SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
1998 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 30, 1999
[ ] 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 3, 1999, 18,204,290 common shares were outstanding, and the
aggregate market value of the common shares held by non-affiliates of
the registrant was approximately $247 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended January
30, 1999, are incorporated by reference into Parts I and II.
Portions of the proxy statement for the annual meeting of shareholders
to be held May 27, 1999, are incorporated by reference into Part III.
PART I
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ITEM 1 - BUSINESS
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The Company, founded in 1878 and incorporated in 1913,
operates in the Footwear industry. Current activities include
the operation of retail shoe stores and the sourcing and
marketing of footwear for women, men and children. During 1998,
categories of footwear sales were approximately 59% women's
footwear, 25% men's footwear and 16% children's footwear. This
composition has remained relatively constant over the past few
years. Approximately 68% of 1998 footwear sales were made at
retail compared to 66% in 1997 and 63% in 1996. See Note 6 of
Notes to Consolidated Financial Statements on page 29 of the
Annual Report to Shareholders for the year ended January 30,
1999, which is incorporated herein by reference, for additional
information regarding the Company's business segments.
The Company's business is 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 11,000 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, 1999 and October,
2000.
Retail Operations
- -----------------
The Company's retail operations at January 30, 1999 include
1,289 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 includes Company-owned and licensed
brand names.
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 827 stores in the
United States as of the end of fiscal 1998. 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 5,500 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. Footwear brands
include Nike, Reebok, adidas, Skechers, Rockport, What's What,
Naturalizer, Connie, Keds, Nunn Bush and Buster Brown.
ITEM 1 - BUSINESS (Continued)
- -----------------
Famous Footwear has developed store model stocks which
reflect consumer demand, historical brand preferences, styles and
sizes. These inventory models are adjusted based upon store
location and promotional opportunities. Product and promotional
mix are managed to control gross margins. The Company in fiscal
1999 expects to complete the replacement of all existing store
information systems. The new systems will improve inventory
controls, training and communication between headquarters and the
stores as well as reduce store technology costs.
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 and current promotional
items, 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
maximize 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 1998, management invested over $27 million to communicate
Famous Footwear's philosophy: delivering the customer the best
value and service on quality, branded footwear, 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 331 Naturalizer stores located in the United States and
115 stores in Canada. Naturalizer specialty stores located in
regional malls average approximately 1,200 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. In addition, the Company is repositioning certain
styles to focus on a younger, active woman aged between 35-45
years old. 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 casual shoes. The Naturalizer brand is one
of North America's leading women's footwear brands, providing
stylish, comfortable and quality footwear in a variety of
patterns and sizes. Retail price points are typically 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,
and utilizes a database marketing program, which targets and
rewards frequent customers. In 1998, the Company installed
updated point-of-sale registers and in 1999 a new merchandising
reporting system will become operational. These systems will
enhance management information and capture consumer preferences.
ITEM 1 - BUSINESS (Continued)
- -----------------
The Company also operates 16 F.X. LaSalle retail 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
1998 1997 1996
---- ---- ----
Famous Footwear
Family footwear stores which feature "brand names
for less"; located in strip centers and regional
and outlet malls. 827 815 794
Naturalizer
Stores selling the Naturalizer and Naturalsport
brands of women's footwear; located in major
malls, shopping centers and outlet centers
throughout the U.S. and Canada. 446 448 446
F. X. LaSalle
Stores selling men's and women's better-grade
branded footwear in major malls in Canada. 16 16 16
----- ----- -----
Total 1,289 1,279 1,256
===== ===== =====
Wholesale Operations
- --------------------
Footwear is distributed by the Company's Brown Branded,
Pagoda and Canada Wholesale divisions to approximately 2,800
retailers including department stores, mass merchandisers and
independent retailers in the United States, Canada and to
affiliates. These divisions import substantially all of their
footwear through the Brown Shoe Sourcing division, except for the
Canadian Wholesale division which also produces footwear in two
Company-owned manufacturing facilities. Most of the Company's
wholesale customers also sell shoes bought from competing
footwear suppliers.
The nature of the Company's wholesale shoe business is such
that orders for shoes are solicited by the Company's sales force
throughout the year for the two major selling seasons, 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 reorders.
- -
ITEM 1 - BUSINESS (Continued)
- -----------------
At February 27, 1999, the Company's core wholesale operations
had a backlog of unfilled orders of approximately $129 million
compared to $134 million on February 28, 1998. 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, the continuing trend among customers to reduce the
lead time on their orders and the timing of licensed product
releases such as movies or sporting events. Accordingly, a
comparison of backlog from period to period is not necessarily
meaningful and may not be indicative of eventual actual
shipments.
In the past, the Company also has distributed footwear
through its Pagoda International division. This division
marketed 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 as a result of excessive inventories and declining
performance. The restructuring plan included the sale of the
remaining Brazilian inventory of licensed products and the shift
of European inventory ownership and marketing of its licensed
footwear to other parties. See Note 4 of Notes to Consolidated
Financial Statements on page 28 of the Annual Report to
Shareholders for the year ended January 30, 1999, which is
incorporated herein by reference, for additional information
regarding the restructuring of the Pagoda International division.
Brown Branded Division
The Brown Branded division is one of the nation's leading
marketers of women's footwear. This division designs and markets
the Company's Naturalizer, Naturalsport, Life Stride, LS Studio,
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 and Naturalsport 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. Life Stride, and
its brand extension, LS Studio, is a leading entry-level price
point, women's brand in department stores, offering fashion-right
styling. The Night Life brand is the Company's line of women's
shoes for special occasions.
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 and Sak's.
The Brown Branded 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.
ITEM 1 - BUSINESS (Continued)
- -----------------
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. In each of the past two years, the division
has invested approximately $19 million in advertising and
marketing in support of its brands. The Company continues to
focus on these marketing efforts by augmenting its market
research, product development and marketing communications.
Pagoda Division
The Pagoda division designs and markets branded, licensed and
private label athletic, casual and dress footwear products to
men, women and children at a variety of price points via mass
merchandisers, mid-tier retailers, chains and department stores
in the United States and Canada.
Major brand names owned by the Pagoda division include Air
Step, Buster Brown, Connie, Larry Stuart and Wildcats. The
division is a resource for many of the nation's larger retailers,
including Dillard's, Famous Footwear, Federated, Kmart,
Nordstrom, Payless ShoeSource, Sak's, Sears, Spiegel, Target and
Wal-Mart, providing its wholesale customers with over 45 million
pairs of shoes in 1998.
The Pagoda division also seeks 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 8%, 11% and 13% of
consolidated sales in 1998, 1997, and 1996, respectively. Pagoda
has a long-term licensing agreement which is renewable through
2014 to market the Dr. Scholl's brand of affordable, casual and
work shoes for men and women both in the United States and in
Canada. The Company's other significant license agreements
include Barbie, Russell Athletic, Star Wars, Unionbay and various
Walt Disney properties, including Mickey & Co., Mulan, Simba's
Pride and Tarzan. No single licensor represented greater than 4
percent of consolidated net sales for 1998.
Canada Wholesale Division
The Canada Wholesale division markets branded and licensed
footwear products to women and children at a variety of price
points to department stores, specialty stores and mass
merchandisers.
Similar to the Brown Branded division, the Canada Wholesale
division markets the Company's Naturalizer and Naturalsport
brands in Canada. The division manufactures in two Company-owned
facilities a significant portion of the Naturalizer and
Naturalsport brands sold by them. In addition, the division
provides all Naturalizer related product for the Naturalizer
stores located in Canada. Other brands and licensed footwear
sold by the division include Barbie, Buster Brown, Connie, Star
Wars and Westport.
ITEM 1 - BUSINESS (Continued)
- -----------------
Brown Shoe Sourcing Division
The Brown Shoe Sourcing Division sources essentially all of
the footwear globally for the Brown Branded division, the
Naturalizer Retail division, the Pagoda division, and a portion
of the footwear sold by Famous Footwear. The division, which in
1998 sourced 58.8 million pairs of shoes, has developed a global
sourcing capability through its relationships with over 75 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 1998, over three-fourths 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 1998:
Country Millions of Pairs
------- -----------------
China 45.4
Brazil 7.2
Indonesia 3.8
Italy 0.9
Mexico 0.4
All Other 1.1
----
Total 58.8
====
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.
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 1 - BUSINESS (Continued)
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Risk Factors
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Certain statements herein and in the documents incorporated
herein by reference as well as 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, Brazil, Indonesia, and to a lesser extent from Italy,
Mexico, 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, primarily 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
Normal Trading Relations 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. 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 in other
countries, the loss of a substantial portion of its Chinese
manufacturing capacity could have a material adverse effect on
the Company.
ITEM 1 - BUSINESS (Continued)
- -----------------
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.
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 1,289 shoe stores, including 131 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 involved in legal proceedings and litigation
arising in the ordinary course of business. In the opinion of
management, after consulting with legal counsel, the outcome of
such proceedings and litigation currently pending will not have a
materially adverse effect on the Company's results of operations
or financial position.
The Company is involved in environmental remediation and
ongoing compliance activities at several sites. The Company is
remediating a residential area adjacent to owned property in
Colorado, under the oversight of Colorado authorities. This
residential area has been affected by types of solvents that
previously were used at the facility. Monitoring of the
residential area continues. The Company also is evaluating
remediation alternatives for the owned property. During 1998,
the Company incurred charges of $2.3 million related to this
site.
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 25 years. In
addition, various federal and state authorities have identified
the Company as a potentially responsible party for remediation at
certain landfills from the sale or disposal of solvents and other
by-products from the closed tannery and shoe manufacturing
facilities.
Based on information currently available, the Company is
carrying an accrued liability of $4.2 million, as of January 30,
1999, to complete the clean up at all sites. The ultimate cost
may vary.
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.
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 1998.
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, 1999.
Name Age Current Position
- ---- --- ----------------
Ronald A. Fromm 48 Chairman of the Board,
President, Chief Executive Officer,
Brown Group, Inc. and President,
Brown Shoe Company
Theodore L. Anderson 50 Senior Vice President, Retail Sales and
Operations, Famous Footwear
Brian C. Cook 59 Executive Vice President, Brown Group, Inc.
and President, Famous Footwear
William A. Dandy 41 Senior Vice President, Marketing,
Famous Footwear
Charles C. Gillman 37 Senior Vice President and Director, Far East
Operations, Brown Shoe Sourcing
J. Martin Lang 42 Senior Vice President and Chief Financial
Officer, Famous Footwear
Byron D. Norfleet 37 Senior Vice President and General Manager,
Naturalizer Retail
Gary M. Rich 48 President, Pagoda
Harry E. Rich 59 Director, Executive Vice President,
Chief Financial Officer
James M. Roe 53 Senior Vice President, Real Estate,
Famous Footwear
Andrew M. Rosen 48 Senior Vice President and Treasurer
Richard C. Schumacher 51 Vice President and Controller
David H. Schwartz 53 President, Brown Shoe Sourcing
Gregory J. Van Gasse 48 President, Brown Branded
George J. Zelinsky 50 Senior Vice President and General Merchandise
Manager, Famous Footwear
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.
Ronald A. Fromm, Chairman of the Board, President and Chief
Executive Officer of the registrant since January 1999;
President, Brown Shoe Company since March 1998. Vice President
of the registrant from April 1998 to January 1999. Executive Vice
President, Famous Footwear from September 1992 to March 1998.
Vice President and Chief Financial Officer of Famous Footwear
from 1988 to 1992.
Theodore L. Anderson, Senior Vice President, Retail Sales and
Operations, Famous Footwear since October 1997. Senior Vice
President of Stores for Thom McAn, a division of Melville
Corporation, from 1992 to October 1997.
Brian C. Cook, Executive Vice President of the registrant since
January 1999; Vice President of the registrant from March 1992 to
January 1999; President of Famous Footwear since 1981.
William A. Dandy, Senior Vice President, Marketing, Famous
Footwear since February 1997. Vice President of Marketing and
Advertising for Michael's Arts and Crafts Stores from July 1993
to February 1997.
Charles C. Gillman, Senior Vice President and Director, Far East
Operations, Brown Shoe Sourcing since February 1997. Senior Vice
President, Far East Operations, Brown Shoe Sourcing from 1995 to
1997. Senior Vice President, Women's Division - Far East, Pagoda
from 1992 to 1995.
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.
Byron D. Norfleet, Senior Vice President and General Manager,
Naturalizer Retail since July 1998. Series of management
positions with Genesco, Inc. since 1984, most recently as Vice
President - Jarman Lease.
Gary M. Rich, President of Pagoda 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, Senior Vice President and Treasurer since March
1999. 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.
EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
- ------------------------------------
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.
Gregory J. Van Gasse, President, Brown Branded since September
1998. Senior Vice President - Marketing and Sales for Florsheim
Group, Inc. from 1990 to September 1998.
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.
PART II
-------
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
- --------------------------------------------------
Common Stock market prices and dividends on page 42 of the
Annual Report to Shareholders and the number of shareholders of
record on page 44 of the Annual Report to Shareholders for the
year ended January 30, 1999, are incorporated herein by
reference.
ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
Selected Financial Data on page 20 of the Annual Report to
Shareholders for the year ended January 30, 1999, 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 19 of the Annual Report
to Shareholders for the year ended January 30, 1999, is
incorporated herein by reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
Information appearing under the caption "Financial
Instruments" on pages 17 through 18 of the Annual Report for
Shareholders to the year ended January 30, 1999, is incorporated
herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The consolidated financial statements of the Company and its
subsidiaries on pages 21 through 41, and the supplementary
financial information on page 42 of the Annual Report to
Shareholders for the year ended January 30, 1999, are
incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
- ------------------------------------------------------
None.
PART III
--------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information regarding Directors of the Company on pages 4
through 9 of the Proxy Statement for the Annual Meeting of
Shareholders to be held May 27, 1999, 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 21 and 23 through 29 of the Proxy Statement for the Annual
Meeting of Shareholders to be held May 27, 1999, is incorporated
herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Security Holdings of Directors and Management on page 4 of the Proxy
Statement for the Annual Meeting of Shareholders to be held May 27, 1999,
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. (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.
(a) (i) 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.
(b) Bylaws of the Company as amended through
April 20, 1999, 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.
(b) (ii) Amendment No. 2, dated January 7, 1999, 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, filed herewith.
(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, incorporated herein by reference
to the Company's Form 10-K dated
January 31, 1998.
(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.
(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.
(d) (ii) Amendment No. 3, dated January 7, 1999, to the
Senior Note Agreement between the Company and
Prudential Insurance Company of America, as
amended, filed herewith.
(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,
as amended, incorporated herein by reference to
Exhibit 3 to the Company's definitive proxy
statement dated April 17, 1996.
(c)* Transition and Consulting Agreement, dated
September 11, 1997, between the Company and
B. A. Bridgewater, Jr., incorporated herein by
reference to the Company's Form 10-K dated
January 31, 1998.
(d)* Stock Option and Restricted Stock Plan of 1998,
incorporated herein by reference to Exhibit 3
to the Company's definitive proxy statement
dated April 24, 1998.
(e)* Employment Agreement, dated May 14, 1998
between the Company and Ronald A. Fromm,
incorporated herein by reference to the
Company's Form 10-Q dated May 2, 1998.
(f)* Severance Agreement, dated July 27, 1998
between the Company and Brian C. Cook,
incorporated herein by reference to the
Company's Form 10-Q dated August 1, 1998.
(g)* Severance Agreement, dated July 27, 1998
between the Company and Ronald A. Fromm,
incorporated herein by reference to the
Company's Form 10-Q dated August 1, 1998.
(h)* Severance Agreement, dated July 27, 1998
between the Company and Gary M. Rich,
incorporated herein by reference to the
Company's Form 10-Q dated August 1, 1998.
(i)* Severance Agreement, dated July 27, 1998
between the Company and Harry E. Rich,
incorporated herein by reference to the
Company's Form 10-Q dated August 1, 1998.
(j)* Severance Agreement, dated July 27, 1998
between the Company and David H. Schwartz,
incorporated herein by reference to the
Company's Form 10-Q dated August 1, 1998.
13. Annual Report to Shareholders of Brown
Group, Inc. for the fiscal year ended
January 30, 1999. 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 1998.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the
quarter ended January 30, 1999.
(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.
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 26, 1999 BROWN GROUP, INC.
(Registrant)
By /s/ Harry E. Rich
-------------------------------
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 26, 1999, by
the following persons on behalf of the Registrant and in the
capacities indicated.
Signatures Title
/s/ Ronald A. Fromm
- ----------------------------- Chairman of the Board of Directors
Ronald A. Fromm President and Chief Executive
Officer and on behalf of the Company
as Principal Executive Officer
/s/ Harry E. Rich
- ----------------------------- Director, Executive Vice President
Harry E. Rich and Chief Financial Officer
/s/ Richard C. Schumacher
- ----------------------------- Vice President and Controller and
Richard C. Schumacher on behalf of the Company as
Principal Accounting Officer
Signature Title
--------- -----
- --------------------------------- Director
Joseph L. Bower
/s/ B. A. Bridgewater, Jr.
- --------------------------------- Director
B. A. Bridgewater, Jr.
/s/ Julie C. Esrey
- ---------------------------------- Director
Julie C. Esrey
/s/ Richard A. Liddy
- ---------------------------------- Director
Richard A. Liddy
/s/ John Peters MacCarthy
- ---------------------------------- Director
John Peters MacCarthy
- ---------------------------------- Director
John D. Macomber
- ---------------------------------- Director
William E. Maritz
- ---------------------------------- Director
General Edward C. Meyer, Retired
- ---------------------------------- Director
Jerry E. Ritter
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 30, 1999
BROWN GROUP, INC.
ST. LOUIS, MISSOURI
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 30, 1999, are incorporated by
reference in Item 8:
Consolidated Balance Sheets - January 30, 1999, and January 31, 1998.
Consolidated Earnings - Years ended January 30, 1999,
January 31, 1998, and February 1, 1997.
Consolidated Cash Flows - Years ended January 30, 1999,
January 31, 1998, and February 1, 1997.
Consolidated Shareholders' Equity - Years ended January 30, 1999,
January 31, 1998, and February 1, 1997.
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 II - 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.
SCHEDULE II
-----------
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
--------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(Thousands)
YEAR ENDED JANUARY 30, 1999
Deducted from assets:
For doubtful accounts
and discounts $ 9,925 $2,772 - $2,877-A $ 9,820
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
A. Accounts written off, net of recoveries
and discounts taken.
</TABLE>
BROWN GROUP, INC.
ANNUAL REPORT TO SHAREHOLDERS ON FORM 10-K
INDEX TO EXHIBITS
Exhibit
-------
3. (b) Bylaws as amended through April 20, 1999.
4. (b)(ii) Amendment No. 2, dated January 7, 1999,
to the Credit Agreement between the
Company and the Lenders named thereof
NationsBank, N.A., as Agent, and
First Chicago Capital Markets, Inc.,
as Syndication Agent.
4. (d)(ii) Amendment No. 3, dated January 7, 1999,
to the Senior Note Agreement between
the Company and Prudential Insurance
Company of America.
13. 1998 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 1998
EXHIBIT 3.(b)
BROWN GROUP, INC.
A NEW YORK CORPORATION
BYLAWS
ADOPTED BY THE STOCKHOLDERS
JANUARY 11, 1946
AMENDED THROUGH APRIL 20, 1999
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. A proxy may be appointed either by instrument in writing
executed by such holder or by his duly authorized attorney, or by
such other means, including the transmission of a telegram,
cablegram or other means of electronic transmission, such as
telephone and Internet, as may be authorized under the laws of
the State of New York. No proxy shall be valid after the
expiration of eleven months from the date of its execution or
transmission unless the stockholder executing or transmitting it
shall have specified therein a longer time during which it is to
continue in force.
SECTION 6. Record of Stockholders. The Board of Directors may
prescribe a period, not exceeding fifty days nor less than ten
days prior to any meeting of the stockholders, during which no
transfer of stock on the books of the company may be made. In
lieu of prohibiting the transfer of stock as aforesaid, the Board
of Directors may fix a day or hour, not more than fifty days
prior to the day of holding any meeting of stockholders, as the
time as of which stockholders entitled to notice of and to vote
at such meeting shall be determined, and all persons who were
holders of record of voting stock at such time, and no others,
shall be entitled to notice of and to vote at such meeting.
SECTION 7. Inspectors of Election. At all elections of
directors by the stockholders, the chairman of the meeting shall
appoint two Inspectors of Election. Before entering upon the
discharge of his duties, each such inspector shall take and
subscribe an oath or affirmation faithfully to execute the duties
of inspector at such meeting as provided by law with strict
impartiality and according to the best of his ability and
thereupon the inspectors shall take charge of the polls and after
the balloting shall make a certificate of the result of the vote
taken. No director or candidate for the office of director shall
be appointed such inspector.
ARTICLE II.
SECTION 1. Number. The number of directors within the maximum
and minimum limits provided for in the Certificate of
Incorporation may be changed from time to time by the
stockholders or by the Board of Directors by an amendment to
these Bylaws. Subject to amendment of these Bylaws, as
aforesaid, the number of directors of the Corporation shall be
eleven* (*eight-effective May 27, 1999). 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
four* (*three-effective May 27, 1999) directors each and one
class consisting of three* (*two-effective May 27, 1999)
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 Stockholders any person for
election as a director for a term extending beyond the Annual
Meeting of Stockholders following the end of the calendar year
during which he attains his seventieth birthday, provided,
however, that this shall not 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.
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.
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(b)(ii)
AMENDMENT NO. 2
THIS AMENDMENT NO. 2 (the "Amendment") dated as of January 7,
1999, to the Credit Agreement referenced below, is by and
among BROWN GROUP, INC., a New York corporation, certain of its
subsidiaries and affiliates identified herein, the lenders
identified herein and NATIONSBANK, N.A., as successor to The
Boatmen's National Bank of St. Louis, as Agent. Terms used but
not otherwise defined shall have the meanings provided in the
Credit Agreement.
W I T N E S S E T H
WHEREAS, a $155 million credit facility has been established
in favor of Brown Group, Inc. (the "Borrower") pursuant to the
terms of that Credit Agreement dated as of January 9, 1997,
amended by Amendment No. 1 dated October 8, 1997 (as amended and
modified, the "Credit Agreement") among the Borrower, the
Guarantors and Lenders identified therein, First Chicago Capital
Markets, Inc., as Syndication Agent, and The Boatmen's National
Bank of St. Louis, a national banking association now known as
NationsBank, N.A., as Agent;
WHEREAS, the Borrower has requested certain modifications to
the Credit Agreement;
WHEREAS, the modifications requested require the consent of
the Required Lenders;
WHEREAS, the Required Lenders have agreed to the requested
modifications on the terms and conditions set forth herein;
NOW, THEREFORE, IN CONSIDERATION of the premises and other
good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as
follows:
1. The Credit Agreement is amended and modified in the
following respects:
1.1 The definition of "Termination Date" in Section
1.1 is amended and modified to read as follows:
"Termination Date" means January 9, 2001, as extended
in accordance with Section 2.6.
1.2 Section 6.18 (Capital Expenditures) is amended by
replacing the reference in clause (i) to "$25,000,000" with
"$30,000,000". This change is effective beginning with the
Borrower's 1999 fiscal year, which begins on January 31, 1999.
2. This Amendment shall be effective upon execution by the
Borrower, the Guarantors and the Required Lenders.
3. Except as modified hereby, all of the terms and
provisions of the Credit Agreement (including Schedules and
Exhibits) shall remain in full force and effect.
4. The Borrower agrees to pay all reasonable costs and
expenses of the Agent in connection with the preparation,
execution and delivery of this Amendment, including without
limitation the reasonable fees and expenses of Moore & Van Allen,
PLLC.
5. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall
be deemed an original and it shall not be necessary in making
proof of this Amendment to produce or account for more than one
such counterpart.
6. This Amendment shall be deemed to be a contract made
under, and for all purposes shall be construed in accordance with
the laws of the State of Missouri.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered
as of the date first above written.
BORROWER: BROWN GROUP, INC.
By: /s/ Harry E. Rich
-----------------------------------------
Harry E. Rich,
Executive Vice President and
Chief Financial Officer
8300 Maryland Avenue
P.O. Box 29
St. Louis, MO 63166
Telephone No.: (314) 854-4124
Telecopier No.: (314) 854-4098
GUARANTORS: BROWN GROUP INTERNATIONAL, INC.
BROWN GROUP RETAIL, INC.
PAGODA TRADING COMPANY, INC.
SIDNEY RICH ASSOCIATES, INC.
By: /s/ Harry E. Rich
-----------------------------------------
Vice President for each of the foregoing
8300 Maryland Avenue
P.O. Box 29
St. Louis, MO 63166
Telephone No.: (314) 854-4124
Telecopier No.: (314) 854-4098
LENDERS: NATIONSBANK, N.A.,
individually and as Agent
By: /s/ Bridget Garavalia
----------------------------------------
Title: Managing Director
----------------------------------------
NationsBank, N.A.
901 Main Street
TX1-49-213-05
Dallas, TX 75283
Attn.: Molly Oxford, Agency Services
Telephone No.: (214) 508-3255
Telecopier No.: (214) 508-2118
with a copy to:
231 South LaSalle Street
Chicago, Illinois 60697
Attn.: Bridget Garavalia
Telephone No.: (312) 828-1259
Telecopier No.: (312) 828-6292
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ John Runger
----------------------------------------
Title: Managing Director
----------------------------------------
First Chicago Capital Markets, Inc.
One First National Plaza
National Corporate Banking, Suite 0324
Chicago, IL 60670
Attn.: John Runger
Telephone No.: (312) 732-7101
Telecopier No.: (312) 732-1117
SUNTRUST BANK, ATLANTA,
By: /s/ Linda L. Dash
----------------------------------------
Title: Vice President
----------------------------------------
By: /s/ Philip Potter /s/ Charles C. Pick
----------------------------------------
Title: Banking Officer Vice President
----------------------------------------
25 Park Place, 26th Floor
Mail Code 118
Atlanta, GA 30303
Attn.: Linda L. Dash
Telephone No.: (404) 658-4923
Telecopier No.: (404) 658-4905
MORGAN GUARANTY TRUST COMPANY
By:
----------------------------------------
Title:
----------------------------------------
Attn.: Randy Parker
Telephone No.: (312) 541-3609
Telecopier No.:
ROYAL BANK OF CANADA
By: /s/ Karen T. Hull
----------------------------------------
Title: Retail Group Manager
----------------------------------------
New York Branch
Financial Square, 23rd Floor
New York, New York 10005-3531
Attn.: Manager, Credit Administration
Telephone No.: (212) 428-6311
Telecopier No.: (212) 428-2372
with a copy to:
1 North Franklin Street
Suite 700
Chicago, IL 60606
Attn.: Karen T. Hull, Retail Group Manager
Telephone No.: (312) 551-1617
Telecopier No.: (312) 551-0805
FIRST BANK
By: /s/ Brenda J. Laux
----------------------------------------
Title: Senior Vice President
----------------------------------------
135 North Emramec
St. Louis, Missouri 63105
Attn.: Brenda Laux
Telephone No.: (314) 854-4611
Telecopier No.: (314) 854-5454
BANKBOSTON, N.A.
Retail and Apparel Division
By: /s/ Bethann R. Halligan
----------------------------------------
Title: Division Executive
----------------------------------------
100 Federal Street
Mail Stop 01-0-05
Boston, MA 02110-1802
Attn.: Peter Griswald
Telephone No.:
Telecopier No.:
THE SAKURA BANK, LIMITED
By:
----------------------------------------
Title:
----------------------------------------
Attn.: Yoshikazu Nagura
Telephone No.: (212) 909-4549
Telecopier No.: (312) 332-5345
EXHIBIT 4(d)(ii)
AMENDMENT NO. 3
January 7, 1999
The Prudential Insurance Company
of America
Pruco Life Insurance Company
c/o Prudential Capital Group
2200 Ross Avenue, Suite 4200E
Dallas, Texas 75201
Ladies and Gentlemen:
We refer to the Note Agreement dated as of October 24,
1995, as amended by Amendment No. 1 dated January 17, 1997 and
Amendment No. 2 dated October 8, 1997 (as amended, the
"Agreement"), among the undersigned, Brown Group, Inc. (the
"Company") and you. Unless otherwise defined herein, the terms
defined in the Agreement shall be used herein as therein defined.
The Company has requested that Prudential amend the
Agreement to increase the permitted capital expenditure basket by
$5 million. The Company and the holders of the Notes have agreed
to amend the Agreement. Accordingly, it is hereby agreed as
follows:
Section 1. Amendment to Agreement. Paragraph 6K of the
Agreement is hereby amended by deleting the figure "$25,000,000"
therein and substituting for such figure the figure
"$30,000,000." This change is effective beginning with the
Company's 1999 fiscal year, which begins on January 31, 1999.
Section 2. Conditions to Effectiveness. This Amendment
shall become effective, when and only when each of the holders of
the Notes shall have received counterparts of this Amendment
which shall have been executed by the Company, each Guarantor,
and each of the holders of the Notes.
Section 3. Representations and Warranties. Each Credit
Party hereby represents and warrants that the representations and
warranties contained in paragraph 8 of the Agreement are true and
correct on the date hereof as if made on such date, except that
the references to "this Agreement" shall mean the Agreement as
amended by this Amendment.
Section 4. Miscellaneous.
4.01. Effect of Amendment. On and after the effective
date of this Amendment, each reference in the Agreement to "this
Agreement", "hereunder", "hereof", or words of like import
referring to the Agreement, and each reference in the Notes to
"the Agreement", "thereunder", "thereof", or words of like import
referring to the Agreement, shall mean the Agreement as amended
by this Amendment. The Agreement, as amended by this Amendment,
is and shall continue to be in full force and effect and is
hereby in all respects ratified and confirmed. The execution,
delivery and effectiveness of this Amendment shall not, except as
expressly provided herein, operate as a waiver of any right,
power or remedy under the Agreement nor constitute a waiver of
any provision of the Agreement.
4.02. Counterparts. This Amendment may be executed in
any number of counterparts and by any combination of the parties
hereto in separate counterparts, each of which counterparts shall
be an original and all of which taken together shall constitute
one and the same Amendment.
[Signatures on following page.]
If you agree to the terms and provisions hereof, please
evidence your agreement by executing and returning at least a
counterpart of this Amendment to the Company at its address at
8300 Maryland Ave., St. Louis, Missouri 63105, Attention:
Treasurer.
Very truly yours,
BROWN GROUP, INC.
By: /s/ Harry E. Rich
---------------------------------
Title: Executive Vice President &
Chief Financial Officer
GUARANTORS
BROWN GROUP INTERNATIONAL, INC.
BROWN GROUP RETAIL, INC.
PAGODA TRADING COMPANY, INC.
SIDNEY RICH ASSOCIATES, INC.
By: /s/ Harry E. Rich
---------------------------------
Title: Vice President
Agreed as of the date first above written:
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By: /s/ Jay Squiers
----------------------------
Vice President
PRUCO LIFE INSURANCE COMPANY
By: /s/ Jay Squiers
----------------------------
Vice President
1998 Annual Report
Brown Group, Inc
Brown Group, Inc.
- --------------------------
1998 Financial Highlights
- -------------------------
<TABLE>
<CAPTION>
For the Fiscal Years Ended January 30, 1999,
January 31, 1998 and
February 1, 1997 1998 1997* 1996
-------- --------- ----------
(Dollars in thousands,
except per share data)
<S> <C> <C> <C>
Operating Results
Net sales $ 1,538,530 $ 1,567,202 $ 1,525,052
Net earnings (loss) 23,669 (20,896) 20,315
Per Share of Common Stock
Diluted net earnings (loss) 1.32 (1.19) 1.15
Dividends paid .40 .85 1.00
Shareholders' equity 11.95 11.04 13.19
Financial Position
Total assets 655,232 694,988 722,375
Working capital 250,939 260,437 301,020
Shareholders' equity 217,174 199,190 237,037
Return on beginning
shareholders' equity 11.9% (8.8%) 8.8%
Current ratio 2.0:1 1.9:1 2.1:1
</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.
- -------------
Going Places
- ------------
- ---------------------------------
To Our Shareholders 2
Famous Footwear
- --Better Than the Rest 6
Naturalizer Retail
- --The Spirit of Naturalizer 8
Brown Shoe Company
- --Reaching the Consumer 9
Stores and Brands at a Glance 12
Financial Statements 13
Leadership--Operating
Executives and Officers 43
Board of Directors 44
Investor Information 44
- ----------------------------------
Today's consumers are going places. And they need shoes that can get them there
- --shoes that reflect their sense of fashion and keep up with the demands of
their active lifestyles.
Brown Group's businesses are positioned to offer today's footwear consumers
what they need: comfortable, quality footwear ... with relevant styling
...in brand names they trust ...in the places where they like to shop.
This positioning has served us well. With $1.5 billion in annual sales, Brown
Group ranks among the top ten shoe companies, retailing and wholesaling a wide
variety of footwear for women, men and children. Last year was a good year for
our company; with momentum in all our divisions, we are excited about the
opportunities for further progress. Brown Group is going places, too.
- --
Ronald A. Fromm was elected Chairman of the Board, President and Chief Executive
Officer of Brown Group, Inc. in January 1999. His previous positions at Brown
Group included President--Brown Shoe Company, and Executive Vice President and
Chief Financial Officer--Famous Footwear.
- --
- -------------------------------------------------------------------
Dear Shareholder
We are pleased to report that 1998 was a year of continued progress
for Brown Group, providing a solid platform for building our future.
- --------------------------------------------------------------------
In last year's Annual Report, we said that our plans for 1998 called for
continuing progress in our core businesses and a major improvement in net
earnings. This report will describe a year in which we delivered on that
promise. Our 1998 results were achieved during a difficult year for the shoe
industry, when many of our competitors struggled with a downturn in athletic
shoe demand and a highly promotional retail marketplace.
In 1998, Brown Group earned $23.7 million, or $1.32 per share, on sales of $1.5
billion--an encouraging return to solid profitability. These results include a
$7.5 million loss associated with the planned withdrawal from our international
licensed business. In 1998, our core operations earned $31.2 million, or $1.74
per share. This performance reaffirms the earning capability of Brown Group and
sets the stage for further improvements.
These results are particularly encouraging to me, as the new Chairman of Brown
Group. I would like to thank all of the talented associates whose dedication,
commitment and teamwork were an essential element of the success achieved in
1998. There are three major trends affecting the footwear industry today: the
increasing time pressure of work and family leave consumers with less
opportunities to shop; the American lifestyle continues to favor more casual
attire; and the preference for athletic footwear continues to decline. Our
businesses address the needs of today's active, time-stressed consumer. The
consumer is telling us she likes the convenience of shopping in our stores, and
she seeks our brand-name footwear because of the consistent value and quality it
provides.
This is an exciting time for Brown Group--as we move into the 21st century, the
opportunities for continued progress are significant. The leadership of B. A.
"Dolph" Bridgewater, Jr., who retired as Chairman of Brown Group in January,
helped the company maneuver through a time of great change in the footwear and
retail industries. During the past 20 years of his stewardship, a framework for
the company's future growth and success was put in place. We intend to build on
that foundation.
- --------------------------
Plans for Continued Change
- --------------------------
Our plans call for a continuation of change. The footwear industry is dynamic--
chronic oversupply of product and far too much retail square footage continue to
create pressure for industry consolidation, and continue to sift out the weak.
Our strategy has been to transform Brown Group back to a company dedicated to
operating and growing its footwear businesses. A significant proposal to be
considered by our shareholders at the Annual Meeting in May is the change of our
company's name to Brown Shoe Company, Inc. This new identity will reflect that
we are a footwear company--rather than a holding company with diverse
operations. We are dedicated to forming one, integrated, increasingly efficient,
brand-driven footwear operating company, and having footwear industry leaders
dedicated to delivering results that position Brown as a high-performing
business. We know where we are--we know where we want to be--and we know what
we have to do to get us there.
- ----------------------------------------------
Revenue Growth a Priority; Leadership in Place
- ----------------------------------------------
Over the years ahead, a principal element in Brown Group's success will be
top-line growth--we must deliver revenue growth in all of our businesses. To
that end, we have assembled a leadership team committed to developing
strategies to grow our business in the footwear industry. Gregory J. Van Gasse
joined the team in September 1998 in the new position of President of the Brown
Branded division. Other members of the team include Brian C. Cook, President of
the Famous Footwear division; Harry E. Rich, Executive Vice President and Chief
Financial Officer; Gary M. Rich, President of the Pagoda division; and David H.
Schwartz, President of the Brown Shoe Sourcing division. At our Naturalizer
Retail division, Byron D. Norfleet joined the company as Senior Vice President
and General Manager in July 1998.
- --
In January 1999, the Board of Directors elected Brian C. Cook as an Executive
Vice President of Brown Group. He also continues to serve as President of the
company's Famous Footwear division.
- --
- --------------------------------------------------------
A Year of Record Retail Performance--
Famous Footwear's Operating Earnings Increase 25 Percent
- --------------------------------------------------------
Our 1998 results were led by the excellent performance of the Famous Footwear
division. Sales and earnings for Famous Footwear reached record levels in 1998.
Retail sales of $861 million during the year were 4 percent higher than last
year. Operating earnings rose 25 percent to $47.2 million. This gain reflects
continued improvements in execution, including higher margins, very good expense
management and successful merchandising and marketing strategies to overcome the
decline in demand for athletic footwear. These results are very encouraging,
reestablishing Famous Footwear as a high-performance retailer, with Return on
Invested Capital exceeding 10 percent in 1998--a goal that the entire Famous
Footwear team set out to accomplish at the beginning of the year.
At the company's Naturalizer Retail operations in the U.S. and Canada, a sales
gain of 3 percent to $187.2 million for the year also reflects the encouraging
momentum of our Naturalizer brand. Operating earnings were $.8 million versus
$2.3 million last year. This reflects record results for the Canadian retail
operations, offset by losses in the U.S. operations due to higher store
operating costs.
- ---------------------------------------------------
Earnings Gains for Combined Wholesale Operations--
Naturalizer Sales Increase 9 Percent
- ---------------------------------------------------
The company's wholesale operations--the Brown Branded, Pagoda, and Canadian
Wholesale divisions--also achieved improved results during 1998. Operating
earnings increased 5 percent to $33.5 million on a 2 percent sales gain to
$455.9 million. These results were led by continued strengthening of the
Naturalizer brand, including a 9 percent sales increase, as it continues to
achieve increasing consumer acceptance and new retail distribution. Performance
also was strong for the Pagoda Children's division and the Dr. Scholl's brand.
- ---------------------------------------------------------
Balance Sheet Strengthened; Business Withdrawal Completed
- ---------------------------------------------------------
With the dramatic improvement in our operating results last year, Brown Group
generated positive cash flow of $49.2 million, and our balance sheet was
materially strengthened. Our net debt to capital ratio was reduced to 41 percent
from 50 percent at the end of fiscal year 1997. Inventories were tightly
controlled in all operations during the year, ending the period well below plan
and below last year.
We are very pleased to report that the withdrawal from the Pagoda International
marketing division has been substantially completed. Virtually all the inventory
has been sold, all licenses either terminated or assigned to other parties, and
only minimal office operations retained.
- -----------------------------------------------------
Looking Ahead: Continued Improvements; Building Value
- -----------------------------------------------------
With the solid performance of our operating divisions in 1998 and the final
phase-out of our Pagoda International division, we plan to record significant
improvement in operating earnings for fiscal year 1999. We are now in a strong
position to capture market share in the consolidating shoe industry. Our plans
call for us to grow both our retail operations and our wholesale businesses.
Building on the momentum at Famous Footwear, a more aggressive rate of store
openings is planned for 1999. We also expect that the progress of our
Naturalizer brand will continue at both wholesale and retail in 1999. We have
programs in place to build on the success of our Life Stride brand and to
roll-out our repositioned Naturalsport brand. We also see exciting potential in
our Pagoda operations, capitalizing on the opportunities of our Star Wars,
Barbie and Dr. Scholl's licensed products.
The strong positioning of Brown Group's businesses with today's consumer, our
strengthened balance sheet, and proven leadership in all of our operations,
provide good prospects for continued improvements. As a shareholder of Brown
Group, you can be assured that we are intensely focused on building the value of
this company. We know that it will take consistent growth in sales and earnings
of our businesses to increase the value of your investment in Brown Group. We
are committed to achieving that goal.
/s/ Ronald A. Fromm
Chairman of the Board, President
and Chief Executive Officer
April 23, 1999
- --
Director Retirements: At the Annual Meeting of Shareholders in May, retired
Brown Group Chairman B. A. "Dolph" Bridgewater also will retire from the
Brown Group Board of Directors. Other Directors planning to retire from the
Board at the Annual Meeting include William E. Maritz, John D. Macomber and
General Edward C. Meyer. The wise counsel of each of these Directors has been
instrumental in shaping the company's current and future success.
- --
- ---------------------
Famous Footwear
Better than the Rest
- ---------------------
- --
Famous Footwear has 827 stores in 48 states and Guam. These stores average more
than 5,500 square feet in size, with average annual store sales of more than $1
million.
- --
Famous Footwear is relentlessly pursuing its mission to be America's number one
choice for fashionable, branded family shoes. This high-performance retailer had
a record year in 1998, measured in both sales and operating earnings. In a
crowded retail marketplace, Famous Footwear continues to offer consumers a
shopping experience that's "better than the rest."
- ----------------------------------------
The One-Stop-Shop for the Family's Shoes
- ----------------------------------------
In 1998, Famous Footwear made great strides in building its product selection
and service capabilities to satisfy every footwear need of its target consumer:
a busy woman who does all of the family shoe shopping. When she enters a Famous
Footwear store, she wants to buy shoes. She neither has the time nor the desire
to make several trips to several stores. Famous Footwear renewed its commitment
to this consumer in 1998--setting a goal that every time she enters a store,
she leaves with all of the shoes she set out to purchase.
Famous Footwear has expanded its brand mix as well as the sizes and widths of
its product selection--making it more likely than ever that the Famous Footwear
shopper finds a shoe that fits her lifestyle and budget. Specifically, the
company has extended its offering of high-profile brands that appeal to the
consumer's desire for fashion and comfort. These brand extensions position the
chain to take advantage of the consumer's movement away from athletic shoes.
While demand for athletic footwear has dropped in recent years, especially among
men, the company still expects its target woman consumer to satisfy her family's
athletic shoe needs at Famous Footwear stores.
- ----------------------------------------------
Beating the Competition with Value and Service
- ----------------------------------------------
Key to the company's successful brand extensions is its growing reputation for
providing value to the consumer--not just low prices. This emphasis on value
has been a critical factor in building relationships with the company's major
suppliers. Having big-name brands draws consumers into the stores; but only
great service ensures they leave with the shoes they want. Famous Footwear
brought service to the forefront in 1998 by re-emphasizing it as a priority to
all store associates--and training them to help the customer find what she
wants and feel good about her shopping experience.
- -----------------------------------------------------------------------------
Famous Footwear is America's #1 choice for fashionable branded family shoes,
providing a shopping experience that always makes the customer feel good.
- -----------------------------------------------------------------------------
In addition to training, a key strategy for Famous Footwear is attracting and
retaining quality people who are dedicated to providing good customer service.
The chain also has an ongoing program of closing lower-volume stores that cannot
offer a large selection of merchandise and the staffing needed to provide
superior service. This focus on larger-volume stores is being driven by more
than the service component, however; it also reflects marketplace dynamics that
increasingly reward larger stores with a competitive advantage over their
smaller counterparts.
In 1999, Famous Footwear associates will be equipped to provide even greater
customer service: the chain is replacing all store information systems with a
state-of-the-art retail operating system. The company expects to complete the
roll-out of the new system to all Famous Footwear stores by July 1999. New
efficiencies expected from the system include faster credit-card approval and
improved information. All stores will be connected on-line with the chain's
headquarters in Madison, Wisconsin, which will enable real-time communication
between each store and the company's main database. The new technology will
result in significant savings on systems and communications, and Famous
Footwear shoppers will see the benefits of the new system in faster service
and better information.
- ----------------------------------------------
Becoming More Efficient--and Prepared to Grow
- ----------------------------------------------
Famous Footwear finished fiscal year 1998 with 827 stores in 48 states and Guam.
These stores average more than 5,500 square feet in size, with average annual
store sales of more than $1 million. The company has significant penetration in
regional malls, power strip centers and outlet centers--the places people shop
for shoes. A realignment of its field management structure in 1997 put more
managers in the field to operate the business directly, so now the company's
scope of supervision covers virtually the entire country.
The company's two distribution centers continued to deliver increased
operational efficiencies in 1998, enabling the chain to get the right product to
the right store at the right time. These new logistical efficiencies provide
improved service and more flexibility in opening stores farther away from the
centers by reducing cycle times for replenishing store inventories. Together,
the company's wide supervision and distribution capabilities, position Famous
Footwear to increase the rate of store openings in 1999 versus recent years,
without significantly increasing field management or marketing.
The company revamped its marketing in 1998: streamlining its media buying to
more effectively target its primary consumers, and reinforcing its A value A
message by incorporating more brand and fashion presentation in its advertising.
The company's Celebrity Club customer loyalty program continues to be a success
with more than three million members who are rewarded for frequent purchases
and included in targeted promotional mailings and special offers. These valued
customers buy more pairs of shoes annually and spend more per sales transaction
than other customers. The company plans to expand the program to all its stores
by the end of 1999. Celebrity Club is a microcosm of the Famous Footwear
philosophy: delivering the customer the best value--and service--on quality,
branded footwear.
- ------------------
Naturalizer Retail
The Spirit of
Naturalizer
- ------------------
- --
There are 331 company-operated Naturalizer stores in the U.S. and 131 in Canada.
- --
The company's Naturalizer Retail division offers a large selection of casual and
dress footwear that appeals to the active woman's lifestyle. Naturalizer
specialty stores are destination-shopping points for loyal Naturalizer
consumers, who want the highest level of service, selection and sizes. There
currently are 331 company-operated U.S. Naturalizer stores and 131 in Canada. In
addition, the Naturalizer brand is sold in 78 independently operated Naturalizer
stores in the United States and 41 in other countries, building the brand's
worldwide recognition.
Despite a year characterized by intense competition and lackluster performance
for the shoe industry overall, the Naturalizer Retail division improved
store-for-store performance, an indication of the continuing strength of the
Naturalizer brand. The challenge going forward is to transform Naturalizer from
simply being a leading women's shoe brand to becoming an essential element for
the lifestyle of the brand's target consumer.
The Naturalizer Retail division has several programs underway to improve the
performance of the stores, including revamping the design to ensure that the
shopping environment is sophisticated, inviting and easy-to-shop. The company
continues to merchandise its stores for a better balance of casual and dress
styles to appeal to the lifestyle needs of the brand's target consumer. New
marketing programs are being tested to provide improved communications with
the target consumer. A more aggressive real estate repositioning program is
aimed at closing poorly performing stores and opening more stores in better
locations. Updated point-of-sale registers and a new merchandising reporting
system were rolled out in 1998, and are providing improved information on
inventories and consumer preferences.
- -------------------
Brown Shoe Company
Reaching the
Consumer
- -------------------
The goal of Brown Shoe Company's wholesale operations is to put comfortable,
fashionable, quality footwear on as many consumers as possible. And the
company's strategy for reaching consumers is really quite simple: being
everywhere they shop with shoes that fit their lifestyles and their tastes in
fashion. Successful execution of this consumer-reach strategy requires a
powerful line-up of branded products and strong relationships with retail
partners
- ------------------------
Building Brands That Fit
Consumer Lifestyles
- -------------------------
The power of the company's branded products fuels growth in both its
wholesale and retail operations. Brands are more important than ever in reaching
today's time-deprived consumers, who make quick and easy shopping decisions by
choosing brand name products they can count on for quality and value. In 1998,
the company continued building brands that mean comfort, functionality, relevant
styling and affordable pricing to a growing number of consumers.
- --
Consumer research shows that Naturalizer (left) and Life Stride are ranked among
the top women's shoe brands today.
- --
A focus on brands is deliberately built into the structure of Brown Shoe Company
through its three wholesale divisions. The Brown Branded division speaks
directly to the needs of today's fashion-oriented woman, with high-quality
footwear in relevant styles sold at department and specialty stores. The
company's Naturalizer brand has earned a reputation for style and comfort among
women who shop at department and specialty stores. New distribution and a
rejuvenated product line pushed Naturalizer to significant growth in 1998.
- -----------------------------------------------------------------------------
Brands are more important than ever in reaching today's time-deprived
consumers, who make quick and easy shopping decisions by choosing brand name
products they can count on for quality and value.
- -----------------------------------------------------------------------------
The Naturalsport brand continues to create a name for itself among younger women
with active lifestyles, a consumer segment that represents increased
opportunities for the brand going forward. Life Stride and its brand extension,
LS Studio, continue to dominate the A entry level A shoe category in
department and specialty stores, capitalizing on the growing popularity of
casual styles among its target consumers. The Night Life brand is the company's
line of women's shoes for special occasions. Using the Millennium as the
ultimate special occasion, the brand is gaining increased recognition and new
distribution. Together, the Naturalizer, Naturalsport, Life Stride and Night
Life brands cover the full spectrum of affordability and lifestyle fashion for
today's consumer.
The Pagoda division of Brown Shoe Company makes quality footwear affordable to
the growing numbers of consumers who do the family shoe shopping at
mass-merchandisers and mid-tier retailers--increasingly important retail
channels for the footwear industry. In 1998, the company entered into two new
licensing agreements to market footwear featuring characters from the 1999
movies Star Wars: Episode I and Disney's Tarzan.
- --
Sales of the Dr. Scholl's brand (left) increased 5 percent in 1998. The company
also markets children's footwear under powerful licensed brand names.
- --
The Pagoda division is building the presence of its licensed and branded
products in all channels of distribution. Children's footwear sales to
mass-merchandisers, mid-tier retailers and department stores were significantly
increased in 1998, led by Buster Brown, Barbie and lighted footwear. Buster
Brown continues to be one of the most recognized brand names in children's
shoes. Sales of Barbie footwear increased 119 percent in 1998, which marked
Barbie's 40th anniversary and the 12th year of Pagoda's footwear licensing
relationship with this powerful brand. Pagoda's long-standing presence in adult
brands is anchored by well-known brand names such as Dr. Scholl's, Connie,
Russell Athletic, Penn and Unionbay.
At the heart of the company's brand-driven organization is its Brown Shoe
Sourcing division, which ranks among the largest and most versatile footwear
suppliers today. This worldwide sourcing network contracts with footwear
manufacturers in China, Brazil, Indonesia, Italy, Mexico and Taiwan to produce
shoes that meet the company's design, quality, delivery and price standards. The
company has an ongoing program to ensure that these factories meet its strict
standards for working conditions and quality. In 1998, the company sourced
approximately 60 million pairs of shoes through its seven international sourcing
offices. In this way, Brown Shoe Sourcing provides a flexible, cost-efficient
means for supporting the diverse lifestyles of today's footwear consumers with
virtually every category of shoe--from athletic to dress--at virtually every
level of affordability--from popular priced to better brands.
- --
Buster Brown is a trusted name in children's shoes.
- --
- --------------------------------------------------------------
The power of Brown Shoe Company's branded products fuels growth
in both its wholesale and retail businesses.
- ---------------------------------------------------------------
- --
The Naturalsport brand has been repositioned for a younger, casual lifestyle.
- --
- ----------------------------------------------
Partnering to Open the Gateway to the Consumer
- ----------------------------------------------
Retail partners are the gatekeepers to an enormous consumer market for footwear
- --and critical to expanding the company's consumer reach. In 1998, Brown Shoe
Company strengthened its relationships with specialty stores, department stores
and mass-merchandisers. The success of the company's bellwether Naturalizer
brand helped open an additional 220-plus department store doors for Brown Shoe
Company. Naturalizer sales to department store retailers increased 24 percent in
1998, and sales rose 11 percent at multi-line independent specialty stores. The
company's mass-merchandise and mid-tier customers include powerful retailers,
such as Wal-Mart, Kmart, Payless ShoeSource and of course, Famous Footwear.
Brown Group's Canadian Wholesale division, located in Perth, Ontario, maintains
strong retail partnerships as well, closing the year with extensive brand
representation in department stores, better-grade independent accounts and
specialty stores throughout Canada.
Brown Shoe Company is uniquely positioned to serve its retail partners with
sophisticated merchandising and logistic support systems, a flexible worldwide
sourcing network, proven product development teams, and strong marketing and
merchandising programs to reach its consumers. With a portfolio of leading
brands supported by a diversified sourcing network, and a strong customer base
across all retail channels, Brown Shoe Company is in a strong position to seize
its opportunities and to build on the momentum established in fiscal year 1998.
- ------------------------------
Stores and Brands at a Glance
- ------------------------------
<TABLE>
<CAPTION>
Footwear Retail Stores
- ----------------------
Number of Stores
........... 1998 1997 1996* 1995 1994
---- ---- ---- ---- ---
<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. 827 815 794 814 722
Naturalizer: Stores selling the
Naturalizer and Naturalsport brands
of women's footwear; located in major
malls, shopping centers and outlet malls
in the U.S. and Canada. 462 464 462 424 432
* Reflects the transfer of 40 Naturalizer outlet stores from the Famous Footwear
division to the Naturalizer Retail division.
</TABLE>
Footwear Brands
- ----------------
Women's Children's Men's
Air Step Barbie 6 Big Country
Connie Buster Brown Cedar Trail
Connie Too Disney Babies 2 Dr. Scholl's 1
Dr. Scholl's 1 Flash Tech Jean Pier Clemente
Fanfares Hello Kitty 7 le coq sportif
Naturalizer The Land Before Time 9 Nature Sole
Naturalsport Live Wires Penn 3
Life Stride le coq sportif Regal
Larry Stuart Collection The Lion King 2 Russell Athletic 4
le coq sportif Mickey & Co. 2
LS Studio by Life Stride Mickey for Kids 2
Maserati Mulan 2
Mickey Unlimited 2 Simba's Pride 2
Night Life Sound Efx
Original Dr. Scholl's 1 Star Wars 8
Penn 3 Tarzan 2
Russell Athletic 4 Wildcats
Unionbay 5
- ---------------------------------------------------------------------
As denoted, these brands
are under license from:
1 Schering-Plough
HealthCare Products, Inc.
2 The Walt Disney Company
3 Penn Racquet Sports,
a division of GenCorp, Inc.
4 Russell Corporation
5 Seattle Pacific
Industries, Inc.
6 Mattel, Inc.
7 Sanrio, Inc.
8 Lucasfilm Ltd.
9 Universal Studios
- -----------------------------------------------------------------------
- --------------------
Financial Statements
- ---------------------
Management's Discussion and Analysis
of Operations and Financial Condition 14
Five-Year Summary 20
Consolidated Financial Statements 21
Notes to Consolidated Financial
Statements 25
Reports on Financial Statements 41
Supplementary Financial Information 42
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Operations and Financial Condition
- ---------------------------------------------------------------------------
Results of Operations
- ---------------------
1998 Compared to 1997
Brown Group, Inc.'s fiscal 1998 results reflect continuing progress during
a difficult and highly promotional year in the footwear marketplace.
Brown Group, Inc.'s net sales of $1.539 billion in fiscal 1998 were $28 million
lower than the $1.567 billion in fiscal 1997. Net sales were impacted by the
withdrawal from the Pagoda International marketing division and the sale of
Famous Footwear's fixtures manufacturing business at the end of fiscal 1997.
Adjusting for these items, net sales increased 3%, led primarily by Famous
Footwear. Net earnings of $23.7 million in fiscal 1998 compares to a net loss of
$20.9 million in fiscal 1997. The net loss in fiscal 1997 includes $45.6
million of Pagoda International restructuring charges and operating losses
compared to a loss of $7.5 million incurred in fiscal 1998. Excluding the
Pagoda International results and the aftertax loss of $1.5 million incurred on
the sale of the Famous Fixtures business in fiscal 1997, net earnings of the
Company's core businesses were $31.2 million in fiscal 1998 compared to $26.2
million in fiscal 1997.
In fiscal 1998, Famous Footwear achieved record sales and operating earnings.
Net sales increased 1% in fiscal 1998 to $861.3 million and 4% adjusting for the
sale of the Famous Fixtures business. Same-store sales increased .4% and 12 net
new stores were added in fiscal 1998. Sales per square foot increased 3.2% in
fiscal 1998 reflecting improved store productivity from the new stores opened
versus those stores closed in the past year. At the end of fiscal 1998, 827
stores were in operation compared to 815 stores in fiscal 1997. During the year,
60 stores were opened and 48 stores were closed, with plans for fiscal 1999
including the net addition of 30 to 40 stores. Excluding the effect of the sale
of the fixtures business, operating earnings for fiscal 1998 increased 25% to
$47.2 million as a result of higher gross margins, good expense management and
successful merchandising strategies to overcome a decline in athletic footwear
sales.
The Company's wholesale operations--the Brown Branded, Pagoda and Canadian
Wholesale divisions--had a net sales increase of 2% during fiscal 1998 to $455.9
million. Sales of the Naturalizer brand increased 9% in 1998 reflecting the good
consumer acceptance and new retail distribution of the brand. Operating earnings
of $33.5 million increased 5% in fiscal 1998 resulting from improved margins and
well-controlled operating expenses.
In the Company's Naturalizer Retail operations, which includes stores in both
the United States and Canada, net sales of $187.2 million increased 3% in fiscal
1998. Same-store sales in fiscal 1998 increased 2.6% and 1.2% in the United
States and Canada, respectively. At the end of fiscal 1998, 462 total stores
were in operation including 331 stores in the United States and 131 stores in
Canada. Domestically, the Company had a net decrease of 10 stores in fiscal 1998
while Canada had a net increase of 8 Naturalizer stores. Even though the
Canadian operations performed at record levels, total Naturalizer Retail
operations had operating earnings of $.8 million in fiscal 1998 compared to $2.3
million in fiscal 1997. Operations in the United States stores were adversely
impacted by higher store operating costs.
Consolidated gross profit as a percent of sales of 39.9% in 1998 was higher than
the 37.9% in 1997 which excludes the impact of the Pagoda International
restructuring charge of $14.7 million. The improvement in gross profit rate
reflects increases at Famous Footwear and the wholesale operations.
Selling and administrative expenses as a percent of sales of 35.9% in 1998 was
higher than the 35.2% in 1997 excluding the impact of the Pagoda International
restructuring charge. The increase in the selling and administrative expense
rate in 1998 was due to a higher mix of retail sales versus wholesale sales as
well as a higher level of retail expenses in 1998 compared to 1997.
Interest expense of $19.4 million in fiscal 1998 decreased from $21.8 million in
fiscal 1997 primarily as a result of lower average borrowings for the year due
to positive cash flow provided from operations.
Other expense of $4.5 million in fiscal 1998 varied from other income of $.5
million in 1997 as a result of environmental remediation costs of $2.3 million,
and the write-off of certain intangible assets of $1.9 million.
The Company's tax provision of $13.9 million in fiscal 1998 represents an
effective tax rate of 37.1%. The 1997 tax provision of $18.7 million includes an
$8.0 million provision for taxes due on the foreign cash to be repatriated as a
result of the decision to restructure the Pagoda International marketing
division. In addition, fiscal 1997 results include a high level of Pagoda
International losses on which no tax benefit was recorded. See Note 5 to the
consolidated financial statements for a further explanation and a reconciliation
of the effective tax rates to the statutory rates.
1997 Compared to 1996
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. In the third quarter of 1997, the Company announced the decision to
substantially reduce its investment in the Pagoda International marketing
division as a result of excessive inventories and increasing losses. 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 liquidation
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 were the result of
improved store productivity and the addition of 21 net new stores. During the
year, 60 stores were opened and 39 stores were closed. 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 fixture 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 Company's wholesale operations--the Brown Branded, Pagoda and
Canadian Wholesale divisions--decreased 3% during fiscal 1997 to $448.4 million.
Operating earnings were $32.0 million compared to $33.7 million in fiscal 1996,
which included a $4.0 million LIFO credit from the liquidation of remaining
manufactured inventories within the Brown Branded division. Improved operating
earnings resulted from improved margins and tightly controlled operating
expenses.
Net sales for the Company's Naturalizer Retail division of $181.6 million were
2% higher than in 1996. Same-store sales decreased .9% for the United States
stores but increased 5.2% for the Canadian stores in fiscal 1997. The total
number of stores in operation in the United States at the end of fiscal 1997 was
341 representing a net decrease of 5 stores. The Canadian operations had a net
addition of 7 Naturalizer stores in 1997, resulting in 123 stores in operation.
Operating earnings for the Naturalizer Retail division were $2.3 million in 1997
which represents a decrease of 12% from 1996. The lower operating earnings were
a result of higher operating costs within the domestic operations.
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. Selling and administrative expenses as a percent of
sales were 35.2% excluding the restructuring charge impact of $7.3 million. The
increase in 1997 reflects a higher expense rate from advertising expenditures
within the wholesale operations and the effect of a greater mix of retail sales.
Interest expense increased to $21.8 million in fiscal 1997 from $19.3 million in
fiscal 1996 primarily due to 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 resulting 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 to be repatriated as a
result of the decision to restructure the Pagoda International marketing
division. A tax provision was reflected in fiscal 1997 even with the
consolidated pre-tax loss, as no tax benefit was recorded on the Pagoda
International losses.
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Operations and Financial Condition
- ---------------------------------------------------------------------------
Pagoda International Restructuring
- ----------------------------------
In the third quarter of fiscal 1997, the Company made the 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 included the sale of the remaining Brazilian inventory of
licensed products and the shift of European inventory ownership and marketing of
its licensed footwear to other parties. In addition, plans were developed to
repatriate foreign cash previously available to support international
operations. The total aftertax charge of $31.0 million was recorded to cover the
costs of this restructuring and 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 addition to the charge recorded in fiscal 1997, the Company provided $2.0
million in 1998 for additional costs. As of January 30, 1999, the withdrawal
from the division's operations has been substantially completed, as virtually
all of the inventory has been sold and all licenses either terminated or
assigned to other parties.
A cumulative summary of activity in the restructuring reserve is as follows (in
millions):
<TABLE>
<S> <C>
Initial establishment of reserve $31.0
Additional provision recorded in fiscal 1998 2.0
Inventory markdowns (10.6)
Bad debt write-offs and royalty
agreements shortfall (3.7)
Severance and benefit costs (1.9)
Utilization of tax provision (4.0)
Other asset write-offs and costs (2.1)
- ------------------------------------------------------
Remaining reserve at January 30, 1999 $10.7
======================================================
</TABLE>
The reserve activity had a $5.4 million negative cash flow impact in fiscal
1998. This usage was offset by the positive cash flow generated from reduced
receivables and inventories. The remaining reserve will be primarily utilized in
fiscal 1999 to cover inventory markdowns, severance, various write-offs of
assets and an outstanding cumulative translation adjustment amount. The
remaining reserve also includes approximately $4.0 million for income taxes due
on future cash repatriations as cash becomes available. The operating loss to
complete the withdrawal from this business in 1999 is expected to be
approximately $1 million. The Company is also contingently liable for
approximately $8 million related to license guarantees, pending Brazilian tax
and other assessments and outstanding notes receivable from an Argentinean third
party.
- --------------------
Impact of Inflation
- -------------------
The effects of inflation on the Company have been minor over the last several
years and are not expected to have a significant impact in the foreseeable
future.
- -------------------------------
Liquidity and Capital Resources
- -------------------------------
During fiscal 1998, the Company's borrowing level continued to decrease as cash
flow from operations more than offset capital expenditures and dividends. As a
result, total debt decreased from $251.0 million at the end of fiscal 1997 to
$197.0 million at the end of fiscal 1998. The Company's ratio of debt-to-total
capitalization decreased from 55.8% at the end of fiscal 1997 to 47.6% at the
end of fiscal 1998. The ratio was favorably impacted by good management of the
balance sheet as well as cash repatriation amounting to approximately $28
million from Canada and other foreign operations.
Working capital at the end of fiscal 1998 was $250.9 million, which was $9.5
million lower than at the end of fiscal 1997. However, the Company's current
ratio, the relationship of current assets to current liabilities, increased from
1.9 to 1 at the end of fiscal 1997 to 2.0 to 1 at the end of fiscal 1998. The
increase in the current ratio was primarily due to the reduction of outstanding
borrowings under the revolving bank Credit Agreement. The reduction in
outstanding borrowings was slightly offset by lower receivables and inventories
and the increase of current maturities of long-term debt.
Cash provided by operating activities in 1998 was significantly higher than in
1997 as a result of improved earnings as well as decreased inventories and
receivables primarily at the Company's wholesale operations.
Cash used by investing activities was primarily for capital expenditures in
fiscal 1998 of $22.7 million compared to $21.7 million in fiscal 1997. Capital
expenditures in fiscal 1998 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 debt-to-total capitalization, establish minimum levels of
net worth, and limit the sale of assets and the level of liens and certain
investments. In fiscal 1998, the Company amended its revolving bank Credit
Agreement and 7.36% Senior Note Agreement, which increased the maximum levels of
capital expenditures and extended the revolving bank Credit Agreement by one
year. The Company was in compliance with all its covenants during fiscal 1998
and at fiscal year-end, and expects to continue to be in compliance based on
current estimates for fiscal 1999. The Company's current borrowing capacity
under the revolving bank Credit Agreement is believed to be adequate to fund its
operational needs and long-term debt maturities in 1999.
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.
Brown Group paid a dividend of $.40 per share in fiscal 1998 and $.85 per share
in fiscal 1997. The 1998 dividend marked the 76th year of consecutive quarterly
dividends.
- ---------------------
Financial Instruments
- ---------------------
The market risk inherent in the Company's financial instruments and positions
represents the potential loss arising from adverse changes in foreign currency
exchange rates and interest rates. To address these risks, the Company enters
into various hedging transactions to the extent described below. All decisions
on hedging transactions are authorized and executed pursuant to the Company's
policies and procedures, which do not allow the use of financial instruments for
trading purposes. The Company also 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.
A discussion of the Company's accounting policies for derivative financial
instruments is included in the Summary of Significant Accounting Policies in the
Notes to the Consolidated Financial Statements with further disclosure relating
to financial instruments included in Note 11.
- --------------------------------
Foreign Currency Exchange Rates
- --------------------------------
In the normal course of business, the Company is exposed to foreign currency
exchange rate risks as a result of having assets, liabilities and inventory
purchase commitments outside the United States. The Company employs an
established foreign currency hedging strategy to protect earnings and cash flows
from the adverse impact of exchange rate movements. A substantial portion of
inventory sourced from foreign countries 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
foreign exchange contracts or option contracts with maturity periods normally
less than one year to reduce its exposures to foreign exchange risk. 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. The changes in market value of foreign exchange contracts have a high
correlation to the price changes in the currency of the related hedged
transactions. The potential loss in fair value of the Company's net currency
positions at January 30, 1999 resulting from a hypothetical 10% adverse change
in all foreign currency exchange rates would not be material.
Assets and liabilities outside the United States are primarily located in
Canada, Hong Kong, Europe and Brazil. The Company's investments in foreign
subsidiaries with a functional currency other than the United States' dollar are
generally considered long-term, and thus generally are not hedged. In the
countries where the economy is deemed to be hyperinflationary or operations are
being liquidated, the Company hedges the local currency denominated assets and
liabilities. The net investment in foreign subsidiaries translated into dollars
using the year-end exchange rates was approximately $40 million at January 30,
1999. The potential loss in fair value resulting from a hypothetical 10% adverse
change in foreign exchange rates would be approximately $4 million. Any loss in
fair value would be reflected as a cumulative translation adjustment in Other
Compre-hensive Income and would not impact earnings.
- ---------------------------------------------------------------------------
Management's Discussion and Analysis of Operations and Financial Condition
- ---------------------------------------------------------------------------
Interest Rates
- --------------
The Company's financing arrangements include both fixed and variable rate debt
in which changes in interest rates will impact the fixed and variable rate debt
differently. A change in the interest rate of fixed rate debt will only impact
the fair value of the debt whereas a change in the interest rates on the
variable rate debt will impact interest incurred and cash flows. The Company had
no interest rate derivative instruments outstanding at year-end and has not
elected to enter into any derivative instruments based upon cost/benefit
analyses.
The revolving bank Credit Agreement, the Company's only variable rate debt, had
no outstanding borrowings as of January 30, 1999. A hypothetical 10% adverse
change in interest rates on the average outstanding borrowings for fiscal 1998
would not be material to the Company's net earnings and cash flows.
At January 30, 1999, the fair value of the Company's total debt is estimated at
approximately $198 million based upon the borrowing rate currently available to
the Company for financing arrangements with similar terms and maturities. Market
risk is viewed as the potential change in fair value resulting from a
hypothetical 10% adverse change in interest rates and would be approximately $7
million at January 30, 1999.
- --------------------
Year 2000 Compliance
- --------------------
The "Year 2000" issue arises because many computer hardware and software
systems, including the Company's, use only two digits to represent the year. As
a result, these systems and programs may not accurately calculate dates beyond
1999, which could cause system failures or malfunctions. The Company has
established a company-wide Steering Committee, consisting of the Chief Financial
Officer, Vice Presidents of the Information Services (IS) functions, internal
auditors, executive financial and legal management and other employees, to
oversee and manage the Company's Year 2000 project.
A thorough assessment of all of the Company's existing information systems has
been completed, and a comprehensive plan to modify or replace all hardware and
software information systems that are not Year 2000 compliant has been
developed. All systems will be tested to ensure that they will operate properly
with respect to dates in the next century. The Company has also assessed the
operating systems and equipment used in its distribution centers, offices and
other facilities that may contain embedded chips, and that may be Year 2000
sensitive, and will make modifications where necessary. The plan also includes
communicating with significant business partners to determine their state of
readiness for the Year 2000.
With respect to its internal information systems, as of January 30, 1999, the
Company has substantially completed the modification or replacement and testing
of the information and operating systems used in its footwear wholesaling and
sourcing operations, and its financial systems. The Company's Naturalizer Retail
division is modifying its ongoing systems and installing new in-store systems,
which includes replacing all of its point-of-sale registers. The new Year 2000
compliant registers and in-store systems have been installed, and the remaining
modification work and testing has been substantially completed in early 1999.
The Famous Footwear retail division has completed the modification of its
ongoing systems, and is also replacing its in-store systems. Testing of the
modified and new store systems is beginning in the first quarter of 1999 and is
expected to be completed by the end of the second quarter. The new in-store
systems are expected to be installed in all stores by mid-1999. For all of the
Company's divisions, the balance of 1999 will be used for additional testing and
correction of any problems that may arise.
The Company relies on independent business partners to provide various products
and services. One of the most significant groups of partners is the
independently owned and operated factories, primarily in China and Brazil, from
which the Company purchases footwear for its wholesale and retail operations.
Based on communications with representatives of and
on-site visits to these factories, the Company has determined that the use of
date-sensitive technology in their production processes is relatively low.
Nevertheless, the Company is continuing to review the assessment, remediation,
and test plans of these factories to attempt to determine whether they can be
relied on as suppliers going forward. In addition, the Company has been in
contact with footwear companies that provide Famous Footwear with the majority
of its products, banks, benefit plan providers, transportation providers and
others who supply goods and services to it. Communications with these partners
are continuing in order to obtain as much assurance as possible that they will
be compliant. However, there can be no assurance that these partners' Year 2000
remediation efforts will be wholly successful. Nor can there be assurance that
third parties not contacted will not have problems that could materially
adversely affect the Company's business, operations and financial condition.
The Company believes that the most reasonably likely Year 2000 worst case
scenario is that its suppliers of footwear, for both its wholesale and retail
businesses, would not be able to provide an uninterrupted flow of products due
to their own or their suppliers' systems failures or as a result of disruptions
in utility or other government services. The Company has not yet developed
contingency plans for this scenario, but intends to continue to monitor and
evaluate the state of readiness of these suppliers. By mid-1999 the Company will
determine which suppliers appear to be at risk of noncompliance, and will
attempt to arrange for alternative sources of footwear from its large and
diverse group of suppliers. The Company may also consider accelerating purchases
of inventory to reduce this risk. The Company believes that there is adequate
footwear producing capacity available to allow for the use of alternate sources
or accelerated purchases. The Company also believes that if there is a
disruption in the flow of footwear it will be short-term in nature.
Nevertheless, there can be no assurance that the Company can accurately and
fully anticipate the level of disruption that may occur.
The Company's wholesale division customers are department stores, mass-merchants
and numerous other footwear retailers. The Company is communicating with its
significant retail customers through which it processes transactions
electronically using Electronic Data Interchange (EDI) technology to attempt to
determine their ability to continue to conduct business in this manner. The
Company has adopted the Year 2000 compliant version of EDI, and plans to convert
to the new version and perform tests directly with its applicable retail
customers throughout 1999. As a contingency plan, if a customer is unable to
continue to process transactions through EDI, it is expected that manual
procedures could be implemented. The Company intends to continue to monitor and
assess the EDI and the general state of Year 2000 readiness of its major retail
customers. A Year 2000 failure by a major retail customer could have a
materially adverse effect on the Company.
Management estimates that the non-incremental internal IS staff and outside
consultant costs of the Company's Year 2000 efforts will total approximately
$1.6 million. Through January 1999, approximately $1.4 million of this total has
been incurred. In addition, the cost for new purchased or leased hardware and
software that will both upgrade the functionality and operating efficiency of
store and financial systems, and result in Year 2000 compliance, is expected to
be approximately $15 million. All expenditures related to the Company's Year
2000 project are expected to be funded through operating cash flows. The costs
of new purchased and leased systems will be expensed over the next several
years. All costs related to modifying systems are being expensed as incurred.
The costs and anticipated completion dates for Year 2000 modifications and the
risks associated with the Year 2000 issues are based on management's best
estimates utilizing numerous assumptions of future events. There can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Factors that may cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer code and systems, the cooperation and remediation success of the
Company's suppliers (and their suppliers), and the ability to correctly
anticipate risks and implement suitable contingency plans in the event of
systems failures at the Company or its suppliers and customers (and their
suppliers and customers).
- ---------------------
Environmental Matters
- ---------------------
The Company is involved in environmental remediation and ongoing compliance at
several sites, including its closed New York tannery and at its owned facility
in Colorado. In addition, various federal and state authorities have identified
the Company as a potentially responsible party for remediation at certain
landfills from the sale or disposal of solvents and other by-products from the
closed tannery 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 30, 1999, the
accrued environmental liabilities for all sites total approximately $4.2
million. See Note 14 to the consolidated financial statements for further
discussion on specific properties.
- --
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 the Company's
Annual Report on Form 10-K.
- --
<TABLE>
<CAPTION>
- -------------------
Five-Year Summary
- -------------------
Thousands, except
per share amounts 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(52 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks)
<S> <C> <C> <C> <C> <C>
Operations
- ----------
Net sales $1,538,530 $1,567,202 $1,525,052 $1,455,896 $1,461,637
Cost of goods sold 925,190 988,530 958,288 948,925 949,374
---------- ---------- ---------- ---------- ----------
Gross profit 613,340 578,672 566,764 506,971 512,263
---------- ---------- ---------- ---------- ----------
Selling and
administrative
expenses 551,877 559,536 521,553 494,098 448,827
Interest expense 19,383 21,756 19,327 15,969 15,785
Other expense
(income), net 4,477 (452) (1,341) 1,630 (12,320)
---------- ---------- ---------- ---------- ----------
Earnings (loss) from
continuing operations
before income taxes 37,603 (2,168) 27,225 (4,726) 59,971
Income tax
(provision)
benefit (13,934) (18,728) (6,910) 5,423 (26,405)
---------- ---------- ---------- ---------- ----------
Earnings (loss)
from continuing
operations 23,669 (20,896) 20,315 697 33,566
Earnings from
discontinued operations,
net of income taxes -- -- -- -- 1,282
Credit for disposal of
discontinued operations,
net of income taxes -- -- -- 2,600 4,550
---------- ---------- ---------- ---------- ----------
Net earnings (loss) $23,669 $(20,896) $20,315 $3,297 $39,398
========= =========== ========== ========== ==========
Returns from
continuing operations:
Return on net sales 1.5% (1.3%) 1.3% 0.1% 2.3%
Return on beginning
shareholders' equity 11.9% (8.8%) 8.8% 0.3% 14.4%
Return on average
invested capital 5.3% (4.2%) 4.1% 0.2% 6.5%
Dividends paid $7,223 $15,323 $17,956 $23,325 $28,610
Capital expenditures 22,747 21,727 21,044 26,939 32,531
Per Common Share
- ----------------
Basic earnings
(loss) from
continuing operations $1.34 $(1.19) $1.16 $.04 $1.93
Basic net earnings
(loss) 1.34 (1.19) 1.16 .19 2.27
Diluted earnings
(loss) from
continuing operations 1.32 (1.19) 1.15 .04 1.90
Diluted net
ernings (loss) 1.32 (1.19) 1.15 .19 2.23
Dividends paid .40 .85 1.00 1.30 1.60
Shareholders' equity 11.95 11.04 13.19 12.92 13.90
Financial Position
- ------------------
Receivables, net $67,815 $77,355 $90,246 $86,417 $98,079
Inventories, net 362,274 380,177 398,803 342,282 322,029
Working capital 250,939 260,437 301,020 209,399 259,178
Property and
equipment, net 82,178 82,744 85,380 87,720 92,904
Total assets 655,232 694,988 722,375 661,056 636,515
Long-term debt
and capitalized
lease obligations 172,031 197,027 197,025 105,470 133,213
Shareholders' equity 217,174 199,190 237,037 231,636 249,727
Average common shares
outstanding - Basic 17,692 17,591 17,531 17,483 17,374
Average common shares
outstanding - Diluted 17,943 17,841 17,725 17,637 17,653
All data presented reflects the fiscal year ended on the Saturday nearest to
January 31.
</TABLE>
- ----------------------------
Consolidated Balance Sheets
- ----------------------------
<TABLE>
<CAPTION>
Thousands, except number of shares and per share amounts
January 30, 1999 January 31, 1998
---------------- ----------------
<S> <C> <C>
Assets
- ------
Current Assets
Cash and cash equivalents $45, 532 $50,136
Receivables, net of allowance of
$9,820 in 1998 and $9,925 in 1997 67,815 77,355
Inventories, net of adjustment to last-in,
first-out cost of $13,424 in 1998 and
$15,617 in 1997 362,274 380,177
Deferred income taxes 9,381 14,900
Prepaid expenses and other current assets 12,381 15,962
---------------- ----------------
Total Current Assets 497,383 538,530
---------------- ----------------
Prepaid pension costs 34,825 34,388
Other assets 40,846 39,326
Property and equipment, net 82,178 82,744
---------------- ----------------
$655,232 $694,988
================ ================
Liabilities and Shareholders' Equity
- -------------------------------------
Current Liabilities
Notes payable $ -- $54,000
Trade accounts payable 124,921 118,907
Employee compensation and benefits 36,935 33,256
Other accrued expenses 53,146 59,935
Income taxes 6,442 11,995
Current maturities of long-term debt 25,000 --
---------------- ----------------
Total Current Liabilities 246,444 278,093
---------------- ----------------
Other Liabilities
Long-term debt, including
capitalized lease obligations 172,031 197,027
Deferred income taxes 6,086 6,817
Other liabilities 13,497 13,861
---------------- ----------------
Total Other Liabilities 191,614 217,705
---------------- ----------------
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;
18,168,340 and 18,049,327
shares outstanding 68,131 67,685
Additional capital 48,243 47,036
Unamortized value of restricted stock (4,058) (4,358)
Accumulated other comprehensive loss (8,842) (8,427)
Retained earnings 113,700 97,254
---------------- ----------------
Total Shareholders' Equity 217,174 199,190
---------------- ----------------
$655,232 $694,988
================ ================
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
- ----------------------
Consolidated Earnings
- ----------------------
Thousands, except per share amounts
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Sales $1,538,530 $1,567,202 $1,525,052
Cost of goods sold 925,190 988,530 958,288
---------- ----------- -----------
Gross profit 613,340 578,672 566,764
---------- ----------- -----------
Selling and administrative expenses 551,877 559,536 521,553
Interest expense 19,383 21,756 19,327
Other expense (income), net 4,477 (452) (1,341)
---------- ----------- -----------
Earnings (Loss) Before Income Taxes 37,603 (2,168) 27,225
Income tax provision (13,934) (18,728) (6,910)
---------- ----------- -----------
Net Earnings (Loss) $23,669 $(20,896) $20,315
========== =========== ===========
Basic Net Earnings (Loss)
Per Common Share $1.34 $(1.19) $1.16
========== =========== ===========
Diluted Net Earnings (Loss)
Per Common Share $1.32 $(1.19) $1.15
========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
- -----------------------
Consolidated Cash Flows
- -----------------------
<TABLE>
<CAPTION>
Thousands 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net earnings (loss) $23,669 $(20,896) $20,315
Adjustments to reconcile
net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 26,943 26,686 25,886
Loss on disposal or impairment
of facilities and equipment 961 1,475 655
Provision for losses on
accounts receivable 2,772 5,145 5,982
Changes in operating assets
and liabilities:
Receivables 6,768 7,746 (10,256)
Inventories 17,903 18,626 (56,521)
Prepaid expenses
and other current assets 9,100 6,178 4,541
Trade accounts payable
and accrued expenses 2,904 16,349 17,221
Income taxes (5,553) 7,990 (330)
Other, net (6,587) (10,615) (4,223)
---------- -------- --------
Net Cash Provided by
Operating Activities 78,880 58,684 3,270
---------- -------- --------
Investing Activities:
Capital expenditures (22,747) (21,727) (21,044)
Proceeds from sales of fixed assets 58 401 1,414
---------- -------- --------
Net Cash Used by
Investing Activities (22,689) (21,326) (19,630)
---------- -------- --------
Financing Activities:
Decrease in short-term
notes payable (54,000) (8,000) (50,000)
Debt issuance costs -- (678) (3,714)
Principal payments of long-term
debt and capitalized leases -- (2,000) (8,450)
Proceeds from issuance
of long-term debt -- -- 100,000
Proceeds from issuance of common stock 428 93 108
Dividends paid (7,223) (15,323) (17,956)
---------- -------- --------
Net Cash (Used) Provided
by Financing Activities (60,795) (25,908) 19,988
---------- -------- --------
(Decrease) Increase in
Cash and Cash Equivalents (4,604) 11,450 3,628
Cash and Cash Equivalents
at Beginning of Year 50,136 38,686 35,058
---------- -------- --------
Cash and Cash Equivalents
at End of Year $45,532 $50,136 $38,686
========== ======== ========
See notes to consolidated financial statements.
</TABLE>
- ---------------------------------
Consolidated Shareholders' Equity
- ---------------------------------
<TABLE>
<CAPTION>
Thousands, except number of shares and per share amounts
Accumulated
Unamortized Other
Value of Compre- Total
Common Stock Add- Restrict- hensive Share-
-------------- itional ed Income Retained holders'
Shares Dollars Capital Stock (loss) Earnings Equity
-------- ------ -------- ------ ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
February
3, 1996 17,930,977 $67,242 $46,015 $(7,822) $(4,913) $131,114 $231,636
-------- ------ -------- ------ ------ --------- --------
Net
earnings 20,315 20,315
Currency
translation
adjustment 480 480
-------- ------ -------- ------ ------ --------- --------
Comprehensive
income 20,795
Dividends
($1.00 per
share) (17,956) (17,956)
Stock
issued
under
employee
benefit
plans 6,500 24 84 108
Stock
issued
under
restricted
stock
plan, net 32,500 121 211 (332)
Amortization
of
deferred
compensation
under
restricted
stock plan 2,454 2,454
-------- ------ -------- ------ ------ --------- --------
Balance
February
1, 1997 17,969,977 $67,387 $46,310 $(5,700) $(4,433) $133,473 $237,037
--------- ------ -------- ------ ------ --------- --------
Net
loss (20,896) (20,896)
Currency
translation
adjustment (3,994) (3,994)
-------- ------ -------- ------ ------ --------- --------
Comprehensive loss (24,890)
Dividends
($.85
per share) (15,323) (15,323)
Stock
issued
under
employee
benefit
plans 6,350 24 69 93
Stock
issued
under
restricted
stock
plan, net 73,000 274 657 (931)
Amortization
of
deferred
compensation
under
restricted
stock plan 2,273 2,273
-------- ------ -------- ------ ------ --------- --------
Balance
January
31, 1998 18,049,327 $67,685 $47,036 $(4,358) $(8,427) $97,254 $199,190
-------- ------ -------- ------ ------ --------- --------
Net earnings 23,669 23,669
Currency
translation
adjustment (415) (415)
-------- ------ -------- ------ ------ --------- --------
Comprehensive
income 23,254
Dividends
($.40
per share) (7,223) (7,223)
Stock
issued
under
employee
benefit
plans 27,138 102 326 428
Stock
issued
under
restricted
stock
plan, net 91,875 344 881 (1,225)
Amortization
of deferred
compensation
under
restricted
stock plan 1,525 1,525
-------- ------ -------- ------ ------ --------- --------
Balance
January
30, 1999 18,168,340 $68,131 $48,243 $(4,058) $(8,842) $113,700 $217,174
========== ======= ======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
- ------------------------------------------
Notes to Consolidated Financial Statements
- ------------------------------------------
Note 1: Summary of Significant
Accounting Policies Organization
- ---------------------------------
Organization
- ------------
Brown Group, Inc., (the "Company") founded in 1878, is a footwear retailer
and wholesaler. The Company provides a broad offering of branded, licensed 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 1,289 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, Brown Shoe Sourcing, Pagoda and Canadian
Wholesale divisions, the Company designs, sources and markets footwear to
retail stores domestically and internationally, including department stores,
mass merchandisers and specialty shoe stores. In 1998, approximately 68% of the
Company's sales were at retail, compared to 66% in 1997 and 63% in 1996. See
Note 6 for additional information regarding the Company's business segments.
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 1998, 1997 and 1996 ended on January 30,
1999, January 31, 1998, and February 1, 1997, respectively. Fiscal years 1998,
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.
Cash and Cash Equivalents
- --------------------------
The Company considers all short-term investments with maturities of three months
or less to be cash equivalents.
Inventories
- ------------
All inventories are valued at the lower of cost or market, with 92% of
consolidated inventories using the last-in, first-out (LIFO) method.
Computer Software Costs
- -----------------------
In fiscal 1998, the Company adopted AICPA Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which requires the capitalization of certain costs, including
internal payroll costs, incurred in connection with the development or
acquisition of software for internal use. The adoption of this standard resulted
in an increase in net earnings of approximately $1.3 million or $.07 per diluted
share for fiscal 1998. No restatement of prior year results was required.
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.
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.
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
- -------------------
Basic earnings per share is calculated using only the outstanding shares of
common stock. Diluted earnings per share is calculated using all outstanding
shares, unvested restricted stock and the dilutive effect, if any, of stock
options.
Comprehensive Income
- --------------------
In fiscal 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS No. 130), which reports
Comprehensive Income and its components within the Statement of Consolidated
Shareholders' Equity. Comprehensive Income represents the change in
shareholders' equity during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity except
those resulting from investments by owners and distributions to owners.
Accumulated Other Comprehensive Loss for the Company is composed solely of
cumulative foreign currency translation adjustments.
- ---------------------------------------
Notes
to Consolidated Financial Statements
- ---------------------------------------
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 Accumulated Other Comprehensive Loss section of the Statement
of Consolidated 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.
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.
Financial Instruments
- ---------------------
The Company's policy is to use financial derivatives only to manage exposure to
fluctuations in interest and foreign currency exchange rates.
Gains and losses on contracts that hedge specific foreign currency commitments,
which are primarily for inventory purchases, are deferred and included in the
basis of the transaction when it is consummated. Material gains and losses on
forecasted inventory purchases are recorded in income in the period the value of
the contract changes. Gains and losses on contracts which hedge foreign currency
assets or liabilities in highly inflationary economies are recognized in income
as incurred.
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.
Note 2: Earnings Per Share
- ---------------------------
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net earnings (loss) - Basic
and Diluted earnings
(loss) per share $23,669 $(20,896) $20,315
======== ======== ======
Denominator:
Denominator for basic
earnings (loss) per share 17,692 17,591 17,531
Dilutive effect of unvested
restricted stock and stock
options 251 -- 194
-------- -------- ------
Denominator for diluted
earnings (loss) per share 17,943 17,591 17,725
======== ======== ======
Basic earnings (loss)
per share $ 1.34 $(1.19) $1.16
======== ======== ======
Diluted earnings (loss)
per share $1.32 $(1.19) $1.15
======== ======== ======
</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 was recognized.
Note 3: Retirement and Other Benefit Plans
- -------------------------------------------
The Company's pension plan covers substantially all full-time United States
employees. Under the plan, salaried, management and certain hourly employees'
pension benefits are based on the employee's highest consecutive five years of
compensation during the ten years before retirement; hourly employees' and union
members' benefits are based on stated amounts for each year of service. The
Company's funding policy for all plans is to make the minimum annual
contributions required by applicable regulations.
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 table sets forth the plans' changes in benefit obligations and
plan assets and amounts recognized in the Company's Consolidated Balance Sheets
at January 30, 1999 and January 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Other
Pension Benefits Postretirement Benefits
---------------------- ----------------------
1998 1997 1998 1997
-------- ------- ------ ------
<S> <C> <C> <C> <C>
Net benefit
obligation at
beginning of year $100,275 $91,209 $6,887 $7,779
Service cost 4,009 3,494 4 4
Interest cost 7,300 6,876 447 523
Plan participants'
contributions -- -- 380 414
Plan amendments 1,225 -- -- --
Actuarial (gain) loss 16,101 5,743 164 (283)
Gross benefits paid (8,006) (7,047) (1,191) (1,550)
-------- ------- ------ ------
Net benefit obligation
at end of year $120,904 $100,275 $6,691 $6,887
-------- ------- ------ ------
Fair value of plan
assets at beginning
of year $146,722 $124,793 $ -- $ --
Actual return on
plan assets 18,960 28,862 -- --
Employer contributions 31 114 811 1,136
Plan participants'
contributions -- -- 380 414
Gross benefits paid (8,006) (7,047) (1,191) (1,550)
-------- ------- ------ ------
Fair value of plan
assets at end of year $157,707 $146,722 $ -- $ --
-------- ------- ------ ------
Funded status
at end of year $36,803 $46,447 $(6,691) $(6,887)
Unrecognized net
actuarial gain (2,520) (10,845) (1,589) (2,692)
Unrecognized prior
service cost 542 (667) (2) (11)
Unrecognized net
transition asset -- (547) -- --
-------- ------- ------ ------
Net amount recognized
at end of year $34,825 $34,388 $(8,282) $(9,590)
======== ======= ====== =======
Amounts recognized in
the consolidated balance
sheets consist of:
Prepaid benefit cost $41,849 $39,824 $ -- $ --
Accrued benefit cost (7,024) (5,436) (8,282) (9,590)
-------- ------- ------ ------
Net amount recognized
at end of year $34,825 $34,388 $(8,282) $(9,590)
======== ======= ====== =======
</TABLE>
Net periodic benefit cost (income) for 1998, 1997 and 1996 included the
following components (in thousands):
<TABLE>
<CAPTION>
Other
Pension Benefits Postretirement Benefits
---------------------- ------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost $4,009 $3,494 $3,633 $4 $4 $36
Interest cost 7,300 6,876 7,650 447 523 568
Expected return
on assets (11,884) (10,759) (12,452) -- -- --
Amortization of:
Actuarial
(gain) loss -- -- 203 (939) (1,321) (1,601)
Prior service cost 16 74 46 (9) (31) --
Transition asset (547) (635) (781) -- -- --
Settlement cost 700 -- 1,507 -- -- --
---- ---- ---- ---- ---- ----
Total net
periodic
benefit income $(406) $(950) $(194) $(497) $(825) $(997)
===== ===== ===== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
---------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted-average
assumptions:
Discount rate 6.25% 7.00% 6.25% 7.00%
Expected return
on plan assets 9.50% 9.50% n/a n/a
Rate of compensation
increase 4.50% 4.50% n/a n/a
</TABLE>
For measurement purposes, a 6.0% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1998. The rate was assumed to
decrease gradually to 5.0% in 2001 and remain at that level thereafter. A
one-percentage-point change in assumed health care cost trend rates would not
have a material impact on service and interest cost and the postretirement
benefit obligation.
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were $9.4 million, $7.0 million and $0, respectively, as of
January 30, 1999 and $6.5 million, $5.3 million and $0 as of January 31, 1998.
The Company's defined contribution 401(k) plan covers salaried, management and
certain hourly employees. 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 $2.8 million in 1998, $2.0
million in 1997 and $2.0 million in 1996.
Note 4: Restructuring Charges
- ------------------------------
Included in net loss 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 included $14.7
million as reflected in cost of goods sold for inventory markdowns 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) included $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. The total
charge resulted in a reduction in earnings of $1.76 per basic share for fiscal
1997.
In fiscal 1998, the Company provided $2.0 million, which is reflected in other
expense, to cover additional costs. As of January 30, 1999, the withdrawal from
the division's operations has been substantially completed, as virtually all of
the inventory has been sold and all licenses either terminated or assigned to
other parties.
Through January 30, 1999, $22.3 million of the reserve has been utilized: $10.6
million for inventory markdowns; $3.7 million of bad debt write-offs and royalty
agreements shortfall; $1.9 million for severance and benefit costs; $2.1 million
for other asset write-offs and costs; and $4.0 million on the utilization of tax
provisions for cash repatriations made in fiscal 1998.
At January 30, 1999, a $10.7 million remaining reserve will be primarily
utilized in fiscal 1999 to cover inventory markdowns, severance, various asset
write-offs and an outstanding cumulative translation adjustment amount. The
remaining reserve also includes approximately $4.0 million for income taxes due
on future cash repatriations as cash becomes available.
Note 5: Income Taxes
- --------------------
The components of earnings (loss) before income taxes consisted of domestic
earnings before income taxes of $25.2 million, $14.1 million, and $10.7 million
in 1998, 1997 and 1996, respectively, and foreign earnings (loss) before income
taxes of $12.4 million, $(16.3) million, and $16.5 million in 1998, 1997 and
1996, respectively.
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ -----
<S> <C> <C> <C>
Federal
Currently payable $9,373 $6,158 $(523)
Deferred (662) 7,313 2,323
----- ------ -----
8,711 13,471 1,800
State 1,626 614 1,052
Foreign 3,597 4,643 4,058
----- ------ -----
Total income
tax expense $13,934 $18,728 $6,910
======= ======= ======
</TABLE>
The Company made net tax payments, including federal, state and foreign taxes,
of $13.7 million, $4.9 million and $6.8 million in fiscal 1998, 1997 and 1996,
respectively.
The differences between the tax expense (benefit) 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>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Income taxes at statutory rate $13,161 $(759) $9,529
State income taxes,
net of federal
tax benefit 1,057 399 626
Foreign tax in excess of
(less than) domestic rate (2,913) 574 (1,475)
Foreign operating losses
with no benefit provided (A) 2,347 9,390 --
Provision for foreign cash
repatriation -- 8,000 --
Reversal of valuation allowance -- (1,000) (2,300)
Other 282 2,124 530
------- ------ ------
$13,934 $18,728 $6,910
======= ======= ======
</TABLE>
(A) 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>
January 30, January 31,
1999 1998
---------- ----------
<S> <C> <C>
Deferred Tax Assets
Employee benefits, compensation,
and insurance $7,364 $8,874
Allowance for doubtful accounts 3,289 2,899
Inventory capitalization and
inventory reserves 4,185 5,183
Postretirement and postemployment
benefit plans 3,525 3,980
Tax credits and loss carryforwards -- 4,319
Other 9,703 10,131
---------- ----------
Total deferred tax assets 28,066 35,386
Deferred Tax Liabilities
Excess depreciation (1,874) (4,080)
Retirement plans (12,319) (12,140)
LIFO inventory valuation (8,663) (9,325)
Other (1,915) (1,758)
---------- ----------
Total deferred tax liabilities (24,771) (27,303)
Net deferred tax asset $3,295 $8,083
========== ==========
</TABLE>
No deferred tax valuation allowance was recorded at the end of fiscal 1998 based
on management's assessment that it is more likely than not that all the net
deferred tax assets will be realized through future taxable earnings. In fiscal
1998, the Company utilized all cumulative net operating loss carryforwards and
other tax credits for federal income tax purposes.
As of January 30, 1999, no deferred taxes have been provided on the
undistributed earnings of the Company's Canadian subsidiary. It is anticipated
that no additional United States tax would be incurred if the accumulated
Canadian earnings were distributed given the current United States and Canadian
income tax rates. The accumulated unremitted earnings from the Company's other
foreign subsidiaries, as of January, 30, 1999, on which deferred taxes have not
been provided are indefinitely reinvested. In the event that these other foreign
entities' earnings were distributed, it is estimated that U.S. taxes, net of
available foreign tax credits, of approximately $20.7 million would be due. This
liability could be reduced by the $4.0 million liability remaining from the
Pagoda International marketing division restructuring charge. At year-end,
management anticipates that the remaining liability will be utilized for income
taxes due on future cash repatriations as cash becomes available.
Note 6: Business Segment Information
- -------------------------------------
The Company has four reportable segments: Famous Footwear, Wholesale Operations,
Naturalizer Retail, and Pagoda International.
Famous Footwear, which represents the Company's largest operating unit, consists
of an 827-store chain that sells branded footwear for the entire family.
The Wholesale Operations include the Brown Branded, Brown Shoe Sourcing, Pagoda
and Canada Wholesale divisions. These operating units source and market branded,
licensed and private label footwear primarily to mass-merchandisers, department
stores and company-owned concept stores and Famous Footwear.
The Naturalizer Retail specialty store operations include the 331 Naturalizer
Retail stores in the United States and the 131 stores in Canada.
Pagoda International is the Company's international marketing division that sold
footwear products to retailers in Europe, Latin America and the Far East. In
fiscal 1997, the Company made a decision to reduce its investment in this
division as a result of excessive inventories and declining performance; and by
the end of 1998, the liquidation of the division was substantially completed.
- --------------------------------------
Notes
to Consolidated Financial Statements
- ---------------------------------------
The "Other" segment includes the Scholze Tannery business and Corporate
assets and general and administrative expenses, which are not allocated to the
operating units.
The Company's reportable segments are operating units that market to different
customers and are each managed separately as they distribute their products on a
retail or wholesale basis. An operating segment's performance is evaluated and
resources allocated based on operating profit. Operating profit represents gross
profit less general and administrative expenses and other operating income or
expense. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies. Intersegment
sales are generally recorded at a profit to the selling division. All
intersegment profits related to inventory on hand at the purchasing division are
eliminated against the earnings of the selling division (in thousands):
<TABLE>
<CAPTION>
Natural-
Famous Wholesale izer Pagoda
Footwear Operations Retail International Other Totals
--------- ---------- ------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Fiscal
1998
External
sales $861,329 $455,935 $187,201 $25,825 $8,240 $1,538,530
Intersegment
sales -- 188,969 -- -- -- 188,969
Depreciation
and
amortization 13,902 5,961 3,972 187 2,921 26,943
Operating
profit
(loss) 47,235 33,480 784 (7,307)(13,293) 60,899
Operating
segment
assets 316,628 208,779 76,896 9,872 43,057 655,232
Capital
expenditures 14,794 1,968 5,864 -- 121 22,747
Fiscal
1997
External
sales $849,917 $448,369 $181,622 $78,330 $8,964 $1,567,202
Intersegment
sales -- 189,463 -- -- -- 189,463
Depreciation
and
amortization 14,697 4,064 3,800 353 3,772 26,686
Restructuring
charges -- -- -- 23,000 -- 23,000
Operating
profit
(loss) 32,047 31,951 2,264 (36,583) (8,604) 21,075
Operating
segment
assets 322,113 229,767 71,998 31,306 39,804 694,988
Capital
expenditures 12,259 3,028 5,860 432 148 21,727
Fiscal 1996
External
sales $781,319 $463,328 $177,551 $93,149 $9,705 $1,525,052
Intersegment
sales -- 174,011 -- -- -- 174,011
Depreciation
and
amortization 14,354 3,912 3,496 182 3,942 25,886
Operating
profit
(loss) 24,984 33,708 2,564 (5,131)(10,047) 46,078
Operating
segment
assets 320,231 240,441 63,723 50,432 47,548 722,375
Capital
expenditures 13,750 1,947 4,517 464 366 21,044
--------- ---------- ------- ---------- ------ ----------
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Reconciliation of operating
profit to consolidated
pretax earnings (loss):
Total operating profit for
reportable segments $74,192 $29,679 $56,125
Other segment (13,293) (8,604) (10,047)
Interest expense 19,383 21,756 19,327
Non-operating other
(income) expense 3,913 1,487 (474)
------- -------- -------
Total consolidated pretax
earnings (loss) $37,603 $(2,168) $27,225
======= ======== =======
</TABLE>
For geographic purposes, the 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 A first-cost A 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 net sales and long-lived assets by geographic area
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Net Sales
United States $1,221,904 $1,208,878 $1,137,887
Far East 223,986 242,100 278,371
Canada 74,503 76,716 76,620
Latin America,
Europe and Other 25,728 66,583 79,891
Inter-Area Transfers (7,591) (27,075) (47,717)
--------- ---------- ----------
$1,538,530 $1,567,202 $1,525,052
========== ========== ==========
Long-Lived Assets
United States $127,636 $122,840 $121,522
Far East 12,622 15,332 16,297
Canada 10,894 11,080 12,484
Latin America,
Europe and Other 6,697 7,206 7,297
--------- ---------- ----------
$157,849 $156,458 $157,600
========== ========== ==========
</TABLE>
Long-lived assets consist primarily of property and equipment, prepaid pension
costs, goodwill, trademarks and other assets.
Note 7: Inventories
- -------------------
Inventories are valued at the lower of cost or market determined principally by
the last-in, first-out (LIFO) method. If the first-in, first-out (FIFO) method
had been used, inventories would have been $13.4 million and $15.6 million
higher at January 30, 1999 and January 31, 1998, respectively.
During fiscal 1996, 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 net income
by $2.6 million.
Note 8: Property and Equipment
- ------------------------------
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
---------- ----------
<S> <C> <C>
Land and buildings $30,338 $29,927
Leasehold improvements 48,128 47,719
Furniture, fixtures and equipment 138,588 134,684
---------- ----------
217,054 212,330
Allowances for depreciation
and amortization (134,876) (129,586)
---------- ----------
$82,178 $82,744
========== =========
</TABLE>
Under 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," charges included in selling and administrative
expense for impaired assets of $.1 million, $.7 million and $.7 million were
recognized in fiscal 1998, 1997 and 1996, respectively. Fair value was based on
estimated future cash flows to be generated by the retail store, discounted at a
market rate of interest.
Note 9: Long-Term and Short-Term Financing Arrangements
- -------------------------------------------------------
Long-term debt, including capitalized lease obligations, net of unamortized
discounts, consists of the following (in thousands):
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
---------- ----------
<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 18,545 18,543
7.125% Debentures due 2003 10,000 10,000
Capitalized lease obligations 3,486 3,484
---------- ----------
$197,031 $197,027
========== ==========
</TABLE>
Maturities of long-term debt and capitalized lease obligations for 1999 through
2003 are: 1999--$25.0 million; 2000--$10.0 million; 2001--$10.0 million;
2002--$28.6 million; and 2003--$20.0 million.
In fiscal 1996, the Company issued $100 million in 9.5% Senior Notes due 2006.
These Notes are redeemable at the option of the Company, in whole or in part, at
any time on or after October 15, 2001.
The Company's revolving bank Credit Agreement, which provides $155.0 million in
committed working capital and letter of credit financing, expires January 2001.
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 Bank of
America corporate base rate, or the Federal funds rate. A facility fee, .375% at
January 30, 1999, based on the Company's leverage ratio is payable on the entire
amount of the facility. At January 30, 1999, the Company had no short-term
borrowings outstanding and approximately $16.1 million of letters of credit
outstanding under the revolving bank Credit Agreement.
The Company's Canadian operations maintain uncommitted lines of credit totaling
approximately $5.3 million, with letters of credit outstanding of approximately
$2.2 million as of January 30, 1999.
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. In fiscal 1998, the Company amended its revolving
bank Credit Agreement and 7.36% Senior Notes which increased the maximum levels
of capital expenditures and extended the revolving bank Credit Agreement by one
year.
The maximum amount of short-term borrowings under the revolving bank credit
arrangements at the end of any month was $76.0 million in 1998 and $65.0 million
in 1997. The average short-term borrowings during the year were $21.5 million in
1998 and $47.0 million in 1997. The weighted average interest rates approximated
7.1% in 1998 and 7.7% in 1997.
Cash payments of interest for fiscal 1998, 1997, and 1996 were $20.1 million,
$22.5 million, and $16.5 million, respectively.
Note 10: Leases
- ---------------
The Company leases substantially all of its retail locations and certain other
equipment and facilities. Over 60 percent 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>
1998 1997 1996
--------- ---------- ---------
<S> <C> <C> <C>
Minimum payments $87,473 $86,132 $82,829
Contingent payments 2,489 2,665 2,776
--------- ---------- ---------
$89,962 $88,797 $85,605
========= ========== =========
</TABLE>
Future minimum payments under noncancelable operating leases with an initial
term of one year or more were as follows at January 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Operating Leases
---------------
<S> <C>
1999 $81,694
2000 70,121
2001 60,084
2002 48,716
2003 36,757
Thereafter 85,952
---------------
Total minimum lease payments $383,324
===============
</TABLE>
The Company is contingently liable for lease commitments of approximately $45
million which primarily relate to the Cloth World and Meis specialty retailing
chains which were sold.
Note 11: Financial Instruments
- ------------------------------
The Company uses 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 uses foreign exchange instruments to hedge foreign currency
transactions on a continuous basis for periods consistent with its committed
exposures. The terms of these instruments 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 instruments.
The United States dollar equivalent of contractual amounts of the Company's
financial instruments consist of the following (in thousands):
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
---------- ----------
<S> <C> <C>
Deliverable Financial Instruments
Canadian Dollars $12,800 $7,000
French Francs 8,500 9,100
Italian Lira 5,100 11,700
Other Currencies 1,500 1,500
Non-Deliverable Financial Instruments
New Taiwanese Dollars 7,800 7,400
Brazilian Real 4,000 13,100
Other Currencies 1,000 2,700
---------- ----------
$40,700 $52,500
========== ==========
</TABLE>
The unrealized gains or losses related to these instruments, based on
dealer-quoted prices, were a $.3 million loss at January 30, 1999 and a $.1
million gain at January 31, 1998.
Realized gains and losses on financial instruments 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 financial instruments hedging
forecasted purchases are recorded in income in the period the value of the
instruments change. Gains and losses on financial instruments which hedge
foreign currency assets or liabilities in highly inflationary economies, which
are designed to protect earnings, are recognized in income as incurred.
The Company had no interest rate derivative instruments outstanding at January
30, 1999 and January 31, 1998.
Note 12: Fair Value of
Financial Instruments
- ---------------------
The carrying amounts and fair values of the Company's financial instruments at
January 30, 1999 and January 31, 1998 are (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Liabilities
Long-Term Debt,
including current
maturities $197,031 $198,475 $197,027 $201,321
======== ======== ======== ========
</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 significant
concentrations 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 primarily across the
United States and Canada. 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
activities at several sites. The Company is remediating a residential area
adjacent to owned property in Colorado, under the oversight of Colorado
authorities. This residential area has been affected by types of solvents that
previously were used at the facility. Monitoring of the residential area
continues. The Company also is evaluating remediation alternatives for the owned
property. During 1998, the Company incurred charges of $2.3 million related to
this site.
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 25 years.
In addition, various federal and state authorities have identified the Company
as a potentially responsible party for remediation at certain landfills from the
sale or disposal of solvents and other by-products from the closed tannery and
shoe manufacturing facilities.
Based on information currently available, the Company is carrying an accrued
liability of $4.2 million as of January 30, 1999, to complete the clean-up at
all sites. The ultimate cost may vary.
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.
The Company is also involved in legal proceedings and litigation arising in the
ordinary course of business. In the opinion of management, after consulting with
legal counsel, the outcome of such proceedings and litigation currently pending
will not have a materially adverse effect on the Company's results of operations
or financial position.
In conjunction with the withdrawal from the Pagoda International business, the
Company is contingently liable for the performance of certain successor
licensees in Europe and Brazil. In addition, the Company has various tax and
other assessments outstanding in Brazil, which currently are being appealed and
has outstanding notes receivable from an Argentinean third party from the sale
of a portion of the division's business. At January 30, 1999, these outstanding
items total approximately $8 million.
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 30, 1999 and January 31, 1998, there were
18,168,340 shares and 18,049,327 shares, net of 3,837,557 shares and 3,956,570
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 6800 shareholders of record at
April 3, 1999.
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 grant. Since the stock appreciation rights
are issued in tandem with stock options, the exercise of either cancels the
other. As of January 30, 1999, 440,220 additional shares of common stock were
available to be granted in the form of options or restricted stock.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options instead of the alternative fair
value accounting provided for under Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation." Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
1997 and 1996, respectively: risk-free interest rates of 5.2%, 6.0% and 6.6%;
dividend yields of 2.4%, 4.3% and 5.9%; volatility factors of the expected
market price of the Company's common stock of .34, .33 and .29; and a
weighted-average expected life of the option of 7 years. The weighted average
fair value of options granted during 1998, 1997 and 1996 was $5.81, $4.35 and
$3.53 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ---------
<S> <C> <C> <C>
Net income (loss)
as reported $23,669 $(20,896) $20,315
Pro forma net
income (loss) 22,641 (21,513) 19,957
Basic earnings (loss)
per share as reported 1.34 (1.19) 1.16
Pro forma basic
earnings (loss) per share 1.28 (1.22) 1.14
Diluted earnings (loss)
per share as reported 1.32 (1.19) 1.15
Pro forma diluted earnings
(loss) per share 1.26 (1.22) 1.13
--------- ---------- ---------
</TABLE>
The following summary sets forth the Company's stock option and stock
appreciation rights activity for the three years ended January 30, 1999:
<TABLE>
<CAPTION>
Number of Weighted
---------------------- Average
Option Appreciation Exercise
Shares Units Price
------- ------------ --------
<S> <C> <C> <C>
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
Granted 371,000 82,724 17
Exercised (15,250) (22,330) 15
Terminated (252,574) (16,629) 24
------- ------------ --------
Outstanding
January 30, 1999 1,445,094 256,038 $17
========= ============ =========
</TABLE>
Following is a summary of stock options outstanding as of January 30, 1999,
which have exercise prices ranging from $14 to $38:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Exercise Remaining
Options Price Life
---------- -------- ---------
<S> <C> <C> <C>
Options Outstanding:
Price under $17 1,242,399 $16 8
Price $17 or over 202,695 26 5
---------- -------- ---------
1,445,094 $17 8
========== ======== =========
Options Exercisable:
Price under $17 373,100 $15 8
Price $17 or over 177,320 27 5
---------- -------- ---------
550,420 $19 7
========== ======== =========
</TABLE>
Notes
to Consolidated Financial Statements
- --------------------------------------
At January 31, 1998, 596,294 options with a weighted average exercise price of
$21 were exercisable. At February 1, 1997, 354,121 options with a weighted
average exercise price of $28 were exercisable.
Under the Company's restricted stock program, common stock of the Company may be
granted at no cost to certain officers and key employees. Plan participants are
entitled to cash dividends and to vote their respective shares. Restrictions
limit the sale or transfer of these shares during an eight-year period whereby
the restrictions lapse on 50% of these shares after 4 years, 25% after 6 years
and the remaining 25% after 8 years. Upon issuance of stock under the plan,
unearned compensation equivalent to the market value at the date of grant is
charged to shareholders' equity and subsequently amortized to expense over the
eight-year restriction period. Restricted shares granted, net of forfeitures,
were 91,875, 73,000 and 32,500 in 1998, 1997 and 1996, respectively, and
compensation expense was $1.5 million, $2.3 million and $2.5 million in 1998,
1997 and 1996, respectively.
Note 17: Supplementary Information
- ----------------------------------
Balance Sheet
- -------------
Cash equivalents of $37.7 million and $37.6 million at January 30, 1999 and
January 31, 1998, respectively, are stated at cost which approximates fair
value.
Statement of Consolidated Earnings
- ----------------------------------
Advertising costs totaled $54.9 million, $61.0 million,
and $55.9 million in 1998, 1997 and 1996, respectively. Other Expense (Income)
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest income $(1,730) $(1,427) $(1,202)
Restructuring charges 1,950 1,000 --
Royalty income (1,377) (2,127) (2,702)
Amortization
of intangibles 3,488 1,731 1,551
Environmental charges 2,344 -- --
Other, net (198) 371 1,012
--------- --------- ---------
Total $4,477 $(452) $(1,341)
========= ========= =========
</TABLE>
Note 18: Impact of New Accounting Standards
- -------------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). The statement is effective for the Company
beginning fiscal 2000. SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in Other
Comprehensive Income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company has not yet assessed what the impact of SFAS
133 will be on the Company's future earnings or financial position.
Note 19: 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 30,
1999 and January 31, 1998, and the related condensed consolidating statements of
earnings and cash flows for each of the three years in the period ended January
30, 1999 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 (in thousands).
- ------------------------------------------------------------
Condensed Consolidating Balance Sheet as of January 30, 1999
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ---------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Assets
- ------
Current Assets
Cash and cash
equivalents $12,186 $4,738 $28,608 $ -- $45,532
Receivables,
net 35,779 10,823 21,213 -- 67,815
Inventory,
net 52,458 300,009 22,358 (12,551) 362,274
Other current
assets (5,597) 17,456 5,511 4,392 21,762
-------- ---------- ------------- ------------ ----------
Total Current
Assets 94,826 333,026 77,690 (8,159) 497,383
-------- ---------- ------------- ------------ ----------
Other assets 45,723 18,076 11,986 (114) 75,671
Property and
equipment,
net 15,156 60,200 6,822 -- 82,178
Investment in
subsidiaries 229,896 38,386 3,811 (272,093) --
-------- ---------- ------------- ------------ ----------
Total Assets $385,601 $449,688 $100,309 $(280,366) $655,232
======== ========== ============= =========== ===========
Liabilities and
Shareholders'
Equity
- ---------------
Current
Liabilities
Notes payable $ -- $ -- $ -- $ -- $ --
Accounts
payable 5,745 92,943 26,233 -- 124,921
Accrued
expenses 27,145 51,023 15,546 (3,633) 90,081
Income taxes (5,042) 10,913 564 7 6,442
Current
maturities
of long-term
debt 25,000 -- -- -- 25,000
-------- ---------- ------------- -------- ----------
Total Current
Liabilities 52,848 154,879 42,343 (3,626) 246,444
-------- ---------- ------------- --------- ----------
Long-term debt
and capitalized
lease
obligations 172,031 -- 41 (41) 172,031
Other
liabilities 20,130 (716) 238 (69) 19,583
Intercompany
payable
(receivable) (76,582) 58,029 17,976 577 --
Shareholders'
equity 217,174 237,496 39,711 (277,207) 217,174
-------- ---------- ------------- ------------ ----------
Total Liabilities
and Shareholders'
Equity $385,601 $449,688 $100,309 $(280,366) $655,232
======== ========== ============= =========== ===========
</TABLE>
Condensed Consolidating Statement of Earnings for the
Fiscal Year Ended January 30, 1999
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ---------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Net Sales $262,498 $1,223,024 $326,529 $(273,521) $1,538,530
Cost of
goods sold 184,622 752,497 261,592 (273,521) 925,190
-------- ---------- ------------- ------------ ----------
Gross profit 77,876 470,527 64,937 -- 613,340
Selling and
administrative
expenses 74,129 425,959 53,426 (1,637) 551,877
Interest
expense 19,287 5 91 -- 19,383
Intercompany
interest
(income)
expense (14,123) 14,067 56 -- --
Other (income)
expense, net (310) 279 2,871 1,637 4,477
Equity in
(earnings)
loss of
subsidiaries (24,829) (5,980) -- 30,809 --
-------- ---------- ------------- ------------ ----------
Earnings (Loss)
Before Income
Taxes 23,722 36,197 8,493 (30,809) 37,603
Income tax
provision (53) (11,368) (2,513) -- (13,934)
-------- ---------- ------------- ------------ ----------
Net Earnings
(Loss) $23,669 $24,829 $5,980 $(30,809) $23,669
======== ========== ============= =========== ===========
</TABLE>
- ------------------------------------------
Notes to Consolidated Financial Statements
- ------------------------------------------
Condensed Consolidating Statement of Cash Flow for the
Fiscal Year Ended January 30, 1999
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ---------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Net Cash
Provided
(Used) by
Operating
Activities $37,645 $51,971 $(6,925) $(3,811) $78,880
Investing
Activities:
Capital
expenditures (837) (19,717) (2,193) -- (22,747)
Other 13 25 20 -- 58
-------- ---------- ------------- ------------ ----------
Net Cash Used
by Investing
Activities (824) (19,692) (2,173) -- (22,689)
Financing
Activities:
Decrease in
short-term
notes
payable (54,000) -- -- -- (54,000)
Proceeds from
issuance of
common stock 428 -- -- -- 428
Dividends
paid (7,223) -- -- -- (7,223)
Intercompany
financing 34,712 (34,384) (4,179) 3,851 --
-------- ---------- ------------- ------------ ----------
Net Cash
Provided
(Used) by
Financing
Activities (26,083) (34,384) (4,179) 3,851 (60,795)
-------- ---------- ------------- ------------ ----------
Increase
(Decrease)
in Cash and
Cash
Equivalents 10,738 (2,105) (13,277) 40 (4,604)
Cash and Cash
Equivalents at
Beginning of
Period 1,448 6,843 41,885 (40) 50,136
-------- ---------- ------------- ------------ ----------
Cash and Cash
Equivalents at
End of
Period $12,186 $4,738 $28,608 $ -- $45,532
======== ========== ============= =========== ===========
</TABLE>
Condensed Consolidating Balance Sheet as of January 31, 1998
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
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 and 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>
- -----------------------------------------------------------------------
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
administrative
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 (income)
expense,
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)
======== ========== ============= =========== ===========
- ------------------------------------------------------
Condensed Consolidating Statement of Cash Flow for the
Fiscal Year Ended January 31, 1998
- ------------------------------------------------------
</TABLE>
<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
expenditures (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)
Intercompany
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>
- ------------------------------------------
Notes to Consolidated Financial Statements
- ------------------------------------------
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
administrative
expenses 72,660 385,320 64,768 (1,195) 521,553
Interest
expense 18,897 235 195 -- 19,327
Intercompany
interest
(income)
expense (14,097) 14,131 (34) -- --
Other
(income)
expense, net (4,393) 153 1,555 1,344 (1,341)
Equity
in (earnings)
of
subsidiaries (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
Activities $(24,421) $27,197 $4,595 $(4,101) $3,270
Investing
Activities:
Capital
expenditures (1,551) (17,338) (2,155) -- (21,044)
Other 1,387 4 23 -- 1,414
-------- ---------- ------------- ------------ ----------
Net Cash Used by
Investing
Activities (164) (17,334) (2,132) -- (19,630)
Financing Activities:
Decrease in
short-term notes
payable (50,000) -- -- -- (50,000)
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)
Intercompany
financing 4,758 (12,519) 1,461 6,300 --
-------- ---------- ------------- ------------ ----------
Net Cash
Provided
(Used) by
Financing
Activities 24,746 (12,519) 1,461 6,300 19,988
-------- ---------- ------------- ------------ ----------
Increase
(Decrease)
in Cash and
Cash
Equivalents 161 (2,656) 3,924 2,199 3,628
Cash and Cash
Equivalents at
Beginning of
Period (291) 8,966 26,383 -- 35,058
-------- ---------- ------------- ------------ ----------
Cash and Cash
Equivalents at
End of
Period $(130) $6,310 $30,307 $2,199 $38,686
======== ========== ============= =========== ===========
</TABLE>
- -------------------------------
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 four outside
directors in 1998. 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/ Ronald A. Fromm /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 30, 1999 and January 31, 1998, and the related statements of
consolidated earnings, shareholders' equity, and cash flows for each of the
three years in the period ended January 30, 1999. 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 30, 1999 and January 31, 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 30, 1999 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1998 the
Company changed its method of accounting for the costs of computer software
developed or obtained for internal use.
/s/ Ernst & Young, LLP
- ----------------------
St. Louis, Missouri
March 4, 1999
- ------------------------------------------
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 30, 1999 and January 31, 1998.
<TABLE>
<CAPTION>
Quarters
----------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
(13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks)
<S> <C> <C> <C> <C>
1998
Net Sales $402,309 $383,618 $411,976 $340,627
Gross Profit 155,324 154,002 163,754 140,260
Net Earnings 3,871 4,295 12,898 2,605
Per Share of Common Stock:
Net Earnings - Basic $ .22 $ .24 $ .73 $ .15
Net Earnings - Diluted .22 .24 .72 .14
Dividends Paid .10 .10 .10 .10
Market Value:
High 16 19 7/8 16 7/8 18 7/8
Low 14 1/4 15 7/8 12 7/8 15 7/8
---------- ---------- ---------- ----------
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
---------- ---------- ---------- ----------
</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.
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, 1998, the Company purchased, for a three-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 three-year term is $312,000. To date, no claims have been paid
under any policy of directors' and officers' liability insurance.
- ---------------------------------
Leadership
Operating Executives and Officers
- ---------------------------------
Executive Management
- --------------------
Ronald A. Fromm*
Chairman of the Board,
President, Chief Executive
Officer and President--
Brown Shoe Company
Brian C. Cook*
Executive Vice President and
President--Famous Footwear
Gary M. Rich*
President, Pagoda division
Harry E. Rich*
Executive Vice President and
Chief Financial Officer
David H. Schwartz*
President, Brown Shoe Sourcing
division
Gregory J. Van Gasse*
President, Brown Branded
division
Officers and
Operating Management
- --------------------
James W. Anderson
Vice President--Finance,
Pagoda division
Theodore L. Anderson*
Senior Vice President--
Retail Sales and Operations,
Famous Footwear
Carl H. Bengtson
Senior Vice President--Latin
American/European Operations,
Brown Shoe Sourcing division
Donald L. Damask
Senior Vice President--
Marketing, Brown Branded
division
William A. Dandy*
Senior Vice President--
Marketing, Famous Footwear
Earl B. Fischer
Vice President--Information
Systems, Famous Footwear
Robert D. Gibbs
Vice President--Distribution,
Brown Shoe Company
Kenneth W. Gilbertson
President--Canada Wholesale
division
Charles C. Gillman*
Senior Vice President and
Director--Far East Operations,
Brown Shoe Sourcing division
Dennis F. Hadican
Vice President and General
Manager--Westport,
Pagoda division
David E. Hanebrink
Vice President and General
Manager--Men's, Boys' and
Athletic, Pagoda division
Janet M. Hardyman
Vice President--Human
Resources, Famous Footwear
Richard P. Kuether
Vice President--Logistics,
Famous Footwear
J. Martin Lang*
Senior Vice President and
Chief Financial Officer,
Famous Footwear
Sherman H. Lasser
Senior Vice President--Sales,
Brown Branded division
Byron D. Norfleet*
Senior Vice President and
General Manager--Naturalizer
Retail division
Robert D. Pickle
Vice President, General Counsel
and Corporate Secretary
Sharon L. Poston
Vice President and General
Manager--Naturalsport,
Brown Branded division
James E. Preuss
Director--Human Resources,
Brown Shoe Company
Richard T. Price
Vice President--Management
Information Systems, Brown
Shoe Company
James M. Roe*
Senior Vice President--
Real Estate, Famous Footwear
Andrew M. Rosen*
Senior Vice President and
Treasurer
Daniel F. Ruderer
Vice President--Store Design
and Visual Merchandising,
Famous Footwear
Jeff N. Sanders
Senior Vice President and
General Manager--Life Stride,
Brown Branded division
Mark J. Schauster
Senior Vice President and
Director of Product Development,
Brown Branded division
Richard C. Schumacher*
Vice President and Controller
Paul M. Shapiro
Vice President and General
Manager--Children's and
Children's Better Brands,
Pagoda division
Alan A. Silverstein
Senior Vice President--
Women's, Pagoda division
Mary Sylvia Siverts
Vice President--Public Affairs
Robert E. Stadler, Jr.
Vice President--Finance and
Operations, Brown Shoe
Company
Jean Guy Vaudry
President--Canada Retail
division
George J. Zelinsky*
Senior Vice President and
General Merchandise Manager,
Famous Footwear
Spencer E. Zimmerman
Senior Vice President and
General Manager--Naturalizer,
Brown Branded division
* Member of the Company's
Operating Committee
- ---------------
Board
of Directors
- --------------
Ronald A. Fromm (1)
- -------------------
Chairman of the Board,
President and
Chief Executive Officer
B. A. Bridgewater, Jr.
- ----------------------
Retired Chairman of the Board
Joseph L. Bower (3,4)
- ---------------------
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,
GenAmerica Corporation
John Peters MacCarthy (2,3)
- ---------------------------
Retired Chairman of the Board
and Chief Executive Officer,
Boatmen's Trust Company
John D. Macomber
- ----------------
Director of various corporations
William E. Maritz
- -----------------
Chairman of the Board and
former Chief Executive Officer,
Maritz Inc., a motivation, travel,
training, communications and
marketing research services
company
General Edward C. Meyer
- -----------------------
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 (1,3,4)
- -----------------------
Chairman, Clark Enterprises,
Inc., operator of the Kiel Center
Entertainment Complex and the
St. Louis Blues Hockey Club
Effective May 27, 1999: *
- ------------------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
(4) Member of the Governance and
Nominating Committee
* Upon the retirements of Messrs.
Bridgewater, Macomber, Maritz and
Meyer from the Board of Directors
- ---------------
Investor
Information
- ---------------
Corporate Headquarters
- ----------------------
Brown Group, Inc.
8300 Maryland Avenue
St. Louis, Missouri 63105-3693
Mailing Address:
Post Office Box 29
St. Louis, Missouri 63166-0029
Telephone: (314) 854-4000
Fax: (314) 854-4274
E-mail: [email protected]
Internet Address
- ----------------
http://www.browngroup.com
Annual Meeting
- --------------
11:00 a.m. Central Time
Thursday, May 27, 1999
Brown Group, Inc.
Corporate Headquarters
Number of Employees
- -------------------
11,000
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
- ----------------------
6,800
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.
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.
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
Post Office Box 29
St. Louis, Missouri 63166-0029
(314) 854-4000
- -
On May 27, 1999, shareholders will vote on a proposal recommended by the Board
of Directors to change the name of the company to Brown Shoe Company, Inc.
- -
Famous Footwear
Naturalizer
Life Stride
Naturalsport
Dr. Scholl's
Disney
Buster Brown
Barbie
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 30, 1999
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
PIC International Corporation Cayman Islands
PLD, Inc. North Carolina
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
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
EXHIBIT 23
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 4, 1999, included in the 1998 Annual Report to
Shareholders of Brown Group, Inc.
Our audits also included the financial statement schedule of
Brown Group, Inc. 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 4,
1999, with respect to the consolidated financial statements
and schedule of Brown Group, Inc. included or incorporated by
reference in the Annual Report (Form 10-K) for the year ended
January 30, 1999:
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, as amended
Form S-8 33-60671 Stock Option and Restricted Stock Plan
of 1998
Form S-3 33-21477 Debt Securities
St. Louis, Missouri /s/ Ernst & Young LLP
April 21, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> JAN-30-1999
<CASH> 7,851
<SECURITIES> 0
<RECEIVABLES> 77,635
<ALLOWANCES> (9,820)
<INVENTORY> 362,274
<CURRENT-ASSETS> 497,383
<PP&E> 217,054
<DEPRECIATION> (134,876)
<TOTAL-ASSETS> 655,232
<CURRENT-LIABILITIES> 246,444
<BONDS> 172,031
0
0
<COMMON> 68,131
<OTHER-SE> 149,043
<TOTAL-LIABILITY-AND-EQUITY> 655,232
<SALES> 1,538,530
<TOTAL-REVENUES> 1,538,530
<CGS> 925,190
<TOTAL-COSTS> 1,477,067
<OTHER-EXPENSES> 4,477
<LOSS-PROVISION> 2,772
<INTEREST-EXPENSE> 19,383
<INCOME-PRETAX> 37,603
<INCOME-TAX> 13,934
<INCOME-CONTINUING> 23,669
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,669
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.32
</TABLE>
