-----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, GGSaU08X/PhbD0DSZVMkdOja+njiPC+M7EMlnRjEJ1EZoAMRMmvMio7zlKlL1q2y O/PoSQDx7b+NyS+JOySeWQ== 0000014707-99-000016.txt : 19990610 0000014707-99-000016.hdr.sgml : 19990610 ACCESSION NUMBER: 0000014707-99-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990529 FILED AS OF DATE: 19990609 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-Q SEC ACT: SEC FILE NUMBER: 001-02191 FILM NUMBER: 99642792 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-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ____________ FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended May 1, 1999 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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) BROWN GROUP, INC. (Former name, former address and former fiscal year, if changed since last report) 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 [ ] As of May 29, 1999, 18,241,340 shares of the registrant's common stock were outstanding. BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Thousands)
(Unaudited) ------------------ May 1, May 2, January 30, 1999 1998 1999 --------- --------- ----------- ASSETS Current Assets Cash and Cash Equivalents $ 26,926 $ 36,602 $ 45,532 Receivables, net of allowances of $10,243 at May 1, 1999, $10,505 at May 2, 1998, and $9,820 at January 30, 1999 76,852 71,259 67,815 Inventories, net of adjustment to last-in, first-out cost of $13,097 at May 1, 1999, $15,199 at May 2, 1998, and $13,424 at January 30, 1999 389,181 370,438 362,274 Other Current Assets 21,936 30,300 21,762 --------- --------- --------- Total Current Assets 514,895 508,599 497,383 Other Assets 77,229 74,574 75,671 Property and Equipment 224,810 213,452 217,054 Less allowances for depreciation and amortization (140,048) (133,086) (134,876) --------- --------- --------- 84,762 80,366 82,178 --------- --------- --------- $ 676,886 $ 663,539 $ 655,232 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes Payable $ 28,000 $ 30,000 $ - Accounts Payable 131,805 118,155 124,921 Accrued Expenses 82,501 82,232 90,081 Income Taxes 8,387 13,603 6,442 Current Maturities of Long-Term Debt 10,000 15,000 25,000 --------- --------- --------- Total Current Liabilities 260,693 258,990 246,444 Long-Term Debt and Capitalized Lease Obligations 172,031 182,028 172,031 Other Liabilities 20,354 20,388 19,583 Shareholders' Equity Common Stock 68,266 67,685 68,131 Additional Capital 48,636 46,945 48,243 Unamortized Value of Restricted Stock (4,253) (3,799) (4,058) Accumulated Other Comprehensive Loss (7,036) (8,024) (8,842) Retained Earnings 118,195 99,326 113,700 --------- --------- --------- 223,808 202,133 217,174 --------- --------- --------- $ 676,886 $ 663,539 $ 655,232 ========= ========= ========= See Notes to Condensed Consolidated Financial Statements.
BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (Thousands, except per share)
Thirteen Weeks Ended -------------------- May 1, May 2, 1999 1998 -------- -------- Net Sales $396,826 $402,309 Cost of Goods Sold 239,019 246,985 -------- -------- Gross Profit 157,807 155,324 -------- -------- Selling and Administrative Expenses 141,649 142,782 Interest Expense 4,683 5,632 Other (Income) Expense, Net 1,295 (48) -------- -------- Earnings Before Income Taxes 10,180 6,958 Income Tax Provision 3,864 3,087 -------- -------- NET EARNINGS $ 6,316 $ 3,871 ======== ======== BASIC EARNINGS PER COMMON SHARE $ .36 $ .22 ======== ======== DILUTED EARNINGS PER COMMON SHARE $ .35 $ .22 ======== ======== DIVIDENDS PER COMMON SHARE $ .10 $ .10 ======== ======== See Notes to Condensed Consolidated Financial Statements.
BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Thousands)
Thirteen Weeks Ended -------------------- May 1, May 2, 1999 1998 ---------- --------- Net Cash (Used) Provided by Operating Activities $ (21,708) $ 15,772 Investing Activities: Capital expenditures (8,078) (3,502) --------- --------- Net Cash Used by Investing Activities (8,078) (3,502) Financing Activities: Increase (decrease) in short-term notes payable 28,000 (24,000) Principal payments of long-term debt (15,000) - Dividends paid (1,820) (1,804) --------- --------- Net Cash Provided (Used) by Financing Activities 11,180 (25,804) --------- --------- Decrease in Cash and Cash Equivalents (18,606) (13,534) --------- --------- Cash and Cash Equivalents at Beginning of Period 45,532 50,136 --------- --------- Cash and Cash Equivalents at End of Period $ 26,926 $ 36,602 ========= ========= See Notes to Condensed Consolidated Financial Statements.
BROWN SHOE COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note A - Basis of Presentation - ------------------------------ The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and reflect all adjustments which management believes necessary (which include only normal recurring accruals and the effect on LIFO inventory valuation of estimated annual inflationary cost increases and year-end inventory levels) to present fairly the results of operations. These statements, however, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flow in conformity with generally accepted accounting principles. The Company's business is subject to seasonal influences, and interim results may not necessarily be indicative of results which may be expected for any other interim period or for the year as a whole. For further information refer to the consolidated financial statements and footnotes included in the Company's Annual Report and Form 10-K for the period ended January 30, 1999. Note B - Change of Company Name - ------------------------------- On May 27, 1999, the shareholders of the Company approved a change in the company's name to Brown Shoe Company, Inc. The Company's shares began trading under the "BWS" symbol on the New York and Chicago Stock Exchanges on Friday, May 28, 1999. Note C - Earnings Per Share - --------------------------- The following table sets forth the computation of basic and diluted earnings per share for the periods ended May 1, 1999 and May 2, 1998 (000's, except per share data):
Thirteen Weeks Ended -------------------- May 1, May 2, 1999 1998 ------- ------ Numerator: Net earnings - Basic and Diluted $ 6,316 $ 3,871 Denominator: Weighted average shares outstanding-Basic 17,765 17,625 Effect of potentially dilutive securities 211 261 ------- ------- Weighted average shares outstanding-Diluted 17,976 17,886 ======= ====== Basic earnings per share $ .36 $ .22 ======= ======= Diluted earnings per share $ .35 $ .22 ======= ======
Note D - Comprehensive Income - ----------------------------- Comprehensive Income represents the change in Shareholders' Equity during a period from transactions and other events and circumstances from nonowner sources and accordingly excludes investments by and distributions to owners. The following table sets forth the reconciliation from Net Earnings to Comprehensive Income for the periods ended May 1, 1999 and May 2, 1998 (000's):
Thirteen Weeks Ended -------------------- May 1, May 2, 1999 1998 ------- ------ Net Earnings $6,316 $3,871 Currency Translation Adjustment 1,806 403 ------ ------ Comprehensive Income $8,122 $4,274 ====== ======
Note E - Pagoda International Restructuring Reserve - --------------------------------------------------- In the first quarter of fiscal 1999, the Company utilized approximately $1.1 million of the $10.7 million restructuring reserve remaining at the end of fiscal 1998. The reserve was primarily used to cover inventory markdowns and severance. It is expected that substantially all of the remaining reserve of $9.6 million will be utilized by the end of fiscal 1999. Note F - Business Segment Information - ------------------------------------- Applicable business segment information is as follows for the periods ended May 1, 1999 and May 2, 1998 (000's):
Famous Wholesale Naturalizer Pagoda Footwear Operations Retail International Other Totals -------- ---------- ----------- ------------- ----- ------ Thirteen Weeks Ended May 1, 1999 - -------------------------------- External sales $223,613 $126,306 $44,130 $ 234 $ 2,543 $396,826 Intersegment sales - 49,141 - - - 49,141 Operating profit (loss) 11,373 9,885 (1,188) (470) (3,291) 16,309 Thirteen Weeks Ended May 2, 1998 - -------------------------------- External sales $212,264 $131,809 $46,028 $10,089 $ 2,119 $402,309 Intersegment sales - 56,933 - - - 56,933 Operating profit (loss) 10,423 7,895 (212) (2,946) (2,468) 12,692
Reconciliation of operating profit to consolidated earnings before income taxes:
Thirteen Weeks Ended ------------------------- May 1, 1999 May 2, 1998 ----------- ----------- Total operating profit $16,309 $12,692 Interest expense (4,683) (5,632) Non-operating other expense (1,446) (102) ------- ------- Total consolidated earnings before income taxes $10,180 $ 6,958 ======= =======
The "Other" segment includes the Scholze Tannery business and Corporate general and administrative expenses, which are not allocated to the operating units. Operating profit represents gross profit less general and administrative expenses and other operating income or expense. 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 $0.4 million in the first quarter of 1999 for Naturalizer Retail and a corresponding decrease to operating profit for the Wholesale Operations. Note G - Condensed Consolidated Financial Information - ----------------------------------------------------- Certain of the Company's debt is unconditionally and jointly and severally guaranteed by certain wholly-owned domestic subsidiaries of the Company. Accordingly, condensed consolidating balance sheets as of May 1, 1999 and May 2, 1998, and the related condensed consolidating statements of earnings and cash flows for the quarters ended May 1, 1999 and May 2, 1998, are provided. These condensed consolidating financial statements have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Management believes that this information, presented in lieu of complete financial statements for each of the guarantor subsidiaries, provides meaningful information to allow investors to determine the nature of the assets held by, and the operations and cash flows of, each of the consolidating groups. CONDENSED CONSOLIDATING BALANCE SHEET AS OF MAY 1, 1999 (Thousands)
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals Assets ------ ------------ ------------ ------------ ------------ - ------ Current Assets Cash and cash equivalents $ (285) $ 9,692 $ 17,519 $ - $ 26,926 Receivables, net 29,485 15,828 31,539 - 76,852 Inventory, net 42,747 337,451 21,585 (12,602) 389,181 Other current assets (4,192) 17,916 3,802 4,410 21,936 -------- --------- --------- --------- --------- Total Current Assets 67,755 380,887 74,445 (8,192) 514,895 Other Assets 45,983 19,259 12,101 (114) 77,229 Property and Equipment, net 15,177 62,402 7,183 - 84,762 Investment in Subsidiaries 239,295 43,227 3,811 (286,333) - -------- --------- --------- --------- --------- Total Assets $368,210 $ 505,775 $ 97,540 $(294,639) $ 676,886 ======== ========= ========= ========= ========= Liabilities & Shareholders' Equity - ---------------------------------- Current Liabilities Notes payable $ 28,000 $ - $ - $ - $ 28,000 Accounts payable 5,673 105,109 21,023 - 131,805 Accrued expenses 21,414 46,456 12,045 2,586 82,501 Income taxes (691) 7,377 1,285 416 8,387 Current maturities of long-term debt 10,000 - - - 10,000 -------- --------- --------- --------- --------- Total Current Liabilities 64,396 158,942 34,353 3,002 260,693 Long-Term Debt and Capitalized Lease Obligations 172,031 - 41 (41) 172,031 Other Liabilities 21,002 (811) 232 (69) 20,354 Intercompany Payable (Receivable) (113,027) 102,182 16,929 (6,084) - Shareholders' Equity 223,808 245,462 45,985 (291,447) 223,808 -------- --------- --------- --------- --------- Total Liabilities and Shareholders' Equity $368,210 $ 505,775 $ 97,540 $(294,639) $ 676,886 ======== ========= ========= ========= =========
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS THIRTEEN WEEKS ENDED MAY 1, 1999
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals ------ ------------ ------------ ------------ ------------ Net Sales $ 68,357 $ 310,842 $ 84,195 $ (66,568) $ 396,826 Cost of goods sold 49,207 188,490 67,890 (66,568) 239,019 -------- --------- --------- --------- --------- Gross profit 19,150 122,352 16,305 - 157,807 Selling and administrative expenses 18,502 113,595 10,034 (482) 141,649 Interest expense 4,669 - 14 - 4,683 Intercompany interest (income) expense (3,358) 3,358 - - - Other (income) expense 868 159 (214) 482 1,295 Equity in (earnings) of subsidiaries (7,592) (4,841) - 12,433 - -------- --------- --------- --------- --------- Earnings (Loss) Before Income Taxes 6,061 10,081 6,471 (12,433) 10,180 Income tax provision (benefit) (255) 2,489 1,630 - 3,864 -------- --------- --------- --------- --------- Net Earnings (Loss) $ 6,316 $ 7,592 $ 4,841 $ (12,433) $ 6,316 ======== ========= ========= ========= =========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS THIRTEEN WEEKS ENDED MAY 1, 1999
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals ------ ------------ ------------ ------------ ------------ Net Cash Provided (Used) by Operating Activities $ 12,925 $ (31,907) $ (9,387) $ 6,661 $ (21,708) Investing Activities: Capital expenditures (131) (7,292) (655) - (8,078) -------- --------- --------- --------- --------- Net Cash Used by Investing Activities (131) (7,292) (655) - (8,078) Financing Activities: Increase in short-term notes payable 28,000 - - - 28,000 Principal payments of long-term debt (15,000) - - - (15,000) Dividends paid (1,820) - - - (1,820) Intercompany financing (36,445) 44,153 (1,047) (6,661) - -------- -------- --------- --------- --------- Net Cash Provided (Used) by Financing Activities (25,265) 44,153 (1,047) (6,661) 11,180 Increase (Decrease) in Cash and Cash Equivalents (12,471) 4,954 (11,089) - (18,606) Cash and Cash Equivalents at Beginning of Period 12,186 4,738 28,608 - 45,532 -------- -------- --------- --------- --------- Cash and Cash Equivalents at End of Period $ (285) $ 9,692 $ 17,519 $ - $ 26,926 ======== ======== ========= ========= =========
CONDENSED CONSOLIDATING BALANCE SHEET AS OF MAY 2, 1998 (Thousands)
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals ------ ------------ ------------ ------------ ------------ Assets ______ Current Assets Cash and cash equivalents $ 1,075 $ 9,580 $ 30,947 $ (5,000) $ 36,602 Receivables, net 28,440 12,696 30,123 - 71,259 Inventory, net 49,212 307,778 26,815 (13,367) 370,438 Other current assets (424) 16,179 9,867 4,678 30,300 -------- -------- --------- --------- --------- Total Current Assets 78,303 346,233 97,752 (13,689) 508,599 Other Assets 45,812 16,698 12,176 (112) 74,574 Property and Equipment, net 16,659 56,515 7,192 - 80,366 Investment in Subsidiaries 237,428 32,711 3,811 (273,950) - -------- --------- --------- --------- --------- Total Assets $378,202 $ 452,157 $ 120,931 $(287,751) $ 663,539 ======== ========= ========= ========= ========= Liabilities & Shareholders' Equity - ---------------------------------- Current Liabilities Notes payable $ 30,000 $ - $ - $ - $ 30,000 Accounts payable 7,252 90,614 20,289 - 118,155 Accrued expenses 19,897 46,394 18,755 (2,814) 82,232 Income taxes 1,125 16,426 (4,489) 541 13,603 Current maturities of long-term debt 15,000 - - - 15,000 -------- --------- --------- --------- --------- Total Current Liabilities 73,274 153,434 34,555 (2,273) 258,990 Long-Term Debt and Capitalized Lease Obligations 182,028 - 39 (39) 182,028 Other Liabilities 19,923 125 409 (69) 20,388 Intercompany Payable (Receivable) (99,156) 81,959 23,481 (6,284) - Shareholders' Equity 202,133 216,639 62,447 (279,086) 202,133 -------- --------- --------- --------- --------- Total Liabilities and Shareholders' Equity $378,202 $ 452,157 $ 120,931 $(287,751) $ 663,539 ======== ========= ========= ========= =========
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS THIRTEEN WEEKS ENDED MAY 2, 1998
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals ------ ------------ ------------ ------------ ------------ Net Sales $ 71,847 $ 305,727 $ 97,370 $ (72,635) $ 402,309 Cost of goods sold 52,056 187,471 80,093 (72,635) 246,985 -------- --------- --------- --------- --------- Gross profit 19,791 118,256 17,277 - 155,324 Selling and administrative expenses 20,273 108,061 14,921 (473) 142,782 Interest expense 5,571 5 56 - 5,632 Intercompany interest (income) expense (3,830) 3,806 24 - - Other (income) expense (1,549) 7 1,021 473 (48) Equity in (earnings) of subsidiaries (3,969) (305) - 4,274 - -------- --------- --------- --------- --------- Earnings (Loss) Before Income Taxes 3,295 6,682 1,255 (4,274) 6,958 Income tax provision (benefit) (576) 2,713 950 - 3,087 -------- --------- --------- --------- --------- Net Earnings (Loss) $ 3,871 $ 3,969 $ 305 $ (4,274) $ 3,871 ======== ========= ========= ========= =========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS THIRTEEN WEEKS ENDED MAY 2, 1998
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals ------ ------------ ------------ ------------ ------------ Net Cash Provided (Used) by Operating Activities $ 13,436 $ 15,704 $ (11,418) $ (1,950) $ 15,772 Investing Activities: Capital expenditures (143) (2,513) (846) - (3,502) -------- --------- --------- --------- --------- Net Cash Used by Investing Activities (143) (2,513) (846) - (3,502) Financing Activities: Decrease in short-term notes payable (24,000) - - - (24,000) Dividends paid (1,804) - - - (1,804) Intercompany financing 12,138 (10,454) 1,326 (3,010) - -------- --------- --------- --------- --------- Net Cash Provided (Used) by Financing Activities (13,666) (10,454) 1,326 (3,010) (25,804) Increase (Decrease) in Cash and Cash Equivalents (373) 2,737 (10,938) (4,960) (13,534) 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 $ 1,075 $ 9,580 $ 30,947 $ (5,000) $ 36,602 ======== ========= ========= ========= =========
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------- Results of Operations - --------------------- Quarter ended May 1, 1999 compared to the Quarter ended May 2, 1998 - -------------------------------------------------------------------- Consolidated net sales for the fiscal quarter ended May 1, 1999 were $396.8 million compared to $402.3 million in the quarter ended May 2, 1998. Net earnings of $6.3 million for the first quarter of 1999 compares to net earnings of $3.9 million in the first quarter of 1998. Famous Footwear achieved first quarter record sales and operating earnings. Sales of $223.6 million increased 5.3% from last year representing a same-store sales increase of 1.7% and 22 more stores, reflecting a total of 834 stores in operation. Sales per square foot increased 3.1% in the first quarter of 1999 reflecting improved store productivity from the new stores opened versus those stores closed in the past year. Operating earnings for the first quarter of 1999 increased 9.1% to $11.4 million as a result of higher sales and good expense leveraging. The Company's wholesale operations - the Brown Branded, Brown Pagoda and Brown Canada divisions - had a net sales decrease of 4.2% during the first quarter of 1999 to $126.3 million. However, operating earnings of $9.9 million increased 25.2% from last year resulting from improved margins and lower marketing expenses. In the Company's Naturalizer Retail operations which includes both the United States and Canadian stores, net sales decreased 4.1% to $44.1 million in the first quarter of 1999. Same-store sales in the first quarter of 1999 decreased 6.7% in the United States and were flat in Canada. Domestically, the Company had 9 less stores in operation in 1999; Canada had 10 more stores in operation. At the end of the first quarter of 1999, 464 stores were in operation including 328 stores in the United States and 136 stores in Canada. Total Naturalizer retail operations incurred an operating loss of $1.2 million in 1999 compared to $.2 million in 1998. The higher operating loss resulted from lower sales. Operating losses at the Pagoda International division were $.5 million in the first quarter of 1999 compared to $2.9 million last year reflecting a significantly reduced level of operations. Consolidated gross profit as a percent of sales increased to 39.8% from 38.6% for the same period last year. This increase was primarily due to higher margins at the Company's wholesale operations and a higher mix of retail sales, which historically earn higher margins than wholesale. Selling and administrative expenses as a percent of sales increased to 35.7% from 35.5% for the same period last year. This increase was primarily due to a higher mix of retail sales, which carry a higher expense rate. Other expense in the first quarter of 1999 primarily represents additional provisions for environmental remediation costs associated with an owned facility in Colorado. The consolidated tax rate was 38.0% of consolidated pre-tax income for the first quarter of 1999 compared to 44.4% for last year. The higher effective tax rate for last year reflects higher operating losses at the Pagoda International marketing division, on which tax benefits could not be realized. Financial Condition A summary of key financial data and ratios at the dates indicated is as follows: May 1, May 2, January 30, 1999 1998 1999 ------- ------ ------------ Working Capital (millions) $254.2 $249.6 $250.9 Current Ratio 2.0:1 2.0:1 2.0:1 Total Debt as a Percentage of Total Capitalization 48.4% 52.9% 47.6% Cash flow from operating activities for the first quarter of fiscal 1999 was a net usage of $21.7 million versus a net generation of $15.8 million last year. In the first quarter of 1999, cash flow decreased primarily as a result of higher inventory and receivable levels. The current ratio at May 1, 1999 remained consistent with the ratio for May 2, 1998, primarily due to the combination of higher accounts receivable and inventory corresponding to an increase in current maturities of long-term debt. The increase in the ratio of total debt as a percentage of total capitalization at May 1, 1999, compared to the end of fiscal 1998, is due to the cash usage in the first quarter. In addition, the Company did not have any notes payable outstanding at the end of fiscal 1998. At May 1, 1999, $28.0 million was borrowed and $12.7 million of letters of credit were outstanding under the Company's $155.0 million revolving bank Credit Agreement. Year 2000 Compliance - -------------------- The "Year 2000" issue arises because many computer hardware and software systems, including the Company's, use only two digits to represent the year. As a result, these systems and programs may not accurately calculate dates beyond 1999, which could cause system failures or miscalculations. The Company has established a company-wide Steering Committee, consisting of the Chief Financial Officer, Vice Presidents of the Information Services (IS) functions, internal auditors, executive financial and legal management and other employees, to oversee and manage the Company's Year 2000 project. The Company has completed a thorough assessment of all of its existing information systems and has developed a comprehensive plan to modify or replace all hardware and software information systems that are not Year 2000 compliant. The Company will test all systems to ensure that they will operate properly with respect to dates in the next century. The Company has also assessed the operating systems and equipment used in its distribution centers, offices and other facilities that may contain embedded chips, and that may be Year 2000 sensitive, and will make modifications where necessary. The plan also includes communicating with significant business partners to determine their state of readiness for the Year 2000. With respect to its internal information systems, as of May 1, 1999, the Company has substantially completed the modification or replacement and testing of the information and operating systems used in its footwear wholesaling, Naturalizer retailing and sourcing operations, and its financial systems. The Famous Footwear retail division has completed the modification of its ongoing systems, and is replacing its in-store systems. The Company expects that testing of the modified systems and installation of the new in-store systems will be substantially completed by the end of the Company's second quarter. All of the Company's divisions will use the balance of 1999 for additional testing and correction of any problems that may arise. The Company relies on independent business partners to provide various products and services. One of the most significant groups of partners is the independently owned and operated factories, primarily in China and Brazil, from which the Company purchases footwear for its wholesale and retail operations. Based on communications with representatives of and on-site visits to these factories, the Company has determined that the use of date-sensitive technology in their production processes is relatively low. Nevertheless, the Company is continuing to review the assessment, remediation, and test plans of these factories to determine whether they can be relied on as suppliers going forward. In addition, the Company has been in contact with footwear companies that provide Famous Footwear with the majority of its products, as well as banks and other key business partners and providers. Communications with these partners are continuing in order to obtain as much assurance as possible that they will be compliant. However, there can be no assurance that these partners' Year 2000 remediation efforts will be successful. Nor can there be assurance that third parties not contacted will not have problems that could materially adversely affect the Company's business, operations and financial condition. The Company believes that the most reasonably likely Year 2000 worst case scenario is that its suppliers of footwear, for both its wholesale and retail businesses, would not be able to provide an uninterrupted flow of products due to their own or their suppliers' systems failures or as a result of disruptions in utility or other government services. By mid-1999 the Company expects to develop detailed contingency plans which will include determining which suppliers appear to be at risk of noncompliance, and will attempt to arrange for alternative sources of footwear from its large and diverse group of suppliers, if necessary. The Company may also consider accelerating purchases of inventory to reduce this risk. The Company believes that there is adequate footwear producing capacity available to allow for the use of alternate sources or accelerated purchases. The Company also believes that if there is a disruption in the flow of footwear it will be short-term in nature. Nevertheless, there can be no assurance that the Company can accurately and fully anticipate the level of disruption that may occur. The Company's wholesale division customers are department stores, mass-merchants and numerous other footwear retailers. The Company is communicating with its significant retail customers through which it processes transactions electronically using Electronic Data Interchange (EDI) technology to attempt to determine their ability to continue to conduct business in this manner. The Company has adopted the Year 2000 compliant version of EDI, and plans to convert to the new version and perform tests directly with its applicable retail customers throughout 1999. As a contingency plan, if a customer is unable to continue to process transactions through EDI, it is expected that manual procedures could be implemented. The Company intends to continue to monitor and assess the EDI and the general state of Year 2000 readiness of its major retail customers. A Year 2000 failure by a major retail customer could have a materially adverse effect on the Company. Management estimates that the non-incremental internal IS staff and outside consultant costs of the Company's Year 2000 efforts will total approximately $1.6 million. Through May 1, 1999, approximately $1.5 million of this total has been incurred. In addition, the cost for new purchased or leased hardware and software that will both upgrade the functionality and operating efficiency of store and financial systems, and result in Year 2000 compliance, is expected to be approximately $15 million. All expenditures related to the Company's Year 2000 project are expected to be funded through operating cash flows. The costs of new purchased and leased systems will be expensed over the next several years. All costs related to modifying systems are being expensed as incurred. The costs and anticipated completion dates for Year 2000 modifications and the risks associated with the Year 2000 issues are based on management's best estimates utilizing numerous assumptions of future events. There can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Factors that may cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer code and systems, the cooperation and remediation success of the Company's suppliers (and their suppliers), and the ability to correctly anticipate risks and implement suitable contingency plans in the event of systems failures at the Company or its suppliers and customers (and their suppliers and customers). Forward-Looking Statements - -------------------------- This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially. In Item 1 of the Company's fiscal 1998 Annual Report on Form 10-K, detailed risk factors that could cause variations in results to occur are listed and further discussed. Such filing is incorporated herein by reference. PART II - OTHER INFORMATION --------------------------- Item 1 - Legal Proceedings - -------------------------- There have been no material developments during the quarter ended May 1, 1999, in the legal proceedings described in the Company's Annual Report on Form 10-K for the period ended January 30, 1999. Item 3 - Quantitative and Qualitative Disclosure about Market Risks - --------------------------------------------------------------------- No material changes have taken place in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. Item 4 - Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ At the Annual Meeting of Shareholders held on May 27, 1999, three proposals described in the Notice of Annual Meeting of Shareholders dated April 26, 1999, were voted upon. 1. The shareholders elected two directors, Mr. Ronald A. Fromm and Ms. Patricia G. McGinnis for terms of three years each. The voting for each director was as follows: Directors For Withheld --------- ---------- -------- Mr. Ronald A. Fromm 16,121,195 93,465 Ms. Patricia G. McGinnis 16,084,757 129,903 2. The proposal to amend the Certificate of Incorporation of the Company to change its name to Brown Shoe Company, Inc. was approved by a vote of 15,777,685 in favor to 76,934 against, with 44,791 abstaining. 3. The proposal to ratify and approve the prior adoption by the Board of Directors of the Brown Group, Inc. Incentive and Stock Compensation Plan of 1999 and the allocation of 900,000 of the Corporation's shares thereto was approved by a vote of 13,086,956 in favor to 2,664,098 against, with 148,356 abstaining. Item 6 - Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Listing of Exhibits (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, filed herewith. (b) Bylaws of the Company as amended through April 20, 1999, incorporated herein by reference to Exhibit 3 to the Company's Report on Form 10-K for the fiscal year ended January 30, 1999. (10) (k) 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. (27) Financial Data Schedule (Page 20) (b) Reports on Form 8-K: The Company filed a current report on Form 8-K dated May 27, 1999 which reported the approval by the Company's shareholders to change the name of the company to Brown Shoe Company, Inc. Pursuant to the requirements 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. BROWN SHOE COMPANY, INC. Date: June 9, 1999 /s/ Harry E. Rich - ------------------ ------------------------------- Harry E. Rich Executive Vice President and Chief Financial Officer and O Behalf of the Corporation as the Principal Financial Officer EX-3 2 EXHIBIT (3)(a)(ii) CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF BROWN GROUP, INC. Under Section 805 of the Business Corporation Law We, the undersigned, RONALD A. FROMM and ROBERT D. PICKLE, respectively, the President and the Secretary of Brown Group, Inc. (hereinafter sometimes called the "Company"), do hereby certify and set forth: 1. The name of the Company is Brown Group, Inc. The name under which the Company was formed is Brown Shoe Company, Inc. 2. The Certificate of Incorporation of the Company was filed by the New York Department of State on the 2nd day of January, 1913. 3. (a) The certificate of incorporation is amended to change the name of the company from Brown Group, Inc. to its original name, Brown Shoe Company, Inc. (b) To effect the foregoing change, Article First of the Certificate of Incorporation of the Company is amended to read in its entirety as follows: FIRST: The name of the Company shall be Brown Shoe Company, Inc. (hereinafter termed "Company"). 4. The amendment to the Certificate of Incorporation of the Company was authorized, first by the Board of Directors pursuant to Section 805(a) of the Business Corporation Law, and then by the affirmative vote of the holders of a majority of all issued and outstanding shares of Common Stock of the Company entitled to vote at the Annual Meeting of Stockholders of the Company held on May 27, 1999. IN WITNESS WHEREOF, we have signed this Certificate of Amendment on the 27th day of May, 1999, and we affirm the statements contained therein as true under penalties of perjury. /s/ Ronald A. Fromm ------------------------------- RONALD A. FROMM, President /s/ Robert D. Pickle ------------------------------- ROBERT D. PICKLE, Secretary EX-27 3
5 3-MOS JAN-29-2000 MAY-01-1999 26,926 0 87,095 (10,243) 389,181 514,895 224,810 (140,048) 676,886 260,693 172,031 0 0 68,266 155,542 676,886 396,826 396,826 239,019 380,668 1,295 805 4,683 10,180 3,864 6,316 0 0 0 6,316 .36 .35
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