-----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, VZLjMMSffXU8Mrt3Mv2jxCfRinZ/bHsIjef5B0tMisVMB9tH7Dw86kGVCpTTdbqR XoWpExNYZ0mJvKCp+WIleA== 0000014707-99-000022.txt : 19990913 0000014707-99-000022.hdr.sgml : 19990913 ACCESSION NUMBER: 0000014707-99-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990910 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: 99709055 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 July 31, 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) N/A (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 August 28, 1999, 18,248,590 shares of the registrant's common stock were outstanding. 2 BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Thousands)
(Unaudited) --------------------- July 31, August 1, January 30, 1999 1998 1999 --------- --------- ----------- ASSETS - ------ Current Assets Cash and Cash Equivalents $ 34,642 $ 32,180 $ 45,532 Receivables, net of allowances of $9,660 at July 31, 1999, $9,651 at August 1, 1998, and $9,820 at January 30, 1999 72,975 75,109 67,815 Inventories, net of adjustment to last-in, first-out cost of $12,692 at July 31, 1999, $15,265 at August 1, 1998, and $13,424 at January 30, 1999 412,485 396,657 362,274 Other Current Assets 22,085 26,014 21,762 --------- --------- --------- Total Current Assets 542,187 529,960 497,383 Other Assets 76,066 75,250 75,671 Property and Equipment 228,750 214,260 217,054 Less allowances for depreciation and amortization (144,168) (135,310) (134,876) --------- --------- --------- 84,582 78,950 82,178 --------- --------- --------- $ 702,835 $ 684,160 $ 655,232 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes Payable $ 2,000 $ - $ - Accounts Payable 163,404 161,772 124,921 Accrued Expenses 92,472 87,549 90,081 Income Taxes 11,897 14,197 6,442 Current Maturities of Long-Term Debt 10,000 15,000 25,000 --------- --------- --------- Total Current Liabilities 279,773 278,518 246,444 Long-Term Debt and Capitalized Lease Obligations 172,033 182,029 172,031 Other Liabilities 19,175 20,540 19,583 Shareholders' Equity Common Stock 68,436 67,682 68,131 Additional Capital 49,183 46,883 48,243 Unamortized Value of Restricted Stock (3,882) (3,226) (4,058) Accumulated Other Comprehensive Loss (8,772) (10,079) (8,842) Retained Earnings 126,889 101,813 113,700 --------- --------- --------- 231,854 203,073 217,174 --------- --------- --------- $ 702,835 $ 684,160 $ 655,232 ========= ========= =========
See Notes to Condensed Consolidated Financial Statements. 3 BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (Thousands, except per share)
Thirteen Weeks Ended Twenty-six Weeks Ended -------------------- ---------------------- July 31, August 1, July 31, August 1, 1999 1998 1999 1998 -------- --------- -------- --------- Net Sales $410,100 $383,618 $806,926 $785,927 Cost of Goods Sold 249,025 229,616 488,044 476,601 -------- -------- -------- -------- Gross Profit 161,075 154,002 318,882 309,326 Selling and Administrative Expenses 141,533 140,116 283,182 282,898 Interest Expense 4,392 4,858 9,075 10,490 Other (Income) Expense (2,628) 1,284 (1,333) 1,236 -------- -------- -------- -------- Earnings Before Income Taxes 17,778 7,744 27,958 14,702 Income Tax Provision 7,261 3,449 11,125 6,536 -------- -------- -------- -------- NET EARNINGS $ 10,517 $ 4,295 $ 16,833 $ 8,166 ======== ======== ======== ======== BASIC EARNINGS PER COMMON SHARE $ .59 $ .24 $ .95 $ .46 ======== ======== ======== ======== DILUTED EARNINGS PER COMMON SHARE $ .58 $ .24 $ .93 $ .46 ======== ======== ======== ======== DIVIDENDS PER COMMON SHARE $ .10 $ .10 $ .20 $ .20 ======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements. 4 BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Thousands)
Twenty-six Weeks Ended ---------------------- July 31, August 1, 1999 1998 --------- --------- Net Cash Provided by Operating Activities $ 10,278 $ 47,531 Investing Activities: Proceeds from the sale of le coq sportif 9,281 - Capital expenditures (14,577) (7,915) --------- --------- Net Cash Used by Investing Activities (5,296) (7,915) Financing Activities: Increase (decrease) in short-term notes payable 2,000 (54,000) Principal payments of long-term debt (15,000) - Proceeds from issuance of common stock 773 37 Dividends paid (3,645) (3,609) --------- --------- Net Cash Used by Financing Activities (15,872) (57,572) --------- --------- Decrease in Cash and Cash Equivalents (10,890) (17,956) Cash and Cash Equivalents at Beginning of Period 45,532 50,136 --------- --------- Cash and Cash Equivalents at End of Period $ 34,642 $ 32,180 ========= =========
See Notes to Condensed Consolidated Financial Statements. 5 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. from Brown Group, 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 July 31, 1999 and August 1, 1998 (000's, except per share data):
Thirteen Weeks Ended Twenty-six Weeks Ended --------------------- ---------------------- July 31, August 1, July 31, August 1, 1999 1998 1999 1998 --------- --------- -------- --------- Numerator: Net earnings - Basic and Diluted $10,517 $ 4,295 $16,833 $ 8,166 ======= ======= ======= ======= Denominator: Weighted average shares outstanding-Basic 17,861 17,689 17,812 17,657 Effect of potentially dilutive securities 387 290 300 276 ------- ------- ------- ------- Weighted average shares outstanding-Diluted 18,248 17,979 18,112 17,933 ======= ======= ======= ======= Basic earnings per share $ .59 $ .24 $ .95 $ .46 ======= ======= ======= ======= Diluted earnings per share $ .58 $ .24 $ .93 $ .46 ======= ======= ======= =======
6 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 Income to Comprehensive Income for the periods ended July 31, 1999 and August 1, 1998 (000's):
Thirteen Weeks Ended Twenty-six Weeks Ended -------------------- ---------------------- July 31, August 1, July 31, August 1, 1999 1998 1999 1998 -------- --------- ------- --------- Net Income $10,517 $ 4,295 $16,833 $ 8,166 Currency Translation Adjustment (1,736) (2,055) 70 (1,652) ------- ------- ------- ------- Comprehensive Income $ 8,781 $ 2,240 $16,903 $ 6,514 ======= ======= ======= =======
Note E - Pagoda International Restructuring Reserve - --------------------------------------------------- In the first half of 1999, the Company utilized approximately $1.7 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 currently expected that a substantial portion of the remaining reserve of $9.0 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 July 31, 1999 and August 1, 1998 (000's):
Famous Wholesale Naturalizer Pagoda Footwear Operations Retail International Other Totals -------- ---------- ----------- ------------- ----- ------ Thirteen Weeks Ended July 31, 1999 - ---------------------------------- External sales $237,522 $120,348 $49,977 $ 93 $2,160 $410,100 Intersegment sales - 41,888 - - - 41,888 Operating profit (loss) 13,935 8,778 865 (206) (3,301) 20,071 Thirteen Weeks Ended August 1, 1998 - ----------------------------------- External sales $218,199 $102,734 $51,512 $9,145 $2,028 $383,618 Intersegment sales - 43,340 - - - 43,340 Operating profit (loss) 12,607 3,438 1,848 (1,985) (2,485) 13,423 Twenty-six Weeks Ended July 31, 1999 - ------------------------------------ External sales $461,135 $246,655 $94,106 $ 327 $4,703 $806,926 Intersegment sales - 91,031 - - - 91,031 Operating profit (loss) 25,308 18,664 (323) (676) (6,593) 36,380 Twenty-six Weeks Ended August 1, 1998 - ------------------------------------- External sales $430,463 $234,542 $97,541 $19,234 $4,147 $785,927 Intersegment sales - 100,274 - - - 100,274 Operating profit (loss) 23,030 11,331 1,636 (4,930) (4,952) 26,115
7 Reconciliation of operating profit to consolidated earnings before income taxes:
Thirteen Weeks Ended Twenty-six Weeks Ended -------------------- ---------------------- July 31, August 1, July 31, August 1, 1999 1998 1999 1998 -------- --------- -------- --------- Total operating profit $ 20,071 $ 13,423 $ 36,380 $ 26,115 Interest expense (4,392) (4,858) (9,075) (10,490) Non-operating other income/(expense) 2,099 (821) 653 (923) -------- -------- -------- -------- Total consolidated earnings before income taxes $ 17,778 $ 7,744 $ 27,958 $ 14,702 ======== ======== ======== ========
The "Other" segment includes the Scholze Tannery business and Corporate general and administrative expenses, which are not allocated to the operatin g 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 $1.0 million and $1.3 million for the thirteen weeks ended and twenty-six weeks ended July 31, 1999, respectively, for Naturalizer Retail and a corresponding decrease to operating profit for the Wholesale Operations. Note G - Sale of le coq sportif - ------------------------------- In July 1999, the Company sold its le coq sportif footwear and apparel business for approximately $12.4 million, of which $3.1 million was received in the form of a note payable. The Company recognized a $2.3 million pre-tax gain in connection with the sale; however, the gain was substantially offset by a tax provision of $2.0 million. The tax provision included $1.2 million of taxes related to the repatriation of previously untaxed foreign cash generated from the sale. Note H - 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 July 31, 1999 and August 1, 1998, and the related condensed consolidating statements of earnings and cash flows for the twenty-six weeks ended July 31, 1999 and August 1, 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. 8 CONDENSED CONSOLIDATING BALANCE SHEET AS OF JULY 31, 1999 (Thousands)
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals -------- ------------ ------------- ------------ ------------ Assets - ------ Current Assets Cash and cash equivalents $ 1,353 $ 1,985 $ 31,304 $ - $ 34,642 Receivables, net 33,521 12,932 26,522 - 72,975 Inventory, net 45,341 360,123 19,552 (12,531) 412,485 Other current assets (4,958) 21,063 1,595 4,385 22,085 -------- -------- --------- ---------- -------- Total Current Assets 75,257 396,103 78,973 (8,146) 542,187 Other Assets 49,481 20,815 5,815 (45) 76,066 Property and Equipment, net 14,643 63,549 6,390 - 84,582 Investment in Subsidiaries 248,577 46,097 - (294,674) - -------- -------- --------- ---------- -------- Total Assets $387,958 $526,564 $ 91,178 $(302,865) $702,835 ======== ======== ======== ========= ======== Liabilities & Shareholders' Equity - ---------------------------------- Current Liabilities Notes payable $ 2,000 $ - $ - $ - $ 2,000 Accounts payable 6,095 136,967 20,342 - 163,404 Accrued expenses 25,331 52,987 12,092 2,062 92,472 Income taxes 2,096 8,697 339 765 11,897 Current maturities of long-term debt 10,000 - - - 10,000 -------- -------- --------- ---------- -------- Total Current Liabilities 45,522 198,651 32,773 2,827 279,773 Long-Term Debt and Capitalized Lease Obligations 172,033 41 - (41) 172,033 Other Liabilities 20,312 (1,336) 199 - 19,175 Intercompany Payable (Receivable) (81,763) 75,433 17,122 (10,792) - Shareholders' Equity 231,854 253,775 41,084 (294,859) 231,854 -------- -------- --------- ---------- -------- Total Liabilities and Shareholders' Equity $387,958 $526,564 $ 91,178 $(302,865) $702,835 ======== ======== ======== ========= ========
9 CONDENSED CONSOLIDATING STATEMENT OF EARNINGS TWENTY-SIX WEEKS ENDED JULY 31, 1999
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals -------- ------------ ------------- ------------ ------------ Net Sales $126,104 $640,099 $173,338 $(132,615) $806,926 Cost of goods sold 90,963 390,655 139,041 (132,615) 488,044 -------- -------- -------- --------- -------- Gross profit 35,141 249,444 34,297 - 318,882 Selling and administrative expenses 34,550 227,975 21,457 (800) 283,182 Interest expense 9,060 - 15 - 9,075 Intercompany interest (income) expense (6,881) 6,894 (13) - - Other (income) expense 15 (2,057) (91) 800 (1,333) Equity in (earnings) of subsidiaries (18,682) (9,788) - 28,470 - -------- -------- -------- --------- -------- Earnings (Loss) Before Income Taxes 17,079 26,420 12,929 (28,470) 27,958 Income tax provision (benefit) 246 7,738 3,141 - 11,125 -------- -------- -------- --------- -------- Net Earnings (Loss) $ 16,833 $ 18,682 $ 9,788 $ (28,470) $ 16,833 ======== ======== ======== ========= ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS TWENTY-SIX WEEKS ENDED JULY 31, 1999
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals -------- ------------ ------------- ------------ ------------ Net Cash Provided (Used) by Operating Activities $ 10,420 $(16,041) $ 4,530 $ 11,369 $ 10,278 Investing Activities: Capital expenditures (200) (13,397) (980) - (14,577) Proceeds from sale of le coq sportif - 9,281 - - 9,281 -------- -------- -------- --------- -------- Net Cash Used by Investing Activities (200) (4,116) (980) - (5,296) Financing Activities: Increase in short-term notes payable 2,000 - - - 2,000 Principal payments of long-term debt (15,000) - - - (15,000) Proceeds from issuance of common stock 773 - - - 773 Dividends paid (3,645) - - - (3,645) Intercompany financing (5,181) 17,404 (854) (11,369) - -------- -------- -------- --------- -------- Net Cash Provided (Used) by Financing Activities (21,053) 17,404 (854) (11,369) (15,872) Increase (Decrease) in Cash and Cash Equivalents (10,833) (2,753) 2,696 - (10,890) Cash and Cash Equivalents at Beginning of Period 12,186 4,738 28,608 - 45,532 -------- -------- -------- --------- -------- Cash and Cash Equivalents at End of Period $ 1,353 $ 1,985 $ 31,304 $ - $ 34,642 ======== ======== ======== ========= ========
10 CONDENSED CONSOLIDATING BALANCE SHEET AS OF AUGUST 1, 1998
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals -------- ------------ ------------- ------------ ------------ Assets - ------ Current Assets Cash and cash equivalents $ 6,170 $ 10,007 $ 24,253 $ (8,250) $ 32,180 Receivables, net 32,569 10,121 32,419 - 75,109 Inventory, net 51,667 336,559 22,296 (13,865) 396,657 Other current assets (667) 16,037 5,792 4,852 26,014 -------- -------- -------- --------- -------- Total Current Assets 89,739 372,724 84,760 (17,263) 529,960 Other Assets 46,663 17,071 11,628 (112) 75,250 Property and Equipment, net 15,968 55,796 7,186 - 78,950 Investment in Subsidiaries 240,698 33,129 - (273,827) - -------- -------- -------- --------- -------- Total Assets $393,068 $478,720 $103,574 $(291,202) $684,160 ======== ======== ======== ========= ======== Liabilities & Shareholders' Equity - ---------------------------------- Current Liabilities Notes payable $ - $ - $ - $ - $ - Accounts payable 6,458 132,021 23,293 - 161,772 Accrued expenses 24,511 49,467 14,519 (948) 87,549 Income taxes 3,690 9,640 1,233 (366) 14,197 Current maturities of long-term debt 15,000 - - - 15,000 -------- -------- -------- --------- -------- Total Current Liabilities 49,659 191,128 39,045 (1,314) 278,518 Long-Term Debt and Capitalized Lease Obligations 182,029 - 39 (39) 182,029 Other Liabilities 20,117 125 367 (69) 20,540 Intercompany Payable (Receivable) (61,810) 65,501 17,918 (21,609) - Shareholders' Equity 203,073 221,966 46,205 (268,171) 203,073 -------- -------- -------- --------- -------- Total Liabilities and Shareholders' Equity $393,068 $478,720 $103,574 $(291,202) $684,160 ======== ======== ======== ========= ========
11 CONDENSED CONSOLIDATING STATEMENT OF EARNINGS TWENTY-SIX WEEKS ENDED AUGUST 1, 1998
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals -------- ------------ ------------- ------------ ------------ Net Sales $135,737 $610,568 $176,437 $(136,815) $785,927 Cost of goods sold 97,955 373,309 142,152 (136,815) 476,601 -------- -------- -------- --------- -------- Gross profit 37,782 237,259 34,285 - 309,326 Selling and administrative expenses 39,346 215,179 29,204 (831) 282,898 Interest expense 10,421 5 64 - 10,490 Intercompany interest (income) expense (7,338) 7,298 40 - - Other (income) expense (1,601) (8) 2,014 831 1,236 Equity in (earnings) of subsidiaries (9,298) (723) - 10,021 - -------- -------- -------- --------- -------- Earnings (Loss) Before Income Taxes 6,252 15,508 2,963 (10,021) 14,702 Income tax provision (benefit) (1,914) 6,210 2,240 - 6,536 -------- -------- -------- --------- -------- Net Earnings $ 8,166 $ 9,298 $ 723 $ (10,021) $ 8,166 ======= ======== ======== ========= ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS TWENTY-SIX WEEKS ENDED AUGUST 1, 1998
Guarantor Non-Guarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Totals -------- ------------ ------------- ------------ ------------ Net Cash Provided (Used) by Operating Activities $13,023 $ 36,162 $(11,779) $ 10,125 $ 47,531 Investing Activities: Capital expenditures (213) (6,086) (1,616) - (7,915) -------- -------- -------- --------- -------- Net Cash Used by Investing Activities (213) (6,086) (1,616) - (7,915) Financing Activities: Decrease in short-term notes payable (54,000) - - - (54,000) Proceeds from issuance of common stock 37 - - - 37 Dividends paid (3,609) - - - (3,609) Intercompany financing 49,484 (26,912) (4,237) (18,335) - -------- -------- -------- --------- -------- Net Cash Provided (Used) by Financing Activities (8,088) (26,912) (4,237) (18,335) (57,572) Increase (Decrease) in Cash and Cash Equivalents 4,722 3,164 (17,632) (8,210) (17,956) 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 $ 6,170 $ 10,007 $ 24,253 $ (8,250) $ 32,180 ======= ========= ========= ========= ==========
12 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - --------------------------------------------------------------- Results of Operations - --------------------- Quarter ended July 31, 1999 compared to the Quarter ended August 1, 1998 - --------------------------------------------------------------- Consolidated net sales for the fiscal quarter ended July 31, 1999 were $410.1 million compared to $383.6 million in the quarter ended August 1, 1998. Net earnings of $10.5 million for the second quarter of 1999 compares to net earnings of $4.3 million in the second quarter of 1998. The increase in net earnings resulted from increased revenue in the Company's core businesses as well as a reduction in the liquidated International division's losses in the second quarter of 1999. Excluding the effect of lower International losses, net earnings for the second quarter of 1999 increased 56.1% over the second quarter of 1998. Famous Footwear achieved record second quarter sales and operating earnings which continued the pattern beginning in fiscal 1998 and the first quarter of fiscal 1999. Sales of $237.5 million increased 8.9% from last year representing a same-store sales increase of 4.3% and 29 more stores, reflecting a total of 839 stores in operation. Operating earnings for the second quarter of 1999 increased 10.5% to $13.9 million primarily as a result of higher sales. The Company's wholesale operations - the Brown Branded, Brown Pagoda and Brown Canada divisions - had a net sales increase of 17.1% during the second quarter of 1999 to $120.3 million. The substantial increase in sales was derived from Brown Pagoda's Star Wars, Barbie and Dr. Scholl's licensed products. The increased sales combined with good expense leveraging resulted in operating earnings increasing $5.4 million from last year to $8.8 million this year. In the Company's Naturalizer Retail operations, which includes both the United States and Canadian stores, net sales decreased 3.0% to $50.0 million in the second quarter of 1999. Same- store sales in the second quarter of 1999 decreased 6.9% in the United States while increasing 0.8% in Canada. Domestically, the Company had 9 less stores in operation in 1999; Canada had 7 more stores in operation. At the end of the second quarter of 1999, 465 stores were in operation including 329 stores in the United States and 136 stores in Canada. Total Naturalizer retail operations had operating earnings of $0.9 million in 1999 compared to $1.8 million in 1998. The lower operating earnings resulted directly from the lower sales. Operating losses at the Pagoda International division were $.2 million in the second quarter of 1999 compared to $2.0 million last year reflecting a significantly reduced level of operations. Consolidated gross profit as a percent of sales decreased to 39.3% from 40.1% for the same period last year. This decrease was primarily due to lower margins at the Company's wholesale operations, which primarily represents a higher mix of sales at the Brown Pagoda division. Margins earned on this business are historically lower than the margin earned at the Company's wholesale branded operations. Selling and administrative expenses as a percent of sales decreased to 34.5% from 36.5% for the same period last year. This decrease was primarily due to the lower expense rate at the Company's wholesale operations. 13 Other income in the second quarter of 1999 primarily represents a $2.3 million gain from the sale of the le coq sportif footwear and apparel business. The consolidated tax rate was 40.8% of consolidated pre-tax income for the second quarter of 1999 compared to 44.5% 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. The 1999 tax provision includes $1.2 million of taxes to allow repatriation of the previously untaxed foreign cash generated from the sale of the le coq sportif business. Six Months ended July 31, 1999 compared to the Six Months ended August 1, 1998 - --------------------------------------------------------------- Consolidated net sales for the first half of 1999 were $806.9 million, an increase of 2.7% from the first six months of 1998 total of $785.9 million. Net earnings of $16.8 million for the first half of 1999 compare to net earnings of $8.2 million for the first half of 1998, an increase of 106.1%. Excluding the impact of lower losses at the International division, 1999 earnings increased 29.6% over 1998. Sales at Famous Footwear for the first six months of 1999 increased 7.1% from the first half of last year to $461.1 million, reflecting a 3.0% increase in same-store sales and 29 more units in operation. The higher levels of sales resulted in operating earnings for 1999 increasing 9.9% to $25.3 million. The Company's wholesale sales for the first six months of 1999 increased 5.2% to $246.7 million from the same period last year. Operating earnings of $18.7 million increased $7.4 million from last year due to the increased sales combined with good expense leveraging. In the Company's Naturalizer Retail operations, net sales decreased 3.5% to $94.1 million in the first six months of 1999. Same-store sales decreased 6.8% in the United States while increasing 0.5% in Canada. Domestically, the Company had 9 less stores in operation in 1999; Canada had 7 more stores in operation. Total Naturalizer retail operations had an operating loss of $0.3 million in 1999 compared to operating earnings of $1.6 million in 1998. The lower operating performance continues to result directly from the lower sales. At the Pagoda International division, operating losses were $.7 million in the first six months of 1999 compared to $4.9 million last year reflecting a significantly reduced level of operations. Consolidated gross profit as a percent of sales increased to 39.5% from 39.4% for the same period last year. This increase was primarily due to a higher mix of retail sales, which historically earn a higher gross profit rate. Selling and administrative expenses as a percent of sales decreased to 35.1% from 36.0% for the same period last year. This decrease was primarily due to the lower expense rate at the Company's wholesale operations. Other income has varied from prior year's other expense primarily due to the $2.3 million gain from the sale of the le coq sportif footwear and apparel business. 14 The consolidated tax rate was 39.8% of consolidated pre-tax income for the first six months of 1999 compared to 44.5% 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. As previously discussed, the 1999 tax provision includes $1.2 million of taxes related to the repatriation of foreign cash. Financial Condition - ------------------- A summary of key financial data and ratios at the dates indicated is as follows: July 31, August 1, January 30, 1999 1998 1999 -------- --------- ----------- Working Capital (millions) $262.4 $251.4 $250.9 Current Ratio 1.9:1 1.9:1 2.0:1 Total Debt as a Percentage of Total Capitalization 44.3% 49.2% 47.6% Cash flow from operating activities for the first half of fiscal 1999 provided $10.3 million versus a net generation of $47.5 million last year. In the first half of 1999, cash flow decreased primarily as a result of higher inventory levels. The current ratio at July 31, 1999 remained consistent with the ratio for August 1, 1998, primarily due to the combination of higher inventory slightly offsetting decreases in receivables and other current assets. The decrease in the ratio of total debt as a percentage of total capitalization at July 31, 1999, compared to the end of fiscal 1998, is due to principal payments made on long-term debt combined with earnings for the first six months of 1999. At July 31, 1999, $2.0 million was borrowed and $13.2 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 information systems and has substantially completed the modification or replacement of its operating and financial systems that were not Year 2000 compliant used in its wholesaling, retailing and sourcing operations, and the testing of all systems. These systems included operating systems and equipment used in the Company's distribution centers, offices and other facilities that may have contained embedded chips. The Company will use the balance of 1999 for additional testing and to correct any problems that may arise. 15 The Company relies on independent business partners, including foreign footwear factories, to provide various products and services. The Company has communicated with key suppliers and service providers and has conducted on-site visits to key factories in an ongoing effort to determine to the extent possible the status of such third parties' assessment, remediation and test plans, and whether the Company can rely upon such third parties going forward. As a result of these efforts, the Company believes that its key suppliers and service providers are making progress toward achieving Year 2000 compliance. With regard to its key foreign footwear manufacturers, the Company has determined that their use of date-sensitive technology is relatively low. The Company continues to communicate with key partners to obtain as much assurance as possible that such third parties will be Year 2000 compliant. Nevertheless, there can be no assurance that such third parties remediation efforts, or those of suppliers or service providers to such third parties, will be totally successful. The Company believes that its greatest Year 2000 risk is that its suppliers of footwear, for both its wholesale and retail businesses, will 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 transportation, utilities or other government services. If there is a disruption in the flow of footwear, the Company believes that there is adequate footwear production capacity available from alternate sources and that if there is a disruption, 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 or secure alternative sources of footwear at acceptable prices. The Company's wholesale division's 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 and to test directly with them. The Company has adopted the Year 2000 compliant version of EDI. The Company intends to continue to monitor and assess the EDI and the general state of Year 2000 readiness of its major retail customers; however, a Year 2000 failure by a major retail customer could have a materially adverse effect on the Company. The Company is developing contingency plans as considered necessary based on assessments of risks of noncompliance of internal systems, and business disruptions at its significant suppliers and customers. The development of these plans will continue throughout the remainder of 1999. 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 July 31, 1999 virtually this entire total has been incurred and expensed. In addition, the cost for new purchased or leased hardware and software that both upgraded the functionality and operating efficiency of store and financial systems, and resulted in Year 2000 compliance, is approximately $15 million, which will be expensed over the next several years. All expenditures related to the Company's Year 2000 project are being funded through operating cash flows. 16 The conclusions, estimates and risks in this Year 2000 information are based on management's best current estimates of numerous 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 customers, 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. 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. 17 PART II - OTHER INFORMATION --------------------------- Item 1 - Legal Proceedings - -------------------------- There have been no material developments during the quarter ended July 31, 1999, in the legal proceedings described in the Company's Annual Report on Form 10-K for the period ended January 30, 1999. Item 4 - Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ The results of the votes cast at the Annual Meeting of Shareholders held on May 27, 1999 were reported in the Company's Quarterly Report on Form 10-Q for the quarter ended May 1, 1999. 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, 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 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. (27) Financial Data Schedule (Page 19) (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. 18 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: September 10, 1999 /s/ Harry E. Rich ------------------- ----------------------------- Harry E. Rich Executive Vice President and Chief Financial Officer and On Behalf of the Corporation as the Principal Financial Officer EX-27 2
5 6-MOS JAN-29-2000 JUL-31-1999 34,642 0 82,635 (9,660) 412,485 542,187 228,750 144,168 702,835 279,773 172,033 0 0 68,436 163,418 702,835 806,926 806,926 488,044 771,226 (1,333) 1,558 9,075 27,958 11,125 16,833 0 0 0 16,833 .95 .93
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