SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
1997 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 January 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ____________ to __________
____________
Commission file number 1-2191
____________
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
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 4, 1998, 18,053,827 common shares were outstanding, and the
aggregate market value of the common shares held by non-affiliates of the
registrant was approximately $261 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended January 31, 1998,
are incorporated by reference into Parts I and II.
Portions of the proxy statement for the annual meeting of shareholders to be
held May 28, 1998, are incorporated by reference into Part III.
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 1997, categories of footwear sales were approximately 60%
women's footwear, 24% men's footwear and 16% children's footwear. This
composition has remained relatively constant over the past few years.
Approximately 66% of 1997 footwear sales were made at retail compared to 63%
in 1996 and 62% in 1995. See Note 6 of Notes to Consolidated Financial
Statements on page 28 of the Annual Report to Shareholders for the year ended
January 31, 1998, 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 with 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 100 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, 1998 and October,
1999.
Retail Operations
- -----------------
The Company's retail operations at January 31, 1998 include 1,279 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 with over 800 stores is America's largest chain selling
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 815 stores in the United States as of the end of fiscal 1997. Famous
Footwear stores feature a wide selection of "brand name shoes for less for the
entire family" 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, Rockport, What's What, Westies, Dexter,
Naturalizer, Connie, Nunn Bush, Adidas 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.
With two distribution centers located in Madison, Wisconsin and Lebanon,
Tennessee, Famous Footwear's distribution systems allow for merchandise to be
delivered typically 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 1997, management invested over $28 million, an 8%
increase over 1996, to communicate Famous Footwear's "brand name shoes for
less for the entire family" 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 341
Naturalizer stores located in the United States and 107 stores in Canada.
Naturalizer specialty stores located in regional malls average approximately
1,300 square feet in size, and outlet stores located in outlet malls and
shopping centers average approximately 2,600 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. The
Company has invested in additional Naturalizer sales force training
commensurate with the brand image of style, quality and comfort as well as
utilized a database marketing program, which targets and rewards frequent
customers. In addition, the Company believes that updated point-of-sale
registers and a new merchandising reporting system planned for 1998 will
improve the information on inventories and consumer preferences.
<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 2,100 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
1997 1996 1995
---- ---- ----
Famous Footwear
Family footwear stores which feature "brand names
for less"; located in strip centers and regional
and outlet malls. 815 794 814
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. 448 446 409
F. X. LaSalle
Stores selling men's and women's better-grade
branded footwear in major malls in Canada. 16 16 15
Other Family Footwear Stores
Selling men's, women's and children's footwear. 0 0 3
----- ----- -----
Total 1,279 1,256 1,241
===== ===== =====
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, Pagoda
and Brown Shoe Sourcing divisions to approximately 5,000 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
Brown Shoe Sourcing division, formerly known as Pagoda Trading.
<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 February 28, 1998, the Company's wholesale operations had a backlog of
unfilled orders of approximately $167 million compared to the same amount on
March 1, 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
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, Penaljo, Life Stride, LS Studio, and
Night Life 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. In addition, the division introduced in 1997 the
patented Energyheel technology, held under a license agreement, on certain
Naturalizer products.
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
Proffitts, Inc.
<PAGE>
ITEM 1 - BUSINESS (Continued)
- ------------------
The Brown Branded Marketing division maintains an independent sales force
to market its Naturalizer, NaturalSport, Life Stride, LS Studio and Night Life
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 1997, the
division invested over $19 million in advertising and marketing in support of
certain of its brands, which represents an increase of 18% over 1996.
Pagoda Division
The Pagoda division is a leading 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; and (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.
In 1997, the Company made a decision to reduce its investment in the
Pagoda International division in Latin America and Europe as a result of
excessive inventories and declining performance. The restructuring plan
includes the sale of the remaining Brazilian inventory of licensed products
and the shift of European inventory ownership and marketing of its licensed
footwear to distributors. See Note 3 of Notes to Consolidated Financial
Statements on page 25 of the Annual Report to Shareholders for the year ended
January 31, 1998, which is incorporated herein by reference, for additional
information regarding the restructuring of the Pagoda International division.
Pagoda USA, which is a leading branded and private label footwear
resource for many of the nation's larger retailers, including Dillards, Edison
Brothers, Famous Footwear, Kmart, Mercantile, Payless ShoeSource, Sears,
Target and Wal-Mart, provided its wholesale customers with over 43 million
pairs of shoes in 1997.
Pagoda USA and Pagoda International design and market a broad offering of
women's, men's and children's branded and licensed footwear for department
stores, specialty footwear stores and other retailers, domestically and
internationally, respectively. Major brand names owned by the Pagoda Division
include Air Step, Connie, le coq sportif, Larry Stuart, Buster Brown and
Wildcats.
<PAGE>
ITEM 1 - BUSINESS (Continued)
- -----------------
Pagoda USA and Pagoda International also 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 11%,
13% and 13% of consolidated sales in 1997, 1996, and 1995, respectively.
Pagoda has 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. The Company's
other significant license agreements include Penn, Russell Athletic, Unionbay,
Barbie, Star Wars and various Walt Disney properties, including Mickey & Co.,
Mulan and Simba's Pride. No single licensor represented greater than four
percent of consolidated net sales for fiscal 1997.
Brown Shoe Sourcing Division
The Brown Shoe Sourcing Division, formerly known as Pagoda Trading,
sources essentially all of the footwear globally for Brown Shoe Company's
Branded Marketing division, the Naturalizer Retail division, Pagoda USA and
Pagoda International, and a portion of the footwear sold by Famous Footwear.
The division, which in 1997 sourced 72 million pairs of shoes, has developed a
global sourcing capability through its 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, China, Hong
Kong, Indonesia, Italy, Mexico, and Taiwan. This structure enables the
Company to source footwear at various price levels from significant shoe
manufacturing regions of the world. In 1997, over half of the footwear
sourced by Brown Shoe Sourcing 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 1997:
Country Millions of Pairs
------- -----------------
China 54.6
Brazil 7.0
Indonesia 4.8
Italy 3.4
Taiwan 0.6
All Other 1.7
----
Total 72.1
====
The Company monitors the quality of the 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.
<PAGE>
ITEM 1 - BUSINESS (Continued)
- ------------------
The Company maintains separate design teams 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. A leased sales office and showroom is maintained in New York City.
The Company's retail footwear operations are conducted throughout the
United States and Canada and involve the operation of 1,279 shoe stores,
including 123 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.
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 results of
operations or financial position.
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 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 over the next 26 years. The Company has begun
remediation work at an owned manufacturing facility that is leased to another
party in Colorado, and is working with the state of Colorado's environmental
authorities to determine the extent to which, if any, solvents have left the
Company's property. 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
Company's closed tannery and shoe manufacturing facilities. See Note 14 of
Notes to Consolidated Financial Statements on page 31 of the Annual Report to
Shareholders for the year ended January 31, 1998, 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.
<PAGE>
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 1997.
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, 1998.
Name Age Current Position
- ---- --- ----------------
B. A. Bridgewater, Jr. 64 Chairman of the Board, President, Chief
Executive Officer and Chairman of the
Executive Committee
Brian C. Cook 58 Vice President, Brown Group, Inc. and
President, Famous Footwear
Ronald A. Fromm 47 Vice President, Brown Group, Inc. and
President, Brown Shoe Company
J. Martin Lang 41 Senior Vice President and Chief Financial
Officer, Famous Footwear
Robert D. Pickle 60 Vice President, General Counsel and
Corporate Secretary
Gary M. Rich 47 President, Pagoda U.S.A.
Harry E. Rich 58 Director, Executive Vice President,
Chief Financial Officer and Member of the
Executive Committee
James M. Roe 52 Senior Vice President, Real Estate,
Famous Footwear
Andrew M. Rosen 47 Vice President and Treasurer
Richard C. Schumacher 50 Vice President and Controller
David H. Schwartz 53 President, Brown Shoe Sourcing
Mary Sylvia Siverts 38 Vice President, Public Affairs
George J. Zelinsky 49 Senior Vice President and General Merchandise
Manager, Famous Footwear
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
- -------------------------------------
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 A. Fromm, Vice President of the registrant and President, Brown Shoe
Company since March 1998. Executive Vice President, Famous Footwear from
September 1992 to March 1998. Vice President and Chief Financial Officer of
Famous Footwear from 1988 to 1992.
J. Martin Lang, Senior Vice President and Chief Financial Officer, Famous
Footwear since March 1998. Vice President and Chief Financial Officer, Famous
Footwear from 1995 through March 1998. 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.
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, Real Estate, Famous Footwear since August
1997. Senior Vice President, Sales and Operations, Famous Footwear from
December 1994 to August 1997. 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, Brown Shoe Sourcing 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.
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 January 31, 1998, 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 January 31, 1998, 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 January 31, 1998, 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 January 31, 1998, 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 9 of
the Proxy Statement for the Annual Meeting of Shareholders to be held
May 28, 1998, 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 10 through 19 and
21 through 26 of the Proxy Statement for the Annual Meeting of Shareholders to
be held May 28, 1998, is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Security Holdings of Directors and Management on page 3 of the Proxy
Statement for the Annual Meeting of Shareholders to be held May 28, 1998, 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
March 5, 1998, filed herewith.
4.(a) Rights Agreement dated as of March 7, 1996
between the Company and First Chicago Trust
Company of New York, which includes as
Exhibit A the form of Rights Certificate
evidencing the Company's Common Stock
Purchase Rights, incorporated herein by
reference to the Company's Form 8-K dated
March 7, 1996.
(a) (i) Amendment to Rights Agreement between
Brown Group, Inc. and First Chicago
Trust Company of New York, dated as of
July 8, 1997, effective August 11,
1997, incorporated herein by reference
to the Company's Form 8-K dated August
8, 1997.
(b) 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 the
Company's Form 8-K dated January 9, 1997.
(b) (i) Amendment No. 1, dated October 8, 1997, to
the Credit Agreement between the Company and
the Lenders named therein, NationsBank, N.A.,
as Agent, and First Chicago Capital Markets,
Inc., as Syndication Agent, incorporated
herein by reference to the Company's Form
10-Q dated November 1, 1997.
(c) Indenture dated as of October 1, 1996, between the
Company and State Street Bank and Trust Company, as
Trustee, incorporated herein by reference to the
Company's Form 8-K dated October 7, 1996.
(c) (i) First Supplemental Indenture dated as of
January 9, 1997, between the Company and
State Street Bank and Trust Company, as
Trustee, incorporated herein by reference to
the Company's Form 8-K dated January 9, 1997.
(c) (ii) Second Supplemental Indenture dated as of
January 23, 1998, between the Company and
State Street Bank and Trust Company, as
Trustee, filed herewith.
(d) Senior Note Agreement, dated as of
October 24, 1995, between the Company
and Prudential Insurance Company of
America, as amended, incorporated
herein by reference to the Company's
Form 10-K dated February 1, 1997.
<PAGE>
(d)(i) Amendment No. 2, dated October 7,
1997, to the Senior Note Agreement
between the Company and Prudential
Insurance Company of America, as
amended, incorporated herein by
reference to the Company's Form 10-Q
dated November 1, 1997.
(e) 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.
(c)* Transition and Consulting Agreement, dated
September 11, 1997, between the Company and
B. A. Bridgewater, Jr., filed herewith.
13. Annual Report to Shareholders of Brown
Group, Inc. for the fiscal year ended
January 31, 1998. Such report, except
for portions specifically 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 for fiscal 1997.
27.1 Financial Data Schedule for restatement of
first three quarters of fiscal 1997.
27.2 Financial Data Schedule for restatement of the three
quarters and year end of fiscal 1996.
27.3 Financial Data Schedule for restatement of year
end of fiscal 1995.
<PAGE>
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 January 9, 1998, which announced
the commencement of a consent solicitation
relating to its $100,000,000 aggregate
principal amount of 9-1/2% Senior Notes due
October 15, 2006.
The Company filed a current report on Form
8-K dated January 23, 1998, which announced
that the consent solicitation relating to its
$100,000,000 9-1/2% Senior Notes due October
15, 2006 expired at 5:00 p.m., New York City
time and that it had received consents from
holders of at least a majority in aggregate
principal amount of the Notes.
The Company filed a current report on Form
8-K dated February 5, 1998, which announced
divisional retail sales results for the four-
week period, fourth quarter, and fiscal year
ended January 31, 1998. Brown Group, Inc.
also announced additional losses at its
Pagoda International division as well as
disclosed the sale of Famous Footwear's
fixture manufacturing facilities and the
contract completion for sale of its Brazilian
subsidiary's inventory.
The Company filed a current report on Form
8-K dated March 5, 1998, which announced
operating results for the fiscal year ended
January 31, 1998. Brown Group, Inc. also
announced additional losses at its Pagoda
International division which offset favorable
results from core operations.
(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 20, 1998 BROWN GROUP, INC.
----------------------------
(Registrant)
By /s/ Harry E. Rich
----------------------------
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 20, 1998, by the following persons on
behalf of the Registrant and in the capacities indicated.
Signatures Title
---------- -----
/s/ B. A. Bridgewater, Jr. Chairman of the Board of Directors
President and Chief Executive
Officer and on behalf of the Company
as Principal Executive Officer
/s/ Harry E. Rich Director, Executive Vice President
and Chief Financial Officer
/s/ Richard C. Schumacher Vice President and Controller and
on behalf of the Company as
Principal Accounting Officer
<PAGE>
Signatures Title
---------- -----
/s/ Julie C. Esrey Director
/s/ Richard A. Liddy Director and Chairman of
Audit Committee
/s/ John Peters MacCarthy Director
/s/ Jerry E. Ritter 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 JANUARY 31, 1998
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 January 31, 1998, are incorporated by reference in Item 8:
Consolidated Balance Sheets - January 31, 1998, and February 1, 1997.
Consolidated Earnings - Years ended January 31, 1998, February 1, 1997,
and February 3, 1996.
Consolidated Cash Flows - Years ended January 31, 1998, February 1, 1997,
and February 3, 1996.
Consolidated Shareholders' Equity - Years ended January 31, 1998, February
1, 1997, and February 3, 1996.
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
(Thousands)
YEAR ENDED JANUARY 31, 1998
- ---------------------------
Deducted from assets:
For doubtful accounts
and discounts $10,203 $5,145 $5,423-A $9,925
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
</TABLE>
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
Exhibit
3.(ii) Bylaws as amended through March 5, 1998
4.(c)(ii) Second Supplemental Indenture dated as
of January 23, 1998, between the
Company and State Street Bank and
Trust Company, as Trustee
10.(c) Transition and Consulting Agreement,
dated September 11, 1997, between
the Company and B. A. Bridgewater,
Jr.
13. 1997 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 - fiscal 1997
27.1 Financial Data Schedule - first three
quarters of fiscal 1997 restated
27.2 Financial Data Schedule - first three
quarters and year end of fiscal
1996 restated
27.3 Financial Data Schedule - year end of
fiscal 1995 restated
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 MARCH 5, 1998
<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 Shareholders 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 ten. Such directors shall be classified in respect of the
time for which they shall severally hold office by dividing them into
two classes consisting of three directors each and one class consisting
of four directors. 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 Shareholders any person for election as a director for a term
extending beyond the Annual Meeting of Shareholders 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 Shareholders 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.
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.
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.
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)(ii)
SECOND SUPPLEMENTAL INDENTURE
This SECOND SUPPLEMENTAL INDENTURE, dated as of January 23,
1998, between BROWN GROUP, INC., a corporation incorporated under the laws of
the State of New York (the "Company"), BROWN GROUP INTERNATIONAL, INC., a
Delaware corporation, BROWN GROUP RETAIL, INC., a Pennsylvania corporation,
PAGODA TRADING COMPANY, INC., a Missouri corporation, and SIDNEY RICH
ASSOCIATES, INC., a Missouri corporation (each a "Guarantor" and collectively,
the "Guarantors"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts
Trust Company, as trustee.
WHEREAS, the Company has heretofore executed and delivered to
the Trustee an Indenture dated as of October 1, 1996 (as amended, modified or
supplemented from time to time, the "Indenture");
WHEREAS, the Company and the Guarantors heretofore executed and
delivered to the Trustee a First Supplemental Indenture dated as of January 9,
1997 (the "First Supplemental Indenture");
WHEREAS, Section 9.02 of the Indenture provides that the
Company, when authorized by a Board Resolution of its Board of Directors, and
the Trustee may amend the Indenture or the Securities with the written consent
of the Holders of not less than a majority in aggregate principal amount of the
Securities then outstanding; and
WHEREAS, Holders of not less than a majority in aggregate
principal amount of Securities outstanding as of January 9, 1998, have
consented in writing to certain modifications to the definition of "Consolidated
Net Income" in Section 1.01 of the Indenture and to an amendment to the
Limitation on the Disposition of Proceeds of Asset Sales in Section 4.13 of the
Indenture.
NOW THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Company, the Guarantors
and the Trustee hereby agree as follows:
Section 1. Definitions. Except as otherwise expressly
provided herein, all capitalized words and terms used herein shall have the
meanings ascribed thereto in the Indenture.
Section 2. Amendment to Definition of "Consolidated Net
Income". The definition of Consolidated Net Income in Section 1.01 of the
Indenture is hereby amended to read as follows (strike-through indicates text
to be deleted and underline indicates text to be added):
"Consolidated Net Income" means, with respect to any person,
for any period, the consolidated net income (or loss) of such
person and its Subsidiaries for such period as determined in
accordance with GAAP, adjusted, to the extent included in
calculating such net income, by excluding, without duplication,
(i) all extraordinary gains or losses, (ii) the portion of net
income (but not losses) of such person and its Subsidiaries
allocable to minority interests in unconsolidated persons to
the extent that cash dividends or distributions have not
actually been received by such person or one of its
Subsidiaries, (iii) net income (or loss) of any person combined
with such person or one of its Subsidiaries on a "pooling of
interests" basis attributable to any period prior to the date
of combination, (iv) any gain or loss realized upon the
termination of any employee pension benefit plan on an after
tax basis, (v) gains or losses in respect of any Asset Sales
by such person or one of its Subsidiaries, and(vi) the net
income of any Subsidiary of such person to the extent that the
declaration of dividends or similar distributions by that
Subsidiary of that income is not at the time permitted, directly
or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule
or governmental regulations applicable to that Subsidiary or
its stockholders, and (vii) solely for purposes of calculating
==============================================
the amount available under Section 4.09 for cash dividends on
=============================================================
the Common Stock in regular quarterly installments, the one-time
================================================================
non-recurring charge of $21.0 million taken by the Company in
=============================================================
October 1997 in connection with the restructuring of the
========================================================
Company's international marketing business, Pagoda
==================================================
International.
==============
[The remainder of Section 1.01 is unaffected.]
Section 3. Amendment to the Limitation on the Disposition
of Proceeds of Asset Sales. The Limitation on the Disposition of Proceeds of
Asset Sales in Section 4.13 of the Indenture is hereby amended to read as
follows (strike-through indicates text to be deleted and underline indicates
text to be added):
The Company will not, and will not permit any of its
Subsidiaries to, make any Asset Sale unless (a) the Company or
such Subsidiary, as the case may be, receives consideration at
the time of such Asset Sale at least equal to the Fair Market
Value of the shares or assets sold or otherwise disposed of
and (b) at least 75% of such consideration consists of cash
or Cash Equivalents; provided, however, that the foregoing
=====================================
subsection (b) shall not apply to the sale by the Company's
===========================================================
international marketing business, Pagoda International, of
==========================================================
inventory having an aggregate book value at the time of sale
============================================================
of up to $10 million. To the extent the Net Cash Proceeds of
=====================
any Asset Sale are not required to be applied to repay, and
permanently reduce the commitments under, the Credit Agreement,
as required by the terms thereof, or are not so applied, the
Company or such Subsidiary, as the case may be, may, within
180 days of such Asset Sale, apply the Net Cash Proceeds from
such Asset Sale to an investment in properties and assets that
replace the properties and assets that were the subject of such
Asset Sale or in properties and assets that will be used in the
business of the Company and its Subsidiaries existing on the
Issue Date or in businesses reasonably related thereto
("Replacement Assets"). Any Net Cash Proceeds from any Asset
Sale that are neither used to repay, and permanently reduce the
commitments under, the Credit Agreement, nor invested in,
Replacement Assets within the 180 day period described above
constitute "Excess Proceeds" subject to disposition as provided
below.
[The remainder of Section 4.13 is unaffected.]
Section 4. Construction with Indenture. All of the
covenants, agreements and provisions of this Second Supplemental Indenture
shall be deemed to be and construed as part of the Indenture to the same extent
as if fully set forth therein and shall be fully enforceable in the manner
provided in the Indenture. Except as provided in this Second Supplemental
Indenture (and the First Supplemental Indenture) the Indenture shall remain in
full force and effect and the terms and conditions thereof are hereby confirmed.
Section 5. Conflict with Trust Indenture Act. If any
provision of this Second Supplemental Indenture modifies or excludes any
provision of the Trust Indenture Act that is required under such Act to be
part of and govern the Indenture or this Second Supplemental Indenture, the
latter provision shall control. If any provision hereof modifies or excludes
any provision of the Trust Indenture Act that may be so modified or excluded,
the latter provision shall be deemed to apply to this Second Supplemental
Indenture as so modified or excluded, as the case may be.
Section 6. Notices. Any notice or communication shall be
sufficiently given if given in accordance with the terms of the Indenture and
the First Supplemental Indenture.
Section 7. Separability. In case any provision in this
Second Supplemental Indenture, shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby, it being intended that all of the
provisions hereof shall be enforceable to the full extent permitted by law.
Section 8. Counterparts. This Second Supplemental
Indenture may be executed in multiple counterparts and on separate
counterparts, and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 9. Governing Law. The laws of the State of New
York shall govern this Second Supplemental Indenture without regard to
principles of conflicts of law.
[The next page is signature page.]
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be duly executed, and their respective corporate
seals to be hereunto affixed and attested, all as of the day and year first
above written.
BROWN GROUP, INC.
By: /s/ Harry E. Rich
-----------------------------------------
Executive Vice President and Chief Financial
Officer
BROWN GROUP INTERNATIONAL, INC.
By: /s/ Harry E. Rich
-----------------------------------------
Vice President
BROWN GROUP RETAIL, INC.
By: /s/ Harry E. Rich
-----------------------------------------
Vice President
PAGODA TRADING COMPANY, INC.
By: /s/ Harry E. Rich
-----------------------------------------
Vice President
SIDNEY RICH ASSOCIATES, INC.
By: /s/ Harry E. Rich
-----------------------------------------
Vice President
STATE STREET BANK AND TRUST COMPANY
By: /s/ Laura S. Roberson
-----------------------------------------
Name: Laura S. Roberson
---------------------------------------
Title: Vice President
--------------------------------------
EXHIBIT 10.(c)
TRANSITION AND CONSULTING AGREEMENT
THIS TRANSITION AND CONSULTING AGREEMENT
("Agreement"), made and entered into as of the 11th day of September, 1997, by
and between BROWN GROUP, INC. ("Brown"), a New York corporation, and B. A.
BRIDGEWATER, JR. ("Bridgewater").
WITNESSETH THAT:
WHEREAS, Bridgewater is an employee of Brown and currently
serves as Chairman of the Board of Directors, President and Chief Executive
Officer;
WHEREAS, on or before March 31, 1999, Bridgewater will retire
as an employee of Brown;
WHEREAS, Bridgewater possesses executive skills and leadership
experience which Brown is desirous of calling upon from time to time during the
development of successor leadership in the forty-eight months following such
retirement; and
WHEREAS, Bridgewater is willing to provide his skills and the
benefit of his leadership experience, from time to time, as a consultant over
such forty-eight-month period;
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements hereinafter set forth, Brown and Bridgewater
covenant and agree as follows:
1. Engagement as Consultant. Brown hereby engages
Bridgewater as a consultant effective as of the first day of the month
following Bridgewater's retirement as an employee, and Bridgewater hereby
accepts such engagement at that time in accordance with the terms and
conditions hereinafter set forth. As a consultant, Bridgewater shall be an
independent contractor with Brown and shall not for any reason be considered
an employee of Brown.
2. Consulting Duties. The Chief Executive and/or the
Chairman of the Board of Directors may from time to time request Bridgewater
to furnish his services as a consultant. Such services shall include:
a. consultation concerning the management and overall
policy and strategic direction of the businesses of
Brown and the financial consequences thereof;
b. consultation with respect to special projects designated
by the Chief Executive and/or the Chairman of the Board
of Brown.
Bridgewater shall not be required to hold himself available for consulting
services at any fixed time, but shall be available on a reasonable basis.
Bridgewater's presence shall not be required at any particular office or place
in order to render his consulting services unless such services could not
reasonably be performed in another location or by telephone or letter.
3. Term. Subject to Section 12 below, the term of this
consulting engagement shall be from the first day of the month following
Bridgewater's retirement as an employee of Brown through the end of the forty-
eight-month period following such retirement (the "Consulting Period").
4. Compensation. Subject to the terms of this Agreement,
in consideration for Bridgewater's agreements contained herein, Bridgewater
shall be paid compensation of Two Hundred Seventy-Five Thousand Dollars
($275,000) for each twelve-month period during the first two years of the
Consulting Period and Two Hundred Forty-Five Thousand Dollars ($245,000) for
each twelve month period during the last two years of the Consulting Period.
Compensation shall be paid in approximately equal installments no less
frequently than monthly. Bridgewater shall also be reimbursed by Brown for
any reasonable and necessary expenses incurred by him in the performance of
his consulting duties.
5. Election as Director. It is contemplated that
Bridgewater, at the May 1998 meeting of the shareholders of Brown, will stand
for re-election to the Board of Directors of Brown. In the event of
re-election, Bridgewater will also serve as Chairman of the Board of Directors
until his retirement as an employee or his earlier resignation. It is agreed
that he will tender his resignation as a director when he retires as an active
employee.
6. Office and Secretary. Upon commencement of and during
the Consulting Period, Brown shall provide Bridgewater with office space and
secretarial assistance in Clayton, Missouri similar to that currently provided
to him.
7. Restricted Stock and Retirement Benefits. In the event
of Bridgewater's retirement as an active employee prior to attainment of age
65, on or after January 1, 1998, (a) all shares of restricted stock previously
granted to Bridgewater still subject to restrictions in accordance with
section VII(C) of the Brown Group, Inc. Stock Option and Restricted Stock Plan
of 1994 shall become immediately free of such restrictions, and (b) for
purposes of calculating his retirement benefits under the Brown Group, Inc.
Retirement Plan and the Supplemental Retirement Plan ("SERP"), Bridgewater
shall be deemed to have retired at age 65.
8. Tax Services, Security Services, Title. During the
Consulting Period Bridgewater shall continue to receive at the expense of Brown
tax preparation services similar to those currently provided to him by Ernst &
Young, and security services similar to those currently provided through Brown.
He shall during the Consulting Period and thereafter, as he wishes, refer to
himself as the "Retired Chairman" of Brown.
9. Death or Disability. In the event of the death or
permanent disability of Bridgewater during the Consulting Period, payments
otherwise due hereunder to Bridgewater pursuant to Section 4 shall be paid to
his designee at the same times and in the same amounts as if paid to
Bridgewater, but only until the end of the calendar year in which such death
or disability occurs.
10. Confidential Information. During the Consulting Period
and thereafter, Bridgewater will not directly or indirectly (without Brown's
prior written consent) use for himself or use for, or disclose to, any party
other than Brown or its subsidiaries any secret or confidential or proprietary
information or data relating to the business of Brown or its subsidiaries or
any such information or data with respect to businesses being investigated by
Brown for acquisition.
11. Noncompetition Agreement. Bridgewater agrees that
during the Consulting Period and for a period of three years thereafter, he
will not engage in or enter the employ of, act as a consultant to or have any
interest in any other person, firm, corporation or other entity engaged in any
related or similar business activities competitive with the business of any
division of Brown or any of its subsidiaries. This restriction shall be
applicable only with respect to the manufacturing, importing and retail areas
in which Brown or its subsidiaries shall have conducted business operations at
any time during the Consulting Period, and nothing herein shall restrict
Bridgewater from owning two percent or less of the corporate securities of any
competitor of Brown, which securities are listed on any national securities
exchange or traded over-the-counter, if Bridgewater has no other connection or
relationship with the issuer of such securities or from serving as a director
of any corporation which is not a competitor of Brown.
The parties acknowledge the broad scope of the restrictions
contained in this Section 11, but expressly agree and acknowledge that the
restrictions are reasonable and shall be fully enforceable in light of, among
other things, (i) the worldwide markets in which Brown and its subsidiaries
operate their businesses, (ii) the extremely sensitive, confidential trade
secret information to which Bridgewater has had, and will have, access, and
(iii) Brown's legitimate interests in protecting its confidential information,
goodwill and relationships.
12. Enforcement of Terms. If Bridgewater violates the
terms of Section 10 or Section 11 during the Consulting Period, Brown may
terminate this Agreement and shall be relieved of its obligation to make any
further payments hereunder. In addition, if Bridgewater violates the terms of
Section 10 or Section 11, whether during the Consulting Period or thereafter,
Brown shall be entitled to obtain full injunctive relief restraining Bridgewater
from violation of such terms in addition to any other legal or equitable
remedies to which Brown may be entitled. Bridgewater acknowledges that the
harm which would result to Brown from any violation of the terms of Sections
10 and 11 would be largely irreparable.
13. Definition of Subsidiary. The terms "subsidiary" or
"subsidiaries" as used herein shall mean a corporation owned or controlled by
Brown, directly or indirectly through stock ownership, and shall include (but
not be limited to) each corporation, a majority of the voting stock of which
is owned by Brown or any such other majority-owned subsidiary (or a chain
thereof) of Brown.
14. Nonwaiver of Rights. The failure to enforce at any
time any of the provisions of this Agreement or to require at any time
performance by the other party of any of the provisions hereof shall in no way
be construed to be a waiver of such provisions or to affect either the validity
of this Agreement, or any part hereof, or the right of either party thereafter
to enforce each and every provision in accordance with the terms of this
Agreement.
15. Invalidity of Provisions. In the event that any
provision of this Agreement is adjudicated to be invalid or unenforceable under
applicable law, the validity and enforceability of the remaining provisions
shall be unaffected. To the extent that any provision of this Agreement is
adjudicated to be invalid or unenforceable because it is overbroad, that
provision shall not be void but rather shall be limited only to the extent
required by applicable law and enforced to the maximum extent allowed under
such law.
16. Assignment. This Agreement shall be freely assignable
by Brown to any person, firm, corporation or other entity which shall succeed,
in whole or in part, to the business presently operated by Brown and shall
inure to the benefit of, and be binding upon, Brown, its successors and
assigns; but, being a contract for personal services, neither this Agreement
nor any rights hereunder shall be assigned by Bridgewater.
17. Governing Law and Choice of Forum. This Agreement
shall be interpreted in accordance with and governed by the laws of the State
of Missouri. Any actions or proceedings arising out of or relating, directly
or indirectly, to this Agreement shall be filed and litigated exclusively in
any state or federal court located in the City or County of St. Louis.
18. Amendments. No modification, amendment or waiver of
any of the provisions of this Agreement shall be effective unless agreed to
in writing by the parties hereto.
19. Notices. Any notice to be given by either party
hereunder shall be in writing and shall be deemed to have been duly given if
delivered or mailed, certified or registered mail, postage prepaid, as follows:
TO BROWN: Brown Group, Inc.
8300 Maryland Avenue
St. Louis, Missouri 63105
Attention:
Vice President and General Counsel
TO BRIDGEWATER: B.A. Bridgewater, Jr.
35 Overhills Drive
St. Louis, Missouri 63124
or to such other address as may have been furnished to the other party by
written notice.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the 11th day of September, 1997 in the County
of St. Louis, State of Missouri.
BROWN GROUP, INC.
By /s/ Robert D. Pickle
------------------------------
Vice President
B. A. BRIDGEWATER, JR.
/s/ B. A. Bridgewater, Jr.
------------------------------
Brown Group, Inc.
1997 Annual Report to Shareholders
Brown Group, Inc.
CONTENTS
- --------
Corporate Overview 1
Letter to Shareholders 2
Famous Footwear 6
Brown Shoe Company 8
Canadian Operations 11
Stores and Brands at a Glance 12
Financial Statements 13
Board of Directors and Tribute
to W. L. Hadley Griffin 40
Officers, Operating Committee
and Investor Information 41
- ------------------
Corporate Overview
- ------------------
Brown Group, Inc. (NYSE) is a $1.567 billion footwear company with
operations in retailing, wholesaling and worldwide sourcing. The Company
operates leading retail store chains including Famous Footwear, Naturalizer
and F.X. LaSalle. Brown Group also markets a diverse range of high-value
footwear for women, children and men under some of the best-known brand
names, including Naturalizer, Natural-SPORT, Life Stride and Buster Brown,
and licensed brands such as Dr. Scholl's and Disney.
In 1997, progress in Brown Group's core businesses -- Famous Footwear,
Brown Shoe Company and the Canadian operations -- was overshadowed by
losses and a restructuring charge related to the Pagoda International
marketing division. The Company's core businesses, which represent about
95 percent of Brown Group's total revenues, earned more than $26 million in
1997. These operations are positioned for continued progress in 1998, the
120th anniversary year of Brown Group's founding.
- --------------------------------------------
Fall classics from Energyheel by Naturalizer
1997
Style names from left to right:
The element
The exceed
The entice
the exec
- ---------------------------------------------
- ---------------------
Financial Highlights*
- ---------------------
<TABLE>
<CAPTION>
For the Fiscal Years Ended January 31, 1998, February 1, 1997 and
February 3, 1996
1997 1996 1995
----------- ---------- ----------
Dollars in thousands,
except per share data (52 Weeks) (52 Weeks) (53 Weeks)
<S> <C> <C> <C>
Operating Results
Net sales $1,567,202 $1,525,052 $1,455,896
Gross profit 578,672 566,764 506,971
Net earnings (loss) (20,896) 20,315 3,297
Per Share of Common Stock
Diluted net earnings (loss) (1.19) 1.15 .19
Dividends paid .85 1.00 1.30
Shareholders' equity 11.04 13.19 12.92
Financial Position
Total assets 694,988 722,375 661,056
Working capital 260,437 301,020 209,399
Shareholders' equity 199,190 237,037 231,636
Return on beginning
shareholders' equity (8.8%) 8.8% 0.3%
Current ratio 1.9:1 2.1:1 1.7:1
</TABLE>
*In 1997, includes aftertax restructuring charges and operating losses of
$45.6 million related to the Company's Pagoda International marketing
division, and a $1.5 million aftertax loss on the sale of the Famous
Fixtures division of Famous Footwear.
- --------------------
To Our Shareholders
- --------------------
This 1997 annual report to you describes a difficult year in which the real
progress achieved in Brown Group's core businesses -- Famous Footwear,
Brown Shoe Company and the Canadian operations -- was offset and obscured
by severe losses in Pagoda International, our international marketing
organization (which represented less than 5 percent of the Company's 1997
sales). Although the core businesses reported combined net earnings of more
than $26 million in 1997, exceeding our plans and extending the progress we
made in 1996, operating losses and a restructuring charge totaling more
than $45 million at Pagoda International led to a 1997 net loss of $21
million.
In my letter to you in last year's Annual Report, I described a year of
progress and, in closing, expressed optimism that our momentum would be
continued in 1997. Throughout the Company's domestic and Canadian
operations, it has continued:
* Famous Footwear achieved a 9 percent sales gain
and a 38 percent increase in operating earnings to
$35 million in 1997.
* Brown Shoe Company achieved an 11 percent
increase in operating earnings to $31 million
(excluding a $4 million nonrecurring gain in
1996) better than planned, on slightly lower sales,
while funding an 18 percent increase in marketing spending.
* The Canadian operations achieved a 4 percent
sales gain and a 19 percent increase in operating
earnings to $8 million.
In the fall, however, it became clear that losses in our Pagoda
International operations were increasing and investment in that business
was far too great. Pagoda International had been controlled poorly, and
radical change was required to reduce investment, bring cash into the
United States, strengthen the Company's balance sheet, and either return
that business to profitability on a much smaller scale, or phase out of it.
The cost of that change led to Brown Group's $21 million loss in 1997; it
represents the price we had to pay to allow the progress in our core
business to continue, and to contribute to the benefit of our shareholders.
- --------------------------------
B. A. Bridgewater, Jr.
Chairman of the Board, President
and Chief Executive Officer
- --------------------------------
- ------------------------------
FAMOUS FOOTWEAR: REAL MOMENTUM
- ------------------------------
Our largest and most profitable business, Famous Footwear accounted for
more than half of Brown Group's sales in 1997, and is developing real
momentum. Strengthened operating execution at Famous Footwear led to a 9
percent increase in sales to $850 million and a 1.9 percent increase in
same-store sales in 1997. Sales per square foot increased 5.6 percent,
reflecting strong productivity in the newer stores, and the maturing of
stores opened in the 1994 to 1995 period of aggressive growth. Famous
Footwear's operating earnings increased 38 percent to $35 million for the
year. These operating earnings exclude a pretax nonrecurring loss on the
February 1998 sale of the Famous Fixtures business. The Fixtures operation
had 1997 sales of $21 million, but had incurred net losses in the $1 to
$2.5 million range over the past several years, repeatedly depressing
Famous Footwear's earnings. Excluding the nonrecurring charge and operating
losses at the Fixtures operation (which will not be incurred in the future
since that business has been sold), Famous Footwear's operating earnings in
1997 were $38 million.
Good inventory flow and well-managed distribution costs, particularly at
the company's second distribution center that opened in fall 1995, also
contributed to Famous Footwear's improved results for the year; the 9
percent sales increase was accomplished on a 3 percent increase in
inventory. As the company continues to leverage its expense and asset base,
measures of operating efficiency also continue to improve. In 1997,
distribution costs were 2 percent lower, the customer purchase ratio
increased 4 percent, and a .6 percent reduction in inventory shrinkage as a
percent of sales was achieved.
The progress at Famous Footwear is particularly encouraging in light of the
slowdown in the athletic footwear industry, as athletic footwear has
historically represented nearly half of Famous Footwear's business. Famous
Footwear benefits from merchandising and distribution strategies that
enable the stores to serve women's, children's and men's changing fashion
needs. The company opened 60 new stores during 1997 and closed 39, ending
the year with 815 stores in operation. Plans for fiscal year 1998 call for
a net of 20 new stores.
- ----------------------------------
BROWN SHOE COMPANY: SOLID PROGRESS
- ----------------------------------
Solid progress in 1997 also was reported at Brown Shoe Company, which
operates the Company's core wholesale businesses -- Brown Branded Marketing
and Pagoda U.S.A. -- and the Naturalizer Retail business. Sales of $433
million were slightly below last year's level, but better margins and
tightly controlled expenses led to operating earnings of $31 million. This
compared to operating earnings of $32 million in fiscal year 1996, which
included $4 million of nonrecurring gains from the liquidation of LIFO
inventories at Brown Branded Marketing. Sales of the Naturalizer and
NaturalSPORT brands increased slightly in 1997, and the continued emphasis
on product development and investment in aggressive brand marketing, which
increased 18 percent in 1997, contributed to the improved results.
- ---------------------------------------------------------------------------
"Famous Footwear achieved a 9 percent sales gain and a 38 percent increase
in operating earnings to $35 million in 1997."
- ---------------------------------------------------------------------------
Naturalizer Retail's chain of 341 stores reported sales of $130 million,
about even with fiscal year 1996 sales. Same-store sales were .9 percent
lower and an operating loss of $3 million was recorded for the year.
However, the real estate strategy initiated in 1997 is achieving
encouraging results, as average store volume increased 5 percent in the
fall season.
- ------------------------------------
CANADIAN OPERATIONS: CONTINUED GAINS
- ------------------------------------
We are pleased with the continued gains the Company's Canadian operations
achieved during 1997. Sales of $76 million were 4 percent higher and
operating earnings increased 19 percent to $8 million. These results were
led by improved sales at the Retail division, where same-store sales were
up 5.2 percent for the year following a 7.3 percent same-store sales
increase in 1996. There were 107 Naturalizer stores and 16 F. X. LaSalle
stores in operation in Canada at fiscal year-end.
- -------------------------------------------
PAGODA INTERNATIONAL: VERY COSTLY CUT-BACKS
- -------------------------------------------
The scale of the losses and nonrecurring charge at Pagoda International --
more than $45 million in all -- largely obscured progress throughout the
rest of the Company. Simply put, the losses were caused by building an
organization and expense base, and accumulating a large in-stock inventory
in anticipation of continued rapid growth, at a time when sales leveled off
in Europe, and declined sharply in Brazil. Costs, and losses, were largely
related to markdowns to reprice the inventory at salable levels, taxes
associated with repatriating cash made available offshore by the
liquidation of investment in this business, and severance costs, license
minimum payments and the other expenses of radically downsizing an
overexpanded business.
- ---------------------------------------------------------------------------
"The scale of the losses and nonrecurring charge at Pagoda International -
more than $45 million in all - largely obscured progress throughout the
rest of the Company."
- ---------------------------------------------------------------------------
The restructuring includes shifting the inventory ownership and marketing
operations to distributors in Brazil and Europe, converting the European
operations to a "first-cost" basis, and replacing the management most
directly responsible for this costly failure. In conjunction with these
plans, a contract with Calcados Dilly Ltda. was signed in February 1998 to
sell Pagoda International's Brazilian inventories, and negotiations are in
process in Europe to sell inventories and transfer certain licenses to
other parties.
With these moves, we are on-plan to reduce investment in the Pagoda
International division to less than $10 million, and restructure the
operations by year-end 1998. This will allow us to protect the balance
sheet, free capital to support our core businesses and pay down debt, and
improve our prospects for better reported performance for the entire
Corporation in the future.
- -----------------------------
CASH FLOW: EXCELLENT PROGRESS
- -----------------------------
Brown Group's management of cash flow for fiscal year 1997 was excellent;
despite the loss for the year, positive cash flow of $21 million was better
than planned, $59 million better than last year, and resulted in short-term
borrowings that were $8 million below year-end 1996 levels.
Considering the encouraging progress and future demands for capital in our
core businesses, and at the same time the costs and uncertainty related to
the restructuring of Pagoda International, at the end of the third quarter
of 1997, Brown Group's quarterly dividend was reduced to 10 cents per share
from 25 cents per share. This move better aligned Brown Group's dividend
payout policy with similar companies in the footwear and retail industries.
It also increased the Company's flexibility to invest in successful
businesses and reduce debt as we move beyond the problems at Pagoda
International.
The losses at Pagoda International and the reduction in the dividend,
however, affected the price of Brown Group stock, as it slipped from $16.50
at year-end 1996, to $14.50 at year-end 1997. Total return for the year
also declined. However, the business structure and balance sheet are now in
place to allow the progress in our core businesses to be reflected in the
Company's earnings, and as these earnings are recorded, in the total return
to our shareholders.
- ----------------------------
MANAGEMENT AND BOARD CHANGES
- ----------------------------
Important changes in management have also been made. On March 9, 1998,
Brown Group announced that Ronald A. "Ron" Fromm was appointed President of
Brown Shoe Company. Ron joined Famous Footwear in 1986 as Director of
Finance and most recently served as Executive Vice President. He has played
a major role in the expansion and success of Famous Footwear and has served
on Brown Group's Operating Committee since 1992.
- ---------------------------------------------------------------------------
"As Brown Group emerges from the impact of restructuring Pagoda
International, and the momentum in the balance of our business continues,
we will clearly demonstrate our developing earning power and the value of
this Company."
- ---------------------------------------------------------------------------
The Famous Footwear management team was also strengthened during 1997 with
several additions and promotions. In February 1997, William A. Dandy joined
Famous Footwear as Senior Vice President - Marketing. Janet M. Hardyman was
promoted to Vice President - Human Resources and James M. Roe was named
Senior Vice President - Real Estate in August 1997. In October 1997,
Theodore L. Anderson joined the company as Senior Vice President - Retail
Sales and Operations. In March 1998, J. Martin "Marty" Lang was promoted to
Senior Vice President and Chief Financial Officer at Famous Footwear.
Changes in the Board of Directors include the resignation of Tom Williams
from the Board, and the planned retirement of Daniel R. Toll at the May
1998 meeting of shareholders. In addition, we record with sadness the death
on November 9, 1997 of W. L. Hadley Griffin, retired Chairman and an
Honorary Director of Brown Group. A Tribute to Hadley can be found on page
40 of this Annual Report.
- ---------------------------------
LOOKING AHEAD: CONTINUED PROGRESS
- ---------------------------------
The solid leadership teams in our core businesses will serve us well as we
continue to build on the progress made in 1997. Plans for 1998 call for
continued progress in these core operations and a major improvement in net
earnings. Our confidence in these plans is supported by the early results
in the first quarter. As Brown Group emerges from the impact of
restructuring Pagoda International, and the momentum in the balance of our
business continues, we will clearly demonstrate our developing earning
power and the value of this Company.
/s/ B. A. Bridgewater, Jr.
Chairman of the Board, President
and Chief Executive Officer
April 24, 1998
- ---------------
Famous Footwear
- ---------------
Famous Footwear's mission is to be America's number one choice for
fashionable, branded family shoes. This chain is uniquely positioned to
market a large selection of footwear styles for women, children and men in
more than 800 stores in forty-six states throughout the country. Whether
its athletics, casual, dress, sandals or boots, Famous Footwear stores
offer a broad selection of popular brand name shoes for less for the
entire family.
- --------------------------------
A satisfying shopping experience
at a famous footwear store in
Birmingham, Alabama
- --------------------------------
- --------------------------------------------------------------------------
Famous Footwear stores average 5,000 square feet and can be found in strip
centers, outlet malls and regional malls throughout the United States.
- --------------------------------------------------------------------------
Achieving operational excellence:
- ---------------------------------
Brown Group acquired Madison, Wisconsin-based Famous Footwear in 1981 when
it was a 32-store regional chain. The business gradually was expanded to
about 300 stores by 1990, and then was doubled between 1991 and 1994 during
a period of rapid growth. As the chain was expanded, a solid infrastructure
of human resources, systems and distribution capabilities was put in place
to support the operations and growth.
During 1997, an emphasis on achieving operational excellence led to
significantly improved results for Famous Footwear. The company's
continuing focus on merchandising and inventory controls resulted in
improved margins at Famous Footwear and helped ensure that the right
product was in the right place at the right time. Programs also were
developed to continue to improve the customer's shopping experience to
increase sales at the store level while keeping costs in control.
Distribution and transportation costs were well-controlled as the chain's
second distribution center completed its second full year
of operation.
In late 1996, Famous Footwear realigned its entire field management
structure as well as the company's merchandising and buying staffs. The
field management team was increased by more than 50 percent to ensure more
direct management of the business and improved customer service. The
realignment of the merchandising and buying staffs helped better align
these functions with the markets and stores they serve. In 1997, the first
full year of operation under this new structure, Famous Footwear achieved a
9 percent increase in sales on a 3 percent increase in inventory.
Making the customer feel good:
- ------------------------------
Famous Footwear is committed to being America's premier family shoe
retailer. Since "Mom" and the family are the primary Famous Footwear
shoppers, the company's programs revolve around making sure every visit
results in a satisfying shopping experience. The location and appearance of
the stores, marketing and visual presentations, product fashion, selection,
brands, pricing and good customer service are all designed to meet the
needs of today's busy families.
The improved merchandising programs and state-of-the-art distribution
capabilities ensure that the most popular brands and styles are available
in-store when and where the customer is looking for them. Famous Footwear
stores are designed to be inviting and easy-to-shop to help make each
customer feel "good" about shopping in the store. New visual merchandising
programs highlight the stores' fashions, brands and selection. To support
customer satisfaction and ease of shopping, Famous Footwear seeks to
position its stores where families shop: in outlet centers, regional malls
and power strip centers throughout the country.
Targeted marketing programs help reinforce the Famous Footwear message of
great brands and styles for less. The company's Celebrity Club customer
loyalty program now has two million members. These customers are rewarded
for frequent purchases and are included in targeted promotional mailings
and special offers. Famous Footwear knows that the shopping experience
begins and ends at each individual store. That is why the company continues
to put a strong emphasis on training and motivating its sales associates to
provide superior service. Helping customers find the brand name shoes they
want is the goal of each sales associate and the entire Famous Footwear
support organization.
- -------------------------------------------------------------------------
America's premier family shoe retailer: more than 800 stores in 46 states
selling fashionable brand name shoes for less.
- -------------------------------------------------------------------------
- ------------------
Brown Shoe Company
- ------------------
Brown Shoe Company is one of the largest footwear companies in the United
States, with a 120 year heritage of marketing quality footwear. The company
designs, imports and markets a wide range of women's, children's and men's
footwear products sold in multiple channels of distribution.
Brown Branded Marketing Division:
- ---------------------------------
Fine women's branded footwear is designed and marketed by the Brown Branded
Marketing division and sold in department and specialty stores nationwide.
This division represents some of the most recognized women's brands in the
industry including Naturalizer, NaturalSPORT, Life Stride, LS Studio and
Night Life. Each brand is targeted to meet the lifestyle needs of a unique
and well-defined consumer.
The Brown Branded Marketing division introduced its Spring 1998 lines at
the company's new showrooms on the eleventh and twelfth floors of the
Takashimaya Building on 5th Avenue in the heart of New York's fashion
district. These new showrooms are premier showcases for the brands and
reflect the division's strategy for updating and building its brand
positioning through product development and marketing. Brand messages are
delivered directly to consumers through increased marketing and advertising
and the continued development of partnerships with retailers, including
focus shops and retail marketing efforts. The division also is organized
around business teams that have the knowledge and experience to serve the
specific needs of the company's retail customer segments, the important
liaisons between the brands and their target consumers.
- -------------------------------------------------------------------------
Walk/Run
the naturalsport brand's latest entry in the growing walking shoe market.
- -------------------------------------------------------------------------
A marketing campaign for the company's flagship Naturalizer brand was
introduced in 1997 to promote the image of Naturalizer as "one of life's
great comforts." The division also introduced its patented Energyheel
technology during 1997, with a major roll-out and comprehensive marketing
campaign planned for 1998. The NaturalSPORT brand also plans increased
national marketing and advertising efforts in 1998 to build on the success
of its walking and other active/casual styles. Life Stride continues to be
one of the industry's premier "entry-level" brands, and its targeted brand
extensions, the LS Studio brand and the Night Life brand, also are popular
with department and specialty store customers.
Naturalizer Retail Division:
- ----------------------------
The Naturalizer Retail division of Brown Shoe Company operates 341
Naturalizer specialty stores throughout the United States, including 57
outlet stores. The specialty stores are designed to showcase the
Naturalizer and NaturalSPORT brands, offering a large selection of styles
and sizes in an inviting and easy-to-shop atmosphere.
Naturalizer Retail successfully introduced updated footwear styles in 1997
and developed a better balance of casual and dress footwear in the stores
to appeal to the lifestyle needs of Naturalizer's target consumer. The
company is continuing its plans for remodeling 30 to 40 stores per year to
ensure that the stores reflect the brand's identity. In addition, updated
point-of-sale registers and a new merchandising reporting system planned
for 1998 will improve the information on inventories and consumer
preferences at Naturalizer Retail.
- -------------------------
footwear relevant to
women's active lifestyles
Style and Comfort
- -------------------------
- -------------------------------------------------------------------------
Well-recognized brands for women, children and men sold through multiple
channels of distribution help make Brown Shoe Company one of the largest
footwear marketing companies in the industry.
- -------------------------------------------------------------------------
- ------------------
Brown Shoe Company
- ------------------
Pagoda Division:
- ----------------
The Pagoda division of Brown Shoe Company markets branded, licensed and
private label footwear to an extensive network of mass-merchandisers,
mid-tier retailers and department stores in the United States and Canada.
Pagoda is a trusted resource to some of North America's largest chains,
including Kmart, Payless ShoeSource, Target and Wal-Mart as well as to
Famous Footwear and department stores such as Dillard's, Mercantile and
Sears.
- ---------------------------------------------------------------------------
Big Brand Names
Fashion-right footwear under some of the best known brand names -- from the
Pagoda children's division.
- ---------------------------------------------------------------------------
Women's footwear accounts for more than half Pagoda's annual revenues. The
Women's Discount and Westport divisions of Pagoda market private label
footwear and brands that include Dr. Scholl's, Connie and Unionbay. Strong
sales of the Original Dr. Scholl's Exercise Sandal and related styles
continued in 1997 and additional patterns have been added for 1998.
- --------------------------------------------------------------------------
The Pagoda division of Brown Shoe Company is a trusted resource to some of
North America's largest retailers.
- --------------------------------------------------------------------------
Pagoda also has a strong reputation in the Children's footwear market, with
leading brand names including Buster Brown and the licensed Barbie, Disney
and Star Wars brands. Buster Brown continues to be one of the most
recognized brands of children's footwear and Pagoda has successfully built
retail partnerships for this brand with Sears, Famous Footwear and The May
Company. Pagoda also sells shoes featuring licensed Disney animated
characters. For 1998, the company will introduce shoes with characters from
Disney's Mulan and The Lion King: Simba's Pride movie releases. In 1997,
Pagoda sold shoes featuring characters from the Star Wars classic trilogy
under a license arrangement with Lucasfilm Ltd. Building on the success of
this footwear brand, in March 1998, Pagoda signed an additional license to
market footwear featuring characters from Episode I of the Star Wars
"prequel," to be released in movie theaters in 1999.
The athletic and men's footwear categories continue to be areas of
opportunity for Pagoda. Athletic brands marketed by Pagoda include licensed
brands such as Russell Athletic, Penn and Dr. Scholl's, and the le coq
sportif brand purchased by the company in 1995. Le coq sportif footwear is
sold internationally and will be introduced in the United States market in
1998. In the men's category, Pagoda sells men's leather casual footwear to
mass-merchandisers and mid-tier retailers primarily under the Dr. Scholl's
brand name.
Brown Shoe Sourcing Division:
- -----------------------------
The Sourcing Division of Brown Shoe Company ranks among the largest and
most versatile suppliers of footwear in the United States. In 1997, this
division sourced more than seventy million pairs of shoes for Brown Group's
retail and wholesale divisions. This worldwide sourcing organization
operates offices in Brazil, Italy, China, Hong Kong, Taiwan and Indonesia
and opened an office in Mexico in 1997. The division contracts with
footwear manufacturers in these regions to produce footwear that meets the
Company's design, quality, delivery and price standards.
Through its flexible and cost-efficient sourcing structure, Brown Shoe
Sourcing can provide footwear for women, children and men at virtually any
price level from any significant shoe manufacturing region of the world.
These capabilities include the manufacture of all categories of footwear
from athletic to dress and from popular priced to better brands. Brown Shoe
Sourcing's versatility and expertise enables it to serve the diverse needs
of Brown Group's retail and marketing divisions.
- -------------------
Canadian Operations
- -------------------
Brown Group has a strong presence in the Canadian marketplace through the
operation of both retail and wholesale businesses. The Canadian Retail
division is headquartered in Montreal, Quebec. This division operates 107
Naturalizer specialty stores and 16 F. X. LaSalle better-grade shoe stores
in Canada. Naturalizer continues to be one of the leading women's footwear
brands in Canada and the Naturalizer stores are located in almost every
major regional mall in the country. The F. X. LaSalle stores are primarily
located in the Montreal area. These stores average 2,500 square feet and
offer women's and men's fashionable shoes retailing for US $100 to $250 a
pair, primarily sourced from Italy.
- --------------------------------------------------------------------------
In Canada, the Company operates successful retail and wholesale businesses
that are important contributors to Brown Group's results.
- --------------------------------------------------------------------------
The Canadian Wholesale division is headquartered in Perth, Ontario, and
markets a variety of shoes for women, children and men to department
stores, better-grade independent accounts and specialty stores throughout
Canada. Brands sold by this division include Naturalizer, NaturalSPORT,
Connie, Airstep, Buster Brown, Regal, Cedar Trail, and the Disney and Star
Wars licensed children's brands. The Wholesale division operates two
production facilities which primarily manufacture the Naturalizer brand of
footwear and boots for the Canadian market.
- -----------------------------
Stores and Brands at a Glance
- -----------------------------
<TABLE>
<CAPTION>
Footwear Retail Stores
- ----------------------
Number of Stores
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Famous Footwear: Family footwear stores
which feature "brand names for less;"
located in strip centers, outlet and
regional malls in the U.S. 815 794 814 722 567
Naturalizer - U.S.: Stores selling the
Naturalizer and NaturalSPORT brands of
women's footwear; located in major malls,
shopping centers and outlet malls. 341 346 313 327 367
Naturalizer - Canada: Stores selling the
Naturalizer and NaturalSPORT brands of
women's footwear; located in regional
malls. 107 100 96 91 83
F. X. LaSalle: Better-grade stores
featuring women's and men's branded
footwear, primarily located in regional
malls in Montreal, Canada. 16 16 15 14 15
</TABLE>
- ----------------------------------------------
Special Effects
Night Life shoes from the Life Stride division
- ----------------------------------------------
Footwear Brands
- ---------------
Women's Children's Men's
- ------- ---------- -----
Air Step Anastasia (6) Big Country
Connie Barbie (7) Cedar Trail
Dr. Scholl's (1) Buster Brown Dr. Scholl's (1)
Fanfares 101 Dalmatians (2) Jean Pier Clemente
Naturalizer Disney Babies (2) le coq sportif
NaturalSPORT Doug (2) Original Dr. Scholl's (1)
Life Stride Hercules (2) Penn (3)
Larry Stuart Collection le coq sportif Regal
le coq sportif The Lion King (2) Russell Athletic (4)
LS Studio Mickey & Co. (2)
Mickey & Co. (2) Mickey for Kids (2)
Mickey Unlimited (2) Mulan (2)
Night Life Original Dr. Scholl's (1)
Original Dr. Scholl's (1 Simba's Pride (2)
Penn (3) Star Wars (8)
Russell Athletic (4) Wildcats
Unionbay (5) Wishbone (9)
- ---------------------------------------------------
As denoted, these brands are under license from:
(1) Schering-Plough HealthCare Products, Inc.
(2) The Walt Disney Company
(3) Penn Racket Sports, a division of GenCorp, Inc.
(4) Russell Corporation
(5) Seattle Pacific Industries, Inc.
(6) Twentieth Century Fox
(7) Mattel, Inc.
(8) Lucasfilm Ltd.
(9) Lyrick Studios
- ---------------------------------------------------
- --------------------
Financial Statements
- --------------------
Management's Discussion and
Analysis of Operations and
Financial Condition 14
Five-Year Summary 19
Consolidated Financial Statements 20
Notes to Consolidated
Financial Statements 24
Reports on Financial Statements 38
Supplementary Financial Information 39
- --------------------------------------------------------------------------
Management's Discussion and Analysis of Operations and Financial Condition
- --------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
1997 Compared to 1996
Brown Group, Inc.'s fiscal 1997 results reflect progress in its core
businesses at Famous Footwear, Brown Shoe Company and the Canadian
operations. However, the overall results were adversely impacted by the
restructuring charges and operating losses of $45.6 million incurred by the
Pagoda International marketing division. In the third quarter, the Company
announced the decision to substantially reduce its investment in the Pagoda
International division as a result of excessive inventories and increasing
losses.
Brown Group, Inc.'s net sales of $1.567 billion in fiscal 1997 were 3%
higher than the $1.525 billion in fiscal 1996. The increased sales reflect
higher sales at Famous Footwear which more than offset lower sales within
the wholesale operations and at Pagoda International. A net loss of $20.9
million in fiscal 1997 compares to net earnings of $20.3 million in fiscal
1996. The net loss in fiscal 1997 includes $45.6 million of Pagoda
International restructuring charges and operating losses compared to an
operating loss of $5.7 million incurred in fiscal 1996. Excluding the
Pagoda International results and the aftertax loss of $1.5 million incurred
on the sale of Famous Footwear's fixtures manufacturing business, net
earnings of the core businesses were $26.2 million in fiscal 1997 compared
to $26.0 million in fiscal 1996. 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 aftertax LIFO recovery of $2.6 million
related to the liquida-tion of inventories at the Company's closed domestic
facilities.
Famous Footwear's net sales increased 9% in fiscal 1997 to $849.9 million
with a same-store sales increase of 1.9%. The increased sales are the
result of improved store productivity and the addition of 21 net new
stores. At the end of fiscal 1997, 815 stores were in operation compared to
794 stores in fiscal 1996. During the year, 60 stores were opened and 39
stores were closed. Plans for fiscal 1998 include the net addition of 20
stores. Operating earnings for fiscal 1997 increased 28% to $32.0 million
as a result of increased sales combined with continued improvement in the
leveraging of the expense base. In fiscal 1997, Famous Footwear's fixtures
manufacturing business was sold and a $2.5 million pretax loss was incurred
on the sale. The fixtures operation which had annual sales in 1997 of $21
million, had incurred net losses between $1.0 and $2.5 million over the
past several years, depressing Famous Footwear's earnings. Excluding the
loss provision on the sale and operating losses at the fixtures operation,
Famous Footwear's operating earnings in fiscal 1997 were $37.8 million.
Net sales from the core wholesale operations -- Brown Shoe Company and
Pagoda U.S.A. -- decreased 3% during fiscal 1997 to $432.7 million.
Operating earnings were $31.1 million compared to $32.0 million in fiscal
1996 which included a $4.0 million LIFO credit from the liquidation of
remaining manufactured inventories within Brown Shoe Company. Sales of the
Naturalizer and NaturalSPORT brands increased slightly in 1997 reflecting
the continued emphasis on product development and investment in aggressive
brand marketing. Improved operating earnings resulted from improved margins
and controlled operating expenses.
The Naturalizer Retail division's net sales of $130.1 million were about
even with 1996 sales, however, same-store sales decreased by 0.9%. The
combination of flat sales levels and higher operating expenses resulted in
an operating loss of $2.9 million in fiscal 1997. The number of stores in
operation at the end of fiscal 1997 was 341 which represents a net decrease
of 5 stores.
The Canadian retail and wholesale operations' sales increased 4% in fiscal
1997 to $76.2 million while combined operating earnings were $7.8 million,
a 19% increase from 1996. The retail operations achieved a same-store sales
increase of 5.2%. Operating earnings increased 20%, primarily as a result
of increased sales. With the net addition of 7 Naturalizer stores in 1997,
the Canadian division operated 123 stores, including 107 Naturalizer stores
and 16 F.X. LaSalle stores at the end of fiscal 1997. The Canadian
wholesale operations' sales decreased 3% in fiscal 1997, however, operating
earnings increased 17% from improved margins.
Consolidated gross profit, as a percent of sales, of 36.9% in 1997 was down
slightly from 37.2% in 1996. Excluding the Pagoda International
restructuring charge impact of $14.7 million, the gross profit as a percent
of sales increased to 37.9% due to higher margins at Famous Footwear and
the core wholesale operations and a higher mix of retail sales
versus wholesale sales.
Selling and administrative expenses as a percent of sales in 1997 increased
to 35.7% from 34.2% in 1996. Excluding the restructuring charge impact of
$7.3 million, the 1997 rate was 35.2%. The increase in 1997 reflects a
higher expense rate within the wholesale operations from advertising
expenditures and the effect from a greater mix of retail sales.
Interest expense increased to $21.8 million in fiscal 1997 from $19.3
million in fiscal 1996 primarily as a result of having a full year impact
of higher rate debt from the Company's debt repositioning in October 1996.
The impact of the higher average borrowing rate on interest expense was
slightly offset by the lower average borrowings resulting from the positive
cash flow provided by operations.
Other income of $.5 million in fiscal 1997 consists primarily of royalty
income and is offset by the $1.0 million impact from the Pagoda
International restructuring charge recorded within other income. Other
income in fiscal 1996 was $1.3 million.
The Company's tax provision of $18.7 million in fiscal 1997 includes an
$8.0 million provision for taxes due on the foreign cash anticipated to be
repatriated as a result of the decision to restructure the Pagoda
International division. A tax provision was reflected in fiscal 1997 even
with the consolidated pretax loss, as no tax benefit was recorded on the
Pagoda International losses. See Note 5 to the consolidated financial
statements for a further explanation and a reconciliation of the effective
tax rates to the statutory rates.
The Company had an overall net deferred tax asset of $8.1 million at
January 31, 1998, which relates primarily to differences in book and
taxable income and tax credit carryforwards. No valuation reserve was
carried against the deferred tax asset as management believes that the net
deferred tax asset will be realized through future operating results and
the tax impact of repatriating foreign cash. In addition, management also
has available certain tax planning strategies, which if implemented, could
substantially eliminate the net deferred tax asset.
1996 Compared to 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 aftertax 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 aftertax 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 in fiscal 1995 were substantially offset by an aftertax 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 were 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
1996 and the latter portion of 1995. Although the gross margin rate was
about the same as in 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 were closed, for a net of 20 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.
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.
- --------------------------------------------------------------------------
Management's Discussion and Analysis of Operations and Financial Condition
- --------------------------------------------------------------------------
At 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.
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 fiscal 1995, 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.
Consolidated gross profit, as a percent of sales, in 1996 increased
significantly to 37.2% from 34.8% in 1995. The improvement primarily
reflects the lower cost base resulting from the shift to all-import
sourcing and the pretax LIFO credit of $4.0 million from the liquidation of
footwear manufactured in closed domestic facilities. Selling and
administrative expenses as a percent of sales of 34.2% in 1996 was
comparable to 1995.
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 primarily consisted
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.
PAGODA INTERNATIONAL RESTRUCTURING
In the third quarter of fiscal 1997, the Company made a decision to reduce
its investment in the Pagoda International marketing division in Latin
America and Europe as a result of excessive inventories and declining
performance. The restructuring plan includes the sale of remaining
Brazilian inventory of licensed products and the shift of European
inventory ownership and marketing of its licensed footwear to distributors.
In addition, foreign cash previously available to support international
operations will be repatriated. An aftertax charge of $31.0 million was
recorded to cover the costs of this restructuring of which $20.2 million
has no expected cash impact. The restructuring charge consisted of the
following:
* Inventory markdowns of $11.7 million to liquidate excess
inventories;
* Charges of $2.9 million for severance and benefit costs for
those employees terminated due to facility closures;
* Charges of $8.4 million for bad debts, royalty agreement
shortfalls and other costs associated with the restructuring;
and
* An income tax provision of $8.0 million associated with the
United States taxes owed on the foreign cash anticipated to
be repatriated in fiscal 1998.
A contract has been completed with a Brazilian footwear company to purchase
virtually all of the Company's Brazilian inventory over a period not to
exceed two and a half years. Negotiations are underway in Europe to sell
inventories and transfer certain licenses to other parties.
Approximately $1.6 million of the restructuring charge was utilized in
1997, resulting in $29.4 million remaining at January 31, 1998. The
remaining reserve activity will be utilized primarily in fiscal 1998 and
into fiscal 1999.
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 1997, the Company's borrowing level decreased as cash flow
from operations more than offset capital expenditures and dividends. As a
result, total debt decreased from $261.0 million at the end of fiscal 1996
to $251.0 million at the end of fiscal 1997. The Company's ratio of
debt-to-total capitalization increased from 52.4% at the end of fiscal 1996
to 55.8% at the end of fiscal 1997, and the ratio of net debt (total debt
less cash and cash equivalents) to total capitalization increased from
48.4% at the end of fiscal 1996 to 50.2% at the end of fiscal 1997. These
ratios were adversely impacted by the restructuring charges and operating
losses incurred by the Pagoda International division.
Working capital at the end of fiscal 1997 was $260.4 million, which was
$40.6 million lower than at the end of fiscal 1996. The decrease in working
capital position led to a decrease in the Company's current ratio, the
relationship of current assets to current liabilities, from 2.1 to 1 at the
end of fiscal 1996 to 1.9 to 1 at the end of fiscal 1997. These decreases
were impacted by the Pagoda International restructuring charges and
operating losses in fiscal 1997.
Cash provided by operating activities in 1997 was significantly higher than
in 1996 as the result of decreased inventories and receivables at the
Company's wholesale operations.
Cash used in investing activities was primarily for capital expenditures in
fiscal 1997 of $21.7 million compared to $21.0 million in fiscal 1996.
Capital expenditures in fiscal 1997 were primarily for new store openings
and remodelings at Famous Footwear and Naturalizer Retail.
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, establish limitations on indebtedness, certain types of
payments, including dividends, liens and investments, and limit the use of
proceeds of asset sales. In anticipation of the impact of the Pagoda
International nonrecurring restructuring charges, the Company amended its
revolving bank Credit Agreement, 7.36% Senior Notes and 9.5% Senior Notes
Agreements to modify certain financial covenants. The Company was in
compliance with all of these covenants at all times during fiscal 1997 and
at fiscal year-end, and expects to continue to be in compliance based on
current estimates for fiscal 1998. 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 the 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, the Company hedges the local currency denominated
assets and liabilities. See Note 11 to 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 $0.85 per share in fiscal 1997, and $1.00
per share in fiscal 1996. The 1997 dividend marked the 75th year of
consecutive quarterly dividends.
YEAR 2000 COMPLIANCE
The Company uses hardware and software in various aspects of its business,
including product sourcing, distribution and administration, which will
require modification or replacement in order to interpret the year 2000
appropriately. The Company has developed a plan to identify and correct all
affected hardware and software in an effective and economical manner, and
to monitor the implementation of these corrections. The plan also includes
communications with the Company's significant customers, vendors and other
outside parties to determine the extent to which the Company's systems are
vulnerable to any failures by them to address the year 2000 issue.
As of February 1998, the Company has completed its initial assessment of
which hardware and software are non-year 2000 compliant. In most instances,
the Company will be replacing the non-compliant systems with new programs
and systems which will significantly upgrade the existing systems as well
as appropriately interpret the year 2000. Although the year 2000 issue
impacts the timing of completion of these replacements, for the most part,
these replacements would have occurred in the normal course of business in
any event. The Company anticipates that most modifications and replacements
will be in place by early 1999. While the Company believes its planning
efforts are adequate to address its year 2000 concerns, there can be no
guarantee that the systems of other companies upon which the Company's
systems and operations rely will be converted on a timely basis.
Management anticipates that the total costs to the Company to modify or
replace its systems in order to remediate the year 2000 issue should not
have a material adverse effect on the Company's business, liquidity or its
results of operations.
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 in Colorado 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 January 31, 1998, the
total accrued environmental liabilities for all sites total approximately
$3.2 million.
- ---------------------------------------------------------------------------
SAFE HARBOR STATEMENT
This Annual Report contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Actual results
could differ materially from those projected as they are subject to various
risks and uncertainties. These include general economic conditions,
competition, consumer apparel and footwear trends, and political and
economic conditions in Brazil and China, which are significant footwear
sourcing countries. These factors are listed and further discussed in
Exhibit 99 to the Company's Annual Report on Form 10-K. Such Exhibit is
incorporated herein by reference.
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------
Five-Year Summary
- -----------------
Thousands, except
per share amounts 1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(52 weeks) (52 weeks) (53 weeks) (52 weeks) (52 weeks)
Operations
- ----------
<S> <C> <C> <C> <C> <C>
Net sales $1,567,202 $1,525,052 $1,455,896 $1,461,637 $1,361,039
Cost of goods sold 988,530 958,288 948,925 949,374 915,443
---------- ---------- ---------- ---------- ----------
Gross profit 578,672 566,764 506,971 512,263 445,596
---------- ---------- ---------- ---------- ----------
Selling and
administrative
expenses 559,536 521,553 494,098 448,827 422,248
Interest expense 21,756 19,327 15,969 15,785 17,334
Other expense
(income), net (452) (1,341) 1,630 (12,320) 21,191
---------- ---------- ---------- ---------- ----------
Earnings (loss) from
continuing operations
before income taxes and
accounting changes (2,168) 27,225 (4,726) 59,971 (15,177)
Income tax
(provision) benefit (18,728) (6,910) 5,423 (26,405) 5,881
---------- ---------- ---------- ---------- ----------
Earnings (loss) from
continuing operations
before cumulative
effect of accounting
changes (20,896) 20,315 697 33,566 (9,296)
Earnings from
discontinued operations,
net of income taxes -- -- -- 1,282 4,298
(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) $(20,896) $20,315 $3,297 $39,398 $(31,612)
========== ========== ========== ========== ==========
Returns from
continuing operations
before accounting
changes:
Return on net sales (1.3%) 1.3% 0.1% 2.3% (0.7%)
Return on beginning
shareholders' equity (8.8%) 8.8% 0.3% 14.4% (3.2%)
Return on average
invested capital (4.2%) 4.1% 0.2% 6.5% (1.6%)
Dividends paid $15,323 $17,956 $23,325 $28,610 $27,979
Capital expenditures 21,727 21,044 26,939 32,531 27,207
Per Common Share
- ----------------
Earnings (loss) from
continuing operations
before accounting
changes - Basic $(1.19) $1.16 $ .04 $1.93 $(.54)
Net earnings (loss) -
Basic (1.19) 1.16 .19 2.27 (1.85)
Earnings (loss) from
continuing operations
before accounting
changes - Diluted (1.19) 1.15 .04 1.90 (.54)
Net earnings (loss) -
Diluted (1.19) 1.15 .19 2.23 (1.85)
Dividends paid .85 1.00 1.30 1.60 1.60
Shareholders' equity 11.04 13.19 12.92 13.90 13.27
Financial Position
- ------------------
Receivables, net $77,355 $90,246 $86,417 $98,079 $109,825
Inventories, net 380,177 398,803 342,282 322,029 286,992
Working capital 260,437 301,020 209,399 259,178 240,554
Property and
equipment, net 82,744 85,380 87,720 92,904 86,695
Total assets 694,988 722,375 661,056 636,515 739,930
Long-term debt and
capitalized lease
obligations 197,027 197,025 105,470 133,213 135,324
Shareholders' equity 199,190 237,037 231,636 249,727 233,863
Average common shares
outstanding - Basic 17,591 17,531 17,483 17,374 17,068
</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
January 31, 1998 February 1, 1997
---------------- ----------------
Assets
- ------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 50,136 $ 38,686
Receivables, net of allowance of
$9,925 in 1997 and $10,203 in 1996 77,355 90,246
Inventories, net of adjustment to last-in,
first-out cost of $15,617 in 1997 and
$18,846 in 1996 380,177 398,803
Deferred income taxes 14,900 24,091
Prepaid expenses and other current assets 15,962 12,949
-------- --------
TOTAL CURRENT ASSETS 538,530 564,775
-------- --------
Other Assets
Prepaid pension costs 34,388 33,325
Other assets 39,326 38,895
Property and equipment, net 82,744 85,380
-------- --------
$694,988 $722,375
======== ========
Liabilities and Shareholders' Equity
- ------------------------------------
Current Liabilities
Notes payable $ 54,000 $ 62,000
Trade accounts payable 118,907 124,697
Employee compensation and benefits 33,256 31,164
Other accrued expenses 59,935 39,889
Income taxes 11,995 4,005
Current maturities of long-term debt -- 2,000
-------- --------
TOTAL CURRENT LIABILITIES 278,093 263,755
-------- --------
Other Liabilities
Long-term debt, including capitalized
lease obligations 197,027 197,025
Deferred income taxes 6,817 9,200
Other liabilities 13,861 15,358
-------- --------
TOTAL OTHER LIABILITIES 217,705 221,583
-------- --------
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;
18,049,327 and 17,969,977
shares outstanding 67,685 67,387
Additional capital 47,036 46,310
Cumulative translation adjustment (8,427) (4,433)
Unamortized value of restricted stock (4,358) (5,700)
Retained earnings 97,254 133,473
-------- --------
TOTAL SHAREHOLDERS' EQUITY 199,190 237,037
-------- --------
$694,988 $722,375
======== ========
See notes to consolidated financial statements.
</TABLE>
- ---------------------
Consolidated Earnings
- ---------------------
<TABLE>
<CAPTION>
Thousands, except per share amounts 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Sales $1,567,202 $1,525,052 $1,455,896
Cost of goods sold 988,530 958,288 948,925
---------- ---------- ----------
Gross profit 578,672 566,764 506,971
---------- ---------- ----------
Selling and administrative expenses 559,536 521,553 494,098
Interest expense 21,756 19,327 15,969
Other expense (income), net (452) (1,341) 1,630
---------- ---------- ----------
Earnings (Loss) From Continuing
Operations Before Income Taxes (2,168) 27,225 (4,726)
Income tax (provision) benefit (18,728) (6,910) 5,423
---------- ---------- ----------
Earnings (Loss) From Continuing
Operations (20,896) 20,315 697
Discontinued operations, net of taxes -- -- 2,600
---------- ---------- ----------
NET EARNINGS (LOSS) $ (20,896) $ 20,315 $ 3,297
========== ========== ==========
Basic Earnings (Loss) Per Common Share:
Continuing operations $(1.19) $ 1.16 $ .04
Discontinued operations -- -- .15
---------- ---------- ----------
NET EARNINGS (LOSS) - BASIC $(1.19) $ 1.16 $ .19
========== ========== ==========
Diluted Earnings (Loss) Per Common Share:
Continuing operations $(1.19) $ 1.15 $ .04
Discontinued operations -- -- .15
---------- ---------- ----------
Net Earnings (Loss) - Diluted $(1.19) $ 1.15 $ .19
========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
- -----------------------
Consolidated Cash Flows
- -----------------------
<TABLE>
<CAPTION>
Thousands 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net earnings (loss) $(20,896) $ 20,315 $ 3,297
Adjustments to reconcile net earnings
to net cash provided by continuing
operating activities:
Discontinued operations -- -- (2,600)
Depreciation and amortization 26,686 25,886 23,827
Loss on disposal or impairment
of facilities and equipment 1,475 655 6,477
Provision for losses
on accounts receivable 5,145 5,982 5,101
Changes in operating assets
and liabilities:
Receivables 7,746 (10,256) 6,561
Inventories 18,626 (56,521) (20,253)
Prepaid expenses and other
current assets 6,178 4,541 (3,051)
Trade accounts payable and
accrued expenses 16,349 17,221 2,672
Income taxes 7,990 (330) 4,977
Other, net (10,615) (4,223) (8,548)
-------- -------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES OF:
Continuing operations 58,684 3,270 18,460
Discontinued operations -- -- (2,755)
-------- -------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 58,684 3,270 15,705
-------- -------- --------
Investing Activities:
Capital expenditures (21,727) (21,044) (26,939)
Proceeds from sales of fixed assets 401 1,414 5,408
Proceeds from sales of assets
of discontinued operations -- -- 2,444
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (21,326) (19,630) (19,087)
-------- -------- --------
Financing Activities:
Increase (decrease) in short-term
notes payable (8,000) (50,000) 45,915
Debt issuance costs (678) (3,714) --
Principal payments of long-term debt
and capitalized leases (2,000) (8,450) (2,812)
Proceeds from issuance of
long-term debt -- 100,000 --
Proceeds from issuance of common stock 93 108 564
Payments for purchases of treasury stock -- -- (824)
Dividends paid (15,323) (17,956) (23,325)
-------- -------- --------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (25,908) 19,988 19,518
-------- -------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 11,450 3,628 16,136
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 38,686 35,058 18,922
-------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 50,136 $ 38,686 $ 35,058
======== ======== ========
See notes to consolidated financial statements.
</TABLE>
- ---------------------------------
Consolidated Shareholders' Equity
- ---------------------------------
<TABLE>
<CAPTION>
Thousands, except number of shares and per share amounts
Unamortized
Cumulative Value of
Common Stock Additional Translation Restricted Retained
Shares Dollars Capital Adjustment Stock Earnings
---------- ------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance
January
28, 1995 17,969,892 $67,388 $46,957 $(5,556) $(10,878) $151,816
---------- ------- ------- ------- -------- --------
Net earnings 3,297
Dividends
($1.30 per
share) (23,325)
Stock issued
under
employee
benefit
plans 23,760 89 475
Purchase
of common
stock for
treasury (25,800) (97) (53) (674)
Currency
translation
adjustment 643
Stock issued
under
restricted
stock plan,
net (36,875) (138) (1,364) 1,502
Amortization
of deferred
compensation
under
restricted
stock plan 1,554
---------- ------- ------- ------- -------- --------
Balance
February
3, 1996 17,930,977 67,242 46,015 (4,913) (7,822) 131,114
---------- ------- ------- ------- -------- --------
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
compensation
under
restricted
stock plan 2,454
---------- ------- ------- -------- --------- --------
Balance
February
1, 1997 17,969,977 67,387 46,310 (4,433) (5,700) 133,473
---------- ------- ------- ------- -------- --------
Net loss (20,896)
Dividends
($0.85 per
share) (15,323)
Stock issued
under
employee
benefit
plans 6,350 24 69
Currency
translation
adjustment (3,994)
Stock issued
under
restricted
stock plan,
net 73,000 274 657 (931)
Amortization
of deferred
compensation
under
restricted
stock plan 2,273
---------- ------- ------- ------- -------- --------
Balance
January
31, 1998 18,049,327 $67,685 $47,036 $(8,427) $(4,358) $97,254
========== ======= ======= ======= ======== ========
</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. The Company provides a broad offering of branded and
private label casual, athletic and dress footwear products to women,
children and men. Footwear is sold at a variety of price points through
multiple distribution channels both domestically and internationally. The
Company currently operates 1,279 retail shoe stores in the United States
and Canada under the Famous Footwear, Naturalizer(R) and F.X. LaSalle(R)
names. In addition, through its Brown Branded Marketing and Pagoda
divisions, the Company designs, sources and markets footwear to retail
stores domestically and internationally, 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 1997, 1996 and 1995 ended on January
31, 1998, February 1, 1997, and February 3, 1996, respectively. Fiscal year
1995 included 53 weeks and fiscal years 1997 and 1996 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 90% 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, bad debt reserves and inventory.
Earnings Per Share
- ------------------
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS No. 128), which replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic earnings per share includes only the
outstanding shares. Diluted earnings per share includes unvested restricted
stock and the dilutive effect, if any, of stock options. All earnings per
share amounts presented have been restated to conform to SFAS No. 128.
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
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), by making pro
forma disclosures of net earnings and earnings per share to reflect the
fair value of stock options as if SFAS No. 123 had been adopted.
Cash and 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 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 and
foreign currency options, 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: EARNINGS PER SHARE
- --------------------------
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Numerator:
Earnings (loss) from continuing
operations - Basic and Diluted
earnings (loss) per share $(20,896) $ 20,315 $ 697
======== ======== ======
Denominator:
Denominator for basic
earnings (loss) per share 17,591 17,531 17,483
Effect of dilutive securities:
Unvested restricted stock -- 141 108
Employee stock options -- 53 46
-------- -------- ------
Dilutive potential common shares -- 194 154
-------- -------- ------
Denominator for diluted
earnings (loss) per share 17,591 17,725 17,637
======== ======== ======
Basic earnings (loss) per share $ (1.19) $ 1.16 $ .04
======== ======== ======
Diluted earnings (loss) per share $ (1.19) $ 1.15 $ .04
======== ======== ======
</TABLE>
The fiscal 1997 denominator for diluted earnings (loss) per share excludes
the potential effect of dilutive securities in accordance with SFAS No. 128
because the inclusion of such shares in the computation are anti-dilutive
in a period in which a loss from continuing operations was recognized.
NOTE 3: RESTRUCTURING CHARGES
- -----------------------------
Included in earnings from continuing operations for fiscal 1997 is an
aftertax charge of $31.0 million for the cost of reducing the Company's
investment in the Pagoda International marketing division in Latin America
and Europe. The total charge includes $14.7 million as reflected in cost of
goods sold for inventory write-downs and anticipated royalty payment
shortfalls. Costs for bad debts, severance and other restructuring costs of
$7.3 million are reflected in selling and administrative expenses. Other
expense (income) includes $1.0 million primarily for the disposal of fixed
assets. In addition, an $8.0 million provision for income taxes was
recorded for the anticipated repatriation of approximately $23.5 million of
foreign cash to the United States. Taxes were not previously provided on
these accumulated earnings as they were considered to be permanently
reinvested in the Company's international operations. In fiscal 1997, the
Company utilized approximately $1.6 million of the restructuring reserve.
The total charge resulted in a reduction in basic earnings of $1.76 per
share for fiscal 1997.
In February 1998, the Company completed an agreement with a Brazilian
company to sell the Company's remaining Brazilian inventory of licensed
products to them over a period not to exceed two and a half years. In
Europe, the Company is in negotiations to shift inventory ownership and
marketing of its licensed footwear to distributors. Upon completion of
these agreements, the Company is expected to remain contingently liable for
minimum royalties under certain license agreements.
NOTE 4: RETIREMENT AND OTHER BENEFIT PLANS
- ------------------------------------------
The Company's pension plan covers substantially all full-time United States
employees. Under the plan, salaried and 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 multi-employer plan, which provides defined
benefits to certain of the Company's union employees.
The following table sets forth the plans' funded status at the December 31,
1997 and 1996 measurement dates, and amounts recognized in the Company's
Consolidated Balance Sheet at January 31, 1998 and February 1, 1997 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation $ 90,260 $ 83,038
======== ========
Accumulated benefit obligation $ 91,603 $ 83,867
======== ========
Projected benefit obligation $100,275 $ 91,209
Plan assets at fair value 146,721 124,793
-------- --------
Excess of plan assets over
projected benefit obligation 46,446 33,584
Unrecognized net (gain) loss (10,844) 1,471
Unrecognized prior service costs (667) (548)
Unrecognized net transition asset (547) (1,182)
-------- --------
Prepaid pension cost recognized
in the balance sheet $ 34,388 $ 33,325
======== ========
</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>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost $ 3,494 $ 3,633 $ 4,306
Interest cost 6,876 7,650 8,638
Actual return on plan assets (28,868) (1,987) (41,055)
Net amortization and deferral 17,548 (10,997) 28,207
Multi-employer plan 25 25 23
-------- -------- --------
Total pension (income) expense $ (925) $ (1,676) $ 119
======== ======== ========
Actuarial assumptions used were:
1997 1996 1995
-------- -------- --------
Discount rate 7.00% 7.75% 7.00%
Expected return on plan assets 9.50% 9.50% 9.50%
Compensation increase 4.50% 5.00% 4.50%
======== ======== ========
</TABLE>
In addition, the Company recognized net curtailment/settlement losses in
fiscal 1996 and 1995 of $1.5 million and $1.8 million, respectively,
related to employee terminations due to personnel reductions as part of the
Company's restructuring and factory closures. These net losses affected
restructuring and factory closure reserves originally established in fiscal
1995.
The Company's defined contribution 401(k) plan covers salaried, management
and certain hourly employees who are at least 21 years of age. Company
contributions represent a partial matching of employee contributions
generally up to a maximum of 3.5% of the employee's salary. The Company's
expense for this plan was $2.0 million in 1997, $2.0 million in 1996 and
$2.5 million in 1995.
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 January 31, 1998 and
February 1, 1997
(in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------------------------
Life Life
Health Insurance Health Insurance
Plans Plans Plans Plans
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Accumulated postretirement
benefit obligations:
Retirees $ 2,229 $ 4,358 $ 2,216 $ 4,657
Active participants 279 21 843 63
-------- --------- -------- ---------
2,508 4,379 3,059 4,720
Plan assets -- -- -- --
-------- --------- -------- ---------
Accumulated obligation in
excess of plan assets 2,508 4,379 3,059 4,720
Unrecognized net gain 2,574 129 3,644 128
-------- --------- -------- ---------
Accrued postretirement
benefit cost $ 5,082 $ 4,508 $ 6,703 $ 4,848
======== ========= ======== =========
</TABLE>
Net postretirement benefit cost (income) for 1997, 1996 and 1995 included
the following components (in thousands):
<TABLE>
<CAPTION>
Life
Health Insurance
Plans Plans
--------- ---------
<S> <C> <C>
1997
Service cost $ 4 $ --
Interest cost 194 329
Net amortization benefit (1,352) --
--------- ---------
Postretirement benefit cost (income) $ (1,154) $ 329
========= =========
1996
Service cost $ 34 $ 1
Interest cost 219 350
Net amortization benefit (1,601) --
--------- ---------
Postretirement benefit cost (income) $ (1,348) $ 351
========= =========
1995
Service cost $ 162 $ 5
Interest cost 407 385
Net amortization benefit (878) --
--------- ---------
Postretirement benefit cost (income) $ (309) $ 390
========= =========
</TABLE>
In addition, the Company recognized a net curtailment gain in fiscal 1995
of $.7 million related to employee terminations due to personnel reductions
as part of the Company's restructuring and factory closures. These net
gains increased the restructuring and factory closure reserves originally
established in fiscal 1995.
Actuarial assumptions used were ($ in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Projected health care cost
trend rate (A) 6.50% 7.00% 7.50%
Ultimate trend rate (A) 5.00% 5.00% 5.00%
Year ultimate trend rate is achieved 2001 2001 2001
Effect of a 1% point increase in the
health care cost trend rate on the
postretirement benefit obligation $ 66 $ 105 $ 132
Effect of a 1% point increase in the
health care cost trend rate on the
aggregate of service and
interest cost $ 6 $ 11 $ 26
Discount rate 7.00% 7.75% 7.00%
===== ===== =====
</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 1997, 1996 and 1995,
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 $14.1 million, $10.7
million, and ($18.6) million in 1997, 1996 and 1995, respectively, and
foreign earnings (loss) of ($16.3) million, $16.5 million and $13.9 million
in 1997, 1996 and 1995, respectively.
The components of income tax expense (benefit) are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal
Currently payable $ 6,158 $ (523) $ (7,220)
Deferred 7,313 2,323 (2,485)
--------- --------- ---------
13,471 1,800 (9,705)
State 614 1,052 (399)
Foreign 4,643 4,058 4,681
--------- --------- ---------
Total income tax expense (benefit)
on earnings (loss) from
continuing operations 18,728 6,910 (5,423)
Tax expense of
discontinued operations -- -- 1,400
--------- --------- ---------
Total income tax expense (benefit) $ 18,728 $ 6,910 $ (4,023)
========= ========= =========
</TABLE>
The Company made net tax payments, including domestic federal, state and
foreign taxes, of $4.9 million and $6.8 million in fiscal 1997 and 1996,
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>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Income taxes at statutory rate $ (759) $ 9,529 $ (1,654)
State income tax
net of federal tax benefit 399 626 (259)
Foreign tax in excess of (less than)
domestic rate 574 (1,475) 337
Recovery of tax assessment (A) -- -- (5,837)
Foreign operating losses with
no benefit provided (B) 9,390 -- --
Provision for foreign
cash repatriation 8,000 -- --
Valuation of temporary differences (1,000) (2,300) 2,700
Other 2,124 530 (710)
--------- --------- ---------
$ 18,728 $ 6,910 $ (5,423)
========= ========= =========
</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 fiscal 1994, 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.
(B) Represents foreign operating losses on which no tax benefit will be
realized.
Significant components of the Company's deferred income tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred Tax Assets
Employee benefits, compensation,
and insurance $ 8,874 $ 7,820
Allowance for doubtful accounts 2,899 3,649
Inventory capitalization and
inventory reserves 5,183 6,325
Postretirement and postemployment
benefit plans 3,980 4,658
Tax credits and loss carryforwards 4,319 10,515
Discontinued operations, restructuring,
and store closing reserves 249 1,682
Other 9,882 10,603
--------- ---------
Total deferred tax assets 35,386 45,252
Deferred Tax Liabilities
Excess depreciation (4,080) (6,303)
Retirement plans (12,140) (12,009)
LIFO inventory valuation (9,325) (7,693)
Other (1,758) (3,356)
--------- ---------
Total deferred tax liabilities (27,303) (29,361)
Valuation allowance -- (1,000)
--------- ---------
Net deferred income tax asset $ 8,083 $ 14,891
========= =========
</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. During fiscal 1996, $2.3 million of the valuation allowance
was reversed, due to the increased domestic earnings of the Company. The
Company reversed the remaining deferred tax asset valuation allowance of
$1.0 million in fiscal 1997. 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 January 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of $2.5 million which are available to offset
future federal taxable income through fiscal 2011. Other tax credits
primarily represent alternative minimum tax credits which have no
expiration and foreign tax credits which have expiration dates from fiscal
1998 through fiscal 2001.
As of January 31, 1998, 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 entities'
earnings were distributed, it is estimated that U.S. taxes, net of foreign
tax credits, of approximately $16.4 million, after considering the $8.0
million tax provided for cash repatriations expected in fiscal 1998, 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, children's and men's footwear. In 1997, approximately 66% of the
Company's sales were at retail, compared to 63% in 1996 and 62% in 1995.
Domestic operations include the wholesale distribution of branded, licensed
and private label footwear to a variety of retail customers, and operation
of 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 foreign port to customers who then
import the footwear into the United States.
A summary of the Company's operations by geographic area follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Net Sales
United States $1,208,878 $1,137,887 $1,065,143
Far East 242,100 278,371 282,580
Canada 76,716 76,620 69,244
Latin America, Europe
and Other 66,583 79,891 78,697
Inter-Area Transfers (27,075) (47,717) (39,768)
---------- ---------- ----------
$1,567,202 $1,525,052 $1,455,896
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Operating Income (Loss)
United States (A) (B) $ 47,054 $ 40,074 $ 8,741
Far East 769 7,750 748
Canada 7,823 6,569 6,358
Latin America, Europe
and Other (C) (24,185) 2,235 8,251
Less Corporate, Interest and
Other Income (Expense) (33,629) (29,403) (28,824)
----------- ----------- ----------
$ (2,168) $ 27,225 $ (4,726)
=========== =========== ==========
Identifiable Assets
United States $ 541,790 $ 556,711 $ 511,435
Far East 41,366 38,309 55,754
Canada 52,678 50,871 45,674
Latin America, Europe
and Other 59,154 76,484 48,193
----------- ----------- ----------
$ 694,988 $ 722,375 $ 661,056
=========== =========== ==========
</TABLE>
(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.
(C) 1997 includes a charge of $23.0 million for the costs of
restructuring the Pagoda International marketing division.
Inter-area transfers to affiliates are generally priced to recover cost
plus an appropriate margin for profit. Identifiable foreign assets consist
primarily of cash and cash equivalents, receivables and 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>
January 31, February 1,
1998 1997
----------- -----------
<S> <C> <C>
Finished goods $ 374,470 $ 389,188
Work-in-progress 511 560
Raw materials and supplies 5,196 9,055
----------- -----------
$ 380,177 $ 398,803
=========== ===========
</TABLE>
If the first-in, first-out (FIFO) cost method had been used, inventories
would have been $15.6 million and $18.8 million higher at January 31, 1998
and February 1, 1997, respectively.
During fiscal 1996 and 1995, 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 and 1995 net income by $2.6 and $6.6 million, respectively.
NOTE 8: PROPERTY AND EQUIPMENT
- ------------------------------
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
----------- -----------
<S> <C> <C>
Land and buildings $ 29,927 $ 29,963
Leasehold improvements 47,719 38,669
Furniture, fixtures and equipment 134,684 133,597
----------- -----------
212,330 202,229
Allowances for depreciation
and amortization (129,586) (116,849)
----------- -----------
$ 82,744 $ 85,380
=========== ===========
</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." 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 and 1997
charges for impaired assets of $.7 million each year were charged to
selling and administrative expense. 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>
January 31, February 1,
1998 1997
----------- -----------
<S> <C> <C>
9.5% Senior Notes due 2006 $ 100,000 $ 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 18,543 18,542
7.125% Debentures due 2003 10,000 10,000
Capitalized lease obligations 3,484 3,483
----------- -----------
$ 197,027 $ 197,025
=========== ===========
</TABLE>
Maturities of long-term debt and capitalized lease obligations for 1998
through 2002 are: 1998--$0; 1999--$25.0 million; 2000--$10.0 million;
2001--$10.0 million and 2002--$28.6 million.
In fiscal 1996, the Company issued $100.0 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.
The Company's revolving bank Credit Agreement, which provides $155.0
million in committed working capital and letter of credit financing,
expires January 2000. 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, 0.375% at January 31,1998, based on the Company's
leverage ratio is payable on the entire amount of the facility. At January
31, 1998, $54.0 million of short-term notes and approximately $21.0 million
of letters of credit were outstanding under the revolving bank Credit
Agreement.
The Company's Canadian operations maintain uncommitted lines of credit
totaling approximately $5.5 million, with letters of credit outstanding of
approximately $2.0 million.
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, establish limitations on indebtedness, certain types of
payments including dividends, liens and investments, and limit the use of
proceeds of asset sales. 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. As a result of the
Pagoda International restructuring charges and corresponding operating
losses, in fiscal 1997 the Company amended its revolving bank Credit
Agreement, 9.5% Senior Notes, and 7.36% Senior Notes to modify certain
financial covenants.
The maximum amount of short-term borrowings under the revolving bank credit
arrangements at the end of any month was $65.0 million in 1997 and $144.5
million in 1996. The average short-term borrowings during the year were
$47.0 million in 1997 and $103.7 million in 1996. The weighted average
interest rates approximated 7.7% in 1997 and 7.0% in 1996.
Cash payments of interest for fiscal 1997, 1996 and 1995 were $22.5
million, $16.5 million and $16.0 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>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Minimum payments $ 86,132 $ 82,829 $ 77,814
Contingent payments 2,665 2,776 3,303
-------- -------- --------
$ 88,797 $ 85,605 $ 81,117
======== ======== ========
</TABLE>
Future minimum payments under noncancelable operating leases with an
initial term of one year or more were as follows at January 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
Operating Leases
- --------------------------------------------------------------------
<S> <C>
1998 $ 83,113
1999 70,342
2000 54,588
2001 44,988
2002 34,079
Thereafter 91,392
--------
Total minimum lease payments $378,502
========
</TABLE>
The Company is contingently liable for lease commitments of approximately
$57 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, foreign currency options, 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 at the end of
1997 owned a $6.9 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 in the Brazilian
economy. 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 consists of the following (in thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
----------- -----------
<S> <C> <C>
Deliverable Contracts
Italian Lira $ 11,700 $ 21,400
French Francs 9,100 9,600
Canadian Dollars 7,000 6,300
Other Currencies 1,500 2,000
Non-Deliverable Contracts
Brazilian Real 13,100 22,100
New Taiwanese Dollars 7,400 7,200
Other Currencies 2,700 1,900
----------- -----------
$ 52,500 $ 70,500
=========== ===========
</TABLE>
The unrealized gains related to these contracts, based on dealer-quoted
prices, were $.1 million at January 31, 1998 and $.3 million at February 1,
1997.
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.
The Company had no interest rate derivative instruments outstanding at
January 31, 1998 and February 1, 1997.
NOTE 12: FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------
The carrying amounts and fair values of the Company's financial instruments
at January 31, 1998 and February 1, 1997 are (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Liabilities
Long-Term Debt $ 197,027 $ 201,321 $ 199,025 $ 199,009
========= ========= ========= =========
</TABLE>
Carrying amounts reported on the balance sheet for cash, cash equivalents,
receivables and notes payable approximate fair value due to the short-term
maturity of these instruments.
The fair value of the Company's long-term debt 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 a
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 valuations 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 is 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 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 over the next 26 years. The Company has begun remediation
work at an owned manufacturing facility that is leased to another party in
Colorado, and is working with the state of Colorado's environmental
authorities to determine the extent to which, if any, solvents have left
the Company's property. 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 Company's closed tannery and shoe manufacturing
facilities. At January 31, 1998, the total accrued environmental
liabilities for all sites total $3.2 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 January 31, 1998 and February 1,
1997, there were 18,049,327 shares and 17,969,977 shares, net of 3,956,570
shares and 4,035,920 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 6,700 shareholders of record at April
4, 1998.
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 may
also be granted in tandem with options. Such units entitle the participant
to receive an amount, in cash and/or stock, equal to the difference between
the current market value of a share of stock at the exercise date and the
option price of such share of stock. The options and appreciation units
become exercisable one year from the date of the grant at a rate of 25% per
year and are exercisable for up to 10 years from the date of the grant.
Since the stock appreciation rights are issued in tandem with stock
options, the exercise of either cancels the other. As of January 31, 1998,
47,600 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 the Black-Scholes option pricing model with the following
weighted-average assumptions for 1997, 1996 and 1995, respectively:
risk-free interest rates of 6.0%, 6.6% and 5.9%; dividend yields of 4.3%,
5.9% and 6.9%; volatility factors of the expected market price of the
Company's common stock of .33, .29 and .26; and a weighted-average expected
life of the option of 7 years. The weighted average fair value of options
granted during 1997, 1996 and 1995 was $4.35, $3.53 and $2.41 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>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Net income (loss), as reported $ (20,896) $ 20,315 $ 3,297
Pro forma net income (loss) (21,513) 19,957 3,226
Basic earnings (loss) per
share, as reported (1.19) 1.16 .19
Pro forma basic earnings
(loss) per share (1.22) 1.14 .18
Diluted earnings (loss) per
share, as reported (1.19) 1.15 .19
Pro forma diluted earnings
(loss) per share (1.22) 1.13 .18
========= ========= =========
</TABLE>
The following summary sets forth the Company's stock option and stock
appreciation rights activity for the three years ended January 31, 1998:
<TABLE>
<CAPTION>
Number of Weighted
---------------------- Average
Option Appreciation Exercise
Shares Units Price
------- ------------ --------
<S> <C> <C> <C>
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
Granted 501,000 101,488 15
Exercised (2,000) -- 14
Terminated (80,578) -- 30
---------- -------- ----
Outstanding January 31, 1998 1,341,918 212,273 $ 19
========== ======== ====
</TABLE>
Following is a summary of stock options outstanding as of January 31, 1998,
which have exercise prices ranging from $14 to $34:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Exercise Remaining
Options Price Life
---------- -------- ---------
<S> <C> <C> <C>
Options Outstanding:
Price under $20 997,500 $ 15 9
Price $20 or over 344,418 28 4
---------- -------- ---------
1,341,918 $ 19 8
---------- -------- ---------
Options Exercisable:
Price under $20 320,376 $ 15 8
Price $20 or over 275,918 29 3
---------- -------- ---------
596,294 $ 21 6
========== ======== =========
</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 8-year restriction period.
Restricted shares granted, net of forfeitures, were 73,000; 32,500; and
(36,875) in 1997, 1996 and 1995, respectively, and compensation expense was
$2.3 million, $2.5 million and $1.6 million in 1997, 1996 and 1995,
respectively.
NOTE 17: SUPPLEMENTARY INFORMATION
- ----------------------------------
Balance Sheet
- -------------
Cash equivalents of $37.6 million and $26.3 million at January 31, 1998 and
February 1, 1997, respectively, are stated at cost which approximates fair
value.
Statement of Consolidated Earnings
- ----------------------------------
Advertising costs totaled $61.0 million, $55.9 million and $51.8 million in
1997, 1996 and 1995, respectively. Other Expense (Income) consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest income $ (1,427) $ (1,202) $ (1,762)
Restructuring charges 1,000 -- 3,600
Royalty income (2,127) (2,702) (2,996)
Other, net 2,102 2,563 2,788
--------- --------- ---------
Total $ (452) $ (1,341) $ 1,630
========= ========= =========
</TABLE>
NOTE 18: DISCONTINUED OPERATIONS
- --------------------------------
During fiscal 1994 and 1993, the Company sold its Cloth World chain of
fabric stores to Fabri-Centers of America, Inc., closed its Maryland Square
catalog operation and withdrew from the Wohl Leased Shoe Department
business. Due to better-than-expected withdrawal terms, $4.0 million of the
reserve, established in 1993, was reversed to income in the fourth quarter
of 1995.
NOTE 19: IMPACT OF NEW ACCOUNTING STANDARDS
- -------------------------------------------
In March 1998, the AICPA issued the Accounting For the Costs of Computer
Software Developed For or Obtained For Internal-Use Statement of Position
(SOP). The SOP is effective for the Company beginning on January 1, 1999,
however, earlier adoption is allowable. The SOP will require the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal-use. The
Company currently expenses such costs as incurred except for the
acquisition of software. The Company has not yet assessed what the impact
of the SOP will be on the Company's future earnings or financial position.
NOTE 20: 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 January 31, 1998 and February 1, 1997, and the related
condensed consolidating statements of earnings and cash flows for each of
the three years in the period ended January 31, 1998 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 flow of, each of the consolidating groups.
- ------------------------------------------------------------
Condensed Consolidating Balance Sheet As of January 31, 1998
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Non- Consoli-
Guarantor Guarantor idated
Parent Subsidiaries Subsidiaries Eliminations Totals
--------- ------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Assets
- ------
Current Assets
Cash and cash
equivalents $ 1,448 $ 6,843 $ 41,885 $ (40) $ 50,136
Receivables, net 36,244 9,697 31,414 -- 77,355
Inventory, net 62,543 302,339 29,004 (13,709) 380,177
Other current
assets (100) 18,589 7,575 4,798 30,862
--------- --------- --------- ---------- --------
Total Current
Assets 100,135 337,468 109,878 (8,951) 538,530
Other Assets 44,709 17,029 12,088 (112) 73,714
Property and
Equipment, net 17,192 58,784 6,768 -- 82,744
Investment in
Subsidiaries 233,048 32,406 3,811 (269,265) --
--------- --------- --------- ---------- --------
Total Assets $ 395,084 $ 445,687 $ 132,545 $(278,328) $694,988
========= ========= ========= ========== ========
Liabilities &
Shareholders'
Equity
- --------------
Current
Liabilities
Notes payable $ 54,000 $ -- $ -- $ -- $ 54,000
Accounts payable 6,911 81,329 30,667 -- 118,907
Accrued expenses 27,004 44,993 21,693 (499) 93,191
Income taxes 2,157 14,027 (4,189) -- 11,995
--------- --------- --------- ---------- --------
Total Current
Liabilities 90,072 140,349 48,171 (499) 278,093
Long-Term Debt
and Capitalized
Lease Obligations 197,027 -- 79 (79) 197,027
Other Liabilities 20,089 259 399 (69) 20,678
Intercompany
Payable
(Receivable) (111,294) 92,413 22,155 (3,274) --
Shareholders'
Equity 199,190 212,666 61,741 (274,407) 199,190
--------- --------- --------- ---------- --------
Total
Liabilities
and
Shareholders'
Equity $ 395,084 $ 445,687 $ 132,545 $(278,328) $ 694,988
========= ========= ========= ========== =========
</TABLE>
- ------------------------------------------
Notes to Consolidated Financial Statements
- ------------------------------------------
Condensed Consolidating Statement of Earnings for the Fiscal Year Ended
January 31, 1998
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $256,031 $1,201,078 $369,735 $(259,642) $1,567,202
Cost of
goods
sold 180,568 755,729 312,051 (259,818) 988,530
-------- ------------ ------------- ------------ -----------
Gross
profit 75,463 445,349 57,684 176 578,672
Selling
and admin-
istrative
expenses 71,752 412,221 76,954 (1,391) 559,536
Interest
expense 21,512 9 235 -- 21,756
Intercompany
interest
(income)
expense (15,403) 15,368 35 -- --
Other
expense
(income),
net (4,655) 1,201 1,435 1,567 (452)
Equity in
(earnings)
loss of
subsidiaries 22,622 23,693 -- (46,315) --
-------- ------------ ------------- ------------ -----------
Earnings
(Loss)
Before
Income
Taxes (20,365) (7,143) (20,975) 46,315 (2,168)
Income tax
provision (531) (15,479) (2,718) -- (18,728)
-------- ------------ ------------- ------------ -----------
Net Earnings
(Loss) $(20,896) $(22,622) $(23,693) $46,315 $(20,896)
========= ============ ============ ============ ===========
</TABLE>
Condensed Consolidating Statement of Cash Flow for the Fiscal Year Ended
January 31, 1998
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net Cash
Provided
(Used) by
Operating
Activities $23,891 $29,544 $(1,590) $6,839 $58,684
Investing
Activities:
Capital
expend-
itures (2,512) (17,530) (1,685) -- (21,727)
Other 386 8 7 -- 401
-------- ------------ ------------- ------------ -----------
Net Cash
Used by
Investing
Activities (2,126) (17,522) (1,678) -- (21,326)
Financing
Activities:
Decrease
in short-
term notes
payable (8,000) -- -- -- (8,000)
Debt
issuance
costs (678) -- -- -- (678)
Repayments
of long-
term debt (2,000) -- -- -- (2,000)
Proceeds
from
issuance
of common
stock 93 -- -- -- 93
Dividends
paid (15,323) -- -- -- (15,323)
Inter-
company
financing 5,721 (11,489) 14,846 (9,078) --
-------- ------------ ------------- ------------ -----------
Net Cash
Provided
(Used) by
Financing
Activities (20,187) (11,489) 14,846 (9,078) (25,908)
Increase
(Decrease)
in Cash
and Cash
Equivalents 1,578 533 11,578 (2,239) 11,450
Cash and
Cash
Equivalents
at Beginning
of Period (130) 6,310 30,307 2,199 38,686
-------- ------------ ------------- ------------ -----------
Cash and
Cash
Equivalents
at End of
Period $ 1,448 $ 6,843 $41,885 $ (40) $50,136
======== =========== =========== ============ ===========
</TABLE>
- ------------------------------------------------------------
Condensed Consolidating Balance Sheet As of February 1, 1997
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations 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
Inventory,
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
Other
Assets 43,786 15,479 13,227 (272) 72,220
Property
and Equip-
ment, net 17,751 59,679 7,950 -- 85,380
Investment
in Subsid-
iaries 259,669 56,102 3,811 (319,582) --
-------- ---------- ----------- ------------ ----------
Total
Assets $434,874 $462,513 $150,598 $(325,610) $722,375
======== ========== =========== ============ ==========
Liabilities
&
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
maturity
of long-
term debt 2,000 -- -- -- 2,000
-------- ---------- ----------- ------------ ----------
Total
Current
Liabil-
ities 96,442 124,195 49,624 (6,506) 263,755
Long-Term
Debt and
Capital-
ized Lease
Obliga-
tions 197,025 -- 75 (75) 197,025
Other
Liabil-
ities 21,385 2,678 608 (113) 24,558
Inter-
company
Payable
(Receiv-
able) (117,015) 103,902 7,309 5,804 --
Share-
holders'
Equity 237,037 231,738 92,982 (324,720) 237,037
-------- ---------- ----------- ------------ ---------
Total
Liabil-
ities
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>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations 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 admin-
istrative
expenses 72,660 385,320 64,768 (1,195) 521,553
Interest
expense 18,897 235 195 -- 19,327
Inter-
company
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 subsid-
iaries (17,075) (8,556) -- 25,631 --
-------- ------------ ------------- ------------ ----------
Earnings
(Loss)
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
(Loss) $ 20,315 $ 17,075 $ 8,556 $ (25,631) $ 20,315
======== ============ ============= ============ ==========
</TABLE>
Condensed Consolidating Statement of Cash Flow for the Fiscal Year Ended
February 1, 1997
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash
Provided
(Used) by
Operating
Activ-
ities $(24,421) $27,197 $ 4,595 $ (4,101) $ 3,270
Investing
Activities:
- ------------
Capital
expendi-
tures (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)
Debt
issuance
costs (3,714) -- -- -- (3,714)
Repayments
of long-
term debt (8,450) -- -- -- (8,450)
Proceeds
from
issuance
of long-
term debt 100,000 -- -- -- 100,000
Proceeds
from
issuance
of common
stock 108 -- -- -- 108
Dividends
paid (17,956) -- -- -- (17,956)
Inter-
company
financing 4,758 (12,519) 1,461 6,300 --
-------- -------- --------- --------- --------
Net Cash
Provided
(Used) by
Financing
Activity 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 Statement of Earnings for the Fiscal Year Ended
February 3, 1996
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations 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
admini-
strative
expenses 68,899 364,833 61,644 (1,278) 494,098
Interest
expense 14,696 528 745 -- 15,969
Inter-
company
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 subsid-
iaries (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
(Loss)
from
Continuing
Operations $ 697 $10,653 $4,645 $(15,298) $697
======= =========== =========== =========== ==========
</TABLE>
Condensed Consolidated Statement of Cash Flow for the Fiscal Year Ended
February 3, 1996
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash
Provided
(Used) by
Operating
Activ-
ities $(10,271) $19,768 $4,366 $1,842 $15,705
Investing Activities:
- ---------------------
Capital
expend-
itures (3,093) (21,076) (2,770) -- (26,939)
Proceeds
from sales
of assets
of discon-
tinued
operations 2,444 -- -- -- 2,444
Other 4,293 1,090 25 -- 5,408
-------- ----------- ------------ ----------- -----------
Net Cash
Provided
(Used) by
Investing
Activities 3,644 (19,986) (2,745) -- (19,087)
Financing Activities:
- ---------------------
Increase
in short-
term notes
payable 45,915 -- -- -- 45,915
Repayments
of long-
term debt (2,812) -- -- -- (2,812)
Proceeds
from
issuance
of common
stock 564 -- -- -- 564
Payments
for
purchase
of
treasury
stock (824) -- -- -- (824)
Dividends
paid (23,325) -- -- -- (23,325)
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>
- -------------------------------
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 comprised six
outside directors in 1997. 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 January 31, 1998 and February 1, 1997, and the related
statements of consolidated earnings, shareholders' equity, and cash flows
for each of the three years in the period ended January 31, 1998. 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 January 31, 1998 and February 1, 1997, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended January 31, 1998 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 5, 1998
- ------------------------------------------
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 January 31, 1998 and
February 1, 1997.
<TABLE>
<CAPTION>
Quarters
----------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
(13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks)
<S> <C> <C> <C> <C>
1997
Net Sales $391,815 $378,823 $433,886 $362,678
Gross Profit 145,833 146,236 155,830 130,773
Net Earnings (Loss) 1,542 3,530 (13,323) (12,645)
Per Share of Common Stock:
Net Earnings (Loss)
- Basic $ .09 $ .20 $ (.76) $ (.72)
Net Earnings (Loss)
- Diluted .09 .20 (.76) (.72)
Dividends Paid .25 .25 .25 .10
Market Value:
High 17 3/4 20 18 3/8 16 1/2
Low 15 5/8 15 3/4 14 7/8 12 3/4
-------- -------- -------- --------
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 - Basic $ .03 $ .31 $ .74 $ .08
Net Earnings - Diluted .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
-------- -------- -------- --------
</TABLE>
Note 1: Results for 1997 include an aftertax charge of $31.0 million for
the restructuring of the Pagoda International marketing division. The net
effect on the quarterly results of fiscal 1997 is $21.0 million in the
third quarter and $10.0 million in the fourth quarter.
Note 2: Results for 1996 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 $1.2 million from a lower than previously expected
tax rate.
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, 1997, 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. 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 $144,000. To date, no claims have been paid under any policy of
directors' and officers' liability insurance.
- ------------------
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 3, 4
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
1 Member of Executive Committee
2 Member of Audit Committee
3 Member of Compensation Committee
4 Member of Governance and Nominating Committee
- ---------------------------------------------
A Tribute to W. L. Hadley Griffin 1918 - 1997
- ---------------------------------------------
Hadley Griffin's career with Brown Group spanned half a century. He joined
Wohl Shoe Company as Counsel in 1947. He was named Secretary of Brown Shoe
Company in 1954 after it had merged with Wohl Shoe Company. He was elected
to the Board of Directors in 1961, was elected President in 1968, Chief
Executive Officer in 1969, and assumed the additional duties of Chairman of
the Board in 1972 until his retirement in 1985. He continued as a Director
of the Company until 1994 and served as an Honorary Director from that time
until his death on November 9, 1997.
Hadley Griffin brought strength both to Brown Group and to the community.
He was admired as a person of absolute integrity and high principle. Guided
by his judgment as a Manager, leadership as Chief Executive and counsel as
a Director, Brown Group maneuvered the ever-changing course of the shoe
industry through some of its most turbulent years. His leadership
influenced the shape of Brown Group today. During the span of his service,
Wohl and Brown Shoe Company joined forces, Regal was acquired, Kinney was
divested, Brown Group and its International sourcing division were created,
and Famous Footwear and Pagoda were acquired.
In the community, Hadley Griffin's leadership reflected positively on Brown
Group. A graduate of Williams College and the Washington University School
of Law, he was recognized by both schools with honorary Doctor of Laws
degrees and numerous other awards. He was a Director of many organizations,
including serving as Chairman of the Federal Reserve Bank of St. Louis. He
served as a Life Trustee and Chairman of the Board of Trustees of
Washington University in St. Louis and served as a Life Trustee, President
and Chairman Emeritus of the St. Louis Symphony Society. In addition, he
was an honorary member and Chairman of the Smithsonian National Board,
Washington, D.C. and was elected as a Fellow of the American Academy of
Arts and Sciences in 1989. He served as Campaign Chairman and President of
the United Way of Greater St. Louis and in 1973, he received the
St. Louis Globe-Democrat Man of the Year Award for "performance and
accomplishments beyond the call of a citizen's duty."
A leader in footwear industry affairs, Hadley Griffin was Chairman of the
American Footwear Industries Association (now Footwear Industries of
America) and served on the Industry Policy Advisory Committee (IPAC) to the
special Trade Represen-tative in connection with the "Tokyo Round" of
multi-lateral trade negotiations. He was awarded the prestigious T. Kenyon
Holly Award by the Two/Ten International Footwear Foundation in 1983.
Hadley Griffin's sound judgment and vision earned the respect of all who
knew him. His leadership guided the devel-opment of Brown Group and the
community around him -- a legacy that will endure.
- ------------------------------------------
Corporate Officers and Operating Committee
- ------------------------------------------
Corporate Officers
- ------------------
B. A. Bridgewater, Jr.
Chairman of the Board, President
and Chief Executive Officer
Brian C. Cook
Vice President and President,
Famous Footwear
Ronald A. Fromm
Vice President and President,
Brown Shoe Company
Robert D. Pickle
Vice President, General Counsel
and Corporate Secretary
Harry E. Rich
Executive Vice President and
Chief Financial Officer
Andrew M. Rosen
Vice President and Treasurer
Richard C. Schumacher
Vice President and Controller
Mary Sylvia Siverts
Vice President - Public Affairs
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 A. Fromm
Vice President and President,
Brown Shoe Company
J. Martin Lang
Senior 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 -
Real Estate, Famous Footwear
Andrew M. Rosen
Vice President and Treasurer
David H. Schwartz
President, Brown Shoe Sourcing
George J. Zelinsky
Senior Vice President and
General Merchandise Manager,
Famous Footwear
Secretary to the Committee:
- ---------------------------
Richard C. Schumacher
Vice President and Controller
- --------------------
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. Central Time
Thursday, May 28, 1998
Brown Group, Inc.
Corporate Headquarters
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
- --------------------------------
6,700
Number of employees
- -------------------
11,500
Independent Auditors
- --------------------
Ernst & Young LLP
St. Louis, Missouri
Transfer Agent/ Registrar/ Dividend Disbursing Agent
- ----------------------------------------------------
First Chicago Trust Company of New York
Post Office Box 2500
Jersey City, NJ 07303-2500
(201) 324-0498 or (800) 446-2617
Internet: http://www.fctc.com
E-mail: [email protected]
Dividend Reinvestment Plan
- --------------------------
The Dividend Reinvestment 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 First
Chicago Trust Company (address above).
Direct deposit of Dividends
- ---------------------------
Registered shareholders may have their quarterly dividend checks deposited
directly to their bank accounts. For more information or to request an
enrollment form, contact First Chicago Trust Company (address above).
Trustee of Debentures/Notes
- ---------------------------
State Street Bank and Trust
Company of Missouri, N. A.
One Metropolitan Square
Post Office Box 321
St. Louis, Missouri 63166-0321
(314) 206-3020
ADDITIONAL INFORMATION
- ----------------------
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: Copies of Brown Group's press releases can be transmitted at
no charge via fax by calling "Company News On-Call" at (800) 758-5804
extension 109435.
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
Brown Group, Inc.
8300 Maryland Avenue
Post Office Box 29
St. Louis, Missouri 63166-0029
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
BROWN GROUP, INC.
January 31, 1998
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 Missouri, Inc. Missouri
Brown Retail Development Company Louisiana
Brown Shoe Company of Canada, Ltd. Canada
Brown Shoe de Mexico, S.A. de C.V. Mexico
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
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 5, 1998, included in
the 1997 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 5, 1998, 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 January 31,
1998:
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 20, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 50,136
<SECURITIES> 0
<RECEIVABLES> 87,280
<ALLOWANCES> (9,925)
<INVENTORY> 380,177
<CURRENT-ASSETS> 538,530
<PP&E> 212,330
<DEPRECIATION> (129,586)
<TOTAL-ASSETS> 694,988
<CURRENT-LIABILITIES> 278,093
<BONDS> 197,027
0
0
<COMMON> 67,685
<OTHER-SE> 131,505
<TOTAL-LIABILITY-AND-EQUITY> 694,988
<SALES> 1,567,202
<TOTAL-REVENUES> 1,567,202
<CGS> 988,530
<TOTAL-COSTS> 1,548,066
<OTHER-EXPENSES> (452)
<LOSS-PROVISION> 5,145
<INTEREST-EXPENSE> 21,756
<INCOME-PRETAX> (2,168)
<INCOME-TAX> 18,728
<INCOME-CONTINUING> (20,896)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,896)
<EPS-PRIMARY> (1.19)
<EPS-DILUTED> (1.19)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1998 JAN-31-1998
<PERIOD-END> MAY-03-1997 AUG-02-1997 NOV-01-1997
<CASH> 28,168 42,320 25,496
<SECURITIES> 0 0 0
<RECEIVABLES> 97,419 82,458 96,110
<ALLOWANCES> (10,107) (8,974) (10,512)
<INVENTORY> 401,123 439,208 393,972
<CURRENT-ASSETS> 555,860 592,646 540,537
<PP&E> 205,886 208,234 210,262
<DEPRECIATION> (121,660) (124,368) (126,701)
<TOTAL-ASSETS> 711,870 748,622 696,893
<CURRENT-LIABILITIES> 257,739 295,623 262,448
<BONDS> 197,025 197,025 197,027
0 0 0
0 0 0
<COMMON> 67,612 67,590 67,579
<OTHER-SE> 165,004 164,455 146,557
<TOTAL-LIABILITY-AND-EQUITY> 711,870 748,622 696,893
<SALES> 391,815 770,638 1,204,524
<TOTAL-REVENUES> 391,815 770,638 1,204,524
<CGS> 245,982 478,569 756,625
<TOTAL-COSTS> 383,989 751,322 1,176,249
<OTHER-EXPENSES> (436) (90) 305
<LOSS-PROVISION> 603 (88) 4,615
<INTEREST-EXPENSE> 5,765 11,129 16,274
<INCOME-PRETAX> 2,497 8,277 11,696
<INCOME-TAX> 955 3,205 19,947
<INCOME-CONTINUING> 1,542 5,072 (8,251)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,542 5,072 (8,251)
<EPS-PRIMARY> .09 .29 (.47)
<EPS-DILUTED> .09 .29 (.47)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> FEB-01-1997 FEB-01-1997 FEB-01-1997 FEB-01-1997
<PERIOD-END> MAY-04-1996 AUG-03-1996 NOV-02-1996 FEB-01-1997
<CASH> 22,146 35,120 28,091 38,686
<SECURITIES> 0 0 0 0
<RECEIVABLES> 87,498 88,483 98,474 100,449
<ALLOWANCES> (10,916) (10,723) (11,049) (10,203)
<INVENTORY> 374,272 410,282 408,813 398,803
<CURRENT-ASSETS> 515,340 564,886 563,707 564,775
<PP&E> 198,374 199,279 206,458 202,229
<DEPRECIATION> (112,089) (114,981) (121,676) (116,849)
<TOTAL-ASSETS> 670,506 718,913 720,142 722,375
<CURRENT-LIABILITIES> 310,672 358,457 255,253 263,755
<BONDS> 104,022 104,022 199,023 197,025
0 0 0 0
0 0 0 0
<COMMON> 67,224 67,376 67,359 67,387
<OTHER-SE> 161,421 162,744 173,061 169,650
<TOTAL-LIABILITY-AND-EQUITY> 670,506 718,913 720,142 722,375
<SALES> 355,785 745,768 1,166,115 1,525,052
<TOTAL-REVENUES> 355,785 745,768 1,166,115 1,525,052
<CGS> 219,908 465,370 729,530 958,288
<TOTAL-COSTS> 350,592 726,840 1,125,061 1,479,841
<OTHER-EXPENSES> (401) (140) (812) (1,341)
<LOSS-PROVISION> 1,440 3,363 4,472 5,982
<INTEREST-EXPENSE> 4,733 9,255 13,700 19,327
<INCOME-PRETAX> 861 9,813 28,166 27,225
<INCOME-TAX> 334 3,772 9,220 6,910
<INCOME-CONTINUING> 527 6,041 18,946 20,315
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 527 6,041 18,946 20,315
<EPS-PRIMARY> .03 .34 1.08 1.16
<EPS-DILUTED> .03 .34 1.07 1.15
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-END> FEB-03-1996
<CASH> 35,058
<SECURITIES> 0
<RECEIVABLES> 97,684
<ALLOWANCES> (11,267)
<INVENTORY> 342,282
<CURRENT-ASSETS> 505,338
<PP&E> 191,457
<DEPRECIATION> (103,737)
<TOTAL-ASSETS> 661,056
<CURRENT-LIABILITIES> 295,939
<BONDS> 105,470
0
0
<COMMON> 67,242
<OTHER-SE> 164,394
<TOTAL-LIABILITY-AND-EQUITY> 661,056
<SALES> 1,455,896
<TOTAL-REVENUES> 1,455,896
<CGS> 948,925
<TOTAL-COSTS> 1,443,023
<OTHER-EXPENSES> 1,630
<LOSS-PROVISION> 5,101
<INTEREST-EXPENSE> 15,969
<INCOME-PRETAX> (4,726)
<INCOME-TAX> 5,423
<INCOME-CONTINUING> 697
<DISCONTINUED> 2,600
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,297
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</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
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.
