-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NTfwRmDmP8plSVoRIA5q3fpDLiJtZweZbjArvR0uxBn/e2sY1sXgRhagITrWWJ8S 7d5Akggm8e2zb20XFsC+KA== 0000014707-99-000007.txt : 19990427 0000014707-99-000007.hdr.sgml : 19990427 ACCESSION NUMBER: 0000014707-99-000007 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990130 FILED AS OF DATE: 19990426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROWN GROUP INC CENTRAL INDEX KEY: 0000014707 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [3140] IRS NUMBER: 430197190 STATE OF INCORPORATION: NY FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-02191 FILM NUMBER: 99600606 BUSINESS ADDRESS: STREET 1: 8300 MARYLAND AVE STREET 2: P O BOX 29 CITY: ST LOUIS STATE: MO ZIP: 63105 BUSINESS PHONE: 3148544000 MAIL ADDRESS: STREET 1: P O BOX 29 CITY: ST LOUIS STATE: MO ZIP: 63166 FORMER COMPANY: FORMER CONFORMED NAME: BROWN SHOE CO INC DATE OF NAME CHANGE: 19720327 10-K405 1 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 ------ ITEM 1 - BUSINESS - ----------------- The Company, founded in 1878 and incorporated in 1913, operates in the Footwear industry. Current activities include the operation of retail shoe stores and 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) - ----------------- Risk Factors - ------------ 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.
COL. A. COL. B COL. C COL. D COL. E - ---------------------------------------------------------------------------------------- ADDITIONS ----------------------- (1) (2) Balance Charged to at Charged to Other Balance Beginning Costs and Accounts- Deductions- at End of Period Expenses Describe Describe of Period --------- ---------- ---------- ----------- --------- (Thousands) YEAR ENDED 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.
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 EX-3 2 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. EX-4 3 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 EX-4 4 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 EX-13 5 1998 Annual Report Brown Group, Inc Brown Group, Inc. - -------------------------- 1998 Financial Highlights - -------------------------
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) 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
*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 - ------------------------------
Footwear Retail Stores - ---------------------- Number of Stores ........... 1998 1997 1996* 1995 1994 ---- ---- ---- ---- --- 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.
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): 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 ======================================================
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. - --
- ------------------- Five-Year Summary - ------------------- Thousands, except per share amounts 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (52 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks) 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.
- ---------------------------- Consolidated Balance Sheets - ----------------------------
Thousands, except number of shares and per share amounts January 30, 1999 January 31, 1998 ---------------- ---------------- 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.
- ---------------------- Consolidated Earnings - ---------------------- Thousands, except per share amounts 1998 1997 1996 ---- ---- ---- 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.
- ----------------------- Consolidated Cash Flows - -----------------------
Thousands 1998 1997 1996 ---- ---- ---- 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.
- --------------------------------- Consolidated Shareholders' Equity - ---------------------------------
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 -------- ------ -------- ------ ------ --------- -------- 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 ========== ======= ======== ======== ======== ======== ========
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):
1998 1997 1996 ---- ---- ---- 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 ======== ======== ======
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):
Other Pension Benefits Postretirement Benefits ---------------------- ---------------------- 1998 1997 1998 1997 -------- ------- ------ ------ 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) ======== ======= ====== =======
Net periodic benefit cost (income) for 1998, 1997 and 1996 included the following components (in thousands):
Other Pension Benefits Postretirement Benefits ---------------------- ------------------------ 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- 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) ===== ===== ===== ====== ====== ======
Other Postretirement Pension Benefits Benefits ---------------- ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- 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
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):
1998 1997 1996 ----- ------ ----- 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 ======= ======= ======
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):
1998 1997 1996 ------- ------ ------ 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 ======= ======= ======
(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):
January 30, January 31, 1999 1998 ---------- ---------- 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 ========== ==========
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):
Natural- Famous Wholesale izer Pagoda Footwear Operations Retail International Other Totals --------- ---------- ------- ---------- ------ ---------- 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 --------- ---------- ------- ---------- ------ ----------
1998 1997 1996 ------- -------- ------- 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 ======= ======== =======
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):
1998 1997 1996 --------- ---------- ---------- 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 ========== ========== ==========
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):
January 30, January 31, 1999 1998 ---------- ---------- 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 ========== =========
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):
January 30, January 31, 1999 1998 ---------- ---------- 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 ========== ==========
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):
1998 1997 1996 --------- ---------- --------- Minimum payments $87,473 $86,132 $82,829 Contingent payments 2,489 2,665 2,776 --------- ---------- --------- $89,962 $88,797 $85,605 ========= ========== =========
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):
Operating Leases --------------- 1999 $81,694 2000 70,121 2001 60,084 2002 48,716 2003 36,757 Thereafter 85,952 --------------- Total minimum lease payments $383,324 ===============
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):
January 30, January 31, 1999 1998 ---------- ---------- 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 ========== ==========
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):
1998 1997 ----------------- ------------------ Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- --------- -------- Liabilities Long-Term Debt, including current maturities $197,031 $198,475 $197,027 $201,321 ======== ======== ======== ========
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):
1998 1997 1996 --------- ---------- --------- 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 --------- ---------- ---------
The following summary sets forth the Company's stock option and stock appreciation rights activity for the three years ended January 30, 1999:
Number of Weighted ---------------------- Average Option Appreciation Exercise Shares Units Price ------- ------------ -------- 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 ========= ============ =========
Following is a summary of stock options outstanding as of January 30, 1999, which have exercise prices ranging from $14 to $38:
Weighted Weighted Average Average Number of Exercise Remaining Options Price Life ---------- -------- --------- 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 ========== ======== =========
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):
1998 1997 1996 --------- --------- --------- 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) ========= ========= =========
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 - ------------------------------------------------------------
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals -------- ---------- ------------- ------------ ---------- 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 ======== ========== ============= =========== ===========
Condensed Consolidating Statement of Earnings for the Fiscal Year Ended January 30, 1999
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals -------- ---------- ------------- ------------ ---------- 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 ======== ========== ============= =========== ===========
- ------------------------------------------ Notes to Consolidated Financial Statements - ------------------------------------------ Condensed Consolidating Statement of Cash Flow for the Fiscal Year Ended January 30, 1999
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals -------- ---------- ------------- ------------ ---------- 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 ======== ========== ============= =========== ===========
Condensed Consolidating Balance Sheet as of January 31, 1998
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals -------- ---------- ------------- ------------ ---------- 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 ======== ========== ============= =========== ==========
- ----------------------------------------------------------------------- Condensed Consolidating Statement of Earnings for the Fiscal Year Ended January 31, 1998 - -----------------------------------------------------------------------
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals -------- ---------- ------------- ------------ ---------- 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 - ------------------------------------------------------
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals -------- ---------- ------------- ------------ ---------- 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 ======== ========== ============= =========== ===========
- ------------------------------------------ Notes to Consolidated Financial Statements - ------------------------------------------ Condensed Consolidating Statement of Earnings for the Fiscal Year Ended February 1, 1997
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals -------- ---------- ------------- ------------ ---------- 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 ======== ========== ============= =========== ===========
Condensed Consolidating Statement of Cash Flow for the Fiscal Year Ended February 1, 1997
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals -------- ---------- ------------- ------------ ---------- 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 ======== ========== ============= =========== ===========
- ------------------------------- 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.
Quarters ---------------------------------------------- First Second Third Fourth ---------- ---------- ---------- ---------- (13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks) 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 ---------- ---------- ---------- ----------
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: info@browngroup.com 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: fctc@em.fcnbd.com 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 EX-21 6 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 EX-23 7 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 EX-27 8
5 12-MOS JAN-30-1999 JAN-30-1999 7,851 0 77,635 (9,820) 362,274 497,383 217,054 (134,876) 655,232 246,444 172,031 0 0 68,131 149,043 655,232 1,538,530 1,538,530 925,190 1,477,067 4,477 2,772 19,383 37,603 13,934 23,669 0 0 0 23,669 1.34 1.32
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