANT GUARANTOR]
By:
Name:
Title
Address for Notices:
Attn: ________________________
Telephone:
Telecopy:
Acknowledged and accepted:
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
By:______________________________
Vice President
PRUCO LIFE INSURANCE COMPANY
By:______________________________
Vice President
<PAGE>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
BROWN GROUP, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Thousands, except per share)
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
PRIMARY
Weighted average shares outstanding 17,672 17,591 17,555
Net effect of dilutive stock options
based on treasury stock method
using average market price 27 7 84
-------- -------- --------
TOTAL 17,699 17,598 17,639
======== ======== ========
Earnings from continuing operations $ 20,315 $ 697 $ 33,566
Discontinued operations - 2,600 5,832
-------- -------- --------
Net earnings $ 20,315 $ 3,297 $ 39,398
======== ======== ========
Earnings per share from continuing
operations $ 1.15 $ 0.04 $ 1.91
Discontinued operations - 0.15 0.33
-------- -------- --------
Net earnings per share (1) $ 1.15 $ 0.19 $ 2.24
======== ======== ========
FULLY DILUTED
Weighted average shares outstanding 17,672 17,591 17,555
Net effect of dilutive stock options
based on treasury stock method
using year-end market price, if
higher than average market price 53 46 98
-------- -------- --------
TOTAL 17,725 17,637 17,653
======== ======== ========
Earnings from continuing operations $ 20,315 $ 697 $ 33,566
Discontinued operations - 2,600 5,832
-------- -------- --------
Net earnings $ 20,315 $ 3,297 $ 39,398
======== ======== ========
Earnings per share from continuing
operations $ 1.15 $ 0.04 $ 1.91
Discontinued operations - 0.15 0.33
-------- -------- --------
Net earnings per share (1) $ 1.15 $ 0.19 $ 2.24
======== ======== ========
(1) The dilutive effect of stock options was not included
in weighted average shares outstanding for purposes of
calculating earnings per share because dilution was less
than 3% and not material.
</TABLE>
<PAGE>
Brown Group, Inc.
1996 Annual Report
A LEADING FOOTWEAR COMPANY WITH WORLDWIDE OPERATIONS
CONTENTS
- --------
1
Corporate Overview
2
Letter to Shareholders
6
Famous Footwear
8
Brown Shoe Company
12
Canadian Operations
13
Financial Statements
40
Directors, Officers and Operating Committee
41
Investor Information
- ------------------
CORPORATE OVERVIEW
- ------------------
The Company: Brown Group, Inc. is a leading footwear company with
worldwide operations. Through both retail and wholesale businesses, Brown
Group markets a diverse range of high-value footwear for women, men and
children. During 1996, the Company achieved better execution at all levels,
improved expense leverage, and developed strong, targeted marketing
programs.
Famous Footwear: Famous Footwear is the largest chain of branded family
shoe stores in the United States, with 794 stores in 45 states. These
stores feature brand name shoes for less, including athletic, dress and
casual shoes for women, men and children.
Brown Shoe Company: Brown Group's footwear brands are sold through Brown
Shoe Company and its Branded Marketing, Pagoda and Naturalizer Retail
divisions. In 1996, 78 million pairs of shoes were sourced by the Company
through a flexible structure of offices all over the world. This worldwide
sourcing structure, combined with a dynamic marketing organization, makes
Brown Shoe Company a market leader in the footwear industry.
Canadian Operations: In Canada, Brown Group's Wholesale division markets
brand name footwear for women, men and children. The Company's Canadian
Retail division operates 100 Naturalizer specialty stores and 16 F. X.
LaSalle better-grade shoe stores in Canada.
- --------------------------------
PIE CHART
$1.525 Billion Sales
Fiscal Year 1996
51% Famous Footwear
44% Brown Shoe Company
11% Branded Marketing division
24% Pagoda division
9% Naturalizer Retail division
5% Canadian Operations
3% Canadian Retail division
2% Canadian Wholesale division
- --------------------------------
- --------------------
FINANCIAL HIGHLIGHTS
- --------------------
<TABLE>
<CAPTION>
In thousands, except per share data and percentages
For the Fiscal Years Ended February 1, 1997, February 3, 1996 and January
28, 1995
1996 1995 1994
---------- ---------- ----------
(52 Weeks) (53 Weeks) (52 Weeks)
<S> <C> <C> <C>
Operating Results
Net sales $1,525,052 $1,455,896 $1,461,637
Gross profit 566,764 506,971 512,263
Net earnings 20,315 3,297 39,398
Per Share of Common Stock
Net earnings 1.15 .19 2.24
Dividends 1.00 1.30 1.60
Shareholders' equity 13.19 12.92 13.90
Financial Position
Total assets 722,375 661,056 636,515
Working capital 301,020 209,399 259,178
Shareholders' equity 237,037 231,636 249,727
Return on beginning shareholders' equity 8.8% 0.3% 14.4%
Current ratio 2.1:1 1.7:1 2.2:1
</TABLE>
- -------------------
TO OUR SHAREHOLDERS
- -------------------
1996 was a year in which Brown Group made good progress recovering from
severely depressed results the prior year. Net earnings were $20.3 million
or $1.15 per share, sales increased 5 percent to $1.525 billion, and the
price of the Company's stock began the recovery to which management is
committed, as total return to shareholders was 32 percent. This performance
reflects the value of more than a decade of structural change completed in
1995, which concentrated the Company in strengthening segments of the shoe
business; operating improvements were made in most major parts of the
Company.
Priorities which guide our plans and progress: In last year's Annual Report
to Shareholders, I summarized the four priorities that have guided
management and the Board of Directors as the Company has been strategically
repositioned, and as steps to strengthen operations have been taken. During
1996, and as we move into 1997, those priorities have continued to guide
Brown Group's plans and progress:
* TO DEVELOP AND INVEST IN OUR SUCCESSFUL GROWTH BUSINESSES, RECOGNIZING
THAT THIS IS THE BEST PROVEN WAY TO BUILD LONG-TERM VALUE FOR SHAREHOLDERS.
We continued to pursue this priority in 1996, but more cautiously than in
prior years. Specifically, after a period of substantial investment in and
growth of the Famous Footwear chain, a strategic slow-down in expansion in
the latter part of 1995 and in 1996 was necessary to allow management to
achieve better execution and cost control.
In 1996 Famous Footwear began to absorb the costs of the 1994-95 rapid
expansion, which included 320 new stores, extensive systems augmentation,
and the addition of a second distribution center. This improved execution
in 1996 led to a 44 percent increase in operating earnings to $25 million
on an 8 percent sales increase to $781 million. Most 1996 measures of
operating performance at Famous Footwear confirm this improvement: total
sales dollars per transaction were increased to $42.13 from $40.92;
expenses as a percent of sales were reduced by .9 percent and a same-store
sales increase of 1.3 percent was accomplished.
During 1996, the Company also increased the strategic investment in brand
development and marketing at Brown Shoe Company's wholesale operations --
which include the Branded Marketing and Pagoda divisions. Marketing
expenditures at the Branded Marketing division were increased by 11 percent
to $16 million in 1996; 1997 plans call for that investment to increase to
$21 million. Examples of the advertisements and marketing materials for the
Company's wholesale brands are pictured on the cover and on the following
pages of this Annual Report.
- ---------------------------------------------------------------------------
"During the year, Brown Shoe Company's wholesale operations achieved
continuing confirmation of a critical turn-around. After the closing of the
Company's remaining five shoe factories in 1995, the shift to all import
sourcing was well-managed."
- ---------------------------------------------------------------------------
At Brown Shoe Company's Branded Marketing division, the return to national
advertising and targeted marketing programs combined with higher margins
and a lower cost base resulting from the shift to all-import sourcing, and
a strategic increase in inventories to support better customer service,
contributed importantly to the improved results. The combined wholesale
operations reported operating earnings of $27 million compared to a slight
loss from operations last year, and sales of $541 million were 2 percent
higher.
- ---------------------------------------------------------------------------
Brown Group Chairman B. A. Bridgewater, Jr. (center) with Thomas A.
Williams, Corporate Vice President and President -- Brown Shoe Company
(left) and Harry E. Rich, Executive Vice President and Chief Financial
Officer in front of the remodeled Naturalizer store at the Galleria in St.
Louis, Missouri.
- ---------------------------------------------------------------------------
* TO MANAGE CHANGING OPERATIONS WITH INTENSITY, EITHER TO "TURN THEM
AROUND" OR TO WITHDRAW INVESTMENT FROM THEM. This was our highest priority
in 1996, and one that was pursued aggressively. During the year, Brown Shoe
Company's wholesale operations achieved continuing confirmation of a
critical turnaround. After the closing of the Company's remaining five shoe
factories in 1995, the shift to all-import sourcing was well-managed.
Results confirm that the Company is now better able to supply customers
with intrinsically more valuable branded footwear, at lower cost, through
its well-established sourcing operations in Brazil, China and Italy.
At Pagoda International, however, after five years of expansion and
investment, lower than anticipated results late in the year were reported
and an operating loss was incurred. In 1997, a tightening and consolidation
of operations of this global marketing business should lead to improved
results. We are committed to managing this business with intensity, and to
reestablishing a solid and profitable operating base upon which we can
grow.
* TO PROTECT THE BALANCE SHEET AND THE COMPANY'S ABILITY TO FINANCE OUR
BUSINESSES, MAINTAINING DEBT AT PRUDENT LEVELS. A capital structure for the
future was put in place in 1996. During the fourth quarter, Brown Group
completed the sale of $100 million of 91/2 percent senior notes due in 10
years and the negotiation of a new three-year term $155 million revolving
bank Credit Agreement, providing for committed working capital and letter
of credit financing. In addition, in January 1997, Brown Group completed
the modification of an existing $50 million note agreement to establish
terms consistent with the Company's other debt arrangements. Within this
structure, however, net debt increased in 1996 to 48 percent of total
capital at year-end, and we plan in 1997 to achieve positive cash flow and
to reduce net borrowings. With these moves, the Company's balance sheet is
well-positioned to support continued investment in operations.
* TO RETURN CAPITAL TO THE SHAREHOLDERS THROUGH DIVIDENDS, RECOGNIZING THAT
THIS SUPPORTS SHAREHOLDERS' TOTAL RETURN IMPORTANTLY. Brown Group's
dividend has contributed importantly to shareholder returns over the years,
as the Company has closed or sold obsolescent manufacturing and retailing
operations, and returned available capital to the shareholders. In
September 1995, as restructuring was concluded with the last plant
closings, the dividend was reduced from $.40 to $.25 per share, and that
rate was maintained in 1996. The April 1, 1997 dividend payment of $.25 per
share marked the 297th consecutive quarterly dividend paid by the Company.
In this letter last year, I emphasized that building shareholder value is
management's primary objective, and our obligation. At fiscal year-end, the
price of Brown Group shares was $16.50, up from $13.25 at the end of fiscal
year 1995. The total return to shareholders in 1996 from investment in our
stock was 32 percent. Although the total return to shareholders improved in
1996, we remain committed to increasing the Company's earnings and to
continuing to improve Brown Group's total return substantially from the
still-depressed 1996 level.
Building brands and businesses: After the extended period of restructuring,
Brown Group's organization and operations now comprise three related shoe
businesses -- Famous Footwear, Brown Shoe Company and Canadian Operations
- -- all with good prospects. We will continue to build our brands and
businesses, taking advantage of our leading retail position and the
competitive advantage provided by our worldwide sourcing capabilities,
marketing strengths, and well-recognized brand names.
Famous Footwear -- strengthened execution: At Famous Footwear, we are
confident of continued progress in 1997. Strengthened execution of the
operations of this business, conservative planned growth, and the maturing
of the stores opened in prior years will all contribute to improved
results. Although higher markdown costs sharply depressed fourth quarter
1996 results, the sell-through of this merchandise left Famous Footwear's
inventory clean and well-positioned to support the stronger and more
profitable sales growth which is planned for 1997. During 1996, a net of 20
new Famous Footwear stores was added while 40 Naturalizer Outlet stores
were transferred to the Naturalizer Retail division at the beginning of the
year. There were 794 stores in operation at fiscal year-end, with a net of
25 new stores planned for 1997.
Brown Shoe Company -- encouraging progress: The progress made throughout
the Brown Shoe Company in 1996 was very encouraging. In the Branded
Marketing division, sales of the NaturalSport brand of casual shoes
increased nearly 50 percent, led by the success of the Roma clog and
related styles. The Life Stride brand also had an excellent year in 1996,
with an 18 percent sales gain. After several years of declines, sales of
the Naturalizer brand leveled out in 1996, as greater emphasis on style,
and higher price points were well-accepted. A new Naturalizer advertising
campaign this spring, combined with a further shift to casual and tailored
merchandise, will be important to Naturalizer's success in 1997. In
addition, early testing of the brand's new Energyheel comfort technology
has produced good results and the brand will benefit from the promotion of
this new category. Orders for the Original Dr. Scholl's Exercise Sandal and
new brand extensions have been exceptionally strong, as the early retail
sell-through in better-grade department stores has far exceeded planned
levels.
At Brown Shoe Company's Pagoda division, higher domestic sales of branded
and licensed product resulted in operating earnings that were almost double
those of 1995, despite a sharp decline at Pagoda International. Higher
sales were led by footwear featuring Disney movie and cartoon characters.
During 1996, Pagoda signed a license for the design and sale of footwear
featuring characters from the recently released Star Wars trilogy, which
will contribute to 1997 results, as will the continued growth of the Connie
and Buster Brown brands with mid-tier retailers.
The Naturalizer Retail division's results declined during 1996. After solid
same-store sales gains through the first three quarters, holiday business
at the Naturalizer stores weakened, as a lack of clearance merchandise led
to a same-store sales decline in the fourth quarter. Overall for the year,
sales of $130 million were 3 percent below last year's sales. Same-store
sales for the year were down 1.2 percent, and an operating loss was again
recorded. At fiscal year-end, there were 346 stores in operation, including
the 40 Naturalizer Outlet stores transferred at the beginning of the year
from Famous Footwear. Improvements in the Naturalizer brand positioning,
increased marketing, and a store remodeling program, should all contribute
to better 1997 performance in this business.
Canadian Operations -- steady performance: The Company's Canadian
Operations continued their steady performance in 1996, with a 6 percent
increase in operating earnings to $7 million. Sales for the combined
wholesale and retail divisions were up 6 percent to $73 million. These
results were led by the retail operations, which reported a same-store
sales increase of 7.3 percent for the year.
Management changes and organization building: Brown Group now has a solid
base of businesses and management in place to build on the progress we made
in 1996, and several changes in Senior Management and the Board of
Directors will provide the experienced leadership necessary to achieve
continued progress. William A. Dandy recently joined Famous Footwear as
Senior Vice President -- Marketing; at Naturalizer Retail, Jeffrey A. Neely
was named Senior Vice President and General Manager; David H. Schwartz was
promoted to President -- Pagoda Trading and Charles C. Gillman was promoted
to Senior Vice President and Director -- Far East Operations for the
sourcing division.
Morton I. Sosland and Joan F. Lane retired in 1996 from the Board of
Directors after long and valuable service to Brown Group as Directors.
During the year, Jerry E. Ritter, immediate past Executive Vice President
and Chief Financial and Administrative Officer of Anheuser-Busch Companies,
Inc. and Thomas A. Williams, Corporate Vice President and President --
Brown Shoe Company, were elected to the Board of Directors.
In summary -- positioned solidly for continued progress: During 1996, Brown
Group made progress in restoring the earning power of our operations.
Although plans are cautious for the seasonally slow first quarter,
same-store sales increases at Famous Footwear, improving sales of Brown
Shoe Company's women's brands and higher forward-orders, continue to be
encouraging. Brown Group is positioned solidly for continued progress.
/s/ B. A. Bridgewater, Jr.
- --------------------------
Chairman of the Board, President and
Chief Executive Officer
April 16, 1997
- ---------------------------------------------------------------------------
"At Famous Footwear, we are confident of continued progress in 1997.
Strengthened execution of the operations of this business, conservative
planned growth, and the maturing of the stores opened in prior years will
all contribute to improved results."
- ---------------------------------------------------------------------------
FAMOUS FOOTWEAR
- ---------------
Great brands, great selection, great service, best prices! This is what
makes Famous Footwear the leading branded family footwear retailer in
America. In 45 states throughout the country, Famous Footwear's almost 800
stores and the entire support organization are committed to operational
excellence at every level.
Brand name shoes for less: Famous Footwear is proud of its 37-year history
of selling "brand name shoes for less for the entire family." Headquartered
in Madison, Wisconsin, the chain was acquired by Brown Group in 1981. It
has grown rapidly from a 32-store regional chain when it was acquired into
a major national shoe retailer. As the chain was expanded, a solid
infrastructure of human resources, systems and distribution capabilities
was built to support the operations and growth.
- --------------------------------
NUMBER OF FAMOUS FOOTWEAR STORES
1996 -- 794
1995 -- 814
1994 -- 722
1993 -- 567
1992 -- 477
- ---------------------------------
Famous Footwear stores average 5,000 square feet and can be found in strip
centers, outlet malls and regional malls throughout the country. They
feature everyday low pricing including 10 to 50 percent savings off
manufacturers' suggested retail prices on athletic, dress and casual shoes
for women, men and children. In 1996, 40 stores that were operated by
Famous Footwear under the Naturalizer Outlet name were transferred to the
Naturalizer Retail division of Brown Shoe Company. A net of 20 stores was
added to the chain, bringing the total number of stores to 794 at the end
of fiscal year 1996.
- ---------------------------------------------------------------------------
Brian C. Cook, President of Famous Footwear (left) visits a recently opened
Famous Footwear store in Madison, Wisconsin, with Ronald A. Fromm,
Executive Vice President of the chain.
- ---------------------------------------------------------------------------
Operations reorganized to support growth: To support Famous Footwear's
expansion, the logistics function and supporting systems have been
reorganized. In 1996, Famous Footwear's second distribution center, located
in Lebanon, Tennessee, completed its first full year of operation. The
successful opening of this center concluded a long process of reorganizing
the company to support multiple distribution locations that can serve the
expanded chain. The new 800,000 square-foot state-of-the-art distribution
center serves the Southern half of the United States. The Northern markets
are served by the Sun Prairie, Wisconsin, distribution center, which opened
in 1990.
Famous Footwear's entire field management structure also has been
reorganized to support the company's goal of operational excellence at
every level. In 1996, the number of districts was increased from 50 to 87,
and the number of regions was increased from six to nine. Field management
was thus increased by more than 50 percent to ensure good customer service
through more direct management. The merchandising and buying staffs also
were realigned to associate more closely these functions with the markets
and stores they serve. This helps guarantee that the right shoe is in the
right place at the right time in each distinct market and individual store.
In 1997, the Company plans to improve marketing and visual merchandising to
deliver the Famous Footwear message to the consumer.
Celebrity Club program introduced: One of the many ways Famous Footwear
creates satisfied customers who always think of Famous Footwear stores as
the best place to buy shoes is through the Celebrity Club program. This
customer loyalty program was introduced in 1996 in 12 markets and will be
rolled out to 25 of the chain's largest markets across the country in 1997.
There are already 600,000 loyal Famous Footwear customers in the Club.
Customers in the Celebrity Club are rewarded for frequent purchases and are
included in targeted promotional mailings and special offers.
Famous Footwear also places a strong emphasis on training and motivating
sales associates to deliver good customer service. This provides customers
with a consistent and positive experience each time they shop at a Famous
Footwear store. In a retail environment that is very competitive, Famous
Footwear continues to stand out as the best place to shop for the
most-recognized brands, pricing lower than the competition and dependable
customer service.
- ---------------------------------------------------------------------------
"Big Foot" is Famous Footwear's hot air balloon. It's recognized as the
world's largest athletic shoe . . . size 1,584 EEEE. At ten stories tall,
Big Foot helps spread the Famous Footwear message at store grand openings
and special events throughout the United States.
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Famous Footwear stores are uniquely positioned to offer a large selection
of brand name shoes for less for the entire family.
- ---------------------------------------------------------------------------
BROWN SHOE COMPANY
- ------------------
Brown Shoe Company is a leading marketer of a wide range of footwear
products for women, men and children. The company comprises three divisions
- -- Branded Marketing, Pagoda and Naturalizer Retail. Brown Shoe Company's
competitive advantages include its well-recognized brands, diversified
sourcing and controlled distribution through Company-owned retail stores.
The Company has benefited from a lower cost structure and investment in its
brands to build strong, targeted marketing programs.
- ---------------------------------------------------------------------------
NaturalSport's Roma Clog was an exciting success in 1996. Now an entire
collection of Genuine Anatomical Walking Clogs is available.
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Life Stride sales jumped 18 percent in 1996. This brand features a range of
styles from dress to casual and includes the LS Studio and Night Life
collections. This footwear is affordably priced and fashion-right.
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
NaturalSport contributes to the support and growth of exercise walking with
its sponsorship of Olympian and U.S. racewalking champion Debbi Lawrence.
- ---------------------------------------------------------------------------
Branded Marketing division: The Branded Marketing division sells women's
footwear brands that offer style, quality, comfort and value. These brands
are sold in department stores, multi-line shoe stores and branded specialty
stores. In the last two years, this division has concentrated on product
development and marketing strategies to identify and reach each brand's
target consumer. The Branded Marketing division is delivering its brand
messages directly to consumers through increased marketing and advertising
and the development of partnerships with retailers, including focus shops
and retail marketing efforts, to ensure strong sell-throughs for the brands
at retail.
The Company's flagship Naturalizer brand answers the consumer's need for
both style and comfort. A multimillion dollar advertising campaign was
initiated in 1995 to deliver Naturalizer's message directly to the consumer
and to present the brand's new styling. The brand has kicked off 1997 with
a new campaign that reinforces the message that Naturalizer is "one of
life's great comforts." In addition, the Naturalizer Energyheel debuted in
spring 1997 at select stores, with a roll-out of this exciting, new,
patented heel technology planned for fall.
- --------------------------
Branded Marketing Division
Larry Stuart Collection
Life Stride
LS Studio
Naturalizer
NaturalSport
Night Life
Original Dr. Scholl's*
Penaljo
*under license
- --------------------------
The NaturalSport brand continued its record of growth in 1996. NaturalSport
was created by the company in 1988 as a part of the Naturalizer line.
NaturalSport's heritage in exercise walking now extends to walking sandals,
casual and backland walking shoes and its popular walking clogs. Because of
its solid position in the growing active/casual category, a separate brand
team was established for NaturalSport during 1996. The brand also has
increased its marketing efforts with the 1996 development of a national
advertising campaign and initiation of the NaturalSport web site at
http://www.naturalsport.com, which offers consumers information about
walking and a catalog of available styles. In 1997, these efforts will
continue and plans also are in place for increased grass-roots marketing at
walking events throughout the country.
The LS Group features the Life Stride brand, the industry's premier
"entry-level" women's brand, the LS Studio brand, and the Night Life brand
of special occasion footwear. Affordably-priced and fashion-right, these
brands achieved record sales in 1996.
The Company purchased the Larry Stuart Collection in 1995. This is a
nationally recognized better-grade women's brand, known for its style and
versatility. The Company also began marketing the Original Dr. Scholl's
Exercise Sandal to leading department stores and specialty retailers in
1996, with an expanded collection of colors and styles being introduced in
1997.
- ---------------------------------------------------------------------------
The Dr. is "in!" The Original Dr. Scholl's Exercise Sandal is now available
in an expanded collection of colors and styles.
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Brown Shoe Company returned to national advertising in 1996, and plans to
increase spending on advertising 30% in 1997, including ads like this one
that promote the Naturalizer brand as "one of life's great comforts."
- ---------------------------------------------------------------------------
Naturalizer Retail: The Company's chain of Naturalizer specialty stores
provides a showcase for its flagship Naturalizer brand of women's footwear.
These stores offer the Naturalizer customer individual service, selection
and sizes; help build brand aware-ness and image; and make possible
upstream wholesale profits for Naturalizer.
- ---------------------------------
NUMBER OF U.S. NATURALIZER STORES
1996 -- 346
1995 -- 313
1994 -- 327
1993 -- 367
1992 -- 355
- ---------------------------------
In 1996, the Company continued to upgrade all aspects of its Naturalizer
stores. This included rolling out a new design for the store environment,
new signage and displays, and a renewed emphasis on visual presentation and
training and motivation of store managers and sales associates. In 1997,
the Natural-izer Retail division will place increased emphasis on these
programs and also will continue its program of direct mail advertising to
the millions of loyal Naturalizer consumers who know and trust the brand.
In 1997, an integrated approach to the management of the Naturalizer brand
and stores will continue to ensure that the stores mirror the brand
identity.
Pagoda division: The Pagoda division of Brown Shoe Company is a leading
footwear marketing and sourcing business, operating three units -- the
Pagoda U.S.A. and Pagoda International marketing divisions and Pagoda
Trading, the footwear sourcing division.
Pagoda U.S.A.: Pagoda U.S.A. markets branded, licensed and private label
footwear to an extensive network of mass-merchandisers, mid-tier retailers
and department stores in the United States. Pagoda is a trusted resource to
some of America's largest discount chains, including Famous Footwear,
Kmart, Payless, Target and Wal-Mart as well as to department stores such as
Dillard's, Mercantile, Nordstrom and Sears.
Continuing to lead Pagoda U.S.A.'s extensive list of adult brands is the
popular Dr. Scholl's line of casual and work shoes for men and women. In
1996, Pagoda relaunched the Company's well-recognized Connie brand of
fashionable women's footwear sold to mid-tier and department store
retailers. Pagoda also added the Russell brand name, an important addition
to its offering of adult athletic shoes.
Pagoda is one of the largest children's footwear suppliers with popular
brands including Buster Brown, Playskool and Barbie. Pagoda also licenses
brand names from The Walt Disney Company and sells shoes featuring Disney
movie and cartoon characters. In addition, in 1996, Pagoda signed a license
with Lucasfilm Ltd. for the design and sale of footwear featuring
characters from the recently released Star Wars trilogy.
- ---------------------------------------------------------------------------
PAGODA BRANDS
Adults'
- -------
Air Step
Connie
Dr. Scholl's (1)
Fanfares
le coq sportif
Mickey Unlimited (2)
Nature Sole
Penn (3)
Russell (4)
U.S. 101
Union Bay (5)
- ---------------------------------------------------------------------------
As denoted, the above brands are under license from:
(1) Schering-Plough HealthCare Products, Inc.
(2) The Walt Disney Company
(3) Penn Racquet Sports, a division of GenCorp, Inc.
(4) Russell Corporation
(5) Seattle Pacific Industries, Inc.
- ---------------------------------------------------------------------------
Children's
- ----------
Anastasia (1)
Barbie (2)
Batman (3)
Buster Brown
101 Dalmatians (4)
Disney Babies (4)
Doug (4)
Dr. Scholl's (5)
Hello Kitty (6)
The Hunchback of Notre Dame (4)
Looney Tunes (3)
Mickey for Kids (4)
Playskool (7)
Space Jam (3)
Star Wars (8)
Wildcats
Wishbone (9)
- ---------------------------------------------------------------------------
As denoted, the above brands are under license from:
(1) Twentieth Century Fox
(2) Mattel, Inc.
(3) Warner Bros. Consumer Products, France
(4) The Walt Disney Company
(5) Schering-Plough HealthCare Products, Inc.
(6) Sanrio, Inc.
(7) Hasbro, Inc.
(8) Lucasfilm Ltd.
(9) Lyrick Studios
- ---------------------------------------------------------------------------
Pagoda International: The Pagoda International division is the Company's
international marketing operation. Through this division, the Company's
footwear products for women, men and children are sold to retailers in
Europe, Latin America and the Far East. Pagoda International was founded in
1990 with the opening of the Company's European sales office in Paris,
France. Today, Pagoda International has mar-keting offices in Brazil,
France and Hong Kong and has distribution joint ventures in both Argentina
and Mexico.
- ---------------------------------------------------------------------------
Pagoda's Children's division successfully introduced the Buster Brown brand
into Sears stores in 1996.
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
The le coq sportif brand is sold in more than 40 countries throughout the
world. This athletic brand, purchased by the Company in 1995, has a
100-year heritage and strong positioning in Latin America, Europe and the
Far East.
- ---------------------------------------------------------------------------
The majority of Pagoda's international sales have been for branded shoes
with names familiar to children globally -- Disney and Barbie. For 1997,
Pagoda International has added the Warner Brothers' Looney Tunes, Batman
and Space Jam brands to its list of popular children's footwear and has
begun international marketing of Star Wars footwear for children.
The Dr. Scholl's brand also is a globally recognized name, sold by Pagoda
International in several Latin American countries. In 1996, Pagoda
International began selling Dr. Scholl's footwear in Australia through a
distribution agreement. In addition, the Company's Naturalizer and
NaturalSport women's brands are sold in Japan, Thailand and Australia
through licensing and distribution agreements.
International marketing and sale of athletic footwear is a growth
opportunity for Pagoda. In 1995, the Company purchased the le coq sportif
brand of footwear and apparel from adidas AG. In 1996, Pagoda International
signed a licensing agreement to design and sell athletic footwear for men
and women under the Penn brand name. The Company also combined the product
development function of all Pagoda athletic footwear within the
International division to continue to take advantage of the opportunities
in the growing global athletic market.
Pagoda Trading: Pagoda Trading ranks among the largest suppliers of
footwear in the United States, sourcing 78 million pairs of shoes in 1996.
This worldwide sourcing organization operates offices in Brazil, Italy,
China, Hong Kong, Taiwan and Indonesia and is responsible for sourcing all
categories of footwear from athletic to dress and from popular priced to
better brands.
The Company's flexible sourcing structure gives it the capability to
provide footwear at virtually any price level from any significant shoe
manufacturing region of the world. Pagoda Trading is thus able to supply
the diverse needs of Brown Group's marketing and retail divisions. In 1996,
Pagoda Trading absorbed the sourcing of footwear that had previously been
made in Brown Shoe Company's remaining five domestic factories that closed
in fall, 1995. In 1997, Pagoda Trading will continue to work in partnership
with the Company's marketing and retail divisions to ensure on-time
delivery of quality products at competitive prices while maintaining its
cost efficient sourcing structure.
- ---------------------------------------------------------------------------
In 1996, the Company sourced 78 million pairs of shoes through its
worldwide sourcing structure.
- ---------------------------------------------------------------------------
CANADIAN OPERATIONS
- -------------------
In Canada, the Company operates successful retail and wholesale businesses.
The Canadian Operations were started in 1959 when the Company purchased the
Perth Shoe Company which previously had licensed the rights to manufacture
and sell Brown Shoe Company brands in Canada. Since that time, these
operations have grown to become important contributors to Brown Group's
results.
Canadian Wholesale Operations: The Company manufactures, imports and
wholesales brands for women, men and children in Canada including
Naturalizer, NaturalSport, Connie, Airstep, Buster Brown, Wildcats, Regal,
Savage and Cedar Trail. In 1996, the Canadian Wholesale division worked
with Brown Shoe Company's Pagoda division to add the distribution of Disney
character footwear in Canada and in 1997, will introduce Star Wars footwear
to the Canadian market.
The Wholesale division is headquartered in Perth, Ontario, and wholesales
shoes to department stores, better-grade independent accounts and
specialty stores throughout Canada. The division operates two production
facilities and one distribution center in Canada. Women's shoes and boots
are produced in Canada and footwear also is sourced internationally,
including from Brazil, China and Italy.
Canadian Retail Operations: Brown Group's Canadian Retail division,
headquartered in Montreal, Quebec, was founded in 1988 and today operates
100 Naturalizer specialty stores and 16 F. X. LaSalle better-grade shoe
stores in Canada.
The Naturalizer stores sell Canada's leading brand of women's shoes in
regional malls throughout Canada. The Naturalizer wholesale and retail
divisions in Canada work together on product development and marketing to
capitalize on the brand's strengths in offering fashion, comfort, size and
width selection, and superior service to consumers.
The F.X. LaSalle chain of better-grade men's and women's footwear is
primarily located in the Montreal area. This chain has served this area for
more than 100 years. The stores average 2,500 square feet and offer
fashionable shoes retailing for US $100 to $250 a pair, primarily sourced
from Italy. F.X. LaSalle stores feature an upscale, salon atmosphere and a
high level of customer service.
- -------------------------
NUMBER OF CANADIAN STORES
NATURALIZER
1996 -- 100
1995 -- 96
1994 -- 91
1993 -- 83
1992 -- 76
F.X. LASALLE
1996 -- 16
1995 -- 15
1994 -- 14
1993 -- 15
1992 -- 14
- -------------------------
- ---------------------------------------------------------------------------
Naturalizer is the leading brand of women's footwear in Canada.
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
The F. X. LaSalle chain of better-grade shoe stores has served the Montreal
area for more than 100 years.
- ---------------------------------------------------------------------------
CONTENTS
- --------
14
Management's Discussion and Analysis
of Operations and Financial Condition
19
Five-Year Summary
20
Consolidated Financial Statements
24
Notes to Consolidated Financial Statements
38
Reports on Financial Statements
* Management Report on Responsibility
for Financial Reporting
* Report of Independent Auditors
39
Supplementary Financial Information
- ---------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
- ---------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
1996 Compared to 1995
- ---------------------
Brown Group, Inc.'s fiscal 1996 results reflect the value of the structural
changes completed by the Company in 1995.
Brown Group's net sales of $1.525 billion for the 52-week fiscal 1996 were
up $69 million from the $1.456 billion in fiscal 1995, which had 53 weeks.
The sales increase reflects higher sales at Famous Footwear and the
Company's wholesale operations.
Earnings from continuing operations of $20.3 million in fiscal 1996 compare
to $.7 million in fiscal 1995. Results for fiscal 1996 reflect a reversal
of $2.3 million of a tax valuation reserve related to the Company's
deferred tax assets, as well as an after-tax LIFO recovery of $2.6 million
related to the liquidation of inventories at the Company's closed domestic
facilities. 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 remaining five domestic manufacturing facilities. These
charges in fiscal 1995 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 an Internal Revenue
Service assessment against the Company.
Net earnings for fiscal 1996 of $20.3 million compare to $3.3 million for
fiscal 1995. Included in net earnings for fiscal 1995 is a gain of $2.6
million, net of taxes, from the reversal of a portion of the provision
previously provided for disposal of discontinued operations.
Famous Footwear's results were improved in 1996 as a result of better
execution and cost control as the costs of rapid expansion and
infrastructure development in 1994 and 1995 began to be absorbed. Adjusting
for the transfer of 40 outlet stores from Famous Footwear to the
Naturalizer Retail division at the beginning of 1996, sales increased 8% to
$781.3 million, with a same-store sales increase of 1.3% on a comparable
52-week basis. Operating earnings increased 44% to $25.0 million, primarily
as the result of increased sales combined with a better leveraging of the
expense base. The increased sales are the result of the 1.3% same-store
sales increase, as well as the strong sales contribution of the stores
opened in fiscal 1996 and the latter portion of fiscal 1995. Although the
gross margin rate was about the same as in fiscal 1995, expenses as a
percent of sales were improved, which contributed importantly to the higher
operating earnings. During the year, 55 stores were opened and 35 stores
were closed, for a net of 20 new stores added, down from the 92 net stores
added in fiscal 1995. As a result of the net store openings and the
transfer of 40 outlet stores to the Naturalizer Retail division, there were
794 stores in operation at the end of fiscal 1996. Plans for fiscal 1997
include the net addition of 25 stores.
Net sales from footwear wholesale operations -- Brown Shoe Company and
Pagoda -- increased 2% during fiscal 1996 to $540.9 million. Operating
earnings were $26.8 million compared to an operating loss of $4.1 million
in fiscal 1995. The investments in brand development and marketing in
fiscal 1995 and 1996, combined with higher margins, a $4.0 million LIFO
credit from the liquidation of remaining manufactured inventories, and a
lower cost base resulting from the shift to all-import sourcing,
contributed to these results. The fiscal 1995 results included a pretax
charge of $14.1 million for the costs of closing the remaining five
domestic manufacturing facilities, partially offset by a pretax LIFO gain
of $10.1 million from the liquidation of related inventories.
At the Brown Shoe Company's Branded Marketing division, sales for the
NaturalSport brand of active casual shoes increased nearly 50%, with Life
Stride sales increasing 18% over fiscal 1995. Sales of the Naturalizer
brand product were level with fiscal 1995.
Operating earnings at the Pagoda division nearly doubled in fiscal 1996 to
$9.5 million, primarily as the result of higher sales of branded and
licensed product, led by footwear featuring Disney movie and cartoon
characters. Operating earnings were substantially higher in the Pagoda
U.S.A. operations, while Pagoda International incurred an operating loss
due to a slowdown in the sales growth rate in its Brazilian operations and
higher costs attributable to investment in the le coq sportif brand
acquired in fiscal 1995. During fiscal 1996, Pagoda signed a license for
the design and sale of footwear featuring characters from the recently
released Star Wars trilogy, which will contribute to fiscal 1997 results.
The Naturalizer Retail division's net sales decreased 3% in total to $129.7
million, and decreased 1.2% on a comparable 52-week basis, adjusted for the
transfer of the 40 outlet stores from Famous Footwear. The decreased sales
were partially the result of a decreased promotional mix of merchandise
compared to last year, and an overall decline in mall traffic. As a result
of the reduced sales, an operating loss was incurred in fiscal 1996. During
fiscal 1996 there was a net decrease of 7 stores, and after taking into
account the transfer of 40 outlet stores, the total number of stores in
operation at the end of fiscal 1996 was 346.
Net sales at the Canadian retail and wholesale operations increased 6% in
fiscal 1996 to $73.2 million. The Canadian retail operations achieved a
same-store sales increase of 7.3% on a comparable 52-week basis. Operating
earnings increased 6% to $6.6 million as the result of increased sales,
maintenance of margins and relatively fixed operating expenses. At the end
of fiscal 1996, the Canadian division operated 116 stores, including 100
Naturalizer stores and 16 F.X. LaSalle stores. The Canadian wholesale
operations' sales increased 11% in fiscal 1996; however, operating earnings
declined due to the higher sales mix of lower margin licensed product.
Interest expense increased from $16.0 million in fiscal 1995 to $19.3
million in fiscal 1996 as a result of increased average borrowings, as well
as an increase in the Company's average borrowing rate resulting from the
repositioning of its debt structure. The Company's borrowing level
increased throughout fiscal 1996 as increased cash flow from improved net
earnings was more than offset by increases in inventory and accounts
receivable.
Other Income of $1.3 million in fiscal 1996 consisted primarily of royalty
income. In fiscal 1995, Other Expense of $1.6 million consisted primarily
of $3.0 million of royalty income, offset by a $3.6 million charge related
to factory closings and a $2.1 million charge from the early adoption of
SFAS No. 121.
The Company's income tax expense of $6.9 million in fiscal 1996 reflects
the recovery of $2.3 million of tax valuation reserve based on management's
assessment that it is more likely than not that the net deferred tax assets
will be realized. See Note 5 to the consolidated financial statements for
further discussion of income taxes.
The Company had an overall net deferred tax asset of $14.9 million at
February 1, 1997, which relates primarily to differences in book and
taxable income and net operating loss carryforwards. At February 1, 1997,
the Company carried a valuation reserve related to this asset of $1.0
million. Management believes that the net deferred tax asset will be
realized through future operating results. In addition, management also has
available certain tax planning strategies, which, if implemented, could
substantially eliminate the net deferred tax asset.
1995 Compared to 1994
- ---------------------
Brown Group, Inc.'s fiscal 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 manufacturing facilities were
closed, completing an extended period of restructuring for Brown Group,
Inc. and its divisions.
Brown Group'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
flat 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 stores.
Earnings from continuing operations of $.7 million in fiscal 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 SFAS No. 121, 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 remaining five domestic manufacturing
facilities. 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 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 fiscal 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 fiscal 1995 to $741.1 million, but
same-store sales declined 3.0% for the year on a comparable 52-week basis.
This is 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.
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 brand in the United
States were more than offset by decreases in Naturalizer and Connie branded
sales, Dr. Scholl's and The Lion King 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 an
operating profit of $32.8 million in fiscal 1994. Operating earnings of the
Company's Brazilian and European wholesale operations increased
substantially in fiscal 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 fiscal 1995 loss included a pretax
charge of $14.1 million for the cost of closing the remaining five domestic
manufacturing facilities, 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.
Naturalizer Retail's domestic sales decreased 7% and same-store sales
decreased 4.0% on a comparable 52-week basis. The operating loss recorded
in fiscal 1995 was increased from fiscal 1994. Gross margins were improved
but the increased rate was not enough to offset the effect of the sales
decline. During 1995, 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.
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. With the net addition of five stores in fiscal 1995, this
business now operates 114 stores. 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.
The 1% increase in Brown Group's interest expense in fiscal 1995 reflects
an increase in the average short-term borrowing rate, partially offset by
lower average borrowings. The 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 fiscal 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 fiscal
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, included 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 further
discussion of income taxes.
Restructuring and Factory Closings
- ----------------------------------
In the second quarter of fiscal 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 consisted of the following:
* Charges of $3.6 million for asset writeoffs associated with the disposal
of manufacturing and related facilities and equipment;
* Inventory writedowns of $2.0 million to liquidate manufacturing
inventories; and
* Charges of $8.5 million for severance and benefit costs for those
employees terminated due to plant and facility closures.
In addition to the charge recorded in fiscal 1995, $2.6 million of the
reserves established in fiscal 1993 to cover the costs of other plant
closings, were redesignated to cover additional costs associated with the
final facility closings in fiscal 1995.
A cumulative summary of activity in the 1995 factory closing reserve is as
follows (in millions):
<TABLE>
<S> <C>
Initial establishment of reserve $14.1
Asset writeoffs, net (1.8)
Inventory writedowns (5.9)
Severance and benefit costs (6.2)
Pension settlement and curtailment losses (2.8)
Redesignated from 1993 reserves 2.6
-----
Reserve balance at February 1, 1997 $ --
=====
</TABLE>
The reserve activity had a $2.6 million and $12.8 million negative cash
flow impact on fiscal 1996 and fiscal 1995, respectively. In both fiscal
years this usage was partially offset by positive cash flow generated from
reduced inventories and sales of facilities.
IMPACT OF INFLATION
- -------------------
The effects of inflation have been minor over the last several years and
are not expected to have a significant impact in the foreseeable future.
- -------------------
FINANCIAL CONDITION
- -------------------
Liquidity and Capital Resources
- -------------------------------
During fiscal 1996, the Company's borrowing level increased as cash flow
from earnings and depreciation was more than offset by capital
expenditures, dividends and higher levels of inventory and receivables. As
a result, total debt increased from $219.5 million at the end of fiscal
1995 to $261.0 million at the end of fiscal 1996. The Company's ratio of
debt to total capitalization increased from 48.7% at the end of fiscal 1995
to 52.4% at the end of fiscal 1996, and the ratio of net debt (total debt
less cash and cash equivalents) to total capitalization increased from
44.3% at the end of fiscal 1995 to 48.4% at the end of fiscal 1996.
Working capital at the end of fiscal 1996 was $301.0 million, which was
$91.6 million higher than at the end of fiscal 1995. This increase was
primarily the result of the use of the net proceeds of the issuance of the
9.5% Senior Notes, discussed below, to reduce the short-term borrowings
outstanding. The improvement in working capital position led to an increase
in the Company's current ratio, the relationship of current assets to
current liabilities, from 1.7 to 1 at the end of fiscal 1995 to 2.1 to 1 at
the end of fiscal 1996.
Cash provided by operating activities in fiscal 1996 was lower than in
fiscal 1995 as the effect of increased earnings and higher trade accounts
payable was more than offset by increased inventories at Famous Footwear
and Brown Shoe Company, to support an expected higher level of sales and an
early Easter selling season, and a higher level of receivables from
increased sales.
Cash used by investing activities was primarily from capital expenditures
in fiscal 1996 of $21.0 million compared to $26.9 million in fiscal 1995.
Capital expenditures in fiscal 1996 were primarily for new store openings
and remodelings at Famous Footwear, Naturalizer Retail, and the Canadian
retailing operations.
During fiscal 1996, the Company strategically repositioned its debt
structure. The repositioning consisted of three primary facets: 1) the
issuance on October 7, 1996 of $100 million of 9.5% Senior Notes, due 2006;
2) the placement of a new revolving bank Credit Agreement in the amount of
$155 million, with a three-year term, to provide working capital and
committed letter of credit financing for the Company's operations; and 3)
amendment of the terms of the Company's $50 million 7.36% Senior Notes,
essentially to conform the covenants to those of the 9.5% Senior Notes and
the revolving bank Credit Agreement.
The net proceeds from the issuance of the 9.5% Senior Notes were used to
reduce the amount outstanding under the Company's revolving bank credit
agreement in effect at that date and to repurchase $5 million of
outstanding debentures.
The Company's debt agreements contain various covenants which, among other
things, require the maintenance of certain financial ratios related to
fixed charge coverage and total debt to capital, establish minimum levels
of net worth, and limit the sale of assets and the level of liens and
certain investments. The Company is in compliance with all of these
covenants at fiscal year-end, and expects to continue to be in compliance
based on current estimates for fiscal 1997. The Company's current borrowing
capacity under the revolving bank Credit Agreement is adequate to fund its
operational needs.
The Company's long-term debt is rated Ba2 by Moody's Investors Service, BB
by Standard & Poor's Corporation, and BB+ by Fitch Investors Service.
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 or option contracts to reduce its economic exposure to changes in
exchange rates. The level of outstanding contracts during the year is
dependent on seasonality of the Company's business and on demand for
footwear from various locations throughout the world.
Assets and liabilities outside the United States are primarily located in
Canada, Europe, Hong Kong and Brazil. 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 countries where the economy is deemed
to be hyperinflationary, including Brazil and Mexico, the Company hedges
the local currency denominated assets and liabilities. In addition, the
Company has entered into a forward exchange contract which is designed to
protect the realizable value of inventories at the Company's Brazilian
subsidiary in the event of a major devaluation and economic downturn in the
Brazilian economy. See Note 11 of the consolidated financial statements for
further discussion.
The Company periodically enters into interest rate options and swaps to
reduce its exposure to changing interest rates and to reduce interest
costs.
Dividends
- ---------
Brown Group paid a dividend of $1.00 per share in fiscal 1996, and $1.30
per share in fiscal 1995. This marked the 74th year of consecutive
quarterly dividends.
Environmental Matters
- ---------------------
The Company is involved in environmental remediation and ongoing compliance
at several sites, including its closed New York tannery and at an owned
manufacturing facility that is leased to another party. 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. 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 1, 1997, the accrued environmental
liabilities for all sites total $3.1 million.
FIVE-YEAR SUMMARY
-----------------
<TABLE>
<CAPTION>
Thousands, except per share
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(52 weeks) (53 weeks) (52 weeks) (52 weeks) (52 weeks)
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net sales $1,525,052 $1,455,896 $1,461,637 $1,361,039 $1,243,842
Cost of goods
sold 958,288 948,925 949,374 915,443 834,591
---------- ---------- ---------- ---------- ----------
Gross profit 566,764 506,971 512,263 445,596 409,251
---------- ---------- ---------- ---------- ----------
Selling and
administrative
expenses 521,553 494,098 448,827 422,248 381,835
Interest expense 19,327 15,969 15,785 17,334 16,260
Other expense
(income)--net (1,341) 1,630 (12,320) 21,191 8,318
---------- ---------- ---------- ---------- ----------
Earnings (loss)
from continuing
operations
before income
taxes and
accounting
changes 27,225 (4,726) 59,971 (15,177) 2,838
Income tax
(provision)
benefit (6,910) 5,423 (26,405) 5,881 401
---------- ---------- ---------- ---------- ----------
Earnings (loss)
from
continuing
operations
before
cumulative
effect of
accounting
changes 20,315 697 33,566 (9,296) 3,239
Earnings from
discontinued
operations,
net of income
taxes -- -- 1,282 4,298 1,425
(Provision)
credit for
disposal of
discontinued
operations,
net of income
taxes -- 2,600 4,550 (24,400) --
Cumulative
effect of
changes in
accounting
for
postemployment
benefits -- -- -- (2,214) --
---------- ---------- ---------- ---------- ----------
Net earnings
(loss) $ 20,315 $ 3,297 $ 39,398 $ (31,612) $ 4,664
========== ========== ========== ========== ==========
Returns from
continuing
operations
before
accounting
changes:
Return on
net sales 1.3% 0.1% 2.3% (0.7%) 0.3%
Return on
beginning
share-
holders'
equity 8.8% 0.3% 14.4% (3.2%) 1.0%
Return on
average
invested
capital 4.1% 0.2% 6.5% (1.6%) 0.6%
Dividends paid $ 17,956 $ 23,325 $ 28,610 $ 27,979 $ 27,714
Capital
expenditures 21,044 26,939 32,531 27,207 17,496
PER COMMON
SHARE
Earnings
(loss) from
continuing
operations
before
accounting
changes $ 1.15 $ .04 $ 1.91 $ (.54) $ .19
Net earnings
(loss) 1.15 .19 2.24 (1.83) .27
Dividends paid 1.00 1.30 1.60 1.60 1.60
Shareholders'
equity 13.19 12.92 13.90 13.27 16.69
FINANCIAL
POSITION
Receivables,
net $ 90,246 $ 86,417 $ 98,079 $ 109,825 $ 114,042
Inventories,
net 398,803 342,282 322,029 286,992 253,586
Working capital 301,020 209,399 259,178 240,554 262,611
Property and
equipment, net 85,380 87,720 92,904 86,695 88,500
Total assets 722,375 661,056 636,515 739,930 705,165
Long-term
debt and
capitalized
lease
obligations 197,025 105,470 133,213 135,324 123,024
Shareholders'
equity 237,037 231,636 249,727 233,863 288,988
Average Common
Shares
Outstanding 17,672 17,591 17,555 17,270 17,132
</TABLE>
All data presented reflects the fiscal year ended on the Saturday nearest
to January 31.
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
Thousands, except number of shares
and per share amounts February 1, 1997 February 3, 1996
---------------- ----------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 38,686 $ 35,058
Receivables, net of allowance of
$10,203 in 1996 and $11,267 in 1995 90,246 86,417
Inventories, net of adjustment
to last-in, first-out cost of
$18,846 in 1996 and $27,672 in 1995 398,803 342,282
Deferred income taxes 24,091 26,734
Prepaid expenses and other
current assets 12,949 14,847
-------- --------
Total Current Assets 564,775 505,338
OTHER ASSETS
Prepaid pension costs 33,325 33,077
Other assets 38,895 34,921
Property and equipment, net 85,380 87,720
-------- --------
$722,375 $661,056
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Notes payable $ 62,000 $112,000
Trade accounts payable 124,697 106,113
Employee compensation and benefits 31,164 28,448
Other accrued expenses 39,889 43,043
Income taxes 4,005 4,335
Current maturities of long-term debt 2,000 2,000
-------- --------
Total Current Liabilities 263,755 295,939
OTHER LIABILITIES
Long-term debt, including
capitalized lease obligations 197,025 105,470
Deferred income taxes 9,200 10,806
Other liabilities 15,358 17,205
-------- --------
Total Other Liabilities 221,583 133,481
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;
17,969,977 and 17,930,977 shares
outstanding 67,387 67,242
Additional capital 46,310 46,015
Cumulative translation adjustment (4,433) (4,913)
Unamortized value of restricted stock (5,700) (7,822)
Retained earnings 133,473 131,114
-------- --------
Total Shareholders' Equity 237,037 231,636
-------- --------
$722,375 $661,056
======== ========
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED EARNINGS
---------------------
<TABLE>
<CAPTION>
Thousands, except per share amounts 1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Net Sales $1,525,052 $1,455,896 $1,461,637
Cost of goods sold 958,288 948,925 949,374
---------- ---------- ---------
Gross profit 566,764 506,971 512,263
---------- ---------- ---------
Selling and administrative expenses 521,553 494,098 448,827
Interest expense 19,327 15,969 15,785
Other expense (income), net (1,341) 1,630 (12,320)
---------- ---------- ---------
Earnings (Loss) From Continuing
Operations Before Income Taxes 27,225 (4,726) 59,971
Income tax (provision) benefit (6,910) 5,423 (26,405)
---------- ---------- ---------
Earnings From Continuing Operations 20,315 697 33,566
Discontinued operations:
Earnings from operations,
net of taxes -- -- 1,282
Credit for disposal, net of taxes -- 2,600 4,550
---------- ---------- ---------
Net Earnings $ 20,315 $ 3,297 $ 39,398
========== ========== =========
Earnings Per Common Share:
Continuing operations $ 1.15 $ .04 $ 1.91
Discontinued operations:
Earnings from operations -- -- .07
Credit for disposal -- .15 .26
---------- ---------- ---------
Net Earnings $ 1.15 $ .19 $ 2.24
========== ========== =========
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED CASH FLOWS
-----------------------
<TABLE>
<CAPTION>
Thousands 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 20,315 $ 3,297 $ 39,398
Adjustments to reconcile net earnings
to net cash provided by continuing
operating activities:
Discontinued operations -- (2,600) (5,832)
Depreciation and amortization 25,886 23,827 22,095
Loss on disposal or impairment
of facilities and equipment 655 6,477 103
Provision for losses on
accounts receivable 5,982 5,101 6,442
Changes in operating
assets and liabilities:
Receivables (10,256) 6,561 5,304
Inventories (56,521) (20,253) (35,037)
Prepaid expenses and
other current assets 4,541 (3,051) 26,212
Trade accounts payable
and accrued expenses 17,221 2,672 (7,972)
Income taxes (330) 4,977 (4,430)
Other, net (4,223) (8,548) (6,577)
-------- -------- --------
Net Cash Provided (Used) by
Operating Activities of:
Continuing operations 3,270 18,460 39,706
Discontinued operations -- (2,755) 8,677
-------- -------- --------
Net Cash Provided by
Operating Activities 3,270 15,705 48,383
-------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures (21,044) (26,939) (32,531)
Proceeds from sales of fixed assets 1,414 5,408 4,226
Proceeds from sales of assets
of discontinued operations -- 2,444 118,532
-------- -------- --------
Net Cash Provided (Used) by
Investing Activities (19,630) (19,087) 90,227
-------- -------- --------
FINANCING ACTIVITIES:
Increase (decrease) in short-term
notes payable (50,000) 45,915 (105,005)
Debt issuance costs (3,714) -- --
Principal payments of long-term
debt and capitalized leases (8,450) (2,812) (7,764)
Proceeds from issuance of
long-term debt 100,000 -- --
Proceeds from issuance of common
stock 108 564 5,901
Payments for purchases of
treasury stock -- (824) (1,102)
Dividends paid (17,956) (23,325) (28,610)
-------- -------- --------
Net Cash Provided (Used)
by Financing Activities 19,988 19,518 (136,580)
-------- -------- --------
INCREASE IN CASH AND
CASH EQUIVALENTS 3,628 16,136 2,030
Cash and Cash Equivalents
at Beginning of Year 35,058 18,922 16,892
-------- -------- --------
Cash and Cash Equivalents
at End of Year $ 38,686 $ 35,058 $ 18,922
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED SHAREHOLDERS' EQUITY
---------------------------------
<TABLE>
<CAPTION>
Thousands, except number of shares and per share amounts
Unamortized
Common Stock Cumulative Value of
------------------- Additional Translation Restricted Retained
Shares Dollars Capital Adjustment Stock Earnings
---------- ------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
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
compensa-
tion under
restricted
stock plan 1,554
---------- ------- ------- ------- -------- --------
Balance
February
3, 1996 17,930,977 67,242 46,015 (4,913) (7,822) 131,114
Net earnings 20,315
Dividends
($1.00
per share) (17,956)
Stock issued
under
employee
benefit
plans 6,500 24 84
Currency
translation
adjustment 480
Stock issued
under
restricted
stock plan,
net 32,500 121 211 (332)
Amortization
of deferred
compensa-
tion under
restricted
stock plan 2,454
---------- ------- ------- ------- -------- --------
Balance
February
1, 1997 17,969,977 $67,387 $46,310 $(4,433) $(5,700) $133,473
========== ======= ======= ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
- ------------------------------
Organization
- ------------
Brown Group, Inc. (the "Company"), founded in 1878, is a footwear retailer
and wholesaler, 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 1,256
retail shoe stores in the United States and Canada under the Famous
Footwear(R), Naturalizer(R) and F.X. LaSalle(R) names. In addition, through
Brown Shoe Company and its Pagoda division, the Company designs, sources
and markets footwear to retail stores worldwide, including department
stores, mass merchandisers and specialty shoe stores. See Note 6 for
additional information regarding the Company'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 Company's fiscal year is the 52 or 53-week period ending the Saturday
nearest to January 31. Fiscal years 1996, 1995 and 1994 ended on February
1, 1997, February 3, 1996, and January 28, 1995, respectively. Fiscal year
1995 included 53 weeks and fiscal years 1996 and 1994 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 85% 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.
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 Company 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. The Company has elected to apply the
disclosure provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123).
Cash and cash Equivalents
- -------------------------
The Company considers all short-term investments with maturities of three
months or less to be cash equivalents.
Translation of Foreign Currencies
- ---------------------------------
Assets and liabilities of foreign 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 Company's policy generally 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, or that are designed to protect earnings, are
recognized in income as incurred.
NOTE 2: RESTRUCTURING CHARGES
- -----------------------------
Included in earnings from continuing operations for fiscal 1995 is a pretax
charge of $14.1 million to provide for the cost of closing the Company's
five remaining United States footwear manufacturing plants and several
related facilities. Approximately 2,400 factory positions were eliminated
and the Company'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. During fiscal 1996, all
activities related to the restructuring were substantially completed.
NOTE 3: DISCONTINUED OPERATIONS
- -------------------------------
In fiscal 1994, the Company sold its Cloth World chain of fabric stores to
Fabri-Centers of America, Inc. for $65.7 million in cash. In addition, in
fiscal 1994, the Company closed its Maryland Square catalog operation.
In 1993, the Company adopted a formal plan to withdraw from the Wohl Leased
Shoe Department business, which involved the management of shoe departments
in department stores. The Company completed its withdrawal from the last
Wohl Leased Shoe Department at the end of October 1994. Due to
earlier-than-expected withdrawals from leased departments at
better-than-expected terms, $7.0 million and $4.0 million of the reserve,
established in 1993, was reversed to income in the fourth quarter of 1994
and 1995, respectively.
During fiscal 1994, sales from discontinued operations were $149.0 million
and net earnings were $1.3 million.
NOTE 4: RETIREMENT AND OTHER BENEFIT PLANS
- ------------------------------------------
The Company's pension plans cover substantially all full-time United States
employees. Under the plans, salaried, management and certain hourly
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 Company's funding policy for all plans is to make the
minimum annual contributions required by applicable regulations. The
Company also participates in a multiemployer plan, which provides defined
benefits to certain of the Company's former union employees.
The following table sets forth the plans' funded status at the December 31,
1996 and 1995 measurement dates, and amounts recognized in the Company's
Consolidated Balance Sheet at February 1, 1997 and February 3, 1996 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefit obligation $ 83,038 $109,461
======== ========
Accumulated benefit obligation $ 83,867 $110,646
======== ========
Projected benefit obligation $ 91,209 $118,635
Plan assets at fair value 124,793 154,026
-------- --------
Excess of plan assets over
projected benefit obligation 33,584 35,391
Unrecognized net loss 1,471 905
Unrecognized prior service costs (548) (782)
Unrecognized net transition asset (1,182) (2,437)
-------- --------
Prepaid pension costs recognized
in the balance sheet $ 33,325 $ 33,077
======== ========
</TABLE>
Pension plan assets are invested primarily in listed stocks and bonds. The
plan assets are valued using the current market value for debt instruments
and a five-year moving average for equity securities.
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>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Service cost $ 3,633 $ 4,306 $ 5,828
Interest cost 7,650 8,638 9,957
Actual return on plan assets (1,987) (41,055) 20,269
Net amortization and deferral (10,997) 28,207 (37,823)
Multiemployer plan 25 23 78
-------- -------- --------
Total pension
(income) expense $ (1,676) $ 119 $ (1,691)
======== ======== ========
Actuarial assumptions used were:
Discount rate 7.75% 7.00% 8.75%
Expected return on plan assets 9.50% 9.50% 9.50%
Compensation increase 5.00% 4.50% 5.00%
</TABLE>
In addition, the Company recognized net curtailment/settlement gains
(losses) in fiscal 1996, 1995 and 1994 of ($1.5) million, ($1.8) million
and $3.4 million, respectively, related to employee terminations due to
personnel reductions as part of the Company'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 Company'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 em-ployee contributions generally up to a maximum of 3.5% of
the employee's salary. The Company's expense for this plan was $2.2
million, $2.3 million and $2.5 million in fiscal 1996, 1995 and 1994,
respectively.
In addition to providing pension benefits, the Company 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 Medicare. The retirees' contributions are adjusted annually and the
Company 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 Company's Consolidated Balance Sheet at February 1, 1997 and
February 3, 1996 (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Life Life
Health Insurance Health Insurance
Plans Plans Plans Plans
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Accumulated postretire-
ment benefit obligations:
Retirees $2,216 $4,657 $3,604 $5,071
Active participants 843 63 472 100
------ ------ ------- ------
3,059 4,720 4,076 5,171
Plan assets -- -- -- --
------ ------ ------- ------
Accumulated obligation in
excess of plan assets 3,059 4,720 4,076 5,171
Unrecognized net
gain (loss) 3,644 128 4,640 (211)
------ ------ ------- ------
Accrued postretirement
benefit cost $6,703 $4,848 $8,716 $4,960
====== ====== ======= ======
</TABLE>
Net postretirement benefit cost for fiscal 1996, 1995 and 1994 included the
following components (in thousands):
<TABLE>
<CAPTION>
Life
Health Insurance
Plans Plans
-------- ---------
<S> <C> <C>
1996
Service cost $ 34 $ 1
Interest cost 219 350
Net amortization cost (1,601) --
------- ----
Postretirement benefit cost (income) $(1,348) $351
======= ====
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
======= ====
</TABLE>
In addition to the net postretirement benefit income or expense, the
Company recognized net curtailment gains in fiscal 1995 and 1994 of $.7
million and $.6 million, respectively, related to employee terminations due
to personnel reductions as part of the Company's restructuring, plant
closures and discontinued operations. These net gains increased the
restructuring, factory closure and discontinued operations reserves
originally established in fiscal 1995 and 1993.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Actuarial assumptions used
were ($ in thousands):
Projected health care
cost trend rate (A) 7.00% 7.50% 8.75%
Ultimate trend rate (A) 5.00% 5.00% 5.75%
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 $ 105 $ 132 $ 193
Effect of a 1% point increase in the
health care cost trend rate on the
aggregate of service and
interest cost $ 11 $ 26 $ 34
Discount rate 7.75% 7.00% 8.75%
</TABLE>
(A) 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 1996, 1995 and 1994,
respectively. For future years the rate was assumed to decrease gradually
and remain at the ultimate trend rate thereafter.
NOTE 5: INCOME TAXES
- --------------------
The components of earnings from continuing operations before income taxes
consisted of Domestic earnings (loss) before taxes of $10.7 million,
($18.6) million, and $46.5 million in fiscal 1996, 1995 and 1994,
respectively, and Foreign earnings before taxes of $16.5 million, $13.9
million, and $13.5 million in fiscal 1996, 1995 and 1994, respectively.
The components of income tax expense (benefit) are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Federal
Currently payable $ (523) $(7,220) $(8,389)
Deferred 2,323 (2,485) 29,732
------- ------- --------
1,800 (9,705) 21,343
State 1,052 (399) 355
Foreign 4,058 4,681 4,707
------- ------- --------
Total income tax expense (benefit)
on earnings (loss) from continuing
operations 6,910 (5,423) 26,405
Tax expense of discontinued
operations:
Results of operations -- -- 368
Credit for disposal -- 1,400 2,450
------- ------- --------
Total income tax
expense (benefit) $ 6,910 $(4,023) $29,223
======= ======= ========
</TABLE>
The Company made net tax payments, including domestic federal, state and
foreign taxes, of $6.8 million and $1.3 million in fiscal 1996 and 1994,
respectively. In fiscal 1995 the Company received an income tax refund, net
of payments, of $4.1 million.
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>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Income taxes at
statutory rate $ 9,529 $(1,654) $20,990
State income taxes, net
of federal tax benefit 626 (259) 231
Foreign tax in excess of
(less than) domestic rate (1,475) 337 55
Provision for/(recovery of)
tax assessment (A) -- (5,837) 5,837
Valuation of temporary
differences (2,300) 2,700 --
Other 530 (710) (708)
------- ------- -------
$ 6,910 $(5,423) $26,405
======= ======= =======
</TABLE>
(A) Represents tax and interest (net of tax) related to an Internal Revenue
Service assessment on a portion of the Company'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.
Significant components of the Company's deferred income tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets
Employee benefits, compensation,
and insurance $ 7,820 $ 8,667
Allowance for doubtful accounts 3,649 3,818
Inventory capitalization and
inventory reserves 6,325 4,456
Discontinued operations, restructuring,
and store closing reserves 1,682 3,511
Postretirement and postemployment
benefit plans 4,658 5,581
Tax loss carryforwards 10,515 14,037
Other 10,603 8,840
------- -------
Total deferred tax assets 45,252 48,910
Deferred tax liabilities
Excess depreciation (6,303) (7,347)
Retirement plans (12,009) (11,626)
LIFO inventory valuation (7,693) (7,753)
Other (3,356) (2,956)
-------- --------
Total deferred tax liabilities (29,361) (29,682)
Valuation allowance (1,000) (3,300)
-------- --------
Net deferred income tax assets $ 14,891 $ 15,928
======== ========
</TABLE>
The Company 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 Company. During fiscal 1996, $2.3
million of the valuation allowance was reversed, due to the increased
domestic earnings of the Company. 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 implementation of tax planning
strategies.
At February 1, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of $30.0 million which are available to offset
future federal taxable income for varying periods through fiscal 2010.
As of February 1, 1997, there are accumulated unremitted earnings from the
Company's Canadian subsidiary and other foreign subsidiaries on which
deferred taxes have not been provided as the undistributed earnings of
foreign subsidiaries are indefinitely reinvested. 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
subsidiaries' earnings were distributed, it is estimated that U.S. taxes,
net of foreign tax credits, of approximately $22 million would be due.
NOTE 6: BUSINESS SEGMENT INFORMATION
- ------------------------------------
The Company operates in the Footwear industry throughout the world.
Operations include the sourcing, wholesale distribution, and retailing of
women's, men's and children's footwear. In 1996, 63% of the Company's sales
were at retail, compared to 62% in 1995 and 54% in 1994.
Domestic operations include the wholesale distribution of branded, licensed
and private label footwear to a variety of retail customers, and the Famous
Footwear and Naturalizer nationwide chains of footwear stores.
The Company's foreign operations consist of wholesale distribution
operations in Europe, Latin America, and the Far East, and wholesaling and
retailing in Canada. The Far East operations include "first-cost"
operations, where footwear is sold at a foreign port to customers who then
import the footwear primarily into the United States.
A summary of the Company's operations by geographic area follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net Sales
United States $1,137,887 $1,065,143 $1,030,315
Far East 278,371 282,580 310,902
Canada 76,620 69,244 67,225
Latin America, Europe
and Other 79,891 78,697 90,417
Inter-Area Transfers (47,717) (39,768) (37,222)
---------- ---------- ----------
$1,525,052 $1,455,896 $1,461,637
========== ========== ==========
Operating Income
United States (A) (B) $ 40,074 $ 8,741 $ 64,472
Far East 7,750 748 5,972
Canada 6,569 6,358 6,565
Latin America, Europe
and Other 2,235 8,251 1,621
Less corporate, interest
and other (29,403) (28,824) (18,659)
---------- ---------- ----------
$ 27,225 $ (4,726) $ 59,971
========== ========== ==========
Identifiable Assets
United States $ 556,711 $ 511,435 $ 504,026
Far East 38,309 55,754 59,660
Canada 50,871 45,674 41,909
Latin America, Europe
and Other 76,484 48,193 30,920
---------- ---------- ----------
$ 722,375 $ 661,056 $ 636,515
========== ========== ==========
</TABLE>
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.
(A) 1996 includes a $4.0 million credit from LIFO inventory liquidation.
(B) 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.
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 1, February 3,
1997 1996
----------- -----------
<S> <C> <C>
Finished goods $389,188 $329,184
Work-in-progress 560 1,843
Raw materials and supplies 9,055 11,255
-------- --------
$398,803 $342,282
======== ========
</TABLE>
If the first-in, first-out (FIFO) cost method had been used, inventories
would have been $18.8 million and $27.7 million higher at February 1, 1997
and February 3, 1996, respectively.
During fiscal 1996, 1995 and 1994, certain inventories were reduced at
Brown Shoe Company and other of the Company'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 1996, 1995 and 1994 net income by $2.6, $6.6
and $6.7 million, respectively.
NOTE 8: PROPERTY AND EQUIPMENT
- ------------------------------
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
----------- -----------
<S> <C> <C>
Land and buildings $ 29,963 $ 29,721
Leasehold improvements 38,669 41,903
Furniture, fixtures, and equipment 133,597 119,833
--------- ---------
202,229 191,457
Allowances for depreciation
and amortization (116,849) (103,737)
--------- ---------
$ 85,380 $ 87,720
========= =========
</TABLE>
In fiscal 1995, the Company 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 Company's retail store operations resulted in
the determination that certain store assets were impaired and such 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 Other Expense
(Income) for fiscal 1995 on the Statement of Consolidated Earnings. The
fiscal 1996 charge for impaired assets of $.7 million was charged to
Selling and Administrative expenses. Due to the large number of new retail
stores opened by the Company 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.
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 1, February 3,
1997 1996
----------- -----------
<S> <C> <C>
9.5% Senior Notes due 2006 $100,000 $ --
7.36% Senior Notes, payments of
$10,000 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 18,542 19,990
7.125% Debentures due 2003 10,000 15,000
7.375% Sinking Fund Debentures,
payments of $2,000 due
annually to 1997 -- 1,999
Capitalized lease obligations 3,483 3,481
--------- --------
$197,025 $105,470
========= ========
</TABLE>
Maturities of long-term debt and capitalized lease obligations for 1997
through 2001 are: 1997--$2.0 million; 1998--$0; 1999--$25.0 million;
2000--$10.0 million and 2001--$10.0 million.
In October 1996, the Company issued $100 million in 9.5% Senior Notes due
2006. These Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after October 15, 2001.
In January 1997, the Company entered into a new revolving bank Credit
Agreement to replace the previous bank credit agreement. The new Credit
Agreement, providing $155.0 million in committed working capital and letter
of credit financing, is for a period of three years. Interest on borrowings
under the Credit Agreement is at varying rates and at the Company's option
based on one of the following: the LIBOR rate, the NationsBank corporate
base rate, or the Federal funds rate. A facility fee based on the Company's
leverage ratio is payable on the entire amount of the facility. The
facility fee is 0.375% at February 1, 1997. At February 1, 1997, $62.0
million of short-term notes were outstanding under the revolving bank
Credit Agreement. Although there were no letters of credit outstanding
under the revolving bank Credit Agreement as of February 1, 1997, letters
of credit outstanding through other banking institutions under uncommitted
facilities totaled approximately $37 million.
The Company's Canadian operations maintain uncommitted lines of credit
totaling approximately $6 million.
In 1995, the Company 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. In fiscal 1996, the Company amended the terms of the 7.36% Senior
Notes to conform the covenants, warranties and ranking in all material
respects with those of the 9.5% Senior Notes and the revolving bank Credit
Agreement.
The Company's debt agreements contain various covenants which, among other
things, require the maintenance of certain financial ratios related to
fixed charge coverage, establish minimum levels of net worth, establish
limitations on indebtedness, certain types of payments, liens and
investments, and limit the use of proceeds of asset sales. In addition, the
9.5% Senior Notes, the revolving bank Credit Agreement, and the 7.36%
unsecured Senior Notes are guaranteed by certain wholly-owned domestic
subsidiaries of the Company.
The maximum amount of short-term borrowings (under revolving bank credit
arrangements and in the form of commercial paper) at the end of any month
was $144.5 million in fiscal 1996 and $121.5 million in fiscal 1995. The
average short-term borrowings during the year were $103.7 million in fiscal
1996 and $92.4 million in 1995. The weighted average interest rates
approximated 7.0% in fiscal 1996 and 1995.
Cash payments of interest for fiscal 1996, 1995, and 1994 were $16.5
million, $16.0 million, and $15.8 million, respectively.
NOTE 10: LEASES
- ---------------
The Company 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>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Minimum payments $82,829 $77,814 $67,199
Contingent payments 2,776 3,303 2,871
------- ------- -------
$85,605 $81,117 $70,070
======= ======= =======
</TABLE>
Future minimum payments under noncancelable operating leases with an
initial term of one year or more were as follows at February 1, 1997 (in
thousands):
<TABLE>
<CAPTION>
Operating
Leases
- --------------------------------------------------------------------------
<S> <C>
1997 $ 84,922
1998 74,455
1999 59,650
2000 44,511
2001 34,483
Thereafter 101,232
--------
Total minimum lease payments $399,253
========
</TABLE>
The Company is contingently liable for lease commitments of approximately
$67 million which primarily relate to the Cloth World and Meis specialty
retailing chains which were sold.
NOTE 11: FINANCIAL INSTRUMENTS
- ------------------------------
The Company utilizes derivative financial instruments to reduce its
exposure to market risks from changes in interest rates and foreign
exchange rates. The instruments primarily used are foreign exchange
contracts, interest rate swaps and interest rate futures. The Company is
exposed to credit related losses in the event of nonperformance by
counterparties to these financial instruments; however, counterparties to
these agreements are major international financial institutions, and the
risk of loss due to nonperformance is believed to be minimal.
The Company 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 Company 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
Company also hedges certain foreign currency assets and liabilities through
the use of non-deliverable foreign exchange contracts, and in 1996 entered
into a $17.0 million notional foreign exchange contract which is designed
to protect the realizable value of inventories at the Company's Brazilian
subsidiary in the event of a major devaluation and economic downturn in the
Brazilian economy. 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.
The United States dollar equivalent of contractual amounts of the Company's
forward exchange contracts consist of the following (in thousands):
<TABLE>
<CAPTION
February 1, February 3,
1997 1996
----------- -----------
<S> <C> <C>
Deliverable Contracts
Italian Lira $21,400 $12,600
French Francs 9,600 8,600
Canadian Dollars 6,300 4,400
Other Currencies 2,000 2,000
Non-Deliverable Contracts
Brazilian Real 22,100 4,900
New Taiwanese Dollars 7,200 6,900
Other Currencies 1,900 1,500
------- -------
$70,500 $40,900
======= =======
</TABLE>
The unrealized gains related to these contracts, based on dealer-quoted
prices, were $.3 million at February 1, 1997 and $.5 million at February 3,
1996.
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, or that are designed to protect earnings,
are recognized in income as incurred.
In early 1996, a three-year interest rate swap agreement, which reduced the
interest cost on $75.0 million of long-term debt, expired. The Company had
no interest rate derivative financial instruments outstanding at February
1, 1997.
NOTE 12: FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------
The carrying amounts and fair values of the Company's financial instruments
at February 1, 1997 and February 3, 1996 are (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- --------
<S> <C> <C> <C> <C>
Liabilities
Long-Term Debt $199,025 $199,009 $107,470 $109,626
Interest Rate Swap -- -- 202 635
</TABLE>
Carrying amounts reported on the balance sheet for Cash and Cash
Equivalents, Receivables and Notes Payable approximate fair value due to
the short-term maturity of these instruments.
The fair value of the Company's long-term debt and interest rate swap was
based upon the borrowing rates currently available to the Company 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 Company maintains cash and cash equivalents and certain other financial
instruments with various financial institutions. The financial institutions
are located throughout the world, and the Company's policy is designed to
limit exposure to any one institution or geographic region. The Company's
periodic evaluations of the relative credit standing of these financial
institutions are considered in the Company's investment strategy.
The Company'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 Company 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 Company is involved in environmental remediation and ongoing compliance
at several sites. At its closed New York tannery and two associated
landfills, the Company has completed its remediation efforts, and 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 allowed the
Company to reliably estimate the future liability for monitoring and
maintenance, which is required over the next 27 years. Accordingly, in the
third quarter of 1995, the estimated liability related to this site was
discounted, using a 6.4% rate, resulting in a $2.0 million reduction in the
previously recorded liability for this site. This increase in earnings was
included in Other Expense (Income) on the Consolidated Statements of
Earnings. The Company has begun remediation work at an owned manufacturing
facility that is leased to another party. 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. At February 1, 1997, the total accrued environmental
liabilities for all sites was $3.1 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.
NOTE 15: CAPITAL STOCK
- ----------------------
Common Stock
- ------------
The Company's Common Stock has a par value of $3.75 per share and
100,000,000 shares are authorized. At February 1, 1997 and February 3,
1996, there were 17,969,977 shares and 17,930,977 shares, net of 4,035,920
shares and 4,074,920 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 5,500 shareholders of record at March
1, 1997.
The Company has a Shareholder Rights Plan, under which each outstanding
share of the Company's common stock carries one Common Stock Purchase
Right. The rights may only become exercisable under certain circumstances
involving acquisition of the Company's common stock by a person or group of
persons without the prior written consent of the Company. Depending on the
circumstances, if the rights become exercisable, the holder may be entitled
to purchase shares of the Company'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 Company 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 Company 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
also may 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 the
date of grant. Because the stock appreciation rights are issued in tandem
with stock options, the exercise of either cancels the other. As of
February 1, 1997, 594,150 additional shares of common stock were available
to be granted in the form of options or restricted stock.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options instead of the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that Statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1995 and 1996, respectively: risk-free
interest rates of 5.9% and 6.6%; dividend yields of 6.9% and 5.9%;
volatility factors of the expected market price of the Company's common
stock of .26 and .29; and a weighted-average expected life of the option of
7 years. The weighted average fair value of options granted during 1995 and
1996 was $2.41 and $3.53 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands, except for earnings
per share information):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net income, as reported $20,315 $3,297
Pro forma net income 19,957 3,226
Earnings per share, as reported 1.15 .19
Pro forma earnings per share 1.13 .18
</TABLE>
The following summary sets forth the Company's stock option and stock
appreciation rights activity for the three years ended February 1, 1997:
<TABLE>
<CAPTION>
Number of Weighted
------------------------ Average
Option Appreciation Exercise
Shares Units Price
------ ------------ --------
<S> <C> <C> <C>
Outstanding
January 29, 1994 910,518 55,145 $31
Granted 48,500 -- 38
Exercised (265,893) (14,548) 28
Terminated (59,815) -- 33
--------- ------- ----
Outstanding
January 28, 1995 633,310 40,597 33
Granted 413,000 30,158 17
Exercised (18,225) -- 23
Terminated (154,663) (3,059) 34
--------- ------- ----
Outstanding
February 3, 1996 873,422 67,696 25
Granted 254,000 64,405 17
Exercised -- -- --
Terminated (203,926) (21,316) 32
--------- ------- ----
Outstanding
February 1, 1997 923,496 110,785 $22
========= ======= ====
</TABLE>
Following is a summary of stock options outstanding as of February 1, 1997,
which have exercise prices ranging from $14 to $39:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Exercise Remaining
Options Price Life
--------- -------- ---------
<S> <C> <C> <C>
Options Outstanding:
Price under $25 700,195 $18 9
Price $25 or over 223,301 34 3
------- --- ---
923,496 $22 7
======= === ===
Options Exercisable:
Price under $25 152,320 $19 7
Price $25 or over 201,801 34 2
------- --- ---
354,121 $28 4
======= === ===
</TABLE>
Under the Company's restricted stock program, common stock of the Company
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 vesting period.
Restricted shares granted, net of forfeitures, were 32,500; (36,875); and
168,000 in 1996, 1995 and 1994, respectively, and compensation expense was
$2.5 million, $1.6 million and $2.5 million in 1996, 1995 and 1994,
respectively.
NOTE 17: SUPPLEMENTARY INFORMATION
- ----------------------------------
Balance Sheet
- -------------
Cash equivalents of $26.3 million and $22.3 million at February 1, 1997 and
February 3, 1996, respectively, are stated at cost which approximates fair
value.
Statement of Consolidated Earnings
- ----------------------------------
Advertising costs totaled $55.9 million, $51.8 million, and $44.2 million
in fiscal 1996, 1995 and 1994, respectively. Other Expense (Income)
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- ---------
<S> <C> <C> <C>
Interest income $(1,202) $(1,762) $ (1,521)
Restructuring charges -- 3,600 --
Royalty income (2,702) (2,996) (3,003)
Countervailing duty (A) -- -- (9,819)
Other, net 2,563 2,788 2,023
-------- -------- ---------
Total $(1,341) $ 1,630 $(12,320)
======== ======== =========
</TABLE>
(A) Gain from settlement of Brazilian countervailing duties.
NOTE 18: CONDENSED CONSOLIDATING FINANCIAL INFORMATION
- ------------------------------------------------------
The 9.5% Senior Notes, the revolving bank Credit Agreement and the 7.36%
Senior Notes, discussed in Note 9, are unconditionally and jointly and
severally guaranteed by certain wholly-owned domestic subsidiaries of the
Company. The non-guarantor subsidiaries are predominantly foreign
subsidiaries of the Company. Accordingly, condensed consolidating balance
sheets as of February 1, 1997 and February 3, 1996, and the related
condensed consolidating statements of earnings and cash flows for each of
the three years in the period ended February 1, 1997 are provided. These
condensed consolidating financial statements have been prepared using the
equity method of accounting in accordance with the requirements for
presentation of such information. Management believes that this
information, presented in lieu of complete financial statements for each of
the guarantor subsidiaries, provides meaningful information to allow
investors to determine the nature of the assets held by, and the operations
and cash flows of, each of the consolidating groups.
Condensed Consolidating Balance Sheet As of February 1, 1997
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Sub- Sub- Elimi- Consolidated
Parent sidiaries sidiaries nations Totals
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash and
cash
equivalents $ (130) $ 6,310 $ 30,307 $ 2,199 $ 38,686
Receivables,
net 38,430 11,385 40,431 -- 90,246
Inventories,
net 67,101 296,511 47,689 (12,498) 398,803
Other current
assets 8,267 17,047 7,183 4,543 37,040
-------- ---------- -------- --------- ----------
Total Current
Assets 113,668 331,253 125,610 (5,756) 564,775
Property and
equipment, net 17,751 59,679 7,950 -- 85,380
Other assets 43,786 15,479 13,227 (272) 72,220
Investment in
subsidiaries 259,669 56,102 3,811 (319,582) --
-------- ---------- -------- --------- ----------
Total Assets $434,874 $ 462,513 $150,598 $(325,610) $ 722,375
======== ========== ======== ========= ==========
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ 62,000 $ -- $ -- $ -- $ 62,000
Accounts
payable 5,354 84,617 34,726 -- 124,697
Accrued
expenses 27,158 36,504 13,897 (6,506) 71,053
Income taxes (70) 3,074 1,001 -- 4,005
Current
maturities of
long-term debt 2,000 -- -- -- 2,000
-------- ---------- -------- --------- ----------
Total Current
Liabilities 96,442 124,195 49,624 (6,506) 263,755
Long-term debt
and capitalized
lease
obligations 197,025 -- 75 (75) 197,025
Other liabilities 21,385 2,678 608 (113) 24,558
Intercompany
payable
(receivable) (117,015) 103,902 7,309 5,804 --
Shareholders'
equity 237,037 231,738 92,982 (324,720) 237,037
-------- ---------- -------- --------- ----------
Total
Liabilities
and Share-
holders'
Equity $434,874 $ 462,513 $150,598 $(325,610) $ 722,375
======== ========== ======== ========= ==========
</TABLE>
Condensed Consolidating Statement of Earnings for the Fiscal Year Ended
February 1, 1997
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Sub- Sub- Elimi- Consolidated
Parent sidiaries sidiaries nations Totals
-------- ---------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales $254,764 $1,155,158 $401,222 $(286,092) $1,525,052
Cost of goods
sold 179,403 741,203 323,923 (286,241) 958,288
-------- ---------- -------- --------- ----------
Gross profit 75,361 413,955 77,299 149 566,764
Selling and
administrative
expenses 72,660 385,320 64,768 (1,195) 521,553
Interest expense 18,897 235 195 -- 19,327
Intercompany
interest (income)
expense (14,097) 14,131 (34) -- --
Other expense
(income), net (4,393) 153 1,555 1,344 (1,341)
Equity in
(earnings) of
subsidiaries (17,075) (8,556) -- 25,631 --
-------- ---------- -------- --------- ----------
Earnings before
income taxes 19,369 22,672 10,815 (25,631) 27,225
Income tax
(provision)
benefit 946 (5,597) (2,259) -- (6,910)
-------- ---------- -------- --------- ----------
Net Earnings $ 20,315 $ 17,075 $ 8,556 $ (25,631) $ 20,315
======== ========== ======== ========= ==========
</TABLE>
Condensed Consolidating Statement of Cash Flows for the Fiscal Year Ended
February 1, 1997
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Sub- Sub- Elimi- Consolidated
Parent sidiaries sidiaries nations Totals
-------- ---------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided
(Used) by
Operating
Activities $(24,421) $ 27,197 $ 4,595 $ (4,101) $ 3,270
Investing
Activities:
Capital
expenditures (1,551) (17,338) (2,155) -- (21,044)
Other 1,387 4 23 -- 1,414
-------- ---------- -------- --------- ----------
Net Cash (Used)
by Investing
Activities (164) (17,334) (2,132) -- (19,630)
Financing
Activities:
(Decrease) in
short-term
notes payable (50,000) -- -- -- (50,000)
Principal
payments of
long-term debt
and capital-
ized leases (8,450) -- -- -- (8,450)
Proceeds from
issuance of
long-term debt 100,000 -- -- -- 100,000
Dividends paid (17,956) -- -- -- (17,956)
Proceeds from
issuance of
common stock 108 -- -- -- 108
Intercompany
financing 4,758 (12,519) 1,461 6,300 --
Debt issuance
costs (3,714) -- -- -- (3,714)
-------- ---------- -------- --------- ----------
Net Cash Provided
(Used) by
Financing
Activities 24,746 (12,519) 1,461 6,300 19,988
Increase
(Decrease) in
Cash and Cash
Equivalents 161 (2,656) 3,924 2,199 3,628
Cash and Cash
Equivalents at
Beginning of
Period (291) 8,966 26,383 -- 35,058
-------- ---------- -------- --------- ----------
Cash and Cash
Equivalents at
End of Period $ (130) $ 6,310 $ 30,307 $ 2,199 $ 38,686
======== ========== ======== ========= ==========
</TABLE>
Condensed Consolidating Balance Sheet As of February 3, 1996
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Sub- Sub- Elimi- Consolidated
Parent sidiaries sidiaries nations Totals
-------- ---------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash
equivalents $ (291) $ 8,966 $ 26,383 $ -- $ 35,058
Receivables,
net 34,415 10,737 41,265 -- 86,417
Inventories,
net 46,057 262,874 42,108 (8,757) 342,282
Other current
assets 14,738 16,655 8,200 1,988 41,581
-------- ---------- -------- --------- ----------
Total Current
Assets 94,919 299,232 117,956 (6,769) 505,338
Property and
equipment, net 18,101 62,197 7,422 -- 87,720
Other assets 39,900 15,947 12,604 (453) 67,998
Investment in
subsidiaries 242,121 47,546 3,811 (293,478) --
-------- ---------- -------- --------- ----------
Total Assets $395,041 $ 424,922 $141,793 $(300,700) $ 661,056
======== ========== ======== ========= ==========
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $112,000 $ -- $ -- $ -- $ 112,000
Accounts payable 6,950 65,507 33,656 -- 106,113
Accrued expenses 34,813 27,340 12,139 (2,801) 71,491
Income taxes 1,053 (2,173) 5,455 -- 4,335
Current
maturities of
long-term debt 2,000 -- -- -- 2,000
-------- ---------- -------- --------- ----------
Total Current
Liabilities 156,816 90,674 51,250 (2,801) 295,939
Long-term debt
and capitalized
lease
obligations 105,470 -- 125 (125) 105,470
Other liabilities 22,892 3,160 622 1,337 28,011
Intercompany
payable
(receivable) (121,773) 116,421 5,848 (496) --
Shareholders'
equity 231,636 214,667 83,948 (298,615) 231,636
-------- ---------- -------- --------- ----------
Total
Liabilities
and Share-
holders'
Equity $395,041 $ 424,922 $141,793 $(300,700) $ 661,056
======== ========== ======== ========= ==========
</TABLE>
Condensed Consolidating Statement of Earnings for the Fiscal Year Ended
February 3, 1996
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Sub- Sub- Elimi- Consolidated
Parent sidiaries sidiaries nations Totals
-------- ---------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales $251,292 $1,004,032 $385,367 $(184,795) $1,455,896
Cost of goods
sold 203,980 617,777 312,223 (185,055) 948,925
-------- ---------- -------- --------- ----------
Gross profit 47,312 386,255 73,144 260 506,971
Selling and
administrative
expenses 68,899 364,833 61,644 (1,278) 494,098
Interest expense 14,696 528 745 -- 15,969
Intercompany
interest
(income) expense (11,432) 11,449 (17) -- --
Other expense
(income), net (3,646) 1,426 2,312 1,538 1,630
Equity in
(earnings) of
subsidiaries (10,653) (4,645) -- 15,298 --
-------- ---------- -------- --------- ----------
Earnings (loss)
before income
taxes (10,552) 12,664 8,460 (15,298) (4,726)
Income tax
(provision)
benefit 11,249 (2,011) (3,815) -- 5,423
-------- ---------- -------- --------- ----------
Earnings From
Continuing
Operations $ 697 $ 10,653 $ 4,645 $ (15,298) $ 697
======== ========== ======== ========= ==========
</TABLE>
Condensed Consolidating Statement of Cash Flows for the Fiscal Year Ended
February 3, 1996
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Sub- Sub- Elimi- Consolidated
Parent sidiaries sidiaries nations Totals
-------- ---------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net Cash Pro-
vided (Used)
by Operating
Activities $(10,271) $ 19,768 $ 4,366 $ 1,842 $ 15,705
Investing
Activities:
Capital
expenditures (3,093) (21,076) (2,770) -- (26,939)
Proceeds from
sales of
assets of
discontinued
operations 2,444 -- -- -- 2,444
Other 4,293 1,090 25 -- 5,408
-------- ---------- -------- --------- ----------
Net Cash Provided
(Used) by Inves-
ting Activities 3,644 (19,986) (2,745) -- (19,087)
Financing
Activities:
Increase in
short-term
notes payable 45,915 -- -- -- 45,915
Principal pay-
ments of long-
term debt and
capitalized
leases (2,812) -- -- -- (2,812)
Dividends paid (23,325) -- -- -- (23,325)
Payments for
purchase of
treasury stock (824) -- -- -- (824)
Proceeds from
issuance of
common stock 564 -- -- -- 564
Intercompany
financing (11,309) 8,985 4,166 (1,842) --
-------- ---------- -------- --------- ----------
Net Cash Provided
(Used) by
Financing
Activities 8,209 8,985 4,166 (1,842) 19,518
Increase in Cash
and Cash
Equivalents 1,582 8,767 5,787 -- 16,136
Cash and Cash
Equivalents at
Beginning of
Period (1,873) 199 20,596 -- 18,922
-------- ---------- -------- --------- ----------
Cash and Cash
Equivalents at
End of Period $ (291) $ 8,966 $ 26,383 $ -- $ 35,058
======== ========== ======== ========= ==========
</TABLE>
Condensed Consolidating Statement of Earnings for the Fiscal Year Ended
January 28, 1995
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Sub- Sub- Elimi- Consolidated
Parent sidiaries sidiaries nations Totals
-------- ---------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales $310,409 $ 968,932 $425,870 $(243,574) $1,461,637
Cost of goods
sold 242,005 591,038 360,163 (243,832) 949,374
-------- ---------- -------- --------- ----------
Gross profit 68,404 377,894 65,707 258 512,263
Selling and
administrative
expenses 73,194 326,171 50,218 (756) 448,827
Interest expense 15,406 7 372 -- 15,785
Intercompany
interest
(income) expense (10,316) 10,430 (105) (9) --
Other expense
(income), net (13,998) 327 328 1,023 (12,320)
Equity in
(earnings) of
subsidiaries (34,803) (9,465) -- 44,268 --
-------- ---------- -------- --------- ----------
Earnings before
income taxes 38,921 50,424 14,894 (44,268) 59,971
Income tax
provision (5,355) (15,621) (5,429) -- (26,405)
-------- ---------- -------- --------- ----------
Earnings From
Continuing
Operations $ 33,566 $ 34,803 $ 9,465 $ (44,268) $ 33,566
======== ========== ======== ========= ==========
</TABLE>
Condensed Consolidating Statement of Cash Flows for the Fiscal Year Ended
January 28, 1995
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Sub- Sub- Elimi- Consolidated
Parent sidiaries sidiaries nations Totals
-------- ---------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided
by Operating
Activities $ 9,140 $ 30,467 $ 6,665 $ 2,111 $ 48,383
Investing
Activities:
Capital
expenditures (5,377) (25,587) (1,567) -- (32,531)
Proceeds from
sales of
assets of
discontinued
operations 118,532 -- -- -- 118,532
Other 2,434 1,786 6 -- 4,226
-------- ---------- -------- --------- ----------
Net Cash Provided
(Used) by
Investing
Activities 115,589 (23,801) (1,561) -- 90,227
Financing
Activities:
(Decrease) in
short-term
notes payable (105,005) -- -- -- (105,005)
Principal pay-
ments of
long-term debt
and capitalized
leases (7,764) -- -- -- (7,764)
Dividends paid (28,610) -- -- -- (28,610)
Payments for
purchase of
treasury stock (1,102) -- -- -- (1,102)
Proceeds from
issuance of
common stock 5,901 -- -- -- 5,901
Intercompany
financing 15,715 (6,664) (6,801) (2,250) --
-------- ---------- -------- --------- ----------
Net Cash (Used)
by Financing
Activities (120,865) (6,664) (6,801) (2,250) (136,580)
Increase (De-
crease) in Cash
and Cash
Equivalents 3,864 2 (1,697) (139) 2,030
Cash and Cash
Equivalents at
Beginning of
Period (5,737) 197 22,293 139 16,892
-------- ---------- -------- --------- ----------
Cash and Cash
Equivalents at
End of Period $ (1,873) $ 199 $ 20,596 $ -- $ 18,922
======== ========== ======== ========= ==========
</TABLE>
- -------------------------------
REPORTS ON FINANCIAL STATEMENTS
- -------------------------------
MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
- -----------------------------------------------------------
The management of Brown Group, Inc. has the responsibility for preparing
the accompanying financial statements and for their integrity and
objectivity. The statements were prepared in accordance with generally
accepted accounting principles, and are not misstated due to material fraud
or error. The financial statements include amounts that are based on
management's best estimates and judgments. Management also prepared the
other information in the annual report and is responsible for its accuracy
and consistency with the financial statements.
The Company's financial statements have been audited by Ernst & Young LLP,
independent auditors. Management has made available to Ernst & Young LLP
all the Company's financial records and related data, as well as the
minutes of shareholders' and directors' meetings. Furthermore, management
believes that all representations made to Ernst & Young LLP during its
audit were valid and appropriate.
The Audit Committee of Brown Group's Board of Directors comprises six
outside directors. The Committee meets regularly with the Company's
independent auditors, Ernst & Young LLP, and management. The purpose of
these meetings is to review, among other things, the scope and results of
the annual audit, the internal audit activities and the system of internal
accounting control. To ensure complete independence, Ernst & Young LLP and
the internal audit staff have direct access to the Audit Committee without
the presence of management to discuss the results of their examinations.
Management of the Company has established and maintains a system of
internal control that provides reasonable assurance as to the integrity and
reliability of the financial statements, the protection of assets from
unauthorized use or disposition, and the prevention and detection of
fraudulent financial reporting. The system of internal control provides for
appropriate division of responsibility and is documented by written
policies and procedures that are communicated to employees with significant
roles in the financial reporting process and updated as necessary. The
Company maintains an internal auditing program that independently assesses
the effectiveness of the internal controls and recommends possible
improvements thereto. Management believes that the Company's system of
internal control is adequate to accomplish the objectives discussed herein.
Management also recognizes its responsibility for fostering a strong
ethical climate so that the Company's affairs are conducted according to
the highest standards of personal and corporate conduct. This
responsibility is characterized and reflected in the Company's code of
conduct, which is published throughout the Company. The code of conduct
addresses, among other things, the necessity of ensuring open communication
within the Company; potential conflicts of interest; compliance with all
domestic and foreign laws, including those relating to financial
disclosure; and the confidentiality of proprietary information. The Company
maintains a systematic program to assess compliance with these policies.
The results of this compliance program are discussed with the Audit
Committee.
/s/ B. A. Bridgewater, Jr. /s/ Harry E. Rich
- -------------------------- -----------------
Chief Executive Officer Chief Financial Officer
REPORT OF ERNST & YOUNG LLP,
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 1, 1997 and February 3, 1996, and the related
statements of consolidated earnings, shareholders' equity, and cash flows
for each of the three years in the period ended February 1, 1997. 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 1, 1997 and February 3, 1996, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended February 1, 1997 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.
/s/ Ernst & Young, LLP
- ----------------------
St. Louis, Missouri
March 6, 1997
- -----------------------------------
SUPPLEMENTARY FINANCIAL INFORMATION
- -----------------------------------
Selected Quarterly Information (unaudited)
- ------------------------------
Following is a summary of selected quarterly information
(in thousands, except per share amounts) for fiscal years
ended February 1, 1997, and February 3, 1996.
<TABLE>
<CAPTION>
Quarters
----------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
(13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks)
<S> <C> <C> <C> <C>
1996
Net Sales $355,785 $389,983 $420,347 $358,937
Gross Profit 135,877 144,521 156,187 130,179
Net Earnings 527 5,514 12,905 1,369
Per Share of Common Stock:
Net Earnings .03 $ .31 $ .73 $ .08
Dividends Paid .25 .25 .25 .25
Market Value:
High 16 3/8 17 1/2 23 1/4 21 1/8
Low 12 1/4 12 1/4 14 1/8 14 5/8
(13 Weeks) (13 Weeks) (13 Weeks) (14 Weeks)
1995
Net Sales $357,442 $342,861 $406,921 $348,672
Gross Profit 120,195 116,509 144,009 126,258
Earnings (Loss) From:
Continuing Operations (4,411) (8,381) 9,715 3,774
Discontinued Operations -- -- -- 2,600
Net Earnings (Loss) (4,411) (8,381) 9,715 6,374
Per Share of Common Stock:
Earnings (Loss) From
Continuing Operations $ (.25) $ (.48) $ .55 $ .21
Net Earnings (Loss) (.25) (.48) .55 .36
Dividends Paid .40 .40 .25 .25
Market Value:
High 33 1/4 26 7/8 25 1/4 15 5/8
Low 27 3/4 21 3/4 13 3/4 12 3/4
</TABLE>
Note 1: 1996 results include an aftertax credit from LIFO inventory
liquidations of $2.6 million and a tax credit of $2.3 million from the
recovery of valuation reserves. The net effect on the quarterly results of
fiscal 1996 is aftertax credits of $2.0 million in the first quarter, $.6
million in the second quarter, $1.6 million in the third quarter, and $.7
million in the fourth quarter. In addition, the fourth quarter was
favorably affected by a lower than previously expected tax rate by $1.2
million.
Note 2: 1995 results from continuing operations include an aftertax charge
of $2.6 million for factory closings partially offset by a LIFO credit
related to the liquidation of manufacturing inventories, an aftertax charge
of $1.4 million related to the adoption of SFAS No. 121 on asset
impairment, and a net aftertax credit of $3.1 million primarily from a
court ruling overturning an Internal Revenue Service assessment against the
Company. The net effect on the quarterly results of fiscal 1995 is an
aftertax charge of $8.2 million in the second quarter and aftertax credits
of $3.2 million and $4.1 million in the third and fourth quarters,
respectively.
Directors' and Officers' Liability Insurance: The New York Business
Corporation Act requires that New York corporations provide to their
shareholders information regarding any policies of directors' and officers'
liability insurance which have been purchased or renewed. Accordingly,
notice is hereby given that on October 31, 1996, the Company renewed, for a
one-year term, policies of directors' and officers' liability insurance
from Federal Insurance Company, a member of the Chubb Insurance Group and
National Union Fire Insurance Company of Pittsburgh, Pennsylvania. These
policies cover all duly elected directors and all duly elected or appointed
officers of Brown Group, Inc. and its subsidiary companies. The policy
premium for a one-year term is $153,950. To date, no claims have been paid
under any policy of directors' and officers' liability insurance.
- -------------------------------------------
DIRECTORS, OFFICERS AND OPERATING COMMITTEE
- -------------------------------------------
Board of Directors
- ------------------
B. A. Bridgewater, Jr.1
Chairman of the Board, President, Chief Executive Officer and Chairman of
the Executive Committee
Joseph L. Bower 1, 3
Donald Kirk David Professor, Chairman of Doctoral Programs
and Director of Research,
Harvard Business School
Julie C. Esrey 2, 4
Director of various organizations
Richard A. Liddy 1, 2, 4
Chairman of the Board, President and Chief Executive Officer, General
American Life Insurance Company
John Peters MacCarthy 2, 3
Retired Chairman of the Board
and Chief Executive Officer, Boatmen's Trust Company
John D. Macomber 3, 4
Director of various corporations
William E. Maritz 1, 2, 4
Chairman of the Board and Chief Executive Officer, Maritz, Inc.,
a motivation, travel, training,
communications and marketing research services company
General Edward C. Meyer 3, 4
Retired Chief of Staff of the U.S. Army and international business
consultant
Harry E. Rich 1
Executive Vice President
and Chief Financial Officer
Jerry E. Ritter 2, 3
Chairman, Clark Enterprises, Inc., operator of the Kiel Center
Entertainment Complex and the
St. Louis Blues Hockey Club
Daniel R. Toll 2, 3
Corporate and civic director
Thomas A. Williams
Vice President and
President, Brown Shoe Company
Honorary Director:
- ------------------
W. L. Hadley Griffin
Retired Chairman of the Board of Brown Group, Inc.
Corporate Officers
- ------------------
B. A. Bridgewater, Jr.
Chairman of the Board, President and Chief Executive Officer
Harry E. Rich
Executive Vice President and Chief Financial Officer
Brian C. Cook
Vice President and President, Famous Footwear
Robert D. Pickle
Vice President, General Counsel and Corporate Secretary
Andrew M. Rosen
Vice President and Treasurer
Richard C. Schumacher
Vice President and Controller
Mary Sylvia Siverts
Vice President -- Public Affairs
Thomas A. Williams
Vice President and
President, Brown Shoe Company
Operating Committee
- -------------------
B. A. Bridgewater, Jr.
Chairman of the Board, President and Chief Executive Officer
Brian C. Cook
Vice President and President, Famous Footwear
Ronald N. Durchfort
President, Pagoda International
Ronald A. Fromm
Executive Vice President, Famous Footwear
J. Martin Lang
Vice President and Chief Financial Officer, Famous Footwear
Gary M. Rich
President, Pagoda U.S.A.
Harry E. Rich
Executive Vice President and Chief Financial Officer
James M. Roe
Senior Vice President -- Sales and Operations, Famous Footwear
Andrew M. Rosen
Vice President and Treasurer
David H. Schwartz
President, Pagoda Trading
Thomas A. Williams
Vice President and President, Brown Shoe Company
E. Lee Wyatt, Jr.
Senior Vice President -- Finance and Administration, Brown Shoe Company
George J. Zelinsky
Senior Vice President and General Merchandise Manager, Famous Footwear
Secretary to the Committee:
- ---------------------------
Richard C. Schumacher
Vice President and Controller
- -----------------------------------------------
1 Member of Executive Committee
2 Member of Audit Committee
3 Member of Compensation Committee
4 Member of Governance and Nominating Committee
- -----------------------------------------------
- --------------------
INVESTOR INFORMATION
- --------------------
Corporate Headquarters
- ----------------------
Brown Group, Inc.
8300 Maryland Avenue
St. Louis, Missouri 63105
Mailing Address:
Post Office Box 29
St. Louis, Missouri 63166-0029
(314) 854-4000 Telephone
(314) 854-4274 Fax
Internet Address
- ----------------
http://www.browngroup.com
Annual Meeting
- --------------
11:00 a.m.
Thursday, May 22, 1997
Brown Group, Inc.
Corporate Headquarters
8300 Maryland Avenue
St. Louis, Missouri
Stock Listed
- ------------
Brown Group stock is listed on the New York Stock Exchange and the Chicago
Stock Exchange (ticker symbol BG).
Number of shareholders of record
- --------------------------------
5,500
Number of employees
- -------------------
11,500
Transfer Agent, Registrar and Dividend Disbursing Agent
- -------------------------------------------------------
Boatmen's Trust Company
Corporate Trust Division
510 Locust Street
St. Louis, Missouri 63101-1845
(314) 466-1581 or
(800) 456-9852
Dividend Reinvestment Plan
- --------------------------
A dividend reinvestment plan is offered to shareholders of Brown Group,
Inc. The plan provides a means of automatic dividend reinvestment and
includes a provision for voluntary investment of additional cash. For a
prospectus and enrollment form contact Boatmen's Trust Company (address
above).
Direct deposit of Dividends
- ---------------------------
Registered shareholders may have their quarterly dividend check deposited
directly to their bank accounts. For more information or to request an
enrollment form, contact Boatmen's Trust Company (address above).
Trustee of Debentures/Notes
- ---------------------------
State Street Bank and Trust Company of Missouri, N. A.
Post Office Box 321
St. Louis, Missouri 63166-0321
(314) 206-3020
Independent Auditors
- --------------------
Ernst & Young LLP
St. Louis, Missouri
ADDITIONAL INFORMATION
- ----------------------
Information about Brown Group, Inc. is available to shareholders from
several sources as listed below:
On the Internet: You can access financial and other information such as
significant news releases, Forms 10-K and 10-Q, and product information, on
the Internet at http://www.browngroup.com
By fax-back: As a service to our shareholders and prospective investors,
copies of Brown Group, Inc.'s press releases can be transmitted at no
charge via fax by calling "Company News On-Call" at (800) 758-5804
extension 109435. This electronic, menu-driven system allows callers to
receive specific Brown Group, Inc. news releases within minutes of request.
By calling or writing: You can also request that any of these materials be
mailed to you at no charge by calling
or writing:
Brown Group, Inc.
Investor Relations Office
Post Office Box 29
St. Louis, Missouri 63166-0029
(314) 854-4000
Safe Harbor statement
- ---------------------
This annual report contains forward- looking statements within the meaning
of the Private Securities Litigation Reform Act. Actual results could
differ materially from those projected. In Exhibit 99 to the Company's
Annual Report on Form 10-K, detailed factors that could cause variations in
results to occur are listed and discussed. Such Exhibit is incorporated
herein by reference.
Brown Group, Inc. is an equal opportunity employer.
Printed on recycled paper with soy inks.
Brown Group, Inc.
8300 Maryland Avenue
Post Office Box 29
St. Louis, Missouri 63166-0029
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
BROWN GROUP, INC.
FEBRUARY 1, 1997
State or Country
Name of Incorporation
Brown California, Inc. California
Brown Cayman Ltd. Cayman Islands
Brown Group Dublin Limited Ireland
Brown Group International, Inc. Delaware
Brown Group Retail, Inc. Pennsylvania
Brown Limited Hong Kong
Brown Missouri, Inc. Missouri
Brown Retail Development Company Louisiana
Brown Shoe Company of Canada, Ltd. Canada
Brown Texas, Inc. Texas
Clayton License, Inc. Delaware
KidNATION, Inc. Missouri
Laysan Company Limited Hong Kong
Linway Investment Limited Hong Kong
LCS International B.V. Netherlands
Maryland Square, Inc. Missouri
Maserati Footwear, Inc. New York
Moda Universal S.A. De C.V. Mexico (50% owned)
PIC International Corporation Cayman Islands
PLD, Inc. North Carolina
Pagoda Argentina S.A. Argentina (75% owned)
Pagoda Asia Pacific Limited Hong Kong
Pagoda International Corporation do Brazil Brazil
Pagoda International Footwear Limited Hong Kong
Pagoda International SARL France
Pagoda Italia, S.r.l. Italy
Pagoda Leather Limited Hong Kong
Pagoda Netherlands C.V. Netherlands
Pagoda Netherlands Investment Corporation Missouri
Pagoda Trading Company, Inc. Missouri
Pagoda Trading North America, Inc. Missouri
Sidney Rich Associates, Inc. Missouri
Whitenox Limited Hong Kong
<PAGE>
Exhibit 21
Subsidiaries of the Registrant (Continued)
Naturalizer Retail does business under the following names:
Naturalizer
Naturalizer Outlet
Naturalizer Plus
Famous Footwear does business under the following names:
Factory Brand Shoes
Famous Footwear
Somers
Supermarket of Shoes
Brown Group, Inc. does business under the following names:
Brown Shoe Company
Scholze Tannery<PAGE>
EXHIBIT 23
Consent of Independent Auditors
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Brown Group, Inc. of our report dated March 6, 1997, included in
the 1996 Annual Report to Shareholders of Brown Group, Inc.
Our audits also included the financial statement schedule listed in Item
14(a). This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our
opinion, the financial statement schedule, referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the following
registration statements of our report dated March 6, 1997, with respect to
the consolidated financial statements of Brown Group, Inc. incorporated by
reference in the Annual Report (Form 10-K) for the year ended February 1,
1997:
Registration
Form Statement
Number Number Description
- -------------------------------------------------------------------------------
Form S-8 2-58347 Stock Purchase Plan of 1977, as amended
Form S-8 33-22328 Brown Group, Inc. Stock Option and Restricted
Stock Plan of 1987, as amended
Form S-8 33-58751 Stock Option and Restricted Stock Plan of 1994
Form S-3 33-21477 Debt Securities
St. Louis, Missouri Ernst & Young LLP /s/
April 16, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> FEB-01-1997
<CASH> 38,686
<SECURITIES> 0
<RECEIVABLES> 100,449
<ALLOWANCES> (10,203)
<INVENTORY> 398,803
<CURRENT-ASSETS> 564,775
<PP&E> 202,229
<DEPRECIATION> (116,849)
<TOTAL-ASSETS> 722,375
<CURRENT-LIABILITIES> 263,755
<BONDS> 197,025
0
0
<COMMON> 67,387
<OTHER-SE> 169,650
<TOTAL-LIABILITY-AND-EQUITY> 722,375
<SALES> 1,525,052
<TOTAL-REVENUES> 1,525,052
<CGS> 958,288
<TOTAL-COSTS> 1,479,841
<OTHER-EXPENSES> (1,341)
<LOSS-PROVISION> 5,982
<INTEREST-EXPENSE> 19,327
<INCOME-PRETAX> 27,225
<INCOME-TAX> 6,910
<INCOME-CONTINUING> 20,315
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,315
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.15
</TABLE>
EXHIBIT 99.1
Safe Harbor for Forward-Looking Statements;
Certain Risk Factors That Could Affect the
Company's Operating Results
Certain statements made by the Company from time to time contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Actual results could differ materially. The
considerations listed below represent certain important factors that 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.
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, and in
part on its ability to anticipate and respond to changing merchandise trends
and consumer preferences and demands in a timely manner.
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.
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.
The Company relies heavily on independent third-party manufacturing
facilities located in China. 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
been, however, and may in the future be, threats to the trade relationships
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.
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. 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 changes 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. 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, 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. In addition, 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.
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's achieving certain
results in marketing the licensed material. 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. In
<PAGE>
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 purchases a substantial
portion of its footwear products from major 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.
