-----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, QREj05jIz945EHI8M1G+U1sHDimAPlKKf5u6iYrLN0gOa3jY7kSkbE/p59B1RLe0 RiCYOqZsqlFPXP8UyQsJzw== 0000014707-00-000005.txt : 20000420 0000014707-00-000005.hdr.sgml : 20000420 ACCESSION NUMBER: 0000014707-00-000005 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20000129 FILED AS OF DATE: 20000419 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROWN SHOE CO 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: 604422 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 GROUP INC DATE OF NAME CHANGE: 19920703 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 1999 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 29, 2000 [ ] 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 SHOE COMPANY, 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 1, 2000, 18,270,190 common shares were outstanding, and the aggregate market value of the common shares held by non-affiliates of the registrant was approximately $219 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual shareholders report for the year ended January 29, 2000, are incorporated by reference into Parts I and II. Portions of the proxy statement for the annual meeting of shareholders to be held May 25, 2000, 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. In 1999, the shareholders of the Company approved a change in the Company's name to Brown Shoe Company, Inc. from Brown Group, Inc. Current activities include the operation of retail shoe stores and the sourcing and marketing of footwear for women, men and children. During 1999, categories of footwear sales were approximately 58% women's footwear, 26% men's footwear and 16% children's footwear. This composition has remained relatively constant over the past few years. Approximately 70% of 1999 footwear sales were made at retail compared to 68% in 1998 and 66% in 1997. See Note 6 of Notes to Consolidated Financial Statements on page 67 of the Annual Report to Shareholders for the year ended January 29, 2000, 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 11,500 full and part-time employees. Approximately 100 employees engaged in the warehousing of footwear in the United States are employed under a union contract, which will expire in September, 2002. In Canada, approximately 300 factory and warehouse employees are employed under union contracts, which expire in October, 2000 and October, 2001. Retail Operations - ----------------- The Company's retail operations at January 29, 2000 include 1,353 retail shoe stores in the United States and Canada under the Famous Footwear, Factory Brand Shoes, Supermarket of Shoes, 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, advertising and pricing are important components of retail competition. Famous Footwear Famous Footwear with 867 stores at the end of fiscal 1999 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. Famous Footwear stores feature a wide selection of "brand name shoes for less for the entire family" including athletic, casual and dress shoes for women, men and children typically priced at below manufacturers' suggested retail prices. Famous Footwear stores average approximately 5,600 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, adidas, Skechers, Reebok, Rockport, New Balance, Naturalizer, What's What, Keds and TX Traction. 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. In fiscal 1999, the Company completed 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 to each store typically no less than each 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 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 radio, 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. Marketing and advertising programs are tailored on a region-by-region basis to reach the target consumers. In addition, the timing of certain advertising campaigns is set to correspond to regional differences such as the important back-to- school season, which begins at various times throughout the country. In 1999, management invested over $29 million to communicate Famous Footwear's philosophy: delivering the customer the best value and service on quality, branded footwear. Naturalizer The Company's Naturalizer stores are showcases for the Company's flagship brand of women's shoes. The Company owns and operates 347 Naturalizer stores located in the United States and 123 stores in Canada. Naturalizer specialty stores located in regional malls average approximately 1,300 square feet in size, and outlet stores located in outlet malls average approximately 2,600 square feet in size. These stores are designed and merchandised to appeal to the Naturalizer 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 has repositioned its styles to focus on a younger, active woman aged between 35-54 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 $60 per pair. In fiscal 1999, the Naturalizer Retail division launched the Naturalizer consumer site, www.naturalizeronline.com. The site allows consumers to browse product selection by style or size as well as to order directly from the Company. ITEM 1 - BUSINESS (Continued) - ----------------- 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 continues to invest in 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. Over the past two years, the Company installed updated point-of-sale cash registers and new merchandising reporting systems. These systems will enhance management information and capture consumer preferences as well as improve efficiency at store level. 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 branded and private label footwear. This footwear, primarily imported from Italy, retails at price points ranging from $100 to $250. These stores average approximately 2,200 square feet. A summary of retail footwear stores operated by the Company at each of the prior three fiscal year-ends follows: Company-Owned Retail Footwear Stores 1999 1998 1997 ---- ---- ---- Famous Footwear Family footwear stores which feature "brand names for less"; located in shopping centers and outlet and regional malls in the U.S. 867 827 815 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. 470 446 448 F. X. LaSalle Stores selling men's and women's better-grade branded footwear in major malls in Canada. 16 16 16 ----- ----- ----- Total 1,353 1,289 1,279 ===== ===== ===== Wholesale Operations - -------------------- Footwear is distributed by the Company's Brown Branded, Brown Pagoda and Canada Wholesale divisions to approximately 2,500 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 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. Wholesale orders for shoes are solicited by the Company's sales force throughout the year. 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 and certain high volume styles are inventoried to allow prompt shipment on reorders. ITEM 1 - BUSINESS (Continued) - ----------------- At April 1, 2000, the Company's wholesale operations had a backlog of unfilled orders of approximately $120 million compared to $145 million on April 2, 1999. 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 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 withdraw from the Pagoda International division as a result of excessive inventories and declining performance. The Company completed the withdrawal from this business in 1999. See Note 4 of Notes to Consolidated Financial Statements on page 66 of the Annual Report to Shareholders for the year ended January 29, 2000, 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, LifeStride, LS Studio, and NightLife 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 in 1927, 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. LifeStride, and its brand extension, LS Studio, is a leading entry-level price point, women's brand in department stores, offering fashion-right styling. The NightLife 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, LifeStride, LS Studio and NightLife brands primarily to department and specialty footwear stores domestically. The sales force is responsible for managing the Company's relationships with its wholesale customers. The Brown Branded division also has marketing teams responsible for the development and implementation of marketing programs for each brand, both for the Company and its retail customers. ITEM 1 - BUSINESS (Continued) - ----------------- The Company developed an e-commerce strategy in 1999 to assist in the marketing of their brands. The Company launched an internet site, www.brownshoeonline.com, that allows retail customers to check inventory, place orders and track arrivals. Over 600 retailers are using the system to place orders and reorders. "E-direct", also launched in 1999, allows retailers to collect payment for out-of-stock shoes with the Company directly shipping the shoes to the customer's home. The division is also partnered with Nordstrom.com to offer a Naturalizer boutique on its web site. The Company continues to build on and take advantage of the heritage and consumer recognition of its traditional brands, and it also is clearly defining the independent brand images of certain other brands. The Company launched a Naturalizer brand image campaign in 1999 that illustrated the brand's new fashion appeal and footwear design. In fiscal 1999, the division invested approximately $15 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. Brown Pagoda Division The Brown Pagoda division designs and markets branded, licensed and private label athletic, casual and dress footwear products for 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. The division is a resource for many of the nation's larger retailers, including Famous Footwear, Federated, Kmart, Nordstrom, Payless ShoeSource, Sears, Talbots, Target and Wal-Mart, providing its wholesale customers with over 48 million pairs of shoes in 1999. Major brand names owned by the Brown Pagoda division include Airstep, Brown Shoe, Buster Brown, Connie, Larry Stuart and Wildcats. The Brown 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%, 8% and 11% of consolidated sales in 1999, 1998, and 1997, respectively. The Brown Pagoda division 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 division's other significant license agreements include Barbie, Digimon, NASCAR Racers, Sammy Sosa and Star Wars. No single licensor represented greater than 5 percent of consolidated net sales for 1999. 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 Airstep, Barbie, Buster Brown, Connie and Star Wars. ITEM 1 - BUSINESS (Continued) - ----------------- Brown Sourcing Division The Brown Sourcing Division sources essentially all of the footwear globally for the Brown Branded division, the Naturalizer Retail division, the Brown Pagoda division, and a portion of the footwear sold by Famous Footwear. The division, which in 1999 sourced 63.3 million pairs of shoes, has developed a global sourcing capability through its relationships with approximately 100 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 1999, approximately 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 1999: Country Millions of Pairs ------- ----------------- China 47.5 Brazil 9.4 Indonesia 4.4 Taiwan 0.4 All Other 1.6 ---- Total 63.3 ==== 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 production and 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. In 1999, the Company reengineered its shoe styling process to better anticipate shoe fashion trends and quicken the time to market. From a design center in Florence, Italy, the Company captures European influences like heel shapes and fabrics before appearing at retail. The design center is electronically linked to the Company's line builders in the United States who blend them with latest U.S. fashion trends. This change in the process will assist in shortening the product design cycle. 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 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 customer of these third-party manufacturing facilities. The Company believes 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 the trade relationship between the United States and China will not worsen, and if it does worsen, there can be no assurance 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 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 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 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 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 Brown 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 its relationships with its existing licensors are good and it believes it will be able to renew its existing licenses and obtain new licenses in the future, there can be no assurance 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 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 facilities 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 1,353 shoe stores, including 139 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 previously used at the facility. Monitoring of the residential area continues. The Company also began remediation on the owned property. During 1999, the Company incurred charges of $1.8 million related to this site. In early 2000, a state court class-action lawsuit was filed agianst the Company related to this property. The Company does not believe that the ultimate outcome of this lawsuit will have a materially adverse effect on its results of operations or financial position. 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 requires only continued maintenance and monitoring over the next 24 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 $3.9 million, as of January 29, 2000, 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 1999. 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, 2000. Name Age Current Position - ---- --- ---------------- Ronald A. Fromm 49 Chairman of the Board, President, Chief Executive Officer, Brown Shoe Company, Inc. and President, Brown Shoe Company Theodore L. Anderson 51 Senior Vice President, Retail Sales and Operations, Famous Footwear Brian C. Cook 60 Executive Vice President, Brown Shoe Company, Inc. and President, Famous Footwear William A. Dandy 42 Senior Vice President, Marketing, Famous Footwear Charles C. Gillman 38 Senior Vice President and Director, Far East Operations, Brown Sourcing J. Martin Lang 43 Senior Vice President and Chief Financial Officer, Famous Footwear Byron D. Norfleet 38 Senior Vice President and General Manager, Naturalizer Retail Gary M. Rich 49 President, Brown Pagoda James M. Roe 54 Senior Vice President, Real Estate, Famous Footwear Andrew M. Rosen 49 Chief Financial Officer and Treasurer Richard C. Schumacher 52 Vice President and Controller David H. Schwartz 54 President, Brown Sourcing Robert E. Stadler, Jr. 51 Vice President, Administration, Brown Shoe Company and Senior Vice President, Finance and Administration, Brown Branded Gregory J. Van Gasse 49 President, Brown Branded George J. Zelinsky 51 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 Sourcing since February 1997. Senior Vice President, Far East Operations, Brown 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 Brown 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. 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, Chief Financial Officer and Treasurer of the registrant since October 1999. Senior Vice President and Treasurer of the registrant from March 1999 to October 1999. Vice President and Treasurer of the registrant from January 1992 to March 1999. 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 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. Robert E. Stadler, Jr., Vice President, Administration, Brown Shoe Company and Senior Vice President, Finance and Administration, Brown Branded since October 1999. Vice President, Finance and Operations, Brown Branded division of Brown Shoe Company from March 1999 to October 1999. Series of positions with the registrant and its divisions since 1972, most recently prior to March 1999 as Vice President, Finance, Brown Branded division of Brown Shoe Company. 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 80 of the Annual Report to Shareholders and the number of shareholders of record on page 82 of the Annual Report to Shareholders for the year ended January 29, 2000, are incorporated herein by reference. ITEM 6 - SELECTED FINANCIAL DATA - -------------------------------- Selected Financial Data on page 58 of the Annual Report to Shareholders for the year ended January 29, 2000, is incorporated herein by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION - --------------------------------------------------------------- Management's Discussion and Analysis of Operations and Financial Condition on pages 54 through 57 of the Annual Report to Shareholders for the year ended January 29, 2000, is incorporated herein by reference. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------- Information appearing under the caption "Financial Instruments" on pages 56 through 57 of the Annual Report for Shareholders to the year ended January 29, 2000, is incorporated herein by reference. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- The consolidated financial statements of the Company and its subsidiaries on pages 59 through 79, and the supplementary financial information on page 80 of the Annual Report to Shareholders for the year ended January 29, 2000, 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 8 of the Proxy Statement for the Annual Meeting of Shareholders to be held May 25, 2000, 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 9 through 21 of the Proxy Statement for the Annual Meeting of Shareholders to be held May 25, 2000, is incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - --------------------------------------------------------- Security Holdings of Directors and Management on page 3 of the Proxy Statement for the Annual Meeting of Shareholders to be held May 25, 2000, 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. (a) (ii) Amendment of Certificate of Incorporation of the Company filed May 27, 1999, incorporated herein by reference to Exhibit 3 to the Company's report on Form 10-Q for the quarter ended May 1, 1999. (b) Bylaws of the Company as amended through March 2, 2000, 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 8, 1996. (a) (i) Amendment to Rights Agreement between Brown Shoe Company, 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, incorporated herein by reference to the Company's Form 10-K dated January 30, 1999. (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, incorporated herein by reference to the Company's Form 10-K dated January 30, 1999. (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)* Fourth Amendment to the Brown Group, Inc. Executive Retirement Plan, amended and restated as of January 1, 1998, filed herewith. (a) (i)* Fifth Amendment to the Brown Group, Inc. Executive Retirement Plan, dated January 7, 2000, filed herewith. (b)* 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. (c)* 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. (d)* Stock Option and Restricted Stock Plan of 1998, incorporated herein by reference to Exhibit 2 to the Company's definitive proxy statement dated April 24, 1998. (e)* Incentive and Stock Compensation Plan of 1999, incorporated herein by reference to Exhibit 2 to the Company's definitive proxy statement dated April 26, 1999. (e) (i)* Amendment to Incentive and Stock Compensation Plan of 1999, dated May 27, 1999, filed herewith. (e) (ii)* First Amendment to the Incentive and Stock Compensation Plan of 1999, dated January 7, 2000, filed herewith. (f)* 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) (i)* First Amendment to the Employment Agreement, dated July 27, 1998 between the Company and Ronald A. Fromm, filed herewith. (g)* 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. (h)* 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. (i)* 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. (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. (k)* Severance Agreement, dated December 1, 1999, between the Company and Charles C. Gillman, filed herewith. (l)* Early Retirement Agreement, dated October 26, 1999 between the Company and Harry E. Rich, filed herewith. (m)* Brown Shoe Company, Inc. Deferred Compensation Plan for Non-Employee Directors, filed herewith. 13. Annual Report to Shareholders of Brown Shoe Company, Inc. for the fiscal year ended January 29, 2000. 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 1999. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended January 29, 2000. (c) Exhibits: Exhibits begin on page 27 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. *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 19, 2000 BROWN SHOE COMPANY, INC. - -------------------- --------------------------------- (Registrant) By /s/ Andrew M. Rosen --------------------------------- Andrew M. Rosen 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 Andrew M. Rosen 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 19, 2000, 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 - ---------------------------- President and Chief Executive Ronald A. Fromm Officer and on behalf of the Company as Principal Executive Officer /s/ Andrew M. Rosen Chief Financial Officer - ---------------------------- Andrew M. Rosen /s/ Richard C. Schumacher Vice President and Controller and - ---------------------------- on behalf of the Company as Richard C. Schumacher Principal Accounting Officer Signature Title --------- ----- - ------------------------------ Director Joseph L. Bower /s/ Julie C. Esrey Director - ------------------------------ Julie C. Esrey /s/ Richard A. Liddy Director - ------------------------------ Richard A. Liddy /s/ John Peters MacCarthy Director - ------------------------------ John Peters MacCarthy /s/ Patricia G. McGinnis Director - ------------------------------ Patricia G. McGinnis - ------------------------------ Director W. Patrick McGinnis - ------------------------------ Director Jerry E. Ritter ANNUAL REPORT ON FORM 10-K ITEM 14 (a) (1) and (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE YEAR ENDED JANUARY 29, 2000 BROWN SHOE COMPANY, INC. ST. LOUIS, MISSOURI FORM 10-K - ITEM 14 (a) (1) and (2) BROWN SHOE COMPANY, INC. AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE The following consolidated financial statements of Brown Shoe Company, Inc. and subsidiaries included in the annual report of the registrant to shareholders for the year ended January 29, 2000, are incorporated by reference in Item 8: Consolidated Balance Sheets - January 29, 2000, and January 30, 1999. Consolidated Earnings - Years ended January 29, 2000, January 30, 1999, and January 31, 1998. Consolidated Cash Flows - Years ended January 29, 2000, January 30, 1999, and January 31, 1998. Consolidated Shareholders' Equity - Years ended January 29, 2000, January 30, 1999, and January 31, 1998. Notes to Consolidated Financial Statements. Report of Independent Auditors. The following consolidated financial statement schedule of Brown Shoe Company, Inc. and subsidiaries is included in Item 14(a): 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 SHOE COMPANY, 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 29, 2000 - --------------------------- Deducted from assets: For doubtful accounts and discounts $ 9,820 $2,234 - $3,966-A $ 8,088 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
A. Accounts written off, net of recoveries and discounts taken. BROWN SHOE COMPANY, INC. ANNUAL REPORT TO SHAREHOLDERS ON FORM 10-K INDEX TO EXHIBITS Exhibit ------- 3. (b) Bylaws as amended through March 2, 2000. 10. (a) Fourth Amendment to the Brown Group, Inc. Executive Retirement Plan, amended and restated as of January 1, 1998. 10. (a) (i) Fifth Amendment to the Brown Group, Inc. Executive Retirement Plan, dated January 7, 2000. 10. (e) (i) Amendment to Incentive and Stock Compensation Plan of 1999, dated May 27, 1999. 10. (e) (ii) First Amendment to the Incentive and Stock Compensation Plan of 1999, dated January 7, 2000. 10. (f) (i) First Amendment to the Employment Agreement, dated July 27, 1998 between the Company and Ronald A. Fromm. 10. (k) Severance Agreement, dated December 1, 1999, between the Company and Charles C. Gillman. 10. (l) Early Retirement Agreement, dated October 26, 1999 between the Company and Harry E. Rich. 10. (m) Brown Shoe Company, Inc. Deferred Compensation Plan for Non-Employee Directors. 13. 1999 Annual Report to Shareholders of Brown Shoe Company, Inc. 21. Subsidiaries of the registrant 23. Consent of Independent Auditors 24. Power of Attorney (see signature page) 27. Financial Data Schedule - fiscal 1999 EX-3 2 EXHIBIT 3.(b) BROWN SHOE COMPANY, INC. A NEW YORK CORPORATION BYLAWS ADOPTED BY THE STOCKHOLDERS JANUARY 11, 1946 AMENDED THROUGH MARCH 2, 2000 BYLAWS OF BROWN SHOE COMPANY, 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 eight. Such directors shall be classified in respect of the time for which they shall severally hold office, by dividing them into two classes consisting of three directors each and one class consisting of two 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-10 3 Exhibit 10.(a) FOURTH AMENDMENT TO THE BROWN GROUP, INC. EXECUTIVE RETIREMENT PLAN --------------- WHEREAS, Brown Group, Inc. ("Company") and its Affiliates have adopted the Brown Group, Inc. Executive Retirement Plan (the "Plan") for the benefit of eligible employees of the Company and its affiliates; and WHEREAS, the Company retained the right to amend the Plan pursuant to Section V.G thereof; and WHEREAS, the Company desires to amend and restate the Plan effective as of January 1, 1998; NOW, THEREFORE, effective as of January 1, 1998, the Plan is amended and restated to read as follows: SECTION I --------- DEFINITIONS ----------- A. "Affiliate" means any corporation which, with the consent of the Board of Directors of the Company, adopts the Plan. B. "Change of Control" means a change of control of the Company which shall be deemed to occur if: 1. any person other than the Company shall acquire more than 25% of the Company's common stock through a tender offer, exchange offer or otherwise; or 2. the Company shall be liquidated or dissolved following a sale of all or substantially all of its assets; or 3. the Company shall not be the surviving parent corporation resulting from any merger or consolidation to which it is a party. C. "Code" means the Internal Revenue Code of 1986, as amended. D. "Committee" means the committee appointed pursuant to Section IV. E. "Company" means Brown Group, Inc., a New York corporation. F. "Early Retirement Benefit" means the early retirement benefit payable to a Participant under Section III.A.2. of the Plan on his Early Retirement Date under the Retirement Plan. G. "Effective Date" means January 1, 1983. H. "Employee" means a person employed by the Employer. I. "Employer" means the Company or an Affiliate. J. "Normal Retirement Benefit" means the benefit payable to a Participant under Section III.A.1. of the Plan on his Normal Retirement Date under the Retirement Plan. K. "Participant" means an Employee who has satisfied the eligibility requirements of Section II. L. "Plan" means this Brown Group, Inc. Executive Retirement Plan. M. "Pre-Retirement Death Benefit" means the death benefit payable under Section III.A.3. of the Plan. N. "Retirement Plan" means the Brown Group, Inc. Retirement Plan. SECTION II ---------- ELIGIBILITY ----------- On and after the Effective Date, the Committee may, in its sole discretion, by notice in writing, designate any highly paid key Employee who is a participant in the Retirement Plan, a Participant in this Plan. SECTION III ----------- BENEFITS -------- A. Subject to B., below, benefits shall be payable under the Plan only to those Participants who are receiving a Benefit under the Retirement Plan or to the surviving beneficiary of a Participant entitled to a death benefit under the Retirement Plan. 1. The Normal Retirement Benefit payable under the Plan shall equal (a) minus (b) below, where: (a) equals the Normal Retirement Benefit calculated under the Retirement Plan without regard to the limitations imposed by Sections 415 and 401(a)(17) of the Code but adjusted by substituting 1.465% where 1.425% appears in Section I.A. of the Retirement Plan, and (b) equals the Normal Retirement Benefit payable under the Retirement Plan. 2. The Early Retirement Benefit payable under the Plan shall equal (a) minus (b), below, where: (a) equals the Normal Retirement Benefit calculated under the Retirement Plan without regard to the limitations imposed by Sections 415 and 401(a)(17) of the Code but adjusted by substituting 1.465% where 1.425% appears in Section I.A. of the Retirement Plan, and by reducing such benefit to the retiree by .8333% for each full month between his Early Retirement Date under the Retirement Plan and the first of the month coincident with or next following the month in which the retiree attains age 60; and (b) equals the Early Retirement Benefit payable under the Retirement Plan. 3. The deferred vested benefit payable at Normal Retirement Date under the Plan shall equal (a) minus (b) below, where: (a) equals the deferred vested benefit calculated under Section VII of the Retirement Plan without regard to the limitations imposed by Sections 415 and 401(a)(17) of the Code, but adjusted by substituting 1.465% where 1.425% appears in Section I.A. of the Retirement Plan; and (b) equals the deferred vested benefit payable under Section VII of the Retirement Plan. If benefits begin on or after attainment of age 55 and completion of at least ten years of Credited Service, the Early Retirement reduction factors specified in Section III.A.2(a) of this Plan shall be applied to the deferred vested benefit described above. 4. The Pre-Retirement Death Benefit payable under the Plan shall equal (a) minus (b) below, where: (a) equals the Pre-Retirement Death Benefit calculated under the Retirement Plan without regard to the limitations imposed by Sections 415 and 401(a)(17) of the Code, but adjusted (1) by substituting 1.465% where 1.425% appears in Section I.A. of the Retirement Plan, (2) by substituting the Early Retirement reduction factors specified in Section III.A.2(a) of this Plan for those specified in the Retirement Plan, and (3) by substituting for "fifty percent (50%)" in VI(A)(5)(a) of the Retirement Plan the following: (i) "seventy-five percent (75%)" if the Participant had not attained age 55 at his death and (ii) "one-hundred percent (100%)" if the Participant had attained age 55 at his death; and (b) equals the Pre-Retirement Death Benefit payable under the Retirement Plan. 5. Notwithstanding anything in this Plan to the contrary, for purposes of calculating the benefits of Brian C. Cook or Harry E. Rich under A.1, A.2, A.3 or A.4, an additional ten (10) years of Credited Service shall be credited to Brian C. Cook's and Harry E. Rich's actual or deemed Credited Service. 6. The additional retirement benefits payable by the Company to B. A. Bridgewater, Jr. in accordance with the terms of a letter from the Company to Mr. Bridgewater dated June 2, 1988, as well as any additional benefits provided under written contractual commitments to any other Participant, shall be payable from the Plan. B. Notwithstanding anything else contained in the Plan, in the event of a Change of Control, the Company shall determine the lump sum actuarial equivalent of the benefits payable under Section III.A as if the Participant retired under the Retirement Plan as of the effective date of the Change of Control (using the same actuarial assumptions which are used in calculating benefits under the Retirement Plan at the time of the Change of Control and assuming that any accrued benefits under the Retirement Plan were fully vested) and shall pay such amount to the Participant within 30 days after such date in full discharge of its obligations under the Plan. Following such payment the Plan shall terminate. C. The benefit payable under A.1, A.2, A.3 or A.4, above, and such portion of the benefit payable under A.5 or A.6 above, the form of payment of which is not otherwise specifically provided for in the letters referred to therein, will be paid in monthly installments for the life of the Participant (or the Participant's beneficiary, in the case of the benefit payable under A.4); provided however, that the Participant (or the Participant's beneficiary, in the case of the benefit payable under A.4) may, with the consent of the Committee, elect to receive such benefit in a lump sum or in any of the optional forms of payments available under the Retirement Plan, such lump sum and optional forms to be of equivalent actuarial value to the benefits payable for life using the same actuarial assumptions which are used in calculating benefits under the Retirement Plan; provided further, that a Participant entitled to payments under Section A.3 shall not be entitled to receive benefits in the form of an annuity unless he has either attained age 65 or has both attained age 55 and completed 10 years of Credited Service. Such election shall be made pursuant to such rules as the Committee shall, from time to time, adopt; provided, however, that if a Participant's benefits under the Retirement Plan are limited by the operation of Code Section 415, then such Participant's benefit under this Plan may not commence any earlier than such Participant's benefits commence under the Retirement Plan. D. Except as provided in Sections A.5 and A.6, the benefit calculated under A.1(a), A.2(a), A.3(a) and A.4(a) and the offsets calculated under A.1(b), A.2(b), A.3(b) and A.4(b) shall be calculated based only on Credited Service under the Retirement Plan earned up to the earlier of the date upon which the Participant terminates employment with the Company and its Affiliates or the date as of which the Committee determines that a Participant is no longer a Participant in the Plan. E. If the optional form of benefit received from the Retirement Plan is not actuarially equivalent to the life only annuity due to the operation of the limitations under Code Section 415, then the benefit payable from this Plan shall be adjusted so that the actuarial value of the total benefit from both this Plan and the Retirement Plan shall not exceed the actuarial value of the benefit specified in A.1(a), A.2(a), A.3(a) or A.4(a), whichever applies. SECTION IV ---------- ADMINISTRATION AND CLAIMS PROCEDURE ----------------------------------- A. The Board of Directors of the Company shall appoint a Committee of not less than three persons, who shall serve without compensation at the pleasure of the Board of Directors. Upon death, resignation or inability of a member of the Committee to continue, the Board of Directors shall appoint a successor. The Chief Financial Officer of the Company shall not serve as a member of the Committee. B. The Committee shall construe, interpret and administer all provisions of the Plan and a decision of a majority of the members of the Committee shall govern. C. A decision of the Committee may be made by a written document signed by a majority of the members of the Committee or by a meeting of the Committee. The Committee may authorize any of its members to sign documents or papers on its behalf. D. The Committee shall appoint a Chairman from among its members, and a Secretary who need not be a member of the Committee. The Secretary shall keep all records of meetings and of any action by the Committee and any and all other records desired by the Committee. The Committee may appoint such agents, who need not be members of the Committee, as it may deem necessary for the effective exercise of its duties, and may, to the extent not inconsistent herewith, delegate to such agents any powers and duties, both ministerial and discretionary, as the Committee may deem expedient and appropriate. E. No member of the Committee shall make any decision or take any action covering exclusively his own benefits under the Plan, but all such matters shall be decided by a majority of the remaining members of the Committee or, in the event of inability to obtain a majority, by the Board of Directors of the Company. F. A Participant who believes that he is being denied a benefit to which he is entitled (hereinafter referred to as 'Claimant') may file a written request for such benefit with the Committee setting forth his claim. The request must be addressed to: Committee, Brown Group, Inc. Executive Retirement Plan, 8400 Maryland Avenue, St. Louis, Missouri 63105. G. Upon receipt of a claim the Committee shall advise the Claimant that a reply will be forthcoming within 90 days and shall in fact deliver such reply in writing within such period. The Committee may, however, extend the reply period for an additional 90 days for reasonable cause. If the claim is denied in whole or in part, the Committee will adopt a written opinion using language calculated to be understood by the Claimant setting forth: 1. the specific reason or reasons for denial, 2. the specific references to pertinent Plan provisions on which the denial is based, 3. a description of any additional material or information necessary for the Claimant to perfect the claim and an explanation why such material or such information is necessary, 4. appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review, and 5. the time limits for requesting a review under Subsection H and for the review under Subsection I. H. Within sixty days after the receipt by the Claimant of the writtenopinion described above, the Claimant may request in writing that the Chief Financial Officer of the Company review the determination of the Committee. Such request must be addressed to: Chief Financial Officer, Brown Group, Inc. 8400 Maryland Avenue, St. Louis, Missouri 63105. The Claimant or his duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Chief Financial Officer. If the Claimant does not request a review of the Committee's determination by the Chief Financial Officer within such sixty-day period, he shall be barred and estopped from challenging the Committee's determination. I. Within sixty days after the Chief Financial Officer's receipt of a request for review, he will review the Committee's determination. After considering all materials presented by the Claimant, the Chief Financial Officer will render a written opinion, written in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent Plan provisions on which the decision is based. If special circumstances require that the sixty-day time period be extended, the Chief Financial Officer will so notify the Claimant and will render the decision as soon as possible but not later than 120 days after receipt of the request for review. SECTION V --------- MISCELLANEOUS ------------- A. Plan Year. The Plan Year shall be the calendar year. B. Spendthrift. No Participant or beneficiary shall have the right to assign, transfer, encumber or otherwise subject to lien any of the benefits payable or to be payable under this Plan. C. Incapacity. If, in the opinion of the Committee, a person to whom a benefit is payable is unable to care for his affairs because of illness, accident or any other reason, any payment due the person, unless prior claim therefor shall have been made by a duly qualified guardian or other duly appointed and qualified representative of such person, may be paid to some member of the person's family, or to some party who, in the opinion of the Committee, has incurred expense for such person. Any such payment shall be a payment for the account of such person and shall be a complete discharge of any liability. D. Employee Rights. The Employer, in adopting this Plan, shall not be held to create or vest in any Employee or any other person any benefits other than the benefits specifically provided herein, or to confer upon any Employee the right to remain in the service of the Employer. E. Service of Process and Plan Administrator. 1. The Treasurer of the Company shall be the agent for service of legal process. 2. The Company shall constitute the Plan Administrator. F. Unfunded Plan. The Plan shall be unfunded until after a Change of Control. All payments to a Participant under the Plan shall be made from the general assets of the Employer. The rights of any Participant to payment shall be those of an unsecured general creditor of the Employer. G. Company Rights. The Company reserves the right to amend or terminate the Plan. Each Employer may terminate its participation in the Plan at any time. H. Reemployment. If a Participant is receiving benefits under the Plan and is re-employed by an Employer, benefits shall cease until he is no longer employed by an Employer. I. Governing Law. The Plan shall be governed and construed according to the laws of the State of Missouri. IN WITNESS WHEREOF, Brown Group, Inc. has caused this Amendment to be executed by its duly authorized officers this 3rd day of December, 1998. BROWN GROUP, INC. By /s/ Andrew M. Rosen --------------------------- ATTEST: /s/ Robert D. Pickle. --------------------------- EX-10 4 Exhibit 10.(a)(i) FIFTH AMENDMENT TO THE BROWN GROUP, INC. EXECUTIVE RETIREMENT PLAN ------------------------- WHEREAS, Brown Shoe Company, Inc. ("Company") and its Affiliates have adopted the Brown Group, Inc. Executive Retirement Plan ("Plan") for the benefit of eligible employees of the Company and its Affiliates; and WHEREAS, the Company retained the right to amend the Plan pursuant to Section V.G thereof; and WHEREAS, the Company desires to amend the Plan effective as of January 1, 2000; NOW, THEREFORE, effective as of January 1, 2000, the Plan is amended by deleting Section III.B thereof and replacing it with the following: B. Notwithstanding anything else contained in the Plan, in the event of a Change of Control, the Company shall determine the lump sum actuarial equivalent of the benefits payable under Section III.A.1 if the Participant has reached his Normal Retirement Date under the Retirement Plan, or under Section III.A.2 if the Participant has not reached his Normal Retirement Date under the Retirement Plan, as if the Participant retired as of the effective date of the Change of Control (using the same actuarial assumptions which are used in calculating benefits under the Retirement Plan at the time of the Change of Control and assuming that any accrued benefits under the Retirement Plan were fully vested) and shall pay such amount to the Participant within 30 days after such date. In the event the Participant has not attained age 60 as of the effective date of the Change of Control, such lump sum shall be determined based on the benefit that would be payable under Section III.A.2 commencing at age 60 actuarially reduced to reflect the Participant's age on the date of the Change in Control. In the event a Participant had previously retired and is receiving a monthly benefit as of the effective date of the Change of Control, such lump sum shall be based on the payment form and amount being received by the Participant. In the event that, subsequent to the Change of Control, a Participant becomes entitled to any additional benefits pursuant to the terms of a written contractual commitment as described in Section III.A.6 above, such additional benefits shall be paid as soon as practicable after they have become due in a single lump sum in accordance with the principles outlined in the preceding sentences. After all payments described in the preceding sentences of this Section III.B have been made, the Plan shall terminate. IN WITNESS WHEREOF, Brown Shoe Company, Inc. has adopted this Amendment this 7th day of January, 2000. /s/ Ronald A. Fromm ---------------------------------- EX-10 5 Exhibit 10.(e)(i) AMENDMENT TO INCENTIVE AND STOCK COMPENSATION PLAN OF 1999 WHEREAS, Brown Group, Inc. (the "Company") previously adopted the Brown Group, Inc. Incentive and Stock Option Plan (the "Plan"); WHEREAS, the Board of Directors of the Company may amend the Plan at any time pursuant to Section 14.1 thereof; and WHEREAS, the Board of Directors of the Company desires to amend the Plan, effective May 27, 1999; NOW, THEREFORE, effective May 27, 1999, the Plan is amended by adding the following Section 6.10: "6.10 Prohibition Against Repricing. Notwith-standing any other provision of the Plan (other than Section 4.2, which, in all cases, shall control) no Option granted hereunder shall be repriced, replaced or regranted through cancellation, or by lowering the Option exercise of a previous Award, without approval of the Company's stockholders of an amendment to this Section 6.10." I, ROBERT D. PICKLE, Vice President, General Counsel and Corporate Secretary of Brown Group, Inc. (the "Corporation"), do hereby certify that the above is a true and correct excerpt from the minutes of the meeting of the Board of Directors of the Corporation, duly called and held on Thursday, May 27, 1999, at which meeting a quorum of the said Board of Directors was present and voting throughout, and that the resolutions set forth in said excerpt have not been modified, amended or rescinded and are still in full force and effect. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal of the Corporation this 27th day of May, 1999. /s/ Robert D. Pickle -------------------------- Robert D. Pickle Vice President, General Counsel and Corporate Secretary of BROWN GROUP, INC. (SEAL) EX-10 6 Exhibit 10.(e)(ii) FIRST AMENDMENT TO THE INCENTIVE AND STOCK COMPENSATION PLAN OF 1999 --------------------------------------------- WHEREAS, Brown Shoe Company, Inc., a New York corporation ("Company"), previously established the Brown Group, Inc. Incentive and Stock Compensation Plan of 1999 ("Plan"); and WHEREAS, pursuant to Article 14 of the Plan, the Board of Directors of the Company reserved the right to amend the Plan; and WHEREAS, the Board of Directors desires to amend the Plan effective retroactively to its effective date of May 27, 1999; NOW, THEREFORE, BE IT RESOLVED, that the Plan is amended effective May 27, 1999 by deleting Section 13.1 and replacing it with the following: 13.1 Treatment of Outstanding Awards. Upon the occurrence of a Change in Control, unless otherwise specifically prohibited under applicable laws, or by the rules and regulations of any governing governmental agencies or national securities exchanges: (a) Any and all Options granted hereunder shall become immediately exerciseable; (b) Any restriction periods and restrictions imposed on Restricted Shares which are not performance-based, as set forth in the Restricted Stock Award Agreement, shall lapse; and (c) The target payout opportunities attainable under all outstanding Awards of Restricted Stock, Performance Units, Performance Shares and Cash-Based Awards shall be deemed to have been fully earned for the entire Performance Period(s) as of the effective date of the Change in Control, and all such Awards shall be deemed to be fully vested. As of the effective date of the Change in Control, (a) each Participant holding Options shall be paid in cash, in full satisfaction thereof, an amount equal to the excess, if any, of (i) the aggregate value of the Shares subject to such Options (based on the consideration per Share paid by the acquirer in connection with the Change in Control) over (ii) the aggregate exercise price of such Options, and (b) each Participant awarded Performance Shares shall be paid in cash, in full satisfaction thereof, an amount equal to (i) the value of one Share (based on the consideration per Share paid by the acquirer in connection with the Change in Control) multiplied by (ii) the number of Performance Shares awarded to such Participant. IN WITNESS WHEREOF, the Company has adopted this Amendment this 7th day of January, 2000 effective as of May 27, 1999. /s/ Ronald A. Fromm ----------------------------- EX-10 7 Exhibit 10.(f)(i) FIRST AMENDMENT TO THE EMPLOYMENT AGREEMENT ------------------------------------------- WHEREAS, Brown Group, Inc. (the "Company") and Ronald A. Fromm (the "Employee") previously executed the Employment Agreement dated May 14, 1998 (the "Agreement"); and WHEREAS, the Agreement provides in Section 13 that the Agreement may be modified by a written agreement executed by the Company and the Employee; and WHEREAS, the Company and the Employee desire to amend the Agreement effective July 27, 1998; NOW, THEREFORE, effective, July 27, 1998, the Agreement is hereby amended as follows: 1. Section 2 is deleted in its entirety and replaced by the following: 2. Compensation. Subject to the terms of this Agreement, in consideration of Fromm's agreements contained herein, for the period beginning May 1, 1998 and ending April 30, 2001, Fromm shall be paid base compensation at an annual rate of no less than Four Hundred Fifty-Thousand Dollars ($450,000). Compensation shall be paid in approximately equal installments no less frequently than monthly. If Fromm's employment with the Company is terminated by the Company other than for Cause (as defined in the Severance Agreement, which is incorporated into this agreement pursuant to Section 15 and which is attached hereto as Exhibit 1) prior to April 30, 2001, Fromm may elect to receive from the Company either (a) Thirty-Seven Thousand Five Hundred Dollars ($37,500) multiplied by the number of full months remaining from the last day of the month preceding the date of termination until May 1, 2001, less the amount, if any, of any base compensation paid to Fromm for the month of termination prior to the date of such termination, plus, if Fromm is terminated prior to January 30, 1999, an incentive payment of $180,000 or (b) if the Severance Agreement has not previously terminated, severance benefits payable in according with the Severance Agreement. 2. Section 3 is deleted in its entirety and replaced by the following: 3. Incentive Payment. While serving as President of Brown Shoe Company, Fromm shall be eligible to receive annually an incentive payment in accordance with the annual incentive plan of the Company. A payment of no less than $180,000 for the Company's fiscal year ending January 30, 1999, shall be paid to Fromm in all events within 60 days after the end of such year, if Fromm is employed by the Company at the end of such year. 3. Section 6 is deleted in its entirety and replaced by the following: 6. Other Benefits. If Fromm's employment with the Company is terminated before April 30, 2001 other than for Cause and Fromm, in accordance with his election under Section 2, receives the benefits described in Section 2(a), Fromm shall continue, until April 30, 2001, to be entitled to all rights and benefits currently enjoyed by Fromm as an employee of the Company, with such upward adjustments as are appropriate to take into account his position of increased responsibility. If Fromm's employment with the Company is terminated other than as described in the preceding sentence, all rights and benefits currently enjoyed by Fromm as an employee of the Company shall terminate, unless provided otherwise in the Severance Agreement. 4. Section 7 is deleted in its entirety and replaced by the following: 7. Termination for Cause. "Cause" shall have the meaning set forth in the Severance Agreement. 5. A new Section 15 shall be added to the Agreement as follows: 15. Severance Agreement. The terms of the Severance Agreement, attached hereto as Exhibit 1, shall be part of this Agreement, except that if Fromm elects to receive the benefits described in Section 2(a), (a) he shall not receive the benefits described in the Severance Agreement, but (b) all other provisions of the Severance Agreement shall apply. IN WITNESS WHEREOF, the Company and the Employee have caused this amendment to be executed this 27th day of July, 1998. BROWN GROUP, INC. By: /s/ B. A. Bridgewater, Jr. -------------------------------------------- Its: Chairman of the Board of Directors, President and Chief Executive Officer. EMPLOYEE By: /s/ Ronald A. Fromm -------------------------------------------- Attest: Ronald A. Fromm /s/ James E. Preuss - ----------------------------- EX-10 8 Exhibit 10.(k) SEVERANCE AGREEMENT SEVERANCE AGREEMENT (the "Agreement") dated December 1, 1999 ("Effective Date") between Charles C. Gillman ("Employee") and Brown Shoe Company, Inc., a New York corporation (as further defined in Section 13, the "Company"). WHEREAS, in order to accomplish its objectives, the Company believes it is essential that members of its Operating Committee, such as Employee, be encouraged to remain with the Company during management transition and thereafter and in the event there is any change in corporate structure which results in a Change in Control. WHEREAS, Employee wishes to have the protection provided for in this Agreement and, in exchange for such protection, is willing to give to the Company, under certain circumstances, his covenant not to compete. NOW, THEREFORE, the parties hereto agree as follows: 1. Definitions. a. "Cause" means (i) engaging by Employee in willful misconduct which is materially injurious to the Company; (ii) conviction of the Employee of a felony; (iii) engaging by Employee in fraud, material dishonesty or gross misconduct in connection with the business of the Company; (iv) engaging by Employee in any act of moral turpitude reasonably likely to materially and adversely affect the Company or its business; or (v) habitual use by Employee of narcotics or alcohol. b. "Change of Control" means (i) any person other than the Company acquiring more than 25 percent of the Company's Common Stock through a tender offer, exchange offer or otherwise; (ii) the liquidation or dissolution of the Company following the sale of all or substantially all of its assets; or (iii) the Company not being the surviving parent corporation resulting from any merger or consolidation to which it has been a party. c. "Competitor" shall mean any person, firm, corporation, partnership or other entity which in its prior fiscal year had annual gross sales volume or revenues of shoes of more than $20,000,000 or is reasonably expected to have such sales or revenues in either the current fiscal year or the next following fiscal year. d. "Confidential Information" shall have the meaning set forth in Section 10. e. "Customer" shall mean any wholesale customer of the Company which either purchased from the Company during the one (1) year immediately preceding the Termination Date, or is reasonably expected by the Company to purchase from the Company in the one (1) period immediately following the Termination Date, more than $1,000,000 in shoes. f. "Good Reason," when used with reference to a voluntary termination by Employee of his employment with the Company, shall mean (i) a reduction in Employee's base salary as in effect on the date hereof, or as the same may be increased from time to time; or (ii) a reduction in Employee's status, position, responsibilities or duties. g. "Term" means the period commencing on the Effective Date and terminating three years after the Effective Date; provided, however, that the Term shall automatically be extended for successive additional one year periods unless either party to this Agreement provides the other party with notice of termination of this Agreement at least six months prior to the expiration of such one year periods. h. "Termination Date" shall mean the effective date as provided hereunder of the termination of Employee's employment. 2. Termination During Term -- Change in Control Severance Inapplicable. a. Employee's employment may be terminated by the Company for Cause at any time, effective upon the giving to Employee of a written notice of termination specifying in detail the particulars of the conduct of Employee deemed by the Company to justify such termination for Cause. b. Employee's employment may be terminated by the Company without Cause at any time, effective upon the giving to Employee of a written notice of termination specifying that such termination is without Cause. c. Employee may terminate his employment with the Company at any time. d. Upon a termination by the Company of Employee's employment for Cause during the Term, but prior to a Change in Control or more than 24 months after a Change in Control, Employee shall be entitled only to the payments specified in Section 3.a. below. Upon a termination by the Company of Employee's employment without Cause during the Term, but prior to a Change in Control or more than 24 months after a Change in Control, Employee shall be entitled to all of the payments and benefits specified in Section 3 below. e. If Employee voluntarily terminates his employment during the Term, but prior to a Change in Control or more than 24 months after a Change in Control, he shall notify Employer in writing if he believes the termination is for Good Reason. Employee shall set forth in reasonable detail why Employee believes there is Good Reason. If such termination is for Good Reason, Employee shall be entitled to all of the payments and benefits specified in Section 3 below. If such voluntary termination is for other than Good Reason, then Employee shall be entitled only to the payments specified in Section 3.a. below. 3. Payments and Benefits Upon Termination During Term - -- Change in Control Severance Inapplicable. To the extent provided in Section 2 above, upon termination of his employment during the Term, but prior to a Change in Control or more than 24 months after a Change in Control, Employee shall receive the following payments and benefits: a. The Company shall pay to Employee on the Termination Date (i) the full base salary earned by employee through the Termination Date and unpaid at the Termination Date, plus (ii) credit for any vacation earned by Employee but not taken at the Termination Date, plus (iii) all other amounts earned by Employee and unpaid as of the Termination Date. b. The Company shall continue to pay to Employee his base monthly salary at the highest rate in effect at any time during the twelve months immediately preceding the Termination Date (including his targeted bonus in the current year) for the eighteen months succeeding his Termination Date. Such amounts shall be paid in accordance with the Company's regular pay period policy for its employees. c. The Company, at its expense, shall provide to Employee for a period of eighteen months after the Termination Date medical and/or dental coverage under the medical and dental plans maintained by the Company. Upon Employee's re-employment during such period, to the extent covered by the new Employer's Plan, coverage under the Company's plan shall lapse. Additionally, the Company shall make a cash lump sum payment in an amount equal to the sum of (i) and (ii) below: (i) The fair market value (determined as of the Termination Date) of that number of shares of non-vested restricted stock of the Company held by the Employee which would have vested within the eighteen month period following the Employee's Termination Date had the Employee remained employed with the Company; plus (ii) With respect to each non-vested option to purchase Company stock held by the Employee which would have vested within the eighteen month period following the Employee's Termination Date had the Employee remained employed with the Company, the excess, if any, of the fair market value (determined as of the Termination Date) of the Company stock subject to such option over the exercise price of such option. Employee's participation in and/or coverage under all other employee benefit plans, programs or arrangements sponsored or maintained by the Company shall cease effective as of the Termination Date. d. The Company shall pay the reasonable costs of outplacement services selected by the Company. e. For purposes of determining Employee's benefit under the Brown Group, Inc. Supplemental Employment Retirement Plan, an additional 1.5 years of Credited Service shall be credited to the Employee's actual or deemed Credited Service. 4. Termination Within 24 Months After a Change in Control Which Occurs During the Term. a. Employee's employment may be terminated by the Company for Cause at any time, effective upon the giving to Employee of written notice of termination specifying in detail the particulars of the conduct of Employee deemed by the Company to justify such termination for Cause. b. Employee's employment may be terminated by the Company without Cause at any time, effective upon the giving to Employee of a written notice of termination specifying that such termination is without Cause. c. Employee may terminate his employment with the Company at any time. d. Upon a termination by the Company of Employee's employment for Cause within 24 months after a Change in Control which occurs during the Term, Employee shall be entitled only to the payments specified in Section 5.a. below. Upon a termination by the Company of Employee's employment without Cause within 24 months after a Change in Control which occurs during the Term, Employee shall be entitled to all of the payments and benefits specified in Section 5 below. e. If Employee voluntarily terminates his employment within 24 months after a Change in Control which occurs during the Term, he shall notify the Company in writing if he believes the termination is for Good Reason. Employee shall set forth in reasonable detail why Employee believes there is Good Reason. If such termination is for Good Reason, Employee shall be entitled to all of the payments and benefits specified in Section 5 below. If such voluntary termination is for other than Good Reason, then Employee shall be entitled only to the payments specified in Section 5.a. below. 5. Payments and Benefits Upon Termination Within 24 Months after a Change in Control Which Occurs During Term. To the extent provided in 4 above, upon termination of his employment within 24 months after a Change in Control which occurs during the Term, Employee shall receive the following payments and benefits: a. The Company shall pay to Employee on the Termination Date (i) the full base salary earned by employee through the Termination Date and unpaid at the Termination Date, plus (ii) credit for any vacation earned by Employee but not taken at the Termination Date, plus (iii) all other amounts earned by Employee and unpaid as of the Termination Date. b. The Company shall pay to Employee in a lump sum not later than 30 days after his Termination Date an amount equal to 250 percent of the sum of (i) his base annual salary at the highest rate in effect at any time during the twelve months immediately preceding the Termination Date, and (ii) his targeted bonus for the current year. In addition, the Company shall pay to Employee his targeted bonus payment for the year of termination prorated to the Termination Date. c. The Company, at its expense, shall provide to Employee for a period of thirty months after the Termination Date medical and/or dental coverage under the medical and dental plans maintained by the Company. Upon Employee's re-employment during such period, to the extent covered by the new employer's plan, coverage under the Company's plan shall lapse. Employee's participation in and/or coverage under all other employee benefit plans, programs or arrangements sponsored or maintained by the Company shall cease effective as of the Termination Date. d. The Company shall pay the reasonable costs of outplacement services selected by the Company. e. For purposes of determining Employee's benefit under the Brown Group, Inc. Supplemental Employment Retirement Plan, an additional 2.5 years of Credited Service shall be credited to the Employee's actual or deemed Credited Service. 6. Mitigation or Reduction of Benefits. Employee shall not be required to mitigate the amount of any payment provided for in Section 3 or Section 5 by seeking other employment or otherwise. Except as otherwise specifically set forth herein, the amount of any payment or benefits provided in Section 3 or Section 5 shall not be reduced by any compensation or benefits or other amounts paid to or earned by Employee as the result of employment by another employer after the Termination Date or otherwise. 7. Employee Expenses After Change in Control. If Employee's employment is terminated by the Company within 24 months after a Change in Control which occurs during the Term and there is a dispute with respect to this Agreement, then all Employee's costs and expenses (including reasonable legal and accounting fees) incurred by Employee (a) to defend the validity of this Agreement, (b) if Employee's employment has been terminated for Cause, to contest such termination, (c) to contest any determinations by the Company concerning the amounts payable by the Company under this Agreement, or (d) to otherwise obtain or enforce any right or benefit provided to Employee by this Agreement, shall be paid by the Company if Employee is the prevailing party. 8. Release. Notwithstanding anything to the contrary stated in this Agreement, no benefits will be paid pursuant to Sections 3 and 5 except under Sections 3.a. and 5.a. prior to execution by Employee of a release to the Company in the form attached as Exhibit A. 9. Covenant Not to Compete. Benefits payable pursuant to Sections 3.b, 3.c, and 3.e are subject to the following restrictions. a. Post-Termination Restrictions. i. Employee acknowledges that (i) the Company has spent substantial money, time and effort over the years in developing and solidifying its relationships with its customers throughout the world and in developing its Confidential Information; (ii) under this Agreement, the Company is agreeing to provide Employee with certain benefits based upon Employee's assurances and promises contained herein not to divert the Company's customers' goodwill or to put himself in a position following his employment with Company in which the confidentiality of Company's Confidential Information might somehow be compromised. ii. Accordingly, Employee agrees that, for eighteen (18) months after a Termination Date described in the second sentence of Section 2.d, Employee will not, directly or indirectly, on Employee's own behalf or on behalf of any other person, firm, corporation or entity (whether as owner, partner, consultant, employee or otherwise): A. provide any executive- or managerial-level services in the shoe industry in the United States in competition with the Company, for any Competitor; B. hold any executive- or managerial-level position with any Competitor in the United States; C. engage in any research and development activities or efforts for a Competitor, whether as an employee, consultant, independent contractor or otherwise, to assist the Competitor in competing in the shoe industry in the United States; D. cause or attempt to cause any Customer to divert, terminate, limit, modify or fail to enter into any existing or potential relationship with the Company; E. cause or attempt to cause any shoe supplier or manufacturer of the Company to divert, terminate, limit, modify or fail to enter into any existing or potential relationship with the Company; and F. solicit, entice, employ or seek to employ, in the shoe industry, any executive- or managerial-level employee of, or any consultant or advisor to, the Company. b. Acknowledgment Regarding Restrictions. Employee recognizes and agrees that the restraints contained in Section 9.a. (both separately and in total) are reasonable and should be fully enforceable in view of the high-level positions Employee has had with the Company, the national and international nature of both the Company's business and competition in the shoe industry, and the Company's legitimate interests in protecting its Confidential Information and its customer goodwill and relationships. Employee specifically hereby acknowledges and confirms that he is willing and intends to, and will, abide fully by the terms of Section 9.a. of this Agreement. Employee further agrees that the Company would not have adequate protection if Employee were permitted to work for its competitors in violation of the terms of this Agreement since the Company would be unable to verify whether (i) its Confidential Information was being disclosed and/or misused, and (ii) Employee was involved in diverting or helping to divert the Company's customers and/or its customer goodwill. c. Company's Right to Injunctive Relief. In the event of a breach or threatened breach of any of Employee's duties and obligations under the terms and provisions of Section 9.a. of this Agreement, the Company shall be entitled, in addition to any other legal or equitable remedies it may have in connection therewith (including any right to damages that it may suffer), to temporary, preliminary and permanent injunctive relief restraining such breach or threatened breach. Employee hereby expressly acknowledges that the harm which might result to Company's business as a result of noncompliance by Employee with any of the provisions of Section 9.a. would be largely irreparable. Employee specifically agrees that if there is a question as to the enforceability of any of the provisions of Section 9.a. hereof, Employee will not engage in any conduct inconsistent with or contrary to such Section until after the question has been resolved by a final judgment of a court of competent jurisdiction. Employee undertakes and agrees that if Employee breaches or threatens to breach the Agreement, Employee shall be liable for any attorneys' fees and costs incurred by Company in enforcing its rights hereunder. d. Employee Agreement to Disclose this Agreement. Employee agrees to disclose, during the eighteen month period following a Termination Date described in the second sentence of Section 2.d, the terms of this Section 9 to any potential future employer. 10. Confidential Information. The Employee acknowledges and confirms that certain data and other information (whether in human or machine readable form) that comes into his possession or knowledge (whether before or after the date of this Employment Agreement) and which was obtained from the Company, or obtained by the Employee for or on behalf of the Company, and which is identified herein is the secret, confidential property of the Company (the "Confidential Information"). This Confidential Information includes, but is not limited to: a. lists or other identification of customers or prospective customers of the Company (and key individuals employed or engaged by such parties); b. lists or other identification of sources or prospective sources of the Company's products or components thereof (and key individuals employed or engaged by such parties); c. all compilations of information, correspondence, designs, drawings, files, formulae, lists, machines, maps, methods, models, notes or other writings, plans, records, regulatory compliance procedures, reports, specialized or technical data, schematics, source code, object code, documentation, and software used in connection with the development, manufacture, fabrication, assembly, marketing and sale of the Company's products; d. financial, sales and marketing data relating to the Company or to the industry or other areas pertaining to the Company's activities and contemplated activities (including, without limitation, manufacturing, transportation, distribution and sales costs and non-public pricing information); e. equipment, materials, procedures, processes, and techniques used in, or related to, the development, manufacture, assembly, fabrication or other production and quality control of the Company's products and services; f. the Company's relations with its customers, prospective customers, suppliers and prospective suppliers and the nature and type of products or services rendered to such customers (or proposed to be rendered to prospective customers); g. the Company's relations with its employees (including, without limitation, salaries, job classifications and skill levels); and h. any other information designated by the Company to be confidential, secret and/or proprietary (including without limitation, information provided by customers or suppliers of the Company). Notwithstanding the foregoing, the term "Confidential Information" shall not consist of any data or other information which has been made publicly available or otherwise placed in the public domain other than by the Employee in violation of this Employment Agreement. 11. Certain Additional Payments by the Company. a. Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 11.a., if it shall be determined that the Employee is entitled to a Gross-Up Payment, but that the Payments do not exceed 110 percent of the greatest amount (the "Reduced Amount") that could be paid to the Employee such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Employee, and the Payments, in the aggregate, shall be reduced to the Reduced Amount. b. Subject to the provisions of Section 11.c., all determinations required to be made under this Section 11, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young or such other certified public accounting firm as may be designated by the Employee (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the receipt of notice from the Employee that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Employee shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 11, shall be paid by the Company to the Employee within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 11.c. and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Employee. c. The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Employee is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which the Employee gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: i. give the Company any information reasonably requested by the Company relating to such claim, ii. take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, iii. cooperate with the Company in good faith in order to effectively contest such claim, and iv. permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 11.c., the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee, on an interest-free basis and shall indemnify and hold Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. d. If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 11.c., the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of Section 11.c.) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 11.c., a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 12. Notice. All notices hereunder shall be in writing and shall be deemed to have been duly given (a) when delivered personally or by courier, or (b) on the third business day following the mailing thereof by registered or certified mail, postage prepaid, or (c) on the first business day following the mailing thereof by overnight delivery service, in each case addressed as set forth below: a. If to the Company Brown Shoe Company, Inc. 8300 Maryland Avenue St. Louis, Missouri 63166-0029 Attention: Chief Executive Officer b. If to Employee: Charles C. Gillman 9914 East 10th Street Indianapolis, IN 46229 Any party may change the address to which notices are to be addressed by giving the other party written notice in the manner herein set forth. 13. Successors; Binding Agreement. a. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, upon or prior to such succession, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. A copy of such assumption and agreement shall be delivered to Employee promptly after its execution by the successor. Failure of the Company to obtain such agreement upon or prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to benefits from the Company in the same amounts and on the same terms as Employee would be entitled hereunder if Employee terminated his employment for Good Reason. For purposes of the preceding sentence, the date on which any such succession becomes effective shall be deemed the Termination Date. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 13.a. or which otherwise becomes bound by the terms and provisions of this Agreement by operation of law. b. This Agreement is personal to Employee and Employee may not assign or delegate any part of his rights or duties hereunder to any other person, except that this Agreement shall inure to the benefit of and be enforceable by Employee's legal representatives, executors, administrators, heirs and beneficiaries. 14. Severability. If any provision of this Agreement or the application thereof to any person or circumstance shall to any extent be held to be invalid or unenforceable, the remainder of this Agreement and the application of such provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 15. Headings. The headings in this Agreement are inserted for convenience of reference only and shall not in any way affect the meaning or interpretation of this Agreement. 16. Counterparts. This Agreement may be executed in one or more identical counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 17. Waiver. Neither any course of dealing nor any failure or neglect of either party hereto in any instance to exercise any right, power or privilege hereunder or under law shall constitute a waiver of such right, power or privilege or of any other right, power or privilege or of the same right, power or privilege in any other instance. Without limiting the generality of the foregoing, Employee's continued employment without objection shall not constitute Employee's consent to, or a waiver of Employee's rights with respect to, any circumstances constituting Good Reason. All waivers by either party hereto must be contained in a written instrument signed by the party to be charged therewith, and, in the case of the Company, by its duly authorized officer. 18. Entire Agreement. This instrument constitutes the entire agreement of the parties in this matter and shall supersede any other agreement between the parties, oral or written, concerning the same subject matter, including (but not limited to) the Severance Agreement dated December 31, 1998 between the Employee and the Company. 19. Amendment. This Agreement may be amended only by a writing which makes express reference to this Agreement as the subject of such amendment and which is signed by Employee and by a duly authorized officer of the Company. 20. Governing Law. In light of Company's and Employee's substantial contacts with the State of Missouri, the facts that the Company is headquartered in Missouri and Employee resides in and/or reports to Company management in Missouri, the parties' interests in ensuring that disputes regarding the interpretation, validity and enforceability of this Agreement are resolved on a uniform basis, and Company's execution of, and the making of, this Agreement in Missouri, the parties agree that: (i) any litigation involving any noncompliance with or breach of the Agreement, or regarding the interpretation, validity and/or enforceability of the Agreement, shall be filed and conducted exclusively in the state or federal courts in St. Louis City or County, Missouri; and (ii) the Agreement shall be interpreted in accordance with and governed by the laws of the State of Missouri, without regard for any conflict of law principles. IN WITNESS WHEREOF, Employee and the Company have executed this Agreement as of the day and year first above written. BROWN SHOE COMPANY, INC. By: /s/ Robert D. Pickle -------------------------------- Vice President, General Counsel and Corporate Secretary EMPLOYEE By: /s/ Charles C. Gillman -------------------------------- Charles C. Gillman Exhibit A RELEASE RELEASE (the "Release") dated _____________, ____ between Charles C. Gillman ("Employee") and Brown Shoe Company, Inc., a New York corporation (as further defined in Section 13 of the Severance Agreement, the "Company"). WHEREAS, the Company and Employee are parties to a Severance Agreement dated December 1, 1999 (the "Severance Agreement"), which provides certain protection to Employee during management transition and thereafter and in the event there is any change in corporate structure which results in a change in control of the Company. WHEREAS, the execution of this Release is a condition precedent to, and material inducement to, the Company's provision of certain benefits under the Severance Agreement; NOW, THEREFORE, the parties hereto agree as follows: 1. Mutual Promises. The Company undertakes the obligations contained in the Severance Agreement, which are in addition to any compensation to which Employee might otherwise be entitled, in exchange for Employee's promises and obligations contained herein. The Company's obligations are undertaken in lieu of any other severance benefits. 2. Release of Claims; Agreement Not to File Suit. a. Employee, for and on behalf of himself and his heirs, beneficiaries, executors, administrators, successors, assigns and anyone claiming through or under any of the foregoing, agrees to, and does, remise, release and forever discharge the Company and its subsidiaries and affiliates, each of their shareholders, directors, officers, employees, agents and representatives, and its successors and assigns (collectively, the "Company Released Persons"), from any and all matters, claims, demands, damages, causes of action, debts, liabilities, controversies, judgments and suits of every kind and nature whatsoever, foreseen or unforeseen, known or unknown, which have arisen or could arise from matters which occurred prior to the date of this Release, which matters include without limitation: (i) the matters covered by the Severance Agreement and this Release, (ii) Employee's employment, and/or termination from employment with the Company, and (iii) any claims which might otherwise arise in the future as a result of arrangements or agreements in effect as of the date of this Release or the continuance of such arrangements and agreements. b. Employee, for and on behalf of himself and his heirs, beneficiaries, executors, administrators, successors, assigns, and anyone claiming through or under any of the foregoing, agrees that he will not file or otherwise submit any charge, claim, complaint, or action to any agency, court, organization, or judicial forum (nor will Employee permit any person, group of persons, or organization to take such action on his behalf) against any Company Released Person arising out of any actions or non-actions on the part of any Company Released Person arising before the date of this Release or any action taken after the date of this Release pursuant to the Severance Arrangement. Employee further agrees that in the event that any person or entity should bring such a charge, claim, complaint, or action on his behalf, he hereby waives and forfeits any right to recovery under said claim and will exercise every good faith effort to have such claim dismissed. c. The charges, claims, complaints, matters, demands, damages, and causes of action referenced in Sections 2(a) and 2(b) include, but are not limited to: (i) any breach of an actual or implied contract of employment between Employee and any Company Released Person, (ii) any claim of unjust, wrongful, or tortuous discharge (including any claim of fraud, negligence, retaliation for whistleblowing, or intentional infliction of emotional distress), (iii) any claim of defamation or other common law action, or (iv) any claims of violations arising under the Civil Rights Act of 1964, as amended, 42 U.S.C. Sec. 2000e et seq., the Age Discrimination in Employment Act, 29 U.S.C. Sec. 621 et seq., the Americans with Disabilities Act of 1990, 42 U.S.C. Sec. 12101 et seq., the Fair Labor Standards Act of 1938, as amended, 29 U.S.C. Sec. 201 et seq., the Rehabilitation Act of 1973, as amended, 29 U.S.C. Sec. 701 et seq., or of the Missouri Human Rights Act, Sec. 213.000 R.S. Mo. et seq., the Missouri Service Letter Statute, Sec. 209.140 R.S. Mo. or any other relevant federal, state, or local statutes or ordinances, or any claims for pay, vacation pay, insurance, or welfare benefits or any other benefits of employment with any Company Released Person arising from events occurring prior to the date of this Release other than those payments and benefits specifically provided herein. d. This Release shall not affect Employee's right to any governmental benefits payable under any Social Security or Worker's Compensation law now or in the future. 3. Release of Benefit Claims. Employee, for and on behalf of himself and his heirs, beneficiaries, executors, administrators, successors, assigns and anyone claiming through or under any of the foregoing, further releases and waives any claims for pay, vacation pay, insurance or welfare benefits or any other benefits of employment with any Company Released Person arising from events occurring prior to the date of this Release other than claims to the payments and benefits specifically provided for in the Severance Agreement. 4. Revocation Period; Knowing and Voluntary Agreement. a. Employee acknowledges that he was given a copy of this Agreement when the Severance Agreement was executed and he, therefore, has been given a period of at least forty-five (45) days to consider whether or not to accept this Agreement. Furthermore, Employee may revoke this Agreement for seven (7) days following its execution. b. Employee represents, declares and agrees that he voluntarily accepts the payments described above for the purposes of making a full and final compromise, adjustment and settlement of all potential claims hereinabove described. Employee hereby acknowledges that he has been advised of the opportunity to consult an attorney and that he understands the Release and the effect of signing the Release. 5. Severability. If any provision of this Release or the application thereof to any person or circumstance shall to any extent be held to be invalid or unenforceable, the remainder of this Release and the application of such provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each provision of this Release shall be valid and enforceable to the fullest extent permitted by law. 6. Headings. The headings in this Release are inserted for convenience of reference only and shall not in any way affect the meaning or interpretation of this Release. 7. Counterparts. This Release may be executed in one or more identical counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 8. Entire Agreement. This Release and Related Severance Agreement constitutes the entire agreement of the parties in this matter and shall supersede any other agreement between the parties, oral or written, concerning the same subject matter. 9. Governing Law. This Release shall be governed by, and construed and enforced in accordance with, the laws of the State of Missouri, without reference to the conflict of laws rules of such State. IN WITNESS WHEREOF, Employee and the Company have executed this Release as of the day and year first above written. BROWN SHOE COMPANY, INC. By:__________________________________ Vice President, General Counsel and Corporate Secretary EMPLOYEE By:__________________________________ Charles C. Gillman EX-10 9 Exhibit 10.(l) EARLY RETIREMENT AGREEMENT EARLY RETIREMENT AGREEMENT (the "Agreement") dated October 26, 1999 ("Effective Date") between Harry E. Rich ("Employee") and Brown Shoe Company, Inc., a New York corporation ("Company"). WHEREAS, the Employee will reach his Retirement Date on December 31, 1999; and WHEREAS, the Company recognizes the value of the services performed by the Employee during his period of employment with the Company; and WHEREAS, the Employee wishes to be assured that he will be entitled to certain additional compensation and provided certain benefits following his Retirement Date and upon his "Retirement Payment Date" (as defined below); and WHEREAS, the parties hereto wish to provide the terms and conditions upon which the Company shall pay such additional compensation and provide such benefits to the Employee after his retirement; and WHEREAS, the Employee wishes to have the additional compensation and benefits provided for in this Agreement and, in exchange for such additional compensation and benefits, is willing to give to the Company, under certain circumstances, his covenant not to compete; NOW, THEREFORE, in consideration of the premises and of the mutual promises herein contained, the parties hereto agree as follows: 1. Definitions. a. "Competitor" shall mean any person, firm, corporation, partnership or other entity which in its prior fiscal year had annual gross sales volume or revenues of shoes of more than $20,000,000 or is reasonably expected to have such sales or revenues in either the current fiscal year or the next following fiscal year. b. "Confidential Information" shall have the meaning set forth in Section 6. c. "Customer" shall mean any wholesale customer of the Company which either purchased from the Company during the one (1) year immediately preceding the Retirement Date, or is reasonably expected by the Company to purchase from the Company in the one (1) year period immediately following the Retirement Date, more than $1,000,000 in shoes. d. "Retirement Date" shall mean December 31, 1999. e. "Retirement Payment Date" shall mean the earlier of the Employee's death or June 30, 2001. 2. Payments and Benefits Upon Retirement. Upon and after the Employee's Retirement Date, the following shall apply: a. The Company shall pay to the Employee on his Retirement Date (i) the full base salary earned by him through the Retirement Date and unpaid on such date, plus (ii) credit for any vacation earned by him but not taken at the Retirement Date, plus (iii) all other amounts earned by him and unpaid as of the Retirement Date. Additionally, the Company shall pay to Employee his bonus for the Company's fiscal year ending January 29, 2000 at the same time as other such bonuses are paid to other employees of the Company. b. The Company shall continue to pay to the Employee his base monthly salary at the highest rate in effect at any time during the twelve months immediately preceding the Retirement Date (including on a monthly basis beginning in February 2000 one-twelfth of his targeted bonus for the fiscal year ending January 31, 2001 which in the aggregate is $247,500) until the Retirement Payment Date (even if he dies during such eighteen month period). Such amounts shall be paid in accordance with the Company's regular pay period policy for its employees, and shall be counted in determining Employee's benefits under the Brown Shoe Company, Inc. Executive Retirement Plan. c. Employee will be considered to continue as an employee of the Company from January 1, 2000 through June 30, 2001 solely for purposes of receiving benefits under the Company's Incentive and Stock Compensation Plan of 1999 (except for purposes of the long-term performance-based stock award, as explained more fully below), Executive Retirement Plan, group life insurance program, and medical and dental plans; provided, however, that it is expressly understood and agreed that Employee's status as an Employee of the Company for purposes of the group life insurance program and medical and dental plans will terminate and cease in all events immediately upon Employee's re- employment before June 30, 2001 to the extent covered by his new Employer's group life insurance, medical and dental plans; provided further, that Employee shall be entitled to receive one-third of his long-term performance-based stock award for the three-year period ending on the last day of the Company's 2001 fiscal year based on the Company's actual results during such three-year performance period, such award to be paid after the end of the Company's 2001 fiscal year in accordance with normal practices. By virtue of the fact that Employee is considered to continue in employment from January 1, 2000 through the Retirement Payment Date, for purposes of determining the Employee's benefit under the Brown Shoe Company, Inc. Executive Retirement Plan, an additional 1.5 years of Credited Service (in addition to the additional ten (10) years of Credited Service credited to the Employee in accordance with Section A.5 of the Brown Shoe Company, Inc. Executive Retirement Plan) shall be credited to the Employee's actual or deemed Credited Service, even if he dies before the Retirement Payment Date. Benefits under the Brown Shoe Company, Inc. Executive Retirement Plan shall commence as soon as practicable after the Retirement Payment Date. d. The Company, at its expense, shall provide to the Employee, his spouse and any dependents (as long as such individuals are under the age of 23), for a period beginning on the Retirement Payment Date and ending upon the Employee's attainment of age 65, medical and/or dental coverage under the medical and dental plans maintained by the Company or under an arrangement which provides benefits substantially similar to those provided under the medical and dental plans maintained by the Company. Upon the Employee's re-employment during such period, to the extent covered by his new employer's Plan, coverage under this Section 2.c. shall lapse. The Employee's participation in and/or coverage under all other employee benefit plans, programs or arrangements sponsored or maintained by the Company shall cease effective as of the Retirement Payment Date. e. With respect to each non-vested option to purchase Company stock held by the Employee on the Retirement Payment Date, the Company shall make a cash lump sum payment to the Employee within 30 days after the Retirement Payment Date in an amount equal to the excess, if any, of the fair market value (determined as of the Retirement Payment Date) of the Company stock subject to such option over the exercise price of such option. In addition, any non-vested restricted stock of the Company held by the Employee on the Retirement Payment Date which would have vested if the Employee had remained employed until age 65 shall vest on the Retirement Payment Date. f. During the period commencing on the Retirement Date and ending on the earlier of the Retirement Payment Date or the date the Employee secures other employment, the Company shall pay the reasonable costs of outplacement services selected by the Company and shall provide, at the Company's expense, office space and secretarial service at a non-Company facility. g. The Company shall pay the Employee's federal and state income tax preparation fees charged by a service provider selected by the Employee for his taxable years 1999 and 2000. h. The Company shall pay membership dues for the Employee charged by the Bogey Club and the St. Louis Club, both located in St. Louis, Missouri, until the Employee's attainment of age 65 or his death, if earlier. i. The Employee shall be given the opportunity to purchase the Dell personal computer used by the Employee in his employment with the Company at a purchase price equal to the book value of the computer. 3. Mitigation or Reduction of Benefits. Employee shall not be required to mitigate the amount of any payment provided for in Section 2 by seeking other employment or otherwise. Except as otherwise specifically set forth herein, the amount of any payment or benefits provided in Section 2 shall not be reduced by any compensation or benefits or other amounts paid to or earned by Employee as the result of employment by another employer after the Retirement Date or otherwise. 4. Release. Notwithstanding anything to the contrary stated in this Agreement, no benefits will be paid pursuant to Section 2 except under Section 2.a. prior to execution by Employee of a release to the Company in the form attached as Exhibit A. 5. Covenant Not to Compete. Benefits payable pursuant to Section 2 (except under Section 2.a.) are subject to the following restrictions. a. Post-Retirement Restrictions. i. Employee acknowledges that (i) the Company has spent substantial money, time and effort over the years in developing and solidifying its relationships with its Customers throughout the world and in developing its Confidential Information; (ii) under this Agreement, the Company is agreeing to provide Employee with certain benefits based upon Employee's assurances and promises contained herein not to divert the Company's Customers' goodwill or to put himself in a position following his employment with Company in which the confidentiality of Company's Confidential Information might somehow be compromised. ii. Accordingly, Employee agrees that, for eighteen (18) months after the Retirement Date, Employee will not, directly or indirectly, on Employee's own behalf or on behalf of any other person, firm, corporation or entity (whether as owner, partner, consultant, employee or otherwise): A. provide any executive- or managerial-level services in the shoe industry in the United States in competition with the Company, for any Competitor; B. hold any executive- or managerial-level position with any Competitor in the United States; C. engage in any research and development activities or efforts for a Competitor, whether as an employee, consultant, independent contractor or otherwise, to assist the Competitor in competing in the shoe industry in the United States; D. cause or attempt to cause any Customer to divert, terminate, limit, modify or fail to enter into any existing or potential relationship with the Company; E. cause or attempt to cause any shoe supplier or manufacturer of the Company to divert, terminate, limit, modify or fail to enter into any existing or potential relationship with the Company; and F. solicit, entice, employ or seek to employ, in the shoe industry, any executive- or managerial-level employee of, or any consultant or advisor to, the Company. b. Acknowledgment Regarding Restrictions. Employee recognizes and agrees that the restraints contained in Section 5.a. (both separately and in total) are reasonable and should be fully enforceable in view of the high-level positions Employee has had with the Company, the national and international nature of both the Company's business and competition in the shoe industry, and the Company's legitimate interests in protecting its Confidential Information and its Customer goodwill and relationships. Employee specifically hereby acknowledges and confirms that he is willing and intends to, and will, abide fully by the terms of Section 5.a. of this Agreement. Employee further agrees that the Company would not have adequate protection if Employee were permitted to work for its Competitors in violation of the terms of this Agreement since the Company would be unable to verify whether (i) its Confidential Information was being disclosed and/or misused, and (ii) Employee was involved in diverting or helping to divert the Company's Customers and/or its Customer goodwill. c. Company's Right to Injunctive Relief. In the event of a breach or threatened breach of any of Employee's duties and obligations under the terms and provisions of Section 5.a. of this Agreement, the Company shall be entitled, in addition to any other legal or equitable remedies it may have in connection therewith (including any right to damages that it may suffer), to temporary, preliminary and permanent injunctive relief restraining such breach or threatened breach. Employee hereby expressly acknowledges that the harm which might result to Company's business as a result of noncompliance by Employee with any of the provisions of Section 5.a. would be largely irreparable. Employee specifically agrees that if there is a question as to the enforceability of any of the provisions of Section 5.a. hereof, Employee will not engage in any conduct inconsistent with or contrary to such Section until after the question has been resolved by a final judgment of a court of competent jurisdiction. Employee undertakes and agrees that if Employee breaches or threatens to breach the Agreement, Employee shall be liable for any attorneys' fees and costs incurred by Company in enforcing its rights hereunder. d. Employee Agreement to Disclose this Agreement. Employee agrees to disclose, during the eighteen month period following the Retirement Date, the terms of this Section 5 to any potential future employer. 6. Confidential Information. The Employee acknowledges and confirms that certain data and other information (whether in human or machine readable form) that comes into his possession or knowledge (whether before or after the date of this Agreement) and which was obtained from the Company, or obtained by the Employee for or on behalf of the Company, and which is identified herein, is the secret, confidential property of the Company (the "Confidential Information"). This Confidential Information includes, but is not limited to: a. lists or other identification of customers or prospective customers of the Company (and key individuals employed or engaged by such parties); b. lists or other identification of sources or prospective sources of the Company's products or components thereof (and key individuals employed or engaged by such parties); c. all compilations of information, correspondence, designs, drawings, files, formulae, lists, machines, maps, methods, models, notes or other writings, plans, records, regulatory compliance procedures, reports, specialized or technical data, schematics, source code, object code, documentation, and software used in connection with the development, manufacture, fabrication, assembly, marketing and sale of the Company's products; d. financial, sales and marketing data relating to the Company or to the industry or other areas pertaining to the Company's activities and contemplated activities (including, without limitation, manufacturing, transportation, distribution and sales costs and non-public pricing information); e. equipment, materials, procedures, processes, and techniques used in, or related to, the development, manufacture, assembly, fabrication or other production and quality control of the Company's products and services; f. the Company's relations with its Customers, prospective customers, suppliers and prospective suppliers and the nature and type of products or services rendered to such Customers (or proposed to be rendered to prospective customers); g. the Company's relations with its employees (including, without limitation, salaries, job classifications and skill levels); and h. any other information designated by the Company to be confidential, secret and/or proprietary (including without limitation, information provided by customers or suppliers of the Company). Notwithstanding the foregoing, the term "Confidential Information" shall not consist of any data or other information which has been made publicly available or otherwise placed in the public domain other than by the Employee in violation of this Agreement. 7. Notice. All notices hereunder shall be in writing and shall be deemed to have been duly given (a) when delivered personally or by courier, or (b) on the third business day following the mailing thereof by registered or certified mail, postage prepaid, or (c) on the first business day following the mailing thereof by overnight delivery service, in each case addressed as set forth below: a. If to the Company Brown Shoe Company, Inc. 8300 Maryland Avenue St. Louis, Missouri 63166-0029 Attention: Chief Executive Officer b. If to Employee: Harry E. Rich 101 Fair Oaks Ladue, MO 63124 Any party may change the address to which notices are to be addressed by giving the other party written notice in the manner herein set forth. 8. Successors; Binding Agreement. a. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, upon or prior to such succession, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. A copy of such assumption and agreement shall be delivered to Employee promptly after its execution by the successor. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 8.a. or which otherwise becomes bound by the terms and provisions of this Agreement by operation of law. b. This Agreement is personal to the Employee and the Employee may not assign or delegate any part of his rights or duties hereunder to any other person, except that this Agreement shall inure to the benefit of and be enforceable by the Employee's legal representatives, executors, administrators, heirs and beneficiaries. 9. Severability. If any provision of this Agreement or the application thereof to any person or circumstance shall to any extent be held to be invalid or unenforceable, the remainder of this Agreement and the application of such provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 10. Headings. The headings in this Agreement are inserted for convenience of reference only and shall not in any way affect the meaning or interpretation of this Agreement. 11. Counterparts. This Agreement may be executed in one or more identical counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 12. Waiver. Neither any course of dealing nor any failure or neglect of either party hereto in any instance to exercise any right, power or privilege hereunder or under law shall constitute a waiver of such right, power or privilege or of any other right, power or privilege or of the same right, power or privilege in any other instance. All waivers by either party hereto must be contained in a written instrument signed by the party to be charged therewith, and, in the case of the Company, by its duly authorized officer. 13. Entire Agreement. This instrument constitutes the entire agreement of the parties in this matter and shall supersede any other agreement between the parties, oral or written, concerning the same subject matter. Without limiting the generality of the foregoing, all amounts paid under the Agreement are provided in lieu of any amounts or benefits to which the Employee is or could possibly be entitled under the Severance Agreement executed by the parties on July 27, 1998. 14. Amendment. This Agreement may be amended only by a writing which makes express reference to this Agreement as the subject of such amendment and which is signed by the Employee and by a duly authorized officer of the Company. 15. Governing Law. In light of the Company's and the Employee's substantial contacts with the State of Missouri, the facts that the Company is headquartered in Missouri and the Employee resides in and/or reported to management in Missouri during his employment with the Company, the parties' interests in ensuring that disputes regarding the interpretation, validity and enforceability of this Agreement are resolved on a uniform basis, and Company's execution of, and the making of, this Agreement in Missouri, the parties agree that: (i) any litigation involving any noncompliance with or breach of the Agreement, or regarding the interpretation, validity and/or enforceability of the Agreement, shall be filed and conducted exclusively in the state or federal courts in St. Louis City or County, Missouri; and (ii) the Agreement shall be interpreted in accordance with and governed by the laws of the State of Missouri, without regard for any conflict of law principles. IN WITNESS WHEREOF, the Employee and the Company have executed this Agreement as of the day and year first above written. BROWN SHOE COMPANY, INC. By: /s/ Robert D. Pickle. ---------------------------------- ROBERT D. PICKLE. Vice President, General Counsel and Corporate Secretary EMPLOYEE By: /s/ Harry E. Rich ---------------------------------- Harry E. Rich Exhibit A RELEASE RELEASE (the "Release") dated October 26, 1999 between Harry E. Rich ("Employee") and Brown Shoe Company, Inc., a New York corporation (as further defined in Section 7 of the Early Retirement Agreement, the "Company"). WHEREAS, the Company and the Employee are parties to an Early Retirement Agreement dated October 26, 1999 (the "Early Retirement Agreement"), which provides certain additional compensation and benefits to the Employee following his retirement from the service of the Company; and WHEREAS, the execution of this Release is a condition precedent to, and material inducement to, the Company's provision of certain benefits under the Early Retirement Agreement; NOW, THEREFORE, the parties hereto agree as follows: 1. Mutual Promises. The Company undertakes the obligations contained in the Early Retirement Agreement in exchange for Employee's promises and obligations contained herein. The Company's obligations are undertaken in lieu of any other severance benefits, including, but not limited to, the benefits provided under the Severance Agreement executed by the parties on July 27, 1998. 2. Release of Claims; Agreement Not to File Suit. a. Employee, for and on behalf of himself and his heirs, beneficiaries, executors, administrators, successors, assigns and anyone claiming through or under any of the foregoing, agrees to, and does, remise, release and forever discharge the Company and its subsidiaries and affiliates, each of their shareholders, directors, officers, employees, agents and representatives, and its successors and assigns (collectively, the "Company Released Persons"), from any and all matters, claims, demands, damages, causes of action, debts, liabilities, controversies, judgments and suits of every kind and nature whatsoever, foreseen or unforeseen, known or unknown, which have arisen or could arise from matters which occurred prior to the date of this Release, which matters include without limitation: (i) the matters covered by the Early Retirement Agreement and this Release, (ii) Employee's employment and/or termination from employment with the Company, and (iii) any claims which might otherwise arise in the future as a result of arrangements or agreements in effect as of the date of this Release or the continuance of such arrangements and agreements. b. Employee, for and on behalf of himself and his heirs, beneficiaries, executors, administrators, successors, assigns, and anyone claiming through or under any of the foregoing, agrees that he will not file or otherwise submit any charge, claim, complaint, or action to any agency, court, organization, or judicial forum (nor will Employee permit any person, group of persons, or organization to take such action on his behalf) against any Company Released Person arising out of any actions or non-actions on the part of any Company Released Person arising before the date of this Release or any action taken after the date of this Release pursuant to the Early Retirement Agreement. Employee further agrees that in the event that any person or entity should bring such a charge, claim, complaint, or action on his behalf, he hereby waives and forfeits any right to recovery under said claim and will exercise every good faith effort to have such claim dismissed. c. The charges, claims, complaints, matters, demands, damages, and causes of action referenced in Sections 2.a. and 2.b. include, but are not limited to: (i) any breach of an actual or implied contract of employment between Employee and any Company Released Person, (ii) any claim of unjust, wrongful, or tortuous discharge (including any claim of fraud, negligence, retaliation for whistleblowing, or intentional infliction of emotional distress), (iii) any claim of defamation or other common law action, or (iv) any claims of violations arising under the Civil Rights Act of 1964, as amended, 42 U.S.C. Sec. 2000e et seq., the Age Discrimination in Employment Act, 29 U.S.C. Sec. 621 et seq., the Americans with Disabilities Act of 1990, 42 U.S.C. Sec. 12101 et seq., the Fair Labor Standards Act of 1938, as amended, 29 U.S.C. Sec. 201 et seq., the Rehabilitation Act of 1973, as amended, 29 U.S.C. Sec. 701 et seq., or of the Missouri Human Rights Act, Sec. 213.000 R.S. Mo. et seq., the Missouri Service Letter Statute, Sec. 209.140 R.S. Mo. or any other relevant federal, state, or local statutes or ordinances, or any claims for pay, vacation pay, insurance, or welfare benefits or any other benefits of employment with any Company Released Person arising from events occurring prior to the date of this Release other than those payments and benefits specifically provided in the Early Retirement Agreement. d. This Release shall not affect Employee's right to any governmental benefits payable under any Social Security or Worker's Compensation law now or in the future. 3. Release of Benefit Claims. Employee, for and on behalf of himself and his heirs, beneficiaries, executors, administrators, successors, assigns and anyone claiming through or under any of the foregoing, further releases and waives any claims for pay, vacation pay, insurance or welfare benefits or any other benefits of employment with any Company Released Person arising from events occurring prior to the date of this Release other than claims to the payments and benefits specifically provided for in the Early Retirement Agreement. 4. Revocation Period; Knowing and Voluntary Agreement. a. Employee acknowledges that he was given a copy of this Agreement when the Early Retirement Agreement was executed and he, therefore, has been given a period of at least twenty-one (21) days to consider whether or not to accept this Agreement. Furthermore, Employee may revoke this Agreement for seven (7) days following its execution. b. Employee represents, declares and agrees that he voluntarily accepts the payments described above for the purposes of making a full and final compromise, adjustment and settlement of all potential claims hereinabove described. Employee hereby acknowledges that he has been advised of the opportunity to consult an attorney and that he understands the Release and the effect of signing the Release. 5. Severability. If any provision of this Release or the application thereof to any person or circumstance shall to any extent be held to be invalid or unenforceable, the remainder of this Release and the application of such provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each provision of this Release shall be valid and enforceable to the fullest extent permitted by law. 6. Headings. The headings in this Release are inserted for convenience of reference only and shall not in any way affect the meaning or interpretation of this Release. 7. Counterparts. This Release may be executed in one or more identical counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 8. Entire Agreement. This Release and related Early Retirement Agreement constitutes the entire agreement of the parties in this matter and shall supersede any other agreement between the parties, oral or written, concerning the same subject matter. 9. Governing Law. This Release shall be governed by, and construed and enforced in accordance with, the laws of the State of Missouri, without reference to the conflict of laws rules of such State. IN WITNESS WHEREOF, Employee and the Company have executed this Release as of the day and year first above written. BROWN SHOE COMPANY, INC. By: /s/ Robert D. Pickle. ---------------------------------- ROBERT D. PICKLE. Vice President, General Counsel and Corporate Secretary EMPLOYEE By: /s/ Harry E. Rich ---------------------------------- Harry E. Rich EX-10 10 EXHIBIT 10.(m) BROWN SHOE COMPANY, INC. DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS ---------------------- TABLE OF CONTENTS ----------------- SECTION I STATEMENT OF PURPOSE SECTION II DEFINITIONS SECTION III ELIGIBILITY AND PARTICIPATION A. ELIGIBILITY B. CONDITIONS TO PARTICIPATION C. CONTINUED PARTICIPATION SECTION IV ESTABLISHMENT OF THE CREDITS TO PARTICIPANTS' ACCOUNT A. DEFERRED COMPENSATION B. DIVIDENDS SECTION V PAYMENT OF ACCOUNT A. OTHER THAN DEATH 1. ANNUAL INSTALLMENTS 2. LUMP SUM 3. CHANGE IN ELECTION B. DEATH C. PAYMENT FOR FINANCIAL HARDSHIP D. PAYMENT ON TERMINATION OF THE PLAN, ETC SECTION VI ADMINISTRATION SECTION VII COMMITTEE SECTION VIII ADJUSTMENT IN NUMBER OF UNITS SECTION IX AMENDMENT AND TERMINATION A. AMENDMENT B. TERMINATION C. AFFECT ON UNITS SECTION X NON-ALIENATION OF ACCOUNT SECTION XI EFFECTIVE DATE SECTION XII MISCELLANEOUS A. NO TRUST OR FIDUCIARY RELATIONSHIP CREATED B. ASSUMPTION OF RISK C. NO INTEREST IN COMMON STOCK D. APPLICABLE LAW E. INVALID PLAN PROVISIONS F. RULE 16B-3 COMPLIANCE G. HEADINGS BROWN SHOE COMPANY, INC. DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS ---------------------- SECTION I --------- STATEMENT OF PURPOSE -------------------- The Brown Shoe Company, Inc. Deferred Compensation Plan for Non-Employee Directors has been established by Brown Shoe Company, Inc. (the "Company") and was adopted by the Board of Directors effective October 31, 1999 to provide an incentive which will motivate and reward non-employee directors of the Company and promote the best interests and long-term performance of the Company. SECTION II ---------- DEFINITIONS ----------- A. "Annual Retainer" means the annual retainer received by the Director. B. "Account" means the account in a special ledger, to be established by the Company, in which the Company shall credit Units for a Participant. C. "Beneficiary" means the person(s) designated by a Participant on the Participation Agreement to receive payments due the Participant in the event of the death of the Participant. In the absence of such designation or in the event the designated person fails to survive the Participant, "Beneficiary" shall mean the estate of the Participant. D. "Board of Directors" means the board of directors of the Company. E. "Committee" means the Compensation Committee of the Board of Directors. F. "Common Stock" means shares of the common stock, par value $3.75 per share, of the Company. G. "Company" means Brown Shoe Company, Inc., a New York corporation, or any successor thereto. H. "Director" means each member and each honorary member of the Board of Directors who is not an employee of the Company. I. "Exchange Act" means the Securities Exchange Act of 1934, as amended. J. "Fair Market Value" as of a given date means the mean between the high and low selling prices on the New York Stock Exchange of Common Stock on such given date. In the absence of actual sales on a given date, "Fair Market Value" means the mean between the high and low selling prices on the New York Stock Exchange of Common Stock on the last day preceding such given date on which a sale of Common Stock occurred. K. "Meeting Fees" means those fees received by the Director from the Company for attending annual and special board meetings, as well as committee meetings. L. "Participant" means each Director who has an Account under the Plan. M. "Participation Agreement" means the agreement supplied by the Company which evidences a Participant's participation in the Plan. N. "Payment Date" means the last day of each quarter of each fiscal year of the Company. O. "Plan" means the Brown Shoe Company, Inc. Deferred Compensation Plan for Non-Employee Directors. P. "Unit" means the measure of the benefit which may be awarded under the Plan and which shall, to the extent provided in the Plan, be equivalent to one share of Common Stock. SECTION III ----------- ELIGIBILITY AND PARTICIPATION ----------------------------- A. Eligibility. All Directors are eligible to become Participants. B. Conditions to Participation. Each Director who desires to become a Participant shall execute and deliver a Participation Agreement to the Treasurer of the Company irrevocably electing to defer until the termination of his service as a Director the receipt of all or a portion of either his Annual Retainer or Meeting Fees, or both. The Participation Agreement shall be filed with the Company prior to the commencement of the first fiscal quarter of the Company after he becomes a Director and thereafter prior to the commencement of any fiscal year of the Company. C. Continued Participation. Each Director shall have the right to alter the amount of his Annual Retainer or Meeting Fees deferred pursuant to the Plan or terminate his participation in the Plan for fiscal years subsequent to any fiscal year in which written notice of alteration or termination is filed with the Company. If the Participant chooses to terminate his participation in the Plan for future fiscal years, those amounts already deferred will remain in his Account established pursuant to Section IV hereof and be distributed at the appropriate time in accordance Section V hereof. SECTION IV ---------- ESTABLISHMENT OF THE CREDITS TO PARTICIPANTS' ACCOUNT ----------------------------------------------------- A. Deferred Compensation. The Company shall establish an Account for each Participant and shall credit to the Account for each Participant as of each Payment Date a number of Units equal to the number of shares of Common Stock (including fractions) which could be purchased on such date with the amount of the Annual Retainer or Meeting Fees which the Participant would have otherwise been entitled to receive since the last Payment Date but for such Participant's deferral election pursuant to Section III hereof. The deemed purchase price shall be the Fair Market Value of Common Stock on the Payment Date as of which the purchase is deemed to be made. B. Dividends. Until a Participant has been paid his entire Account, the Company shall credit to such Participant's Account as of the Payment Date next succeeding the dividend payment date on Common Stock a number of Units equal to the number of shares of Common Stock (including fractions) which could be purchased at the Fair Market Value of Common Stock on such Payment Date, with the dividends which the Participant would have received if he had been the owner of a number of shares of Common Stock equal to the number of Units (excluding fractions) in his Account on such dividend payment date. SECTION V --------- PAYMENT OF ACCOUNT ------------------ A. Other Than Death. Upon a Participant's termination of service as a Director for a reason other than death, the Company shall pay to the Participant the amount of Units credited to his Account either in a lump sum or in equal installments over a period of either five or ten years, as elected by the Director in his Participation Agreement. 1. Annual Installments. If the Participant elects annual installments, he shall designate whether such payments shall be made over either a five or ten year period. Depending on the election, the Company shall pay to the Participant the amount credited to his Account in five or ten annual installments as follows: a payment in cash shall be made as soon as practicable after each annual Payment Date commencing with the Payment Date coincident with or next succeeding his termination of service. The amount paid shall equal the sum of: (i) either one-fifth or one-tenth (depending on the Participant's election) of the number of Units credited to the Participant's Account pursuant to Section IV hereof as of the Payment Date coincident with or next succeeding his termination of service multiplied by the Fair Market Value of the Company's Common Stock on the Payment Date as of which such installment is paid, plus (ii) an amount equal to the Fair Market Value of any Units credited to his Account pursuant to Section IV B since the immediately preceding installment payment. 2. Lump Sum. If the Participant elects a lump sum, the Company shall pay to the Participant the amount credited to his Account in a single lump sum cash payment upon his termination of service as a Director. Payment of the lump sum shall be made as of the Payment Date coincident with or next succeeding the Participant's termination of service and shall be equal to the number of Units credited to his Account pursuant to Section IV hereof as of such Payment Date multiplied by the Fair Market Value of Common Stock on such Payment Date. 3. Change in Election. The Participant shall be entitled to change the manner of distribution originally elected provided that such change: (i) is made by written notice to the Company and such notice is received by the Company at least one year in advance of any deferred amounts becoming distributable pursuant to the terms of the Plan; and (ii) the Committee approves the Participant's new distribution method. B. Death. Upon a Participant's termination of service by reason of death or upon the death of a Participant prior to payment to him of the balance of his Account, installments or remaining installments, as the case may be, his account shall be paid to the Participant's Beneficiary in a lump sum as soon as practicable following his death and shall be equal to the number of Units credited to his Account pursuant to Section IV hereof as of the Payment Date immediately preceding distribution multiplied by the Fair Market Value of Common Stock on such Payment Date. C. Payment for Financial Hardship. Notwithstanding any other provisions of this Plan to the contrary, the Board of Directors or the Committee may authorize payment of a Participant's Account to such Participant at any time prior to the time such Account would otherwise be payable, in such manner as shall be determined by the Board of Directors, if the Board of Directors determines that the Participant has proved a demonstrated financial hardship. D. Payment on Termination of the Plan, Etc. Upon the termination of the Plan, upon dissolution or liquidation of the Company, or upon any merger or consolidation in which the Company is not to be the surviving corporation, each Participant and Beneficiary receiving payments hereunder shall receive in a lump sum an amount equal to the number of Units or balance thereof credited to the Participant's Account multiplied by the Fair Market Value of Common Stock on the Payment Date coincident with or next preceding such termination, such dissolution or liquidation, or such merger or consolidation, immediately prior to or simultaneously with such termination, such dissolution or liquidation, or such merger or consolidation. SECTION VI ---------- ADMINISTRATION -------------- The Plan shall be administered by the Committee. Subject to the express provisions of the Plan, the Committee shall have full power and authority to administer, construe and interpret the Plan. The decisions of the Committee concerning the administration, construction, and interpretation of the Plan shall be final. No member of the Committee shall be personally liable for his acts or omissions in respect of the Plan, unless attributable to such member's fraud or willful misconduct. SECTION VII ----------- COMMITTEE --------- All determinations of the Committee shall be made by a majority of its members. Any decision or determination reduced to writing and signed by a majority of the members shall be fully as effective as if it had been made by a majority vote at a meeting duly called and held. Notwithstanding any other provision of this Plan to the contrary, in the event the Committee is making a determination with respect to a Committee member's benefits provided pursuant to this Plan, the interested Committee member shall abstain from the decision-making process with respect to such determination. SECTION VIII ------------ ADJUSTMENT IN NUMBER OF UNITS ----------------------------- Notwithstanding any other provision in the Plan, if there is any change in the Common Stock by reason of exchanges of shares, split-ups, recapitalizations, mergers, consolidations, reorganizations, or combination (or stock dividends to the extent that the credits have not otherwise been made pursuant to Section IV B), the Units shall be appropriately adjusted by the Committee or the Board of Directors. SECTION IX ---------- AMENDMENT AND TERMINATION ------------------------- A. Amendment. The Board of Directors may at any time and from time to time amend the Plan in such respects as it may deem advisable. B. Termination. The Board of Directors may at any time terminate the Plan. C. Affect on Units. Except as provided in Section VIII hereof, no amendment or termination of the Plan shall, without the consent of a Participant or Beneficiary, affect the number of Units credited to his Account. SECTION X --------- NON-ALIENATION OF ACCOUNT ------------------------- No right or payment under this Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber or charge the same shall be void. No right or payment hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefit. If any Participant or Beneficiary hereunder should become bankrupt or attempt to anticipate, alienate, sell, assign, pledge, encumber or charge any right or payment hereunder, then such right or payment shall, in the discretion of the Board of Directors or the Committee, cease, and in such event, the Company may hold or apply the same or any part thereof for the benefit of the Participant or Beneficiary, his or her spouse, children or other dependents, or any of them, in such manner and in such proportion as the Board of Directors or the Committee shall determine. The determination of the Board of Directors or the Committee shall be final. SECTION XI ---------- EFFECTIVE DATE -------------- The Plan shall be effective as of October 31, 1999. SECTION XII ----------- MISCELLANEOUS ------------- A. No Trust or Fiduciary Relationship Created. Nothing contained in the Plan and no action taken pursuant thereto shall create or be construed to create a trust of any kind or a fiduciary relationship between the Company and any Participant, his Beneficiary or any other person. All payments hereunder shall be made from the general assets of the Company. B. Assumption of Risk. Each Participant, on behalf of himself, and his Beneficiary, shall assume all risks in connection with the value of any Unit credited to his Account. C. No Interest in Common Stock. Nothing contained in the Plan shall be construed as conferring upon a Participant or any other person any right, title or interest in any shares of Common Stock, including without limitation, voting rights, rights to any Common Stock or any other equity interest in the Company. D. Applicable Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of New York, without giving effect to the choice of law principles thereof. E. Invalid Plan Provisions. If any provisions of the Plan is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Participant, or would disqualify the Plan under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan, such provision shall be stricken as to such jurisdiction or Participant and the remainder of the Plan shall remain in full force and effect. F. Rule 16b-3 Compliance. Transactions under this Plan are intended to comply with all applicable terms and conditions of Rule 16b-3 as promulgated by the Securities and Exchange Commission under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time. To the extent that any provision of the Plan or action by the Committee or Board of Directors fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee or Board of Directors. G. Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. BROWN SHOE COMPANY, INC. By: /s/ Andrew M. Rosen ------------------------------- Title: Sr. Vice President ------------------------------- Date: October 8, 1999 ------------------------------- EX-13 11 1 [PHOTO] BROWN SHOE ANNUAL REPORT 1999 2 [PHOTO] 3 [PHOTO] 4 [PHOTO] 5 [PHOTO] 6 [PHOTO] 7 [PHOTO] 8 [PHOTO] 9 [PHOTO] 10 [PHOTO] 11 Come on in. We're Brown Shoe. - ----------------------------------------------------------------------------- WE'RE DIFFERENT. WE'RE DYNAMIC. WE'RE CHANGING. WE'RE THE LEADER IN FOOTWEAR. WITH 1,350 RETAIL STORES, WE ARE THE NO. 1 RETAILER OF BRAND NAME, VALUE-PRICED SHOES FOR THE ENTIRE FAMILY. THROUGH OUR WHOLESALE BUSINESS, WE DELIVER SOME 65 MILLION PAIRS OF GREAT LOOKING, GREAT FEELING SHOES FOR WOMEN, MEN AND CHILDREN TO THE MARKETPLACE IN THE UNITED STATES AND CANADA. - ----------------------------------------------------------------------------- 12 [LOGO] SALES [GRAPH] A Famous Footwear 58% B Brown Shoe Wholesale 30% C Naturalizer Retail 12% EARNINGS PER SHARE 1.96 ---------- ---------- 1.32 (1.19) ------------ 1997 1998 1999 FINANCIAL HIGHLIGHTS - ------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) FISCAL YEAR 1999 FISCAL YEAR 1998 FISCAL YEAR 1997 - ------------------------------------------------------------------------------------------------------------------ OPERATING RESULTS: Net sales $1,592,532 $1,538,530 $1,567,202 Net earnings (loss) 35,501 23,669 (20,896) PER SHARE OF COMMON STOCK: Diluted net earnings (loss) 1.96 1.32 (1.19) Dividends paid .40 .40 .85 Shareholders' equity 13.69 11.95 11.04 FINANCIAL POSITION: Total assets 650,338 655,232 694,988 Working capital 270,005 250,939 260,437 Shareholders' equity 249,945 217,174 199,190 Return on beginning shareholders' equity 16.3% 11.9% (8.8%) Current ratio 2.2:1 2.0:1 1.9:1 - ------------------------------------------------------------------------------------------------------------------ Fiscal 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. - ------------------------------------------------------------------------------------------------------------------
13 RONALD A. FROMM, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER [PHOTO] DEAR FELLOW INVESTORS: Progress sums it up. For Brown Shoe, 1999 was a year of visible progress both operationally and financially, a year in which we acted boldly, built on our successes, aggressively competed in the marketplace, and positioned the company for continued growth in sales and profitability. Famous Footwear, the company's largest division with 867 stores at year-end, delivered yet another record year for our shareholders, capturing operating earnings of $54 million. Our Brown Pagoda division, which sells footwear primarily to the mass market, also posted a record year. Equally important, we're successfully positioning our flagship Naturalizer brand to attract a younger, more compelling target customer. This positioning will benefit Naturalizer Retail as we go forward. We also took steps to revitalize our LifeStride brand to fit with today's more casual workplace, and are excited about this line for 2000. 11 14 CHAIRMAN'S LETTER CONTINUED In addition, we delivered impressive financial results: - -- Earnings per share of $1.96 rose 48 percent from year-ago results of $1.32. - -- Return on equity increased to 16.3 percent, a significant improvement over the 11.9 percent recorded in 1998. - -- Cash flow from operations was strong at $39.1 million. - -- The year closed with a strengthened balance sheet as the net debt-to-capital ratio improved to 35.6 percent, versus 41.1 percent last year. FOCUSED ON OPPORTUNITIES TO CREATE GROWTH. We enter fiscal 2000 with increasing confidence that the groundwork we've laid will allow us to achieve growth across all divisions. Our goal is to make Brown Shoe the leading company in the footwear industry, with performance that continues to win market share and delivers annual earnings growth in excess of 15 percent. You see, we have a unique combination at Brown Shoe. We have our high-performing Famous Footwear retail chain that, while generating record profits, is strategically positioned for significant expansion. Our wholesale divisions are each earning better shelf space, and are poised to further increase their market share now. And Brown Shoe's financial strength affords us the ability to invest in dynamic merchandising and marketing programs. More importantly, our operating expertise--from shoe design to the retail floor--provides 12 15 insights to identify emerging footwear trends, so we can deliver fashion-right shoes, in the hottest styles--styles consumers want right now. FAMOUS FOOTWEAR. Today, our Famous Footwear chain is the No. 1 source of brand name, value-priced footwear for the entire family. The chain's buying power, access to top brands, state-of-the-art marketing, merchandising and distribution systems, and sales and profit record make it "best of class." In 1999, Famous Footwear delivered outstanding performance--a 14.4 per- cent increase in operating earnings and a 7.7 percent increase in sales--making 1999 another year of record sales and earnings. Famous Footwear is on track for continued growth. We plan to open 80 to 90 new stores during 2000. Our new stores are slightly larger, and relatively more profitable than the existing store base. At the same time, we will continue our successful strategy of closing approximately one under-performing store for every two stores we open. This strategy increases both total square footage and sales per square foot: in 1999, Famous Footwear opened 77 new stores and closed 37--achieving increases of 5.3 and 4.2 percent for total square footage and sales per square foot, respectively. Together with stable gross margin rates and aggressive expense control, this process contributed to a 30 basis point rise in operating margin to 5.8 percent, from 5.5 percent in 1998 and 4.6 percent in 1997. 13 16 name brands nike adidas skechers reebok rockport new balance naturalizer keds steve madden k-swiss nunn bush timberland connie bandolino buster brown westies aerosoles esprit vans dr. martens white mountain nine west marquise ny lugz wolverine caterpiller converse avia basswood hush puppies nicole dexter street cars mia eastland fila florsheim stacy adams tommy hilfiger premier candie's mootsie tootsie FAMOUS FOOTWEAR IS THE LARGEST RETAILER OF BRAND NAME, VALUE-PRICED FOOTWEAR FOR THE ENTIRE FAMILY #1 17 FAMOUS FOOTWEAR: A 20-YEAR HISTORY OF GROWTH As the leading retailer of brand name, value-priced footwear for the family, our 867-store Famous Footwear chain attains levels of performance that make it "best of class." Sales increased 7.7 percent over 1998, and 27 percent since 1995. Operating profits reached $54 million, up 14.4 percent from 1998 and 155 percent since 1995. Sales per square foot continue to increase, up 4.2 percent over last year, and 15 percent since 1995. 18 CHAIRMAN'S LETTER CONTINUED The culture of Famous Footwear demands excellence in execution, and we'll get even better in 2000. It all starts with the power of our branded offering across all types of footwear, and the ability to anticipate shifting consumer preferences. At Famous Footwear, we're meeting those preferences with highly developed merchandising systems that flow product, store-by-store, filling each location's demand for the "hottest" shoes. Our strategy also demands we increase sales in our highest-performing stores. In 1999, we tested a new merchandising/marketing program in select markets. It employed our extensive database and powerful systems technology to select and price the right products, and execute targeted advertising and store display programs that pull customers into our stores. Pilot markets saw double-digit increases in store sales. In 2000, this program rolls out to other key markets. In summary, we expect Famous Footwear to continue to be Brown Shoe's main earnings driver. BROWN BRANDED DIVISION. Brown Branded, which markets our women's brands to department stores and specialty footwear stores, made substantial progress in revitalizing Naturalizer and LifeStride in 1999. Our charge is to build Naturalizer's momentum while broadening LifeStride--improving market share for both. With Naturalizer, we're pulling a younger customer to the brand. And at LifeStride, we've entered the office casual footwear segment. 16 19 Key to the Naturalizer strategy was launching a dynamic "image" campaign in Fall 1999 that captured the fashion appeal and new designs of this footwear. In this report you'll see examples of the bold, new images that are appearing in fashion magazines, department stores and our own Naturalizer specialty stores. We believe that Naturalizer's 24 percent growth in major department stores for the Fall season validates our progress. Ultimately, the Naturalizer brand can support additional product categories through licensing, more in-store shops for our many department store accounts, and a revitalized specialty store chain--making Naturalizer truly a mega-brand. Equally ambitious plans exist for LifeStride. LifeStride is the No. 1 unit-volume dress brand in department stores, and it dominates the under $40 price zone. While the dress shoe market is shrinking as the workplace embraces "business casual," we see a compelling opportunity for LifeStride. We've added a strong business casual component. In fact, in 2000, casual and tailored shoes will represent about 45 percent of the line. Early orders indicate that the consumer's trust in LifeStride translates well to casual footwear, and we expect to increase market share in 2000 and beyond. We recognize while a new face for our brands is important, ultimately consumers respond to great product. In early 1999, we reengineered our shoe styling process to better anticipate shoe fashion trends and quicken our time to market. 17 20 REVITALIZING OUR BRANDS We've revitalized and repositioned our Naturalizer women's footwear brand to meet consumer preference for great looking, more casual shoes. European design distinguishes both dress and casual styles. Today, dress/tailored shoes are 40 percent of Naturalizer's sales, down from 50 percent two years ago. Two years ago, the average Naturalizer customer was over age 55, today our in-store research indicates she is 44. [PHOTO] repositioning A NEW FASHION FOCUS IN OUR FLAGSHIP BRAND DRESS TODAY 21 [PHOTO] CASUAL TODAY 22 CHAIRMAN'S LETTER CONTINUED From our style center in Florence, Italy, we capture European influences, elements like heel shapes and fabrics--before they appear at retail--and electronically send them to our line-builders in the U.S. who blend them with the latest U.S. fashion trends. This is just one step in a new process that is shortening the product design cycle by some 30 percent. NATURALIZER RETAIL STORES. While the consumer is seeing and buying the new Naturalizer styles in department stores, our 486-store Naturalizer Retail division still struggled in 1999. Sales were flat versus 1998 and same-store sales declined by about 4 percent. As a result, the chain incurred an operating loss of $3.7 million. We regard this performance as unacceptable, and have aggressive plans in place for achieving operating improvement. At the heart of our turn-around strategy is our fashion-right product and our bold image campaign. By placing fresh product and eye catching displays in our stores every 4 to 6 weeks, we plan on driving sales gains. We'll also improve productivity through a better mix of retail locations. In 2000, we will close about 25 of our poorest performing stores. At the same time, we'll open some 25 new concept stores in the "right places," with the "right look" that exudes the new Naturalizer image. While the chain is still in the early stages of transition to a fashion-driven specialty retailer, we expect to see improved operating results and increased same-store sales during the coming year. 20 23 BROWN PAGODA DIVISION. Brown Pagoda achieved a 34 percent increase in operating earnings to post a record year. We're also proud to announce that this division was named Wal-Mart's footwear "Supplier of the Year," and we continue to win accolades as the leading outside supplier to Payless ShoeSource. Buster Brown & Co., our kids' group, had an outstanding year. Our premier licenses, Barbie and Star Wars, were big winners. Sales of Barbie footwear, designed for girls ages 2 to 8, again doubled, and we sold an impressive 4.2 million pairs of Star Wars shoes. We continue to sign the best licenses and develop footwear that captures the imagination of young consumers and their moms. For 2000, we have several exciting license agreements in place. We'll launch a Sammy Sosa line of kids' athletic and baseball shoes, and we'll offer lines featuring the popular Digimon: Digital Monsters, NASCAR Racers, and Rugrats characters. Introduced in 1904, Buster Brown was our first real shoe brand. Since many parents grew up wearing Buster Brown, they know and trust it. In 2000, we plan to support this brand with a national magazine advertising campaign featuring kids and their dogs with the "Let's grow up together" theme. Also in 2000, we'll roll out a new co-branding strategy that places our Buster Brown & Co. name on all our children's shoes. Packaging for our Barbie shoes, for example, will inform parents that Barbie shoes are made by Buster Brown & Co., with its pledge of quality. 21 24 VOLUME MASS MARKET RETAIL POWER [PHOTO] GROWTH AT MASS MARKET Mass market merchandisers are the hottest growing segment for shoe sales today. And Brown Shoe has become the leading outside supplier of footwear to two of the largest--Wal-Mart and Payless ShoeSource. We're partnering with these and other leading retailers to bring their customers well-made, great-looking shoes at affordable prices. 25 [PHOTO] 26 CHAIRMAN'S LETTER CONTINUED Equally successful is Brown Pagoda's adult footwear business. We set the industry standard for product development, speed to market, quality, and ability to meet customers' delivery needs. Our licensed Dr. Scholl's brand, for example, a top seller at mass market, had an 11 percent sales increase over 1998. E-SHOES + ABILITY TO DELIVER = E-GROWTH. As we enter the 21st century, we believe that business-to-business, e-commerce provides an opportunity to competitively differentiate Brown Shoe with retailers. To that end, we've launched the most comprehensive e-commerce site in our industry. www.brownshoeonline.com allows our retail partners to check inventory, place orders, track arrivals, and much more. This investment already is paying off for both Brown Shoe and its customers, as retail users have increased their order volume with us by 13 percent since its implementation. Phase II of this system, e-direct, allows retailers to "make the sale" even when out-of-stock on a shoe: the retailer collects payment, and e-direct ships it from our warehouse to her home. Also in 1999, we launched the Naturalizer consumer site www.naturalizeronline.com. Here, consumers can browse our selection by style or by size, and directly order their favorite shoes, confident that their selection will carry Naturalizer's fit and comfort features. Plus, we're partnering with Nordstrom.com to offer a Naturalizer boutique on its web site. 24 27 IN CONCLUSION. As Chairman of Brown Shoe, I'm obviously proud of the visible progress that was achieved in 1999. I am more pleased to tell you there is a new sense of urgency and a renewed passion to win that characterize our management's outlook. Our employees and business partners also deserve much credit for embracing this enthusiasm. They continue to do a terrific job for your company. In light of our improved performance and encouraging prospects, we are obviously disappointed with the earnings multiple and price of our stock. That said, we continue to focus on growing sales and earnings and on building a compelling business. We believe that Wall Street will come to recognize the progress we've made, and will eventually reward us with a proper multiple. As you know, in 1999 we changed our name back to Brown Shoe Company. It was a move that reflected our 122-year heritage in shoes, but more importantly, it reflects our commitment to becoming the best performing company in the footwear industry--the Leader in Footwear. Thank you for your continuing support. /s/ Ron Fromm RONALD A. FROMM, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER 25 28 EXECUTIVE MANAGEMENT TEAM [PHOTOS] GREGORY J. VAN GASSE BRIAN C. COOK President, Brown Branded Division Executive Vice President and President, Famous Footwear GARY M. RICH DAVID H. SCHWARTZ President, Brown Pagoda Division President, Brown Sourcing Division 107 YEARS OF FOOTWEAR INDUSTRY EXPERIENCE Our Executive Management Team is the best. Brian Cook celebrates his 20th year as president of Famous Footwear, a chain that has grown from 14 to 867 stores under his leadership. Gary Rich led Brown Pagoda to yet another record year in 1999. Dave Schwartz has built a sourcing organization that not only delivers 65 million pairs of shoes a year, but also consistently earns customer quality awards. Greg Van Gasse joined us in 1998 and, as you'll see, brings us a new level of brand marketing. 26 29 consumer driven 30 [LOGO] - ------------------------------------------------------------------------------- FAMOUS FOOTWEAR IS A DESTINATION. Whether you know us as Famous Footwear, Factory Brand Shoes or Supermarket of Shoes, our 867 stores all deliver great brands at great prices. One out of every 10 families shops us for back-to-school shoes each year. They come for brands--Famous Footwear is among the top retailers for Nike, Timberland, Naturalizer, Rockport, Keds and Buster Brown. They come for value--leading brands at great discounts. They come for convenience--our stores are located in neighborhood shopping centers, regional and outlet malls, wherever families want to shop. And they come because it's fun to shop our stores. FASHION TRENDS ARE OUR BUSINESS. Unlike athletic and other specialty footwear stores, Famous Footwear responds season-by-season, market-by-market, and store-by-store to changes in consumer trends. 1999 was the year of junior-casual brands. We had the "hottest" new brands like--Steve Madden, Mia and Skechers. - ------------------------------------------------------------------------------- 31 [PHOTO] 32 [PHOTO] FAMOUS FOOTWEAR. America's #1 choice for value-priced, branded family shoes. 33 [PHOTO] 34 [PHOTO] 35 [PHOTO] FAMOUS FOOTWEAR. The best brands at the best prices. 36 [PHOTO] 37 brand driven 38 [LOGO] - ----------------------------------------------------------------------------- THERE'S A REVOLUTION HAPPENING AT NATURALIZER. Long recognized as the best-fitting, most comfortable women's shoes, today's Naturalizer has forward-styling and an energized attitude. Customers can't help but notice us with our bold new "image" graphics and younger styles. Launched in Fall 1999, the new image campaign can be seen in department stores, our Naturalizer concept stores, and in magazine advertising. NATURALIZER RETAIL. We're focused hard on revitalizing our 486-store chain of Naturalizer stores. An aggressive direct mail program of catalogs, dramatic in-store presentations, and great looking shoes, are pulling in new, younger customers to our Naturalizer stores. LIFESTRIDE. You probably didn't know that LifeSride is the number one selling brand at $29.99 in department stores today. No longer just your classic pump, LifeStride appeals to customers who crave fashion and buy shoes to "make" the outfit. - ----------------------------------------------------------------------------- 39 [PHOTO] 40 [PHOTO] BRAND IMAGE. New, bold, in-store graphics and advertising. 41 [PHOTO] NATURALIZER. Grab life by the straps. 42 [PHOTO] 43 [PHOTO] Got the Pack? Get the Mule. [LOGO] 44 [PHOTO] ORIGINAL DR. SCHOLL'S. Recognized worldwide. 45 market driven 46 [LOGO] - ------------------------------------------------------------------------------ BUSTER BROWN & CO. is the kids' division of Brown Shoe, that sells branded, licensed and private label kids' shoes. Kids love shoes that feature their favorite cartoon or sports hero. Starting in summer 2000, we will launch an exciting program to co-brand these kids' shoes with the Buster Brown & Co. name and pledge of quality. There isn't a label that means more to moms than Buster Brown, and this brand soon will be featured in a national magazine advertising program, "Let's grow up together." BARBIE SHOES have become one of our strongest licensed brands in kids' footwear. In 1999, we doubled our sales of Barbie shoes by expanding the line to include shoes that are fashion-right for girls ages 2 to 8. - ------------------------------------------------------------------------------ 47 [PHOTO] [LOGO] branded shoes 48 [PHOTO] 49 [PHOTO] Let's grow up together. [LOGO] 50 [PHOTO] SOSA AND DIGIMON. Power brands for active kids. 51 [PHOTO] 52 BROWN SHOE DIVISIONS [LOGO] - ------------------------------------------------------------------------------ RETAIL STORES - ------------------------------------------------------------------------------ FAMOUS FOOTWEAR [PHOTO] [LOGOS] - ------------------------------------------------------------------------------ NATURALIZER RETAIL DIVISION [PHOTO] [LOGO] - ------------------------------------------------------------------------------ BROWN SHOE COMPANY OF CANADA, LTD.--RETAIL DIVISION [PHOTO] [LOGOS] - ------------------------------------------------------------------------------ 50 53 BROWN SHOE DIVISIONS T H E L E A D E R I N F O O T W E A R(TM) - ------------------------------------------------------------------------------ WHOLESALE MARKETERS - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ BROWN BRANDED DIVISION [LOGOS] ------------------------------- - ------------------------------------------------------------------------------ BROWN PAGODA DIVISION [LOGO] ------------------------------- [LOGOS] ------------------------------- - ------------------------------------------------------------------------------ BROWN SOURCING DIVISION - ------ ----- --------- --------- ------ ----- ------ TAIWAN CHINA HONG KONG INDONESIA BRAZIL ITALY MEXICO - ------ ----- --------- --------- ------ ----- ------ - ------------------------------------------------------------------------------ BROWN SHOE COMPANY OF CANADA, LTD.-- WHOLESALE DIVISION [LOGO] - ------------------------------------------------------------------------------ 51 54 BRANDS AND STORES - ------------------------------------------------------------------------------------------------------------------- FOOTWEAR RETAIL STORES
NUMBER OF STORES ----------------------------------------------- 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- FAMOUS FOOTWEAR Family footwear stores that feature "brand names for less," located in shopping centers, regional malls and outlet centers in the U.S. 867 827 815 794 814 =================================================================================================================== NATURALIZER Stores selling the Naturalizer and Naturalsport brands of women's footwear, located in regional malls and outlet centers in the U.S. and Canada. 486 462 464 462 424 =================================================================================================================== Reflects the transfer of 40 Naturalizer outlet stores from the Famous Footwear division to the Naturalizer Retail division
- ------------------------------------------------------------------------------ FOOTWEAR BRANDS WOMEN'S AirStep Basswood Connie Connie Too Dr. Scholl's Fanfares Larry Stuart Collection LifeStride LS Studio Maserati Naturalizer Naturalsport NightLife Original Dr. Scholl's Penaljo Tx Traction CHILDREN'S Airborne Basswood Barbie Buster Brown Digimon: Digital Monsters Hello Kitty LiveWires Nascar Racers Rugrats Sammy Sosa Star Wars The Land Before Time Treats MEN'S AND ATHLETIC AirStep Basswood Big Country Brown Shoe Dr. Scholl's Jean Pier Clemente le coq sportif Nature Sole Penn Regal Tx Traction As denoted, these brands are the registered trademarks of, and are under license from: [FN] Schering-Plough Healthcare Products, Inc. Mattel, Inc. Saban Consumer Products Sanrio, Inc. MTV Networks K.K.S.M. Inc. Lucasfilm, Ltd. Universal Studios LCS International B.V. Head Sport AG All other brands are registered trade- marks of Brown Shoe Company, Inc. - ------------------------------------------------------------------------------ 52 55 FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION 54 FIVE-YEAR SUMMARY OF KEY FINANCIAL INFORMATION 58 CONSOLIDATED FINANCIAL STATEMENTS 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 63 REPORTS ON FINANCIAL STATEMENTS 79 SUPPLEMENTARY FINANCIAL INFORMATION 80 - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- 56 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS 1999 COMPARED TO 1998 Brown Shoe Company, Inc. had an impressive year in fiscal 1999, posting a 48% increase in earnings per share compared to fiscal 1998. The Company's Famous Footwear and Brown Pagoda divisions both achieved record earnings. The Company's net sales of $1.593 billion in fiscal 1999 were 3.5% higher than the $1.539 billion in fiscal 1998. The increased net sales reflect higher sales at Famous Footwear and the wholesale operations. Net earnings in fiscal 1999 reached $35.5 million compared to net earnings of $23.7 million in fiscal 1998. Net earnings in fiscal 1999 include a $0.7 million loss related to the withdrawal from the Pagoda International marketing division compared to a $7.5 million loss in fiscal 1998. Excluding the Pagoda International results, net earnings of the Company increased 16.0% to $36.2 million in fiscal 1999 versus $31.2 million in fiscal 1998, and sales increased 5.2%. Famous Footwear achieved its fourth consecutive year of improved earnings. Net sales of $927.6 million in fiscal 1999 increased 7.7% from $861.3 million in fiscal 1998. In fiscal 1999, same-store sales increased 2.2% and 40 net new stores were added while sales per square foot increased 4.2%, reflecting improved store productivity from the new stores opened versus those stores closed in the past year. Operating earnings for fiscal 1999 increased 14.4% to $54.0 million as a result of increased sales, stable gross margins, aggressive expense control and strong execution. At the end of fiscal 1999, 867 stores were in operation compared to 827 stores in fiscal 1998. During the year, 77 stores were opened and 37 stores were closed, with plans for fiscal 2000 including the net addition of 25 to 30 stores. The Company's wholesale operations--Brown Branded, Brown Pagoda and Canadian Wholesale divisions--had net sales of $469.2 million in fiscal 1999, representing a 2.9% increase over fiscal 1998. Sales of the Naturalizer brand increased 5.0% in 1999, reflecting good customer acceptance of the rejuvenated product line. In addition, fiscal 1999 sales included a strong performance of Barbie, Star Wars, and Dr. Scholl's licensed products. Operating earnings of $32.8 million in fiscal 1999 were slightly lower than fiscal 1998's $33.5 million, due to a change in the method of determining the level of profit to be earned on intersegment sales to the Naturalizer Retail operations. Excluding the impact of this change, operating earnings for the wholesale operations would have increased 5.2% in fiscal 1999, primarily due to the sales gains and improved execution in the developing and sourcing of footwear. In the Company's Naturalizer Retail operations, which include stores in both the United States and Canada, net sales of $186.6 million in fiscal 1999 declined slightly from $187.2 million in fiscal 1998. Same-store sales in fiscal 1999 decreased 4.1% and 2.7% in the United States and Canada, respectively. An operating loss of $3.7 million was incurred in fiscal 1999 compared to an operating profit of $0.8 million in fiscal 1998. The decrease in operating earnings resulted from same-store sales declines, reflecting missed product opportunities, and increased marketing expenses to promote the Naturalizer brand's new image. At the end of fiscal 1999, 486 stores were in operation including 347 stores in the United States and 139 stores in Canada. Domestically, the Company had a net increase of 16 stores in fiscal 1999, while Canada had a net increase of 8 stores. Consolidated gross profit as a percent of sales of 39.3% in 1999 was lower than the 39.9% achieved in 1998. The decrease reflected competitive pressures at both retail and wholesale and higher markdowns. Selling and administrative expenses as a percent of sales improved to 35.1% in 1999 versus 35.9% rate in 1998 due to strong expense control throughout the Company and additional leverage of the expense base at Famous Footwear. Interest expense of $17.3 million in fiscal 1999 decreased from $19.4 million in fiscal 1998 due to lower average borrowings and the payments of $25.0 million due on long-term debt. The lower average borrowings resulted from positive cash flow from operations and foreign cash repatriation of approximately $26 million in fiscal 1999. Other income of $2.2 million in fiscal 1999 primarily resulted from the gain recognized from the sale of the le coq sportif footwear and apparel business. This compared to an expense of $4.5 million in fiscal 1998 primarily from the write-off of $1.9 million in intangible assets and additional charges of $2.0 million associated with withdrawal from the Pagoda International marketing business. The Company's tax provision of $16.3 million in fiscal 1999 represented an effective tax rate of 31.4% as compared to 37.1% in fiscal 1998. Fiscal 1998 results included a higher level of Pagoda International losses on which no tax benefit was realized. See Note 5 to the consolidated financial statements for a further explanation and a reconciliation of the effective tax rates to the statutory rates. 54 BROWN SHOE COMPANY, INC. 1999 57 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION 1998 COMPARED TO 1997 The Company'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 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 3.1%, led primarily by Famous Footwear. Net earnings of $23.7 million in fiscal 1998 compared to a net loss of $20.9 million in fiscal 1997. The net loss in fiscal 1997 included $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. Net sales at Famous Footwear increased 1.3% in fiscal 1998 to $861.3 million and increased 3.9% adjusting for the sale of the Famous Fixtures business. Same-store sales increased 0.4% 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 prior 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. Excluding the effect of the sale of the fixtures business, operating earnings for fiscal 1998 increased 24.5% 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--Brown Branded, Brown Pagoda and Canadian Wholesale divisions--had a net sales increase of 1.7% during fiscal 1998 to $455.9 million. Sales of the Naturalizer brand increased 8.7% in 1998 reflecting consumer acceptance and new retail distribution of the brand. Operating earnings of $33.5 million increased 4.8% in fiscal 1998 resulting from improved margins and well-controlled operating expenses. In the Company's Naturalizer Retail operations, net sales of $187.2 million increased 3.1% 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 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 $0.8 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 excluded the impact of the Pagoda International restructuring charge of $14.7 million. The improvement in gross profit rate reflected increases at Famous Footwear and the wholesale operations. Selling and administrative expenses as a percent of sales of 35.9% in 1998 were 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 $0.5 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 represented an effective tax rate of 37.1%. The 1997 tax provision of $18.7 million included an $8.0 million provision for taxes due on the foreign cash to be repatriated as a result of the decision to withdraw from the Pagoda International marketing division. In addition, fiscal 1997 results included a high level of Pagoda International losses on which no tax benefit was realized. PAGODA INTERNATIONAL RESTRUCTURING In fiscal 1997, the Company made the decision to withdraw from the Pagoda International marketing division in Latin America and Europe. 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. Aftertax charges of $33.0 million were recorded to cover the following costs: $14.7 million for inventory markdowns and royalty agreements' shortfall; $7.3 million for bad debts, severance and other administrative costs; $3.0 million for other costs associated with the restructuring; and $8.0 million for income taxes associated with the United States taxes owed on the foreign cash anticipated to be repatriated. As of January 29, 2000, withdrawal 1999 BROWN SHOE COMPANY, INC. 55 58 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION from the division's operations had been completed, as 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): - -------------------------------------------------------------------------- Establishment of reserve $ 33.0 Inventory markdowns and royalty agreements' shortfall (14.7) Bad debt write-offs, severance and other costs (10.3) Utilization of tax provision (8.0) - -------------------------------------------------------------------------- Remaining reserve at January 29, 2000 $ -- ==========================================================================
The reserve activity had a $4.8 million and $5.4 million negative cash flow impact on fiscal 1999 and fiscal 1998, respectively. 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 1999, the Company's borrowing level continued to decrease as cash flow from operations exceeded capital expenditures and dividends. As a result, total debt decreased from $197.0 million at the end of fiscal 1998 to $172.0 million at the end of fiscal 1999. The Company's ratio of total debt-to-total capitalization decreased from 47.6% at the end of fiscal 1998 to 40.8% at the end of fiscal 1999. Favorable cash flow from operations in fiscal 1999 as well as cash repatriation amounting to approximately $26 million from Canada and other foreign operations impacted the ratio. In addition, the Company realized approximately $9.5 million in fiscal 1999 from the sale of the le coq sportif footwear and apparel business. Working capital at the end of fiscal 1999 was $270.0 million, which was $19.1 million higher than at the end of fiscal 1998. The Company's current ratio, the relationship of current assets to current liabilities, increased from 2.0 to 1 at the end of fiscal 1998, to 2.2 to 1 at the end of fiscal 1999. The increase in the current ratio was primarily due to lower levels of accounts payable and current maturities of long-term debt. Cash provided by operating activities in 1999 of $39.1 million was significantly lower than in 1998 as a result of lower trade accounts payable with inventories remaining stable in fiscal 1999. Fiscal 1998 was favorably impacted from decreased inventories and receivables primarily at the Company's wholesale operations. Cash used by investing activities in fiscal 1999 of $19.1 million included capital expenditures of $28.7 million partially offset by the proceeds received from the sale of the le coq sportif business. Capital expenditures were $22.7 million in fiscal 1998 and in both years 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. The Company was in compliance with all of its covenants during fiscal 1999 and at fiscal year-end, and expects to continue to be in compliance based on current estimates for fiscal 2000. 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 2000. 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. In fiscal 1999, Standard & Poor's Corporation revised its outlook on the Company to stable from negative as a result of the continuing improvement in financial performance. Brown Shoe Company, Inc. paid a dividend of $0.40 per share in fiscal 1999 and fiscal 1998. The 1999 dividend marked the 77th 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 description of the Company's accounting policies for derivative financial instruments is included in Note 10 to the consolidated financial statements. 56 BROWN SHOE COMPANY, INC. 1999 59 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION 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 a 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 29, 2000 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 and Hong Kong. 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. The net investment in foreign subsidiaries translated into dollars using the year-end exchange rates was approximately $34 million at January 29, 2000. The potential loss in fair value resulting from a hypothetical 10% adverse change in foreign exchange rates would be approximately $3 million. Any loss in fair value would be reflected as a cumulative translation adjustment in Other Comprehensive Income and would not impact earnings. 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 considerations. The revolving bank Credit Agreement, the Company's only variable rate debt, had no outstanding borrowings as of January 29, 2000. A hypothetical 10% adverse change in interest rates on the average outstanding borrowings for fiscal 1999 would not be material to the Company's net earnings and cash flows. At January 29, 2000, the fair value of the Company's total debt is estimated at approximately $165 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 of the Company's debt resulting from a hypothetical 10% adverse change in interest rates and would be approximately $6 million at January 29, 2000. YEAR 2000 COMPLIANCE In prior years, the Company discussed the nature and progress of its plans to become Year 2000 compliant. In late fiscal 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company is not aware of any material problems resulting from Year 2000 issues, either with its internal systems or the products and services of third parties. The Company will continue to monitor its critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. ENVIRONMENTAL MATTERS The Company is involved in environmental remediation and ongoing compliance at several sites, including its closed New York tannery and 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 29, 2000, the accrued environmental liabilities for all sites total approximately $3.9 million. See Note 13 to the consolidated financial statements for a further description of specific properties. 1999 BROWN SHOE COMPANY, INC. 57 60 FIVE-YEAR SUMMARY OF KEY FINANCIAL INFORMATION FIVE-YEAR SUMMARY
1999 1998 1997 1996 1995 THOUSANDS, EXCEPT PER SHARE AMOUNTS (52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS) - --------------------------------------------------------------------------------------------------------------------- OPERATIONS Net sales $1,592,532 $1,538,530 $1,567,202 $1,525,052 $1,455,896 Cost of goods sold 967,161 925,190 988,530 958,288 948,925 - --------------------------------------------------------------------------------------------------------------------- Gross profit 625,371 613,340 578,672 566,764 506,971 ===================================================================================================================== Selling and administrative expenses 558,436 551,877 559,536 521,553 494,098 Interest expense 17,349 19,383 21,756 19,327 15,969 Other (income) expense, net (2,179) 4,477 (452) (1,341) 1,630 - --------------------------------------------------------------------------------------------------------------------- Earnings (loss) from continuing operations before income taxes 51,765 37,603 (2,168) 27,225 (4,726) Income tax (provision) benefit (16,264) (13,934) (18,728) (6,910) 5,423 - --------------------------------------------------------------------------------------------------------------------- Earnings (loss) from continuing operations 35,501 23,669 (20,896) 20,315 697 Credit for disposal of discontinued operations, net of income taxes -- -- -- -- 2,600 - --------------------------------------------------------------------------------------------------------------------- Net earnings (loss) $ 35,501 $ 23,669 $ (20,896) $ 20,315 $ 3,297 ===================================================================================================================== Returns from continuing operations: Return on net sales 2.2% 1.5% (1.3%) 1.3% 0.1% Return on beginning shareholders' equity 16.3% 11.9% (8.8%) 8.8% 0.3% Return on average invested capital 7.9% 5.3% (4.2%) 4.1% 0.2% Dividends paid $ 7,295 $ 7,223 $ 15,323 $ 17,956 $ 23,325 Capital expenditures 28,688 22,747 21,727 21,044 26,939 PER COMMON SHARE Basic earnings (loss) from continuing operations $ 1.99 $ 1.34 $ (1.19) $ 1.16 $ .04 Basic net earnings (loss) 1.99 1.34 (1.19) 1.16 .19 Diluted earnings (loss) from continuing operations 1.96 1.32 (1.19) 1.15 .04 Diluted net earnings (loss) 1.96 1.32 (1.19) 1.15 .19 Dividends paid .40 .40 .85 1.00 1.30 Shareholders' equity 13.69 11.95 11.04 13.19 12.92 FINANCIAL POSITION Receivables, net $ 68,236 $ 67,815 $ 77,355 $ 90,246 $ 86,417 Inventories, net 365,989 362,274 380,177 398,803 342,282 Working capital 270,005 250,939 260,437 301,020 209,399 Property and equipment, net 84,600 82,178 82,744 85,380 87,720 Total assets 650,338 655,232 694,988 722,375 661,056 Long-term debt and capitalized lease obligations 162,034 172,031 197,027 197,025 105,470 Shareholders' equity 249,945 217,174 199,190 237,037 231,636 Average common shares outstanding--Basic 17,859 17,692 17,591 17,531 17,483 Average common shares outstanding--Diluted 18,125 17,943 17,841 17,725 17,637 - --------------------------------------------------------------------------------------------------------------------- All data presented reflects the fiscal year ended on the Saturday nearest to January 31.
58 BROWN SHOE COMPANY, INC. 1999 61 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS
THOUSANDS, EXCEPT NUMBER AND PER SHARE AMOUNTS JANUARY 29, 2000 JANUARY 30, 1999 - -------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 34,158 $ 45,532 Receivables, net of allowance of $8,088 in 1999 and $9,820 in 1998 68,236 67,815 Inventories, net of adjustment to last-in, first-out cost of $11,709 in 1999 and $13,424 in 1998 365,989 362,274 Deferred income taxes 9,376 9,381 Prepaid expenses and other current assets 10,015 12,381 - -------------------------------------------------------------------------------------------------------------------- Total Current Assets 487,774 497,383 - -------------------------------------------------------------------------------------------------------------------- Prepaid pension costs 39,028 34,825 Other assets 38,936 40,846 Property and equipment, net 84,600 82,178 - -------------------------------------------------------------------------------------------------------------------- $650,338 $655,232 ==================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable $113,820 $124,921 Employee compensation and benefits 35,727 36,935 Other accrued expenses 53,820 53,146 Income taxes 4,402 6,442 Current maturities of long-term debt 10,000 25,000 - -------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 217,769 246,444 - -------------------------------------------------------------------------------------------------------------------- OTHER LIABILITIES Long-term debt, including capitalized lease obligations 162,034 172,031 Deferred income taxes 8,416 6,086 Other liabilities 12,174 13,497 - -------------------------------------------------------------------------------------------------------------------- Total Other Liabilities 182,624 191,614 - -------------------------------------------------------------------------------------------------------------------- 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; 18,262,990 and 18,168,340 shares outstanding 68,486 68,131 Additional capital 49,153 48,243 Unamortized value of restricted stock (3,566) (4,058) Accumulated other comprehensive loss (6,034) (8,842) Retained earnings 141,906 113,700 - -------------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 249,945 217,174 - -------------------------------------------------------------------------------------------------------------------- $650,338 $655,232 ==================================================================================================================== See notes to consolidated financial statements.
1999 BROWN SHOE COMPANY, INC. 59 62 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED EARNINGS
THOUSANDS, EXCEPT PER SHARE AMOUNTS 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- NET SALES $1,592,532 $1,538,530 $1,567,202 Cost of goods sold 967,161 925,190 988,530 - -------------------------------------------------------------------------------------------------------------------- Gross profit 625,371 613,340 578,672 - -------------------------------------------------------------------------------------------------------------------- Selling and administrative expenses 558,436 551,877 559,536 Interest expense 17,349 19,383 21,756 Other (income) expense, net (2,179) 4,477 (452) - -------------------------------------------------------------------------------------------------------------------- EARNINGS (LOSS) BEFORE INCOME TAXES 51,765 37,603 (2,168) Income tax provision (16,264) (13,934) (18,728) - -------------------------------------------------------------------------------------------------------------------- NET EARNINGS (LOSS) $ 35,501 $ 23,669 $ (20,896) ==================================================================================================================== BASIC NET EARNINGS (LOSS) PER COMMON SHARE $ 1.99 $ 1.34 $ (1.19) ==================================================================================================================== DILUTED NET EARNINGS (LOSS) PER COMMON SHARE $ 1.96 $ 1.32 $ (1.19) ==================================================================================================================== See notes to consolidated financial statements.
60 BROWN SHOE COMPANY, INC. 1999 63 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED CASH FLOWS
THOUSANDS 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net earnings (loss) $ 35,501 $ 23,669 $(20,896) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 25,547 26,943 26,686 Loss on disposal or impairment of facilities and equipment 1,567 961 1,475 Provision for losses on accounts receivable 2,234 2,772 5,145 Changes in operating assets and liabilities, net of business sold: Receivables (3,769) 6,768 7,746 Inventories (3,715) 17,903 18,626 Prepaid expenses and other current assets 2,761 9,100 6,178 Trade accounts payable and accrued expenses (12,627) 2,904 16,349 Income taxes (4,949) (5,553) 7,990 Other, net (3,410) (6,587) (10,615) - -------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 39,140 78,880 58,684 - -------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Capital expenditures (28,688) (22,747) (21,727) Proceeds from sale of le coq sportif 9,538 -- -- Proceeds from sales of fixed assets 14 58 401 - -------------------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (19,136) (22,689) (21,326) - -------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Decrease in short-term notes payable -- (54,000) (8,000) Debt issuance costs -- -- (678) Principal payments of long-term debt (25,000) -- (2,000) Proceeds from issuance of common stock 917 428 93 Dividends paid (7,295) (7,223) (15,323) - -------------------------------------------------------------------------------------------------------------------- Net Cash Used by Financing Activities (31,378) (60,795) (25,908) - -------------------------------------------------------------------------------------------------------------------- (Decrease) Increase in Cash and Cash Equivalents (11,374) (4,604) 11,450 Cash and Cash Equivalents at Beginning of Year 45,532 50,136 38,686 - -------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 34,158 $ 45,532 $ 50,136 ==================================================================================================================== See notes to consolidated financial statements.
1999 BROWN SHOE COMPANY, INC. 61 64 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED SHAREHOLDERS' EQUITY
UNAMORTIZED ACCUMULATED COMMON STOCK VALUE OF OTHER TOTAL THOUSANDS, EXCEPT NUMBER OF ---------------------- ADDITIONAL RESTRICTED COMPREHENSIVE RETAINED SHAREHOLDERS' SHARES AND PER SHARE AMOUNTS SHARES DOLLARS CAPITAL STOCK INCOME (LOSS) EARNINGS EQUITY - ----------------------------------------------------------------------------------------------------------------------------- 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 ($0.85 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 ($0.40 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 ============================================================================================================================= Net earnings 35,501 35,501 Currency translation adjustment 2,808 2,808 - ----------------------------------------------------------------------------------------------------------------------------- Comprehensive income 38,309 Dividends ($0.40 per share) (7,295) (7,295) Stock issued under employee benefit plans 56,150 210 707 917 Stock issued under restricted stock plan, net 38,500 145 203 (348) -- Amortization of deferred compensation under restricted stock plan 840 840 - ----------------------------------------------------------------------------------------------------------------------------- BALANCE JANUARY 29, 2000 18,262,990 $ 68,486 $49,153 $ (3,566) $(6,034) $141,906 $249,945 ============================================================================================================================= See notes to consolidated financial statements.
62 BROWN SHOE COMPANY, INC. 1999 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Brown Shoe Company, Inc., (the "Company") founded in 1878, is a footwear retailer and wholesaler. In fiscal 1999, the shareholders of the Company approved a change in the Company's name to Brown Shoe Company, Inc. from Brown Group, Inc. The Company's shares trade under the "BWS" symbol on the New York and Chicago Stock Exchanges. 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 1,353 retail shoe stores in the United States and Canada primarily under the Famous Footwear, Naturalizer and F.X. LaSalle names. In addition, through its Brown Branded, Brown 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 1999, approximately 70% of the Company's sales were at retail, compared to 68% in 1998 and 66% in 1997. See Note 6 for additional information regarding the Company's business segments. CONSOLIDATION The consolidated financial statements include the accounts of Brown Shoe Company, Inc. and its wholly-owned subsidiaries, after the elimination of intercompany accounts and transactions. The accounts of the Brown Pagoda division are consolidated as of December 31. ACCOUNTING PERIOD The Company's fiscal year is the 52 or 53-week period ending the Saturday nearest to January 31. Fiscal years 1999, 1998 and 1997 ended on January 29, 2000, January 30, 1999, and January 31, 1998, respectively. Fiscal years 1999, 1998 and 1997 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 when purchased to be cash equivalents. INVENTORIES All inventories are valued at the lower of cost or market, with 93% of consolidated inventories using the last-in, first-out (LIFO) method. If the first-in, first-out (FIFO) method had been used, inventories would have been $11.7 million and $13.4 million higher at January 29, 2000 and January 30, 1999, respectively. 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 $0.07 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. REVENUE RECOGNITION Retail sales are recorded, net of returns, and exclude sales tax. Wholesale sales are recorded, net of returns, when the merchandise has been shipped and legal title has passed to the customer. INCOME TAXES Provision is made for the tax effects of timing differences between financial and tax reporting. These differences relate principally to 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 includes all changes in equity except those resulting from investments by owners and distributions to owners. The Accumulated Other Comprehensive Loss for the Company is composed solely of cumulative foreign currency translation adjustments. 1999 BROWN SHOE COMPANY, INC. 63 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, stock performance plan 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. RECLASSIFICATIONS Certain reclassifications have been made in the footnote amounts for fiscal 1998 and 1997 to conform to the fiscal 1999 presentation. [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):
1999 1998 1997 - ----------------------------------------------------------------------- NUMERATOR: Net earnings (loss) $35,501 $23,669 $(20,896) ======================================================================= DENOMINATOR (SHARES): Denominator for basic earnings (loss) per share 17,859 17,692 17,591 Dilutive effect of unvested restricted stock and stock options 266 251 -- - ----------------------------------------------------------------------- Denominator for diluted earnings (loss) per share 18,125 17,943 17,591 ======================================================================= Basic earnings (loss) per share $ 1.99 $ 1.34 $ (1.19) ======================================================================= Diluted earnings (loss) per share $ 1.96 $ 1.32 $ (1.19) =======================================================================
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. [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 and hourly employees who had become eligible for benefits by January 1, 1995. 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 $50,000 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 29, 2000 and January 30, 1999 (in thousands): 64 BROWN SHOE COMPANY, INC. 1999 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS -------------------------- ----------------------------- 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- Benefit obligation at beginning of year $120,904 $100,275 $ 6,691 $ 6,887 Service cost 4,626 4,009 5 4 Interest cost 7,316 7,300 378 447 Plan participants' contributions -- -- 329 380 Plan amendments 47 1,225 -- -- Actuarial (gain) loss (18,737) 16,101 (682) 164 Gross benefits paid (14,800) (8,006) (1,055) (1,191) - --------------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 99,356 $120,904 $ 5,666 $ 6,691 - --------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at beginning of year $157,707 $146,722 $ -- $ -- Actual return on plan assets 3,982 18,960 -- -- Employer contributions 4,225 31 727 811 Plan participants' contributions -- -- 328 380 Gross benefits paid (14,800) (8,006) (1,055) (1,191) - --------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $151,114 $157,707 $ -- $ -- - --------------------------------------------------------------------------------------------------------------------------- Funded status at end of year $ 51,758 $ 36,803 $(5,666) $(6,691) Unrecognized net actuarial gain (13,238) (2,520) (1,708) (1,589) Unrecognized prior service cost 508 542 (1) (2) - --------------------------------------------------------------------------------------------------------------------------- Net amount recognized at end of year $ 39,028 $ 34,825 $(7,375) $(8,282) =========================================================================================================================== Amounts recognized in the consolidated balance sheets consist of: Prepaid benefit cost $ 43,769 $ 41,849 $ -- $ -- Accrued benefit cost (4,741) (7,024) (7,375) (8,282) - --------------------------------------------------------------------------------------------------------------------------- Net amount recognized at end of year $ 39,028 $ 34,825 $(7,375) $(8,282) ===========================================================================================================================
Net periodic benefit cost (income) for 1999, 1998 and 1997 included the following components (in thousands):
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS --------------------------------- ------------------------------ 1999 1998 1997 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Service cost $ 4,626 $ 4,009 $ 3,494 $ 5 $ 4 $ 4 Interest cost 7,316 7,300 6,876 378 447 523 Expected return on assets (12,859) (11,884) (10,759) -- -- -- Amortization of: Actuarial (gain) loss 108 -- -- (562) (939) (1,321) Prior service cost 80 16 74 (1) (9) (31) Transition asset -- (547) (635) -- -- -- Settlement cost 750 700 -- -- -- -- - --------------------------------------------------------------------------------------------------------------------- Total net periodic benefit cost (income) $ 21 $ (406) $ (950) $(180) $(497) $ (825) =====================================================================================================================
1999 BROWN SHOE COMPANY, INC. 65 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS -------------------------------------------- 1999 1998 1999 1998 - ----------------------------------------------------------------------------- WEIGHTED-AVERAGE ASSUMPTION: Discount rate 7.75% 6.25% 7.75% 6.25% Expected return on plan assets 9.50% 9.50% n/a n/a Rate of compensation increase 4.75% 4.50% n/a n/a - -----------------------------------------------------------------------------
For measurement purposes, a 6.5% annual rate of increase in the per capita cost of covered health care benefits was assumed. 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 $7.9 million, $4.7 million and $0, respectively, as of January 29, 2000 and $9.4 million, $7.0 million and $0 as of January 30, 1999. 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 $2.7 million in 1999, $2.8 million in 1998 and $2.0 million in 1997. [4] RESTRUCTURING CHARGES Included in net loss for fiscal 1997 is an aftertax charge of $31.0 million for the cost of withdrawal from the Company's Pagoda International marketing division in Latin America and Europe. The total charge included $14.7 million 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 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 related to the restructuring. As of January 29, 2000, withdrawal from the division's operations had been completed, as all of the inventory has been sold and all licenses either terminated or assigned to other parties. Through January 29, 2000, the reserve has been fully utilized: $14.7 million for inventory markdowns and royalty agreements; $10.3 million of bad debt write-offs, severance and other costs; and $8.0 million for taxes related to cash repatriations. [5] INCOME TAXES The components of earnings (loss) before income taxes consisted of domestic earnings before income taxes of $28.8 million, $25.2 million, and $14.1 million in 1999, 1998 and 1997, respectively, and foreign earnings (loss) before income taxes of $23.0 million, $12.4 million, and $(16.3) million in 1999, 1998 and 1997, respectively. The components of income tax expense (benefit) are as follows (in thousands):
1999 1998 1997 - ------------------------------------------------------------------------ FEDERAL Currently payable $ 9,391 $ 9,373 $ 6,158 Deferred 1,920 (662) 7,313 - ------------------------------------------------------------------------ 11,311 8,711 13,471 STATE 913 1,626 614 FOREIGN 4,040 3,597 4,643 - ------------------------------------------------------------------------ Total income tax expense $16,264 $13,934 $18,728 ========================================================================
The Company made federal, state and foreign tax payments of $15.4 million, $13.7 million and $4.9 million in fiscal 1999, 1998 and 1997, respectively. 66 BROWN SHOE COMPANY, INC. 1999 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The differences between the tax expense reflected in the financial statements and the amounts calculated at the federal statutory income tax rate of 35% are as follows (in thousands):
1999 1998 1997 - -------------------------------------------------------------------------- Income taxes at statutory rate $18,117 $13,161 $ (759) State income taxes, net of federal tax benefit 593 1,057 399 Foreign tax in excess of (less than) domestic rate (4,843) (2,913) 574 Foreign operating losses with no benefit provided 603 2,347 9,390 Provision for foreign cash repatriation 1,200 -- 8,000 Other 594 282 1,124 - -------------------------------------------------------------------------- $16,264 $13,934 $18,728 ==========================================================================
Significant components of the Company's deferred income tax assets and liabilities are as follows (in thousands):
JANUARY 29, JANUARY 30, 2000 1999 - --------------------------------------------------------------------------- DEFERRED TAX ASSETS Employee benefits, compensation, and insurance $ 5,943 $ 7,364 Allowance for doubtful accounts 2,835 3,289 Inventory capitalization and inventory reserves 4,365 4,185 Postretirement and postemployment benefit plans 3,095 3,525 Other 9,232 9,703 - --------------------------------------------------------------------------- Total deferred tax assets 25,470 28,066 DEFERRED TAX LIABILITIES Excess depreciation -- (1,874) Retirement plans (13,833) (12,319) LIFO inventory valuation (8,978) (8,663) Other (1,699) (1,915) - --------------------------------------------------------------------------- Total deferred tax liabilities (24,510) (24,771) Net deferred tax asset $ 960 $ 3,295 ===========================================================================
No deferred tax valuation allowance was recorded at the end of fiscal 1999 based on management's assessment it is more likely than not all the net deferred tax assets will be realized through future taxable earnings. As of January 29, 2000, no deferred taxes have been provided on the undistributed earnings of the Company's Canadian subsidiary. It is anticipated 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 29, 2000 on which deferred taxes have not been provided are indefinitely reinvested. In the event these other foreign entities' earnings were distributed, it is estimated U.S. taxes, net of available foreign tax credits, of approximately $19.2 million would be due. [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 867-store chain that sells branded footwear for the entire family. Wholesale Operations include Brown Branded, Brown Sourcing, Brown 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. Naturalizer Retail specialty store operations include 347 Naturalizer Retail stores in the United States and 139 stores in Canada. Pagoda International was 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, and the liquidation of the division was completed by the end of 1999. The "Other" segment includes the Scholze Tannery business and Corporate assets and general and administrative expenses, which are not allocated to the operating units. At the end of fiscal 1999, the Company sold the Scholze Tannery business at approximately book value. 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 1999 BROWN SHOE COMPANY, INC. 67 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 fiscal 1999, the Company revised its method of determining the level of profit to be earned on intersegment sales from the Wholesale Operations to Naturalizer Retail. The change resulted in an increase to operating profit of $2.4 million in fiscal 1999 for Naturalizer Retail and a corresponding decrease to operating profit for the Wholesale Operations.
FAMOUS WHOLESALE NATURALIZER PAGODA THOUSANDS FOOTWEAR OPERATIONS RETAIL INTERNATIONAL OTHER TOTAL - ---------------------------------------------------------------------------------------------------------------------- FISCAL 1999 External sales $927,626 $469,188 $186,621 $ 505 $ 8,592 $1,592,532 Intersegment sales -- 170,834 -- -- -- 170,834 Depreciation and amortization 16,030 3,464 4,340 30 1,683 25,547 Operating profit (loss) 54,022 32,791 (3,655) (664) (14,823) 67,671 Operating segment assets 332,680 194,910 76,334 -- 46,414 650,338 Capital expenditures 18,287 1,762 8,309 -- 330 28,688 ====================================================================================================================== 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 - ----------------------------------------------------------------------------------------------------------------------
1999 1998 1997 - --------------------------------------------------------------------------- RECONCILIATION OF OPERATING PROFIT TO CONSOLIDATED PRETAX EARNINGS (LOSS): Total operating profit $67,671 $60,899 $21,075 Interest expense 17,349 19,383 21,756 Non-operating other (income) expense (1,443) 3,913 1,487 - --------------------------------------------------------------------------- Total consolidated pretax earnings (loss) $51,765 $37,603 $(2,168) ===========================================================================
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 primarily consist of wholesale distribution operations in the Far East, and wholesaling and retailing in Canada. The Far East operations include "first-cost" operations, where footwear is sold at foreign ports to customers who then import the footwear into the United States. 68 BROWN SHOE COMPANY, INC. 1999 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the Company's net sales and long-lived assets by geographic area follows (in thousands):
1999 1998 1997 - -------------------------------------------------------------------------- NET SALES United States $1,280,468 $1,221,904 $1,208,878 Far East 236,451 223,986 242,100 Canada 75,340 74,503 76,716 Latin America, Europe and Other 1,980 25,728 66,583 Inter-Area Transfers (1,707) (7,591) (27,075) - -------------------------------------------------------------------------- $1,592,532 $1,538,530 $1,567,202 ========================================================================== LONG-LIVED ASSETS United States $ 138,651 $ 127,636 $ 122,840 Far East 12,045 12,622 15,332 Canada 11,709 10,894 11,080 Latin America, Europe and Other 159 6,697 7,206 - -------------------------------------------------------------------------- $ 162,564 $ 157,849 $ 156,458 ==========================================================================
Long-lived assets consist primarily of property and equipment, prepaid pension costs, goodwill, trademarks and other assets. [7] PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
JANUARY 29, JANUARY 30, 2000 1999 - --------------------------------------------------------------------------- Land and buildings $ 30,493 $ 30,338 Leasehold improvements 57,458 48,128 Furniture, fixtures, and equipment 143,121 138,588 - --------------------------------------------------------------------------- 231,072 217,054 Allowances for depreciation and amortization (146,472) (134,876) - --------------------------------------------------------------------------- $ 84,600 $ 82,178 ===========================================================================
Under the provisions of Statement of Financial Accounting Standards 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 $1.3 million, $0.1 million and $0.7 million were recognized in fiscal 1999, 1998 and 1997, respectively. Fair value was based on estimated future cash flows to be generated by retail stores, discounted at a market rate of interest. [8] 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 29, JANUARY 30, 2000 1999 - ---------------------------------------------------------------------------- 9.5% Senior Notes due 2006 $100,000 $100,000 7.36% Senior Notes, payments of $10,000 due annually through 2003 40,000 50,000 7.07%-8.83% Debentures due 2002 18,547 18,545 7.125% Debentures due 2003 10,000 10,000 8.45%-8.6% Debentures due 1999 -- 15,000 Capitalized lease obligations 3,487 3,486 - ---------------------------------------------------------------------------- $172,034 $197,031 ============================================================================
Maturities of long-term debt and capitalized lease obligations for 2000 through 2004 are: 2000--$10.0 million; 2001--$10.0 million; 2002--$28.6 million; 2003--$20.0 million and 2004--$0.5 million. The Company's 9.5% Senior Notes are 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, 0.25% at January 29, 2000, based on the Company's leverage ratio, is payable on the entire amount of the facility. At January 29, 2000, the Company had no short-term borrowings outstanding and approximately $11.2 million in letters of credit outstanding under the revolving bank Credit Agreement. The Company's Canadian operations maintain uncommitted lines of credit totaling approximately $5.5 million, with letters of credit outstanding of approximately $1.7 million as of January 29, 2000. 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 1999 BROWN SHOE COMPANY, INC. 69 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The maximum amount of short-term borrowings under the revolving bank credit arrangements at the end of any month was $38.0 million in 1999 and $76.0 million in 1998. The average short-term borrowings during the year were $15.8 million in 1999 and $21.5 million in 1998. The weighted average interest rates approximated 6.8% in 1999 and 7.1% in 1998. Cash payments of interest for fiscal 1999, 1998, and 1997 were $18.0 million, $20.1 million, and $22.5 million, respectively. [9] 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):
1999 1998 1997 - ---------------------------------------------------------------------------- Minimum payments $90,366 $87,473 $86,132 Contingent payments 2,844 2,489 2,665 - ---------------------------------------------------------------------------- $93,210 $89,962 $88,797 ============================================================================
Future minimum payments under noncancelable operating leases with an initial term of one year or more were as follows at January 29, 2000 (in thousands): - ----------------------------------------------------------------------------- 2000 $ 90,458 2001 82,928 2002 71,317 2003 58,592 2004 45,335 Thereafter 97,700 - ----------------------------------------------------------------------------- Total minimum lease payments $446,330 =============================================================================
The Company is contingently liable for lease commitments of approximately $34 million which primarily relate to Cloth World and Meis specialty retailing chains, which were sold. [10] 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 and foreign currency options. Periodically, interest rate swaps and interest rate futures are utilized. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to these financial instruments; however, counterparties to these agreements are major international financial institutions, and the risk of loss due to nonperformance is believed to be minimal. The Company enters into foreign exchange 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. The United States dollar equivalent of contractual amounts of the Company's financial instruments consist of the following (in thousands):
JANUARY 29, JANUARY 30, 2000 1999 - ---------------------------------------------------------------------------- DELIVERABLE FINANCIAL INSTRUMENTS Italian Lira $10,700 $ 5,100 Canadian Dollars 4,500 12,800 French Francs and Other Currencies 1,900 10,000 NON-DELIVERABLE FINANCIAL INSTRUMENTS New Taiwanese Dollars 7,300 7,800 Brazilian Real and Other Currencies -- 5,000 - ---------------------------------------------------------------------------- $24,400 $40,700 ============================================================================
The unrealized losses related to these instruments, based on dealer-quoted prices, were $0.6 million and $0.3 million at January 29, 2000, and January 30, 1999, respectively. 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 70 BROWN SHOE COMPANY, INC. 1999 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The Company had no interest rate derivative instruments outstanding at January 29, 2000 and January 30, 1999. [11] FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of the Company's financial instruments at January 29, 2000 and January 30, 1999 are (in thousands):
1999 1998 --------------------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - ---------------------------------------------------------------------- LIABILITIES Long-term debt, including current maturities $172,034 $165,304 $197,031 $198,475 ======================================================================
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. Carrying amounts reported on the balance sheet for cash, cash equivalents and receivables approximate fair value due to the short-term maturity of these instruments. [12] CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to significant concentration of credit risk consist primarily of cash, cash equivalents and trade accounts receivable. The Company maintains cash and cash equivalents and certain other financial instruments with various financial institutions. The financial institutions are located throughout the world, and the Company's policy is designed to limit exposure to any one institution or geographic region. The Company's periodic evaluations of the relative credit standing of these financial institutions are considered in the Company's investment strategy. The Company's footwear wholesaling businesses sell primarily to department stores, mass merchandisers, and independent retailers across the United States 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 maintains an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. [13] 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 previously used at the facility. Monitoring of the residential area continues. The Company also has begun remediation on the owned property. During fiscal 1999 and 1998, the Company incurred charges of $1.8 million and $2.3 million, respectively, 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 requires only continued maintenance and monitoring over the next 24 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 $3.9 million, as of January 29, 2000, 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. 1999 BROWN SHOE COMPANY, INC. 71 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [14] 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 29, 2000 and January 30, 1999, there were 18,262,990 shares and 18,168,340 shares, net of 3,742,907 shares and 3,837,557 shares held in treasury, outstanding, respectively. The stock is listed and traded on the New York and Chicago Stock Exchanges (symbol BWS). There were approximately 6,200 shareholders of record at February 26, 2000. 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. [15] STOCK OPTION AND STOCK RELATED PLANS The Company has stock option, stock appreciation, restricted stock and stock performance plans under which certain officers and employees and members of the board of directors are participants. All stock options are granted at market value. Stock appreciation units, while the Company discontinued issuing in 1999, have also been granted in tandem with options. Such units entitle the participant to receive an amount, in cash and/or stock, equal to the difference between the current market value of a share of stock at the exercise date and the option price of such share of stock. The options and appreciation units become exercisable one year from the date of the grant at a rate of 25% per year and are exercisable for up to 10 years from date of grant. Since the stock appreciation rights are issued in tandem with stock options, the exercise of either cancels the other. As of January 29, 2000, 653,700 additional shares of common stock were available to be granted in the form of options, restricted stock or stock performance. 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 No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). 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 1999, 1998 and 1997, respectively: risk-free interest rates of 5.8%, 5.2% and 6.0%; dividend yields of 2.2%, 2.4% and 4.3%; volatility factors of the expected market price of the Company's common stock of .36, .34 and .33; and a weighted-average expected life of the option of 7 years. The weighted average fair value of options granted during 1999, 1998 and 1997 was $6.76, $5.81 and $4.35 per share, respectively. 72 BROWN SHOE COMPANY, INC. 1999 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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):
1999 1998 1997 - --------------------------------------------------------------------------- Net income (loss) as reported $35,501 $23,669 $(20,896) Pro forma net income (loss) 33,666 22,641 (21,513) Basic earnings (loss) per share as reported 1.99 1.34 (1.19) Pro forma basic earn- ings (loss) per share 1.89 1.28 (1.22) Diluted earnings (loss) per share as reported 1.96 1.32 (1.19) Pro forma diluted earnings (loss) per share 1.86 1.26 (1.22) - ---------------------------------------------------------------------------
The following summary sets forth the Company's stock option and stock appreciation rights activity for the three years ended January 29, 2000:
NUMBER OF WEIGHTED ----------------------------- AVERAGE OPTION APPRECIATION EXERCISE SHARES UNITS PRICE - ---------------------------------------------------------------------------- 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 Granted 555,300 -- 19 Exercised (50,750) -- 16 Terminated (98,399) (39,005) 21 - ---------------------------------------------------------------------------- Outstanding January 29, 2000 1,851,245 217,033 $18 ============================================================================
Following is a summary of stock options outstanding as of January 29, 2000, which have exercise prices ranging from $14 to $38:
WEIGHTED WEIGHTED AVERAGE AVERAGE NUMBER OF EXERCISE REMAINING OPTIONS PRICE LIFE - ---------------------------------------------------------------------------- OPTIONS OUTSTANDING: Price under $15 531,500 $14 8 Price $15 or over 1,319,745 19 8 - ---------------------------------------------------------------------------- 1,851,245 $18 8 ============================================================================ OPTIONS EXERCISABLE: Price under $15 296,125 $14 7 Price $15 or over 504,245 20 6 - ---------------------------------------------------------------------------- 800,370 $18 6 ============================================================================
At January 30, 1999, 550,420 options with a weighted average exercise price of $19 were exercisable. At January 31, 1998, 596,294 options with a weighted average exercise price of $21 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 38,500, 91,875 and 73,000 in 1999, 1998 and 1997, respectively, and compensation expense was $0.8 million, $1.5 million and $2.3 million in 1999, 1998, and 1997, respectively. In fiscal 1999, the Company adopted a stock performance plan under which common stock will be awarded at the end of the performance period at no cost to certain officers and key employees if certain financial goals are met. Compensation expense is recorded over the performance period based on the anticipated number and market value of shares to be awarded. For fiscal 1999, compensation expense for performance shares was $0.3 million. The Company has currently reserved 84,500 shares as eligible to be awarded to participants upon meeting certain financial goals; however, the actual number of shares ultimately earned may vary. 1999 BROWN SHOE COMPANY, INC. 73 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [16] SUPPLEMENTARY INFORMATION BALANCE SHEET Cash equivalents of $31.8 million and $37.7 million at January 29, 2000 and January 30, 1999, respectively, are stated at cost, which approximates fair value. STATEMENT OF CONSOLIDATED EARNINGS Advertising and marketing costs totaled $52.5 million, $54.9 million, and $61.0 million in 1999, 1998 and 1997, respectively. Other Expense (Income) consisted of the following (in thousands):
1999 1998 1997 - -------------------------------------------------------------------------- Interest income $(1,884) $(1,730) $(1,427) Restructuring charges -- 1,950 1,000 Royalty income (1,599) (1,377) (2,127) Amortization of intangibles 893 3,488 1,731 Environmental charges 1,790 2,344 -- Gain on sale of le coq sportif (2,334) -- -- Other, net 955 (198) 371 - -------------------------------------------------------------------------- Total $(2,179) $4,477 $ (452) ==========================================================================
[17] 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 2001. SFAS 133 requires 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. [18] CONDENSED CONSOLIDATING FINANCIAL INFORMATION The 9.5% Senior Notes, the revolving bank Credit Agreement, and the 7.36% Senior Notes, described in Note 8, 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 29, 2000 and January 30, 1999, and the related condensed consolidating statements of earnings and cash flows for each of the three years in the period ended January 29, 2000, 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 operation and cash flow of, each of the consolidating groups. 74 BROWN SHOE COMPANY, INC. 1999 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING BALANCE SHEET AS OF JANUARY 29, 2000
GUARANTOR NON-GUARANTOR CONSOLIDATED THOUSANDS PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTALS - --------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 8,851 $ 885 $24,422 $ -- $ 34,158 Receivables, net 33,265 11,675 23,296 -- 68,236 Inventory, net 48,066 311,051 18,393 (11,521) 365,989 Other current assets (5,429) 18,846 1,977 3,997 19,391 - --------------------------------------------------------------------------------------------------------------------- Total Current Assets 84,753 342,457 68,088 (7,524) 487,774 - --------------------------------------------------------------------------------------------------------------------- Other assets 52,535 19,121 6,312 (4) 77,964 Property and equipment, net 14,627 63,437 6,536 -- 84,600 Investment in subsidiaries 247,218 34,880 -- (282,098) -- - --------------------------------------------------------------------------------------------------------------------- Total Assets $399,133 $459,895 $80,936 $(289,626) $650,338 ===================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 5,020 $ 85,515 $23,285 $ -- $113,820 Accrued expenses 25,684 48,474 10,938 4,451 89,547 Income taxes 1,702 1,528 1,234 (62) 4,402 Current maturities of long-term debt 10,000 -- -- -- 10,000 - --------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 42,406 135,517 35,457 4,389 217,769 - --------------------------------------------------------------------------------------------------------------------- Long-term debt and capitalized lease obligations 162,034 -- -- -- 162,034 Other liabilities 21,272 (1,342) 660 -- 20,590 Intercompany payable (receivable) (76,524) 73,388 9,939 (6,803) -- Shareholders' equity 249,945 252,332 34,880 (287,212) 249,945 - --------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $399,133 $459,895 $80,936 $(289,626) $650,338 =====================================================================================================================
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS FOR THE FISCAL YEAR ENDED JANUARY 29, 2000
GUARANTOR NON-GUARANTOR CONSOLIDATED THOUSANDS PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTALS - --------------------------------------------------------------------------------------------------------------------- Net Sales $251,585 $1,283,088 $323,047 $(265,188) $1,592,532 Cost of goods sold 181,608 789,074 261,667 (265,188) 967,161 - --------------------------------------------------------------------------------------------------------------------- Gross profit 69,977 494,014 61,380 -- 625,371 Selling and administrative expenses 67,448 452,018 40,504 (1,534) 558,436 Interest expense 17,160 61 128 -- 17,349 Intercompany interest (income) expense (13,606) 13,654 (48) -- -- Other (income) expense, net 649 (3,091) (1,271) 1,534 (2,179) Equity in (earnings) loss of subsidiaries (36,509) (17,842) -- 54,351 -- - --------------------------------------------------------------------------------------------------------------------- Earnings (Loss) Before Income Taxes 34,835 49,214 22,067 (54,351) 51,765 Income tax provision 666 (12,705) (4,225) -- (16,264) - --------------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) $ 35,501 $ 36,509 $ 17,842 $ (54,351) $ 35,501 =====================================================================================================================
1999 BROWN SHOE COMPANY, INC. 75 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE FISCAL YEAR ENDED JANUARY 29, 2000
GUARANTOR NON-GUARANTOR CONSOLIDATED THOUSANDS PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTALS - --------------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Operating Activities $ 29,351 $ (3,427) $ 5,836 $ 7,380 $ 39,140 Investing Activities: Capital expenditures (1,376) (25,323) (1,989) -- (28,688) Proceeds from sale of le coq sportif -- 9,538 -- -- 9,538 Other 10 -- 4 -- 14 - --------------------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (1,366) (15,785) (1,985) -- (19,136) Financing Activities: Repayments of long-term debt (25,000) -- -- -- (25,000) Proceeds from issuance of common stock 917 -- -- -- 917 Dividends paid (7,295) -- -- -- (7,295) Intercompany financing 58 15,359 (8,037) (7,380) -- - --------------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Financing Activities (31,320) 15,359 (8,037) (7,380) (31,378) - --------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents (3,335) (3,853) (4,186) -- (11,374) Cash and Cash Equivalents at Beginning of Period 12,186 4,738 28,608 -- 45,532 - --------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 8,851 $ 885 $24,422 $ -- $ 34,158 =====================================================================================================================
CONDENSED CONSOLIDATING BALANCE SHEET AS OF JANUARY 30, 1999
GUARANTOR NON-GUARANTOR CONSOLIDATED THOUSANDS 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 35,900 -- (265,796) -- - --------------------------------------------------------------------------------------------------------------------- Total Assets $385,601 $447,202 $96,498 $(274,069) $655,232 ===================================================================================================================== LIABILITIES & SHAREHOLDERS' EQUITY Current Liabilities 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 217,174 235,010 35,900 (270,910) 217,174 - --------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $385,601 $447,202 $96,498 $(274,069) $655,232 =====================================================================================================================
76 BROWN SHOE COMPANY, INC. 1999 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING STATEMENT OF EARNINGS FOR THE FISCAL YEAR ENDED JANUARY 30, 1999
GUARANTOR NON-GUARANTOR CONSOLIDATED THOUSANDS 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 =====================================================================================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE FISCAL YEAR ENDED JANUARY 30, 1999
GUARANTOR NON-GUARANTOR CONSOLIDATED THOUSANDS 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 =====================================================================================================================
1999 BROWN SHOE COMPANY, INC. 77 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING STATEMENT OF EARNINGS FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
GUARANTOR NON-GUARANTOR CONSOLIDATED THOUSANDS 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 THOUSANDS 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 =====================================================================================================================
78 BROWN SHOE COMPANY, INC. 1999 81 REPORTS ON FINANCIAL STATEMENTS MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING The management of Brown Shoe Company, 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 Shoe Company's Board of Directors comprised four outside directors in 1999. 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/ Andrew M. Rosen Ronald A. Fromm Andrew M. Rosen Chief Executive Officer Chief Financial Officer REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Brown Shoe Company, Inc. We have audited the accompanying consolidated balance sheets of Brown Shoe Company, Inc. as of January 29, 2000 and January 30, 1999 and the related statements of consolidated earnings, shareholders' equity, and cash flows for each of the three years in the period ended January 29, 2000. 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 auditing standards generally accepted in the United States. 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 Shoe Company, Inc. at January 29, 2000 and January 30, 1999 and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 29, 2000 in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP St. Louis, Missouri February 23, 2000 1999 BROWN SHOE COMPANY, INC. 79 82 SUPPLEMENTARY FINANCIAL INFORMATION SELECTED QUARTERLY INFORMATION (UNAUDITED) Following is a summary of selected quarterly information (in thousands except per share) for fiscal years ended January 29, 2000, and January 30, 1999.
QUARTERS --------------------------------------------------- FIRST SECOND THIRD FOURTH (13 WEEKS) (13 WEEKS) (13 WEEKS) (13 WEEKS) - --------------------------------------------------------------------------------------------------------------------- 1999 Net Sales $396,826 $410,100 $429,132 $356,474 Gross Profit 157,807 161,075 171,844 134,645 Net Earnings 6,316 10,517 14,763 3,905 Per Share of Common Stock: Net Earnings--Basic $ .36 $ .59 $ .82 $ .22 Net Earnings--Diluted .35 .58 .81 .22 Dividends Paid .10 .10 .10 .10 Market Value: High 16-3/4 21-3/4 19-7/8 18-1/8 Low 13-1/8 15-1/2 16-7/8 10-3/4 - --------------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------------
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 Shoe Company, Inc. and its subsidiary companies.The policy premium for the three-year term is $312,000. In October 1999, the Company extended the above policy for one additional year. The premium for the additional year is $114,000. To date, no claims have been paid under any policy of directors' and officers' liability insurance. 80 BROWN SHOE COMPANY, INC. 1999 83 OPERATING EXECUTIVES AND OFFICERS EXECUTIVE MANAGEMENT RONALD A. FROMM Chairman of the Board, President and Chief Executive Officer BRIAN C. COOK Executive Vice President and President, Famous Footwear GARY M. RICH President, Brown Pagoda division ANDREW M. ROSEN Chief Financial Officer and Treasurer DAVID H. SCHWARTZ President, Brown Sourcing division GREGORY J. VAN GASSE President, Brown Branded division OFFICERS AND OPERATING MANAGEMENT DANIEL P. AMADO Senior Vice President and Brand Director, New Products Brown Branded division JAMES W. ANDERSON Vice President, Finance Brown Pagoda division THEODORE L. ANDERSON Senior Vice President Retail Sales and Operations Famous Footwear CARL H. BENGSTON Senior Vice President Latin American and European Operations, Brown Sourcing division WILLIAM A. DANDY Senior Vice President, Marketing Famous Footwear ELIZABETH A. FAGAN Vice President, Public Affairs EARL B. FISCHER Vice President, Information Systems Famous Footwear ROBERT D. GIBBS Vice President, Distribution KENNETH W. GILBERTSON President, Canada Wholesale division CHARLES C. GILLMAN Senior Vice President and Director Far East Operations Brown Sourcing division DENNIS F. HADICAN Vice President and General Manager Westport, Brown Pagoda division DAVID E. HANEBRINK Vice President and General Manager Men's, Boys' and Athletics Brown Pagoda division RICHARD P. KUETHER Vice President, Logistics Famous Footwear J. MARTIN LANG Senior Vice President and Chief Financial Officer, Famous Footwear 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, Customer Service Brown Branded division RICHARD T. PRICE Vice President Information Systems JAMES M. ROE Senior Vice President, Real Estate Famous Footwear JEFFREY M. SANDERS Senior Vice President and General Manager, LifeStride 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 Buster Brown & Co., Brown Pagoda division ALAN A. SILVERSTEIN Senior Vice President and General Manager, Women's Brown Pagoda division ROBERT E. STADLER, JR. Vice President, Administration Brown Shoe, and Senior Vice President, Finance and Administration Brown Branded division 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 [FN] Member of the Company's Operating Committee 1999 BROWN SHOE COMPANY, INC. 81 84 BOARD OF DIRECTORS RONALD A. FROMM Chairman of the Board, President and Chief Executive Officer JOSEPH L. BOWER Donald Kirk David Professor Harvard Business School JULIE C. ESREY Director of various organizations RICHARD A. LIDDY Chairman of the Board, President and Chief Executive Officer GenAmerica Corporation JOHN PETERS MACCARTHY Retired Chairman of the Board and Chief Executive Officer, Boatmen's Trust Company PATRICIA G. MCGINNIS President and Chief Executive Officer, The Council for Excellence in Government W. PATRICK MCGINNIS President and Chief Executive Officer, Ralston Purina Company JERRY E. RITTER Director of various corporations [FN] Member of the Executive Committee Member of the Audit Committee Member of the Compensation Committee Member of the Governance and Nominating Committee INVESTOR INFORMATION CORPORATE HEADQUARTERS Brown Shoe Company, 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@brownshoe.com INTERNET ADDRESS http://www.brownshoe.com ANNUAL MEETING 11:00 a.m. Central Time Thursday, May 25, 2000 Brown Shoe Company, Inc. Corporate Headquarters STOCK LISTED [LOGO] Brown Shoe stock is listed on the New York Stock Exchange and the Chicago Stock Exchange (ticker symbol BWS). NUMBER OF SHAREHOLDERS OF RECORD 6,200 NUMBER OF EMPLOYEES 11,500 INDEPENDENT AUDITORS Ernst & Young LLP St. Louis, Missouri TRANSFER AGENT/REGISTRAR/DIVIDEND DISBURSING AGENT First Chicago Trust, a division of EquiServe Post Office Box 2500 Jersey City, New Jersey 07303-2500 Telephone: (201) 324-0498 (800) 446-2617 Internet: http://www.fctc.com E-mail: equiserve@em.equiserve.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 (address above). DIRECT DEPOSIT OF DIVIDENDS Registered shareholders may have their quarterly dividend checks deposited directly to their bank accounts. For more information or to request an enrollment form, contact First Chicago Trust (address above). TRUSTEE OF DEBENTURES/NOTES State Street Bank and Trust Company of Missouri, N.A. One Metropolitan Square Post Office Box 321 St. Louis, Missouri 63166-0321 (314) 206-3020 ADDITIONAL INFORMATION ON THE INTERNET: You can access financial and other information such as significant news releases, Forms 10-K and 10-Q, and product information, on the Internet at http://www.brownshoe.com BY FAX-BACK: Copies of Brown Shoe news 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 Shoe Company, Inc. Investor Relations Office Post Office Box 29 St. Louis, Missouri 63166-0029 (314) 854-4000 DESIGN: SAMATAMASON PHOTOGRAPHY: SANDRO, VICTOR JOHN PENNER, BRUCE WEBER, STEVE ADAMS, JAMES GARRAHAN PRINTING: H. MACDONALD PRINTING 82 BROWN SHOE COMPANY, INC. 1999 85 [PHOTO] 86 [PHOTO] 87 [PHOTO] 88 [PHOTO] 89 [PHOTO] 90 [PHOTO] 91 [PHOTO] 92 [PHOTO] 93 [PHOTO] 94 [PHOTO] [LOGO] BROWN SHOE T H E L E A D E R I N F O O T W E A R 8300 Maryland Avenue, St. Louis, Missouri 63105-3693 EX-21 12 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT BROWN SHOE COMPANY, INC. January 29, 2000 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 Shoe Italy S.R.L. Italy Brown Texas, Inc. Texas Buster Brown & Co. Missouri Clayton License, Inc. Delaware CV Missouri L.L.C. Missouri Laysan Company Limited Hong Kong Leeway International Company Limited Hong Kong Maryland Square, Inc. Missouri Maserati Footwear, Inc. New York PIC International Corporation Cayman Islands Pagoda Asia Pacific Limited Hong Kong Pagoda International Corporation do Brazil, LTDA Brazil Pagoda International Footwear Limited Hong Kong Pagoda Leather Limited Hong Kong 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: Exalt Naturalizer Naturalizer Outlet Famous Footwear does business under the following names: Factory Brand Shoes Famous Footwear Supermarket of Shoes Brown Shoe Company, Inc. does business under the following names: Brown Branded EX-23 13 EXHIBIT 23 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Brown Shoe Company, Inc. of our report dated February 23, 2000, included in the 1999 Annual Report to Shareholders of Brown Shoe Company, Inc. Our audits also included the financial statement schedule of Brown Shoe Company, 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 Brown Shoe Company, Inc. of our report dated February 23, 2000, with respect to the consolidated financial statements and schedule of Brown Shoe Company, Inc. included or incorporated by reference in the Annual Report (Form 10-K) for the year ended January 29, 2000: 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-8 33-83717 Incentive and Stock Compenstion Plan of 1999 Form S-3 33-21477 Debt Securities St. Louis, Missouri /s/ Ernst & Young LLP April 14, 2000 EX-27 14
5 YEAR JAN-29-2000 JAN-29-2000 34,158 0 76,324 (8,088) 365,989 487,774 231,072 146,472 650,338 217,769 162,034 0 0 68,486 181,459 650,338 1,592,532 1,592,532 967,161 967,161 0 2,234 17,349 51,765 16,264 35,501 0 0 0 35,501 1.99 1.96
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