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FORM
10-K
United
States Securities and Exchange Commission
Washington,
D.C. 20549
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
fiscal year ended January 29, 2005
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 incorporation or
organization) |
(IRS
Employer Identification Number) |
| |
|
|
8300
Maryland Avenue |
63105 |
|
St.
Louis, Missouri |
(Zip
Code) |
|
(Address
of principal executive offices) |
|
(314)
854-4000
(Registrant’s
telephone number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act:
|
Title
of each class |
Name
of each exchange on which registered |
|
Common
Stock — par value $3.75 a share with Common Stock |
New
York Stock Exchange |
|
Purchase
Rights |
Chicago
Stock Exchange |
Securities
Registered Pursuant to Section 12(g) of the Act: None
Indicate
by checkmark 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 checkmark 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. [ ]
Indicate
by checkmark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yes [X] No [ ]
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of July 31, 2004, the last business day of the registrant’s most
recently completed second fiscal quarter, was approximately $586.2
million.
As of
February 26, 2005, 18,262,541 common shares were outstanding.
Documents
Incorporated by Reference
Portions
of the proxy statement for the annual meeting of shareholders to be held May 26,
2005, are incorporated by reference into Part III.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
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P age |
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|
Business |
3 |
|
|
Properties |
12 |
|
|
Legal
Proceedings |
12 |
|
|
Submission
of Matters to a Vote of Security Holders |
13 |
| |
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|
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|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities |
14 |
|
|
Selected
Financial Data |
15 |
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations |
16 |
|
|
Quantitative
and Qualitative Disclosures About Market Risk |
30 |
|
|
Financial
Statements and Supplementary Data |
32 |
| |
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32 |
| |
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33 |
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34 |
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35 |
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36 |
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37 |
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38 |
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39 |
| |
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62 |
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|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure |
63 |
|
|
Controls
and Procedures |
63 |
| |
|
63 |
| |
|
63 |
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Other
Information |
64 |
| |
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Directors
and Executive Officers of the Registrant |
64 |
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Executive
Compensation |
65 |
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|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |
65 |
|
|
Certain
Relationships and Related Transactions |
66 |
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|
Principal
Accountant Fees and Services |
66 |
| |
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Exhibits
and Financial Statement Schedules |
66 |
| |
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BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
|
RESTATEMENT
OF CONSOLIDATED FINANCIAL
STATEMENTS |
On
February 28, 2005, we announced that we would restate our consolidated financial
statements for 2003 and 2002 to correct our method of accounting for certain
lease issues.
Construction
Allowances
Consistent
with many other companies having retail operations, we historically accounted
for construction allowances received from landlords as a reduction of property
and equipment and amortized the allowances over the useful lives of the assets
to which they were assigned. We have determined that, in some cases, the lives
assigned to amortize the construction allowances were shorter than the lease
term, thereby understating rent expense. In our restated consolidated financial
statements, we have treated these construction allowances as a lease incentive,
as defined by Financial Accounting Standards Board (FASB) Technical Bulletin
88-1. The allowances are recorded as a deferred rent obligation upon receipt,
rather than a reduction of property and equipment, and amortized to income over
the lease term as a reduction of rent expense.
Rent
Holidays
We also
determined that our calculation of straight-line rent expense should be
modified. We had previously recognized straight-line rent expense for leases
beginning on the commencement date of the lease, which had the effect of
excluding the store build-out periods from the calculation of the period over
which we expensed rent. In our restated consolidated financial statements, we
have recognized straight-line rent expense over the lease term, including any
rent-free build-out periods.
The
adjustment to net earnings in each period is a noncash item. The cumulative
adjustment to retained earnings for construction allowances and rent holidays
was $5.0 million as of January 31, 2004.
All data
reflected in this Form 10-K have been restated to correct our treatment of these
lease issues. See Note 2 to the consolidated financial statements for further
details.
Brown
Shoe Company, Inc., founded in 1878 and incorporated in 1913, operates in the
footwear industry. Current activities include the operation of retail shoe
stores and the sourcing and marketing of footwear for women, men and children.
Our 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 our earnings for
the year.
During
2004, categories of footwear sales were approximately 60% women’s, 28% men’s and
12% children’s. This composition has remained relatively constant over the past
few years. Approximately 68% of 2004 footwear sales were made at retail compared
to 69% in 2003 and 2002. See Note 8 to the consolidated financial statements for
additional information regarding our business segments and financial information
by geographic area.
We had
approximately 12,000 full-time and part-time employees as of January 29, 2005.
We employed approximately 115 employees engaged in the warehousing of footwear
in the United States under a union contract, which will expire in September
2005. In Canada, we employed 22 warehousing employees under a union contract,
which expires in October 2007. The Canadian manufacturing facility, which closed
in March 2004, employed approximately 275 union employees.
Unless
the context otherwise requires, “we,” “us,” “our” or “the Company” refers to
Brown Shoe Company, Inc. and its subsidiaries.
Recent
Developments
On March
14, 2005, we announced that we have entered into a Securities Purchase Agreement
to acquire Bennett Footwear Group, LLC (“Bennett”) for $205 million in cash,
plus contingent payments of up to $42.5 million based upon the achievement of
certain performance targets over the next three years. The purchase price is
subject to post-closing adjustment based on actual net equity. The Bennett
acquisition is expected to close during April or May of 2005.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Bennett’s
owned and licensed footwear brands, which include Via Spiga, Franco Sarto,
Etienne Aigner and Nickels Soft, are primarily sold in footwear departments of
many major U.S. department and specialty stores. The Bennett acquisition
complements our existing portfolio of well-known wholesale brands such as
Naturalizer, LifeStride, Bass and Dr. Scholl’s, which are sold primarily in the
moderately priced range, by adding strong brands in the better and bridge
footwear zones. Bennett had revenues of approximately $200 million in
2004.
Our
retail operations at January 29, 2005, included 1,294 retail shoe stores in the
United States and Canada. The number of our retail footwear stores at the end of
each of the last three fiscal years is as follows:
| |
|
|
|
|
| |
|
2004 |
2003 |
2002 |
|
Famous
Footwear |
|
|
|
|
|
Family
footwear stores which feature a wide selection of brand-name, value-priced
footwear; located in shopping centers, outlet malls and regional malls in
the U.S., Puerto Rico and Guam; includes stores operated under the Famous
Footwear, Factory Brand Shoes, Supermarket of Shoes and Warehouse Shoes
names |
|
919 |
893 |
918 |
| |
|
|
|
|
|
Naturalizer |
|
|
|
|
|
Stores
selling primarily the Naturalizer brand of women's footwear, located in
regional malls, shopping centers and outlet malls in the U.S. and
Canada |
|
359 |
362 |
373 |
| |
|
|
|
|
|
F.X.
LaSalle |
|
|
|
|
|
Stores
selling women's and men's better grade footwear in major regional malls in
Canada |
|
16 |
16 |
16 |
|
Total |
|
1,294 |
1,271 |
1,307 |
With many
organizations operating retail shoe stores and departments, we compete in a
highly fragmented market. Competitors include local, regional and national shoe
store chains, department stores, discount stores, mass merchandisers 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 919 stores at the end of 2004 and sales of $1.117 billion in
2004, is America’s largest footwear chain selling branded value-priced footwear
for the entire family, based on the number of stores it operates and sales
volume compiled by the Company from published information of its direct
competitors. We acquired Famous Footwear in 1981 as a 32-store chain and we now
also operate under such names as Factory Brand Shoes, Supermarket of Shoes and
Warehouse Shoes.
Famous
Footwear stores feature a wide selection of brand-name, value-priced athletic,
casual and dress shoes for the entire family. Brands carried include, among
others, Nike, Skechers, New Balance, adidas, K-Swiss, Converse, Aerosoles,
Reebok, Vans, LifeStride, Naturalizer, Connie and Mudd. We work closely with our
vendors to provide our customers with fresh product and, in some cases, product
exclusively designed for and available only in our stores.
Famous
Footwear stores are located in strip shopping centers as well as outlet malls
and regional malls in all 50 states, Puerto Rico and Guam. The breakdown by
venue is as follows at the end of 2004 and 2003:
| |
|
|
|
|
January
29, 2005 |
January
31, 2004 |
|
Strip
centers |
537 |
522 |
|
Outlet
malls |
196 |
191 |
|
Regional
malls |
186 |
180 |
|
Total |
919 |
893 |
The
stores open at the end of 2004 and 2003 averaged approximately 7,000 square
feet. Total square footage at the end of 2004 increased 3.6% to 6.4 million
compared to the end of 2003. Plans are to open approximately 80 stores in 2005,
while closing approximately 35 stores.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Sales per
square foot were $175 in 2004, which is up 1.7% from $172 in 2003. This increase
reflects the same-store sales increase of 0.8% in 2004 and the closing of low
productivity stores. Same-store sales changes are calculated by comparing the
sales in stores that have been open at least 13 months.
Famous
Footwear relies on merchandise allocation systems and processes that utilize
allocation criteria, customer profiles and inventory data in an effort to ensure
stores are adequately stocked with products and to differentiate the needs of
each store based on location, customer profiles or other factors. Famous
Footwear’s in-store point-of-sale systems provide detailed sales transaction
data to the main office in Madison, Wisconsin, for daily analysis and update of
the perpetual inventory and product allocation systems. These systems also are
used for training employees and communicating between the stores and the main
office.
In 2001,
we embarked upon an initiative named IMPACT (Improved Performance and
Competitive Transformation), which focused on reengineering the Famous Footwear
buying, merchandising and allocation functions. We initiated new processes and
recruited new talent in an effort to deliver fresher, more popular brands and
styles to customers. This process starts with increased testing to identify
emerging styles. As a result of this testing and knowledge, orders are placed
closer to the selling season, and product is flowed through distribution centers
and stores in smaller quantities and in more frequent intervals. The goal of
this initiative is to have the right shoes at the right time for our customers,
significantly increase inventory turns and reduce base inventories. We have
achieved the key objectives we set for this initiative. We significantly
improved the aging of the inventory compared to the end of 2001 and improved
inventory turns, and customers purchased more current season merchandise, which
led to higher gross profit rates. We achieved reductions in the base level of
inventories. With two distribution centers, located in Sun Prairie, Wisconsin,
and Lebanon, Tennessee, Famous Footwear’s distribution systems allow for
merchandise to be delivered to each store weekly or on a more frequent
basis.
Famous
Footwear’s marketing program includes newspaper, radio and television
advertising, in-store signage and database marketing, all of which are designed
to further develop and reinforce the Famous Footwear concept with the consumer.
Marketing and advertising programs are tailored on a region-by-region basis to
reach target customers. Famous Footwear utilizes a database marketing program,
which targets and rewards frequent customers with product discounts and other
promotions. In addition, we time certain advertising campaigns to correspond to
regional differences such as the important back-to-school season, which begins
at various times throughout the country. In 2004, we spent approximately $32
million to communicate Famous Footwear’s positioning of the Joy of Shoe Shopping
Success for our target customer and her family.
Naturalizer
The
Naturalizer retail stores are showcases for our flagship brand of women’s shoes.
These stores are designed and merchandised to appeal to the Naturalizer
customer, who is style- and comfort-conscious and who seeks quality and value in
her footwear selections. In addition, the Company has repositioned its styles to
focus on a younger, more active woman. The Naturalizer stores offer a selection
of women’s footwear styles, including dress, casual, boots and sandals,
primarily under the Naturalizer brand. The Naturalizer brand is one of North
America’s leading women’s footwear brands, based on its market share in
department stores as reported by the NPD Group/NPD Fashionworld Point-of-Sale
(hereafter “NPD Group, Inc.”), providing stylish, comfortable and quality
footwear in a variety of patterns and sizes. Retail price points are typically
between $50 and $60 per pair. NPD Group, Inc. reports statistical data obtained
from retailers, but NPD Group, Inc. does not guarantee the accuracy and
completeness of its information. All retail shoe outlets have not been surveyed,
but we believe that the principal retailers have been included. Although we have
not independently verified its data, we believe NPD Group, Inc. data to be
generally reliable.
At the
end of 2004, we operated 204 Naturalizer stores in the United States and 155
stores in Canada. Of the total 359 stores, 278 are located almost entirely in
regional malls, with a few stores having street locations, and average
approximately 1,200 square feet in size. Eighty-one are located in outlet malls
and average approximately 2,600 square feet in size. Total square footage at the
end of 2004 was 546,000 compared to 531,000 in 2003. Sales per square foot,
using constant exchange rates for the Canadian dollar, were $305 in 2004 and
$301 in 2003.
In 2004,
we opened 20 Naturalizer stores and closed 23. In 2003, we closed a total of 15
Naturalizer stores while opening 4. We are planning to open approximately 14 new
Naturalizer stores and close approximately 31 stores in 2005.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Marketing
programs for the Naturalizer stores have complemented our Naturalizer brand
advertising, building on the brand’s consumer recognition and reinforcing the
brand’s added focus on style, comfort and quality. Naturalizer utilizes a
database marketing program, which targets frequent customers primarily through
catalogs, which are mailed four times per year and which display the brand’s
current product. Customers can purchase the product in these catalogs from our
stores, via the Internet at www.Naturalizer.com or by telephone to our Consumer
Services call center. The operating results of the Naturalizer stores are
included within the Specialty Retail segment.
F.X.
LaSalle
At the
end of 2004, we operated 16 F.X. LaSalle retail stores, primarily in the
Montreal, Canada, market, that 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 per pair. These stores average
approximately 2,100 square feet. Sales per square foot were $345 in 2004 and
$357 in 2003, using constant exchange rates for the Canadian dollar. The
operating results of the F.X. LaSalle stores are included within the Specialty
Retail segment.
E-Commerce
We own a
majority interest in Shoes.com, Inc., a multi-brand Internet e-tailing company.
In addition, a FamousFootwear.com site operates as a Famous Footwear e-tailing
store. These sites offer footwear and accessories to men, women and children
that include Company-branded and licensed footwear as well as footwear purchased
from outside suppliers and certain merchandise that is sold in Famous Footwear
stores. The operating results of Shoes.com, Inc. are included within the Other
segment.
We also
operate Naturalizer.com, which offers substantially the same product selection
to consumers as our domestic Naturalizer retail stores. This site functions as a
retail outlet for the online consumer and serves as another brand-building
vehicle for Naturalizer.
All of
these e-commerce sites utilize our distribution network and information systems.
Information on these Web sites does not constitute part of this
report.
Our
Wholesale Operations design and market branded, licensed and private-label
dress, casual and athletic footwear for women, men and children at a variety of
price points to over 2,000 retailers, including department stores, mass
merchandisers, national chains and independent retailers throughout the United
States and Canada. The division’s most significant customers include many of the
nation’s largest retailers, including Wal-Mart, Payless ShoeSource, Target, The
May Company, Federated, Dillard’s, Saks, Sears, Nordstrom, Meijer and Famous
Footwear, as well as The Bay, Wal-Mart and Payless ShoeSource Canada in Canada.
We also sell product to a variety of international retail customers and
distributors. The vast majority of the division’s customers also sell shoes
purchased from competing footwear suppliers.
In 2004,
the division provided its customers with approximately 75 million pairs of
shoes. This footwear was imported through our Sourcing operations, independent
agents and a small number of pairs produced at the Company-owned manufacturing
facility in Canada, which closed in March 2004.
Our sales
force solicits wholesale orders for shoes and is generally responsible for
managing our relationships with wholesale customers. We generally place orders
as a result of these sales efforts before the shoes are sourced, with delivery
generally within three to four months thereafter. We sell footwear to wholesale
customers on both a first-cost and landed basis. First-cost sales are those in
which we obtain title to footwear from our overseas suppliers and typically
relinquish title to customers at a designated overseas port. Landed sales are
those in which we obtain title to the footwear from our overseas suppliers and
maintain title until the footwear clears United States customs and is shipped to
our wholesale customers. We carry inventories of certain high-volume styles,
particularly in the Naturalizer, LifeStride, Dr. Scholl’s and Bass lines, to
allow prompt shipment on reorders.
In
addition to orders placed through our sales force, the Wholesale Operations
division provides its retail customers the ability to directly check inventory
of all wholesale product in our distribution centers, place orders and track
expected product arrivals over its business-to-business Internet site,
BrownShoeOnline.com. Approximately 700 retailers utilize this e-commerce tool.
In addition, we provide these retailers with our “E-direct” system that allows
them to sell out-of-stock product, which we then ship directly to the consumer’s
home.
Our major
owned brands include Naturalizer, LifeStride, Buster Brown, Connie and Brown
Shoe. Each of our brands is targeted to a specific customer segment representing
different styles and taste levels at different price points.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Introduced
in 1927, Naturalizer is one of the nation’s leading women’s footwear brands and
is our flagship brand. Naturalizer products emphasize relevant and up-to-date
styling with quality, value, comfort and fit. Naturalizer footwear is sold in
department stores, independent shoe stores and our Naturalizer and Famous
Footwear retail stores. The brand’s department store market share decreased
slightly from 4.9% in 2003 to 4.7% in 2004, but it increased its market share
position within the women’s fashion footwear category within department
stores from No. 3 to No. 2 at January 29, 2005, as reported by the NPD Group,
Inc.
LifeStride
is a leading entry-level price point, women’s brand sold in department stores
offering contemporary styling. LifeStride is focused on providing the consumer
with “stylized casual” footwear at price points of $30 to $50 per pair. In 2004,
the brand achieved a 2.2% department store market share, per the NPD Group,
Inc., compared to 2.1% in 2003.
The
Buster Brown brand of children’s footwear includes Buster Brown “classic”
footwear offered to retailers including The May Company and Famous Footwear. We
are capitalizing on the strength and recognition of the Buster Brown brand by
marketing licensed and branded children’s footwear under the Buster Brown &
Co. umbrella. We sell these products to mass merchandisers including Wal-Mart,
Target and Payless ShoeSource. Licensed products include, among others, Barbie,
Spider-Man and Bass. The Buster Brown & Co. umbrella provides customers with
the assurance that these licensed products contain the quality that they are
accustomed to receiving from Buster Brown shoes.
In 2004,
we signed a licensing agreement with Disney Consumer Products encompassing
Disney standard characters including Mickey and Minnie Mouse, Winnie the Pooh
and more. These footwear products for kids launched at retail in spring 2005.
The license runs through December 2007.
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 12%, 10%
and 9% of consolidated sales in 2004, 2003 and 2002, respectively.
In
addition to the above-mentioned children’s licenses, we have a long-term license
agreement, which is renewable through 2014, to market the Dr. Scholl’s brand of
affordable casual, athletic and work shoes for men, women and children in the
United States, Canada and Latin America. This footwear is primarily distributed
through mass merchandisers. We also sell the Original Dr. Scholl’s Exercise
Sandal and a related line of footwear under this license to department stores,
national chains and independent retailers.
In
February 2004, we entered into an exclusive three-year license agreement, which
is renewable through 2013, to design, source and market men’s, women’s and
children’s footwear at wholesale under the Bass brand. This license agreement
expanded our footwear brand portfolio, greatly strengthening our offering in
branded men’s footwear, and it provides an entry into the casual and outdoor
categories.
In 2001,
our Wholesale Operations division launched a collection of women’s shoes —
Carlos by Carlos Santana — to major department stores. This footwear is marketed
under a license agreement with guitarist Carlos Santana, which runs through
November 2006. This product represents our most fashion-forward line and is
distributed in approximately 400 department store doors and 400 specialty
stores.
We
continue to build on and take advantage of the heritage and consumer recognition
of our traditional brands. Marketing teams are responsible for the development
and implementation of marketing programs for each brand, both for us and for our
retail customers. In 2004, we spent approximately $22 million in advertising and
marketing support primarily for our Naturalizer and LifeStride brands, including
cooperative advertising with our wholesale customers. We continually focus on
enhancing the effectiveness of these marketing efforts through market research,
product development and marketing communications.
At
February 26, 2005, our wholesale operations had a backlog of unfilled orders of
approximately $164 million, compared to $160 million on February 28, 2004. Most
orders are for delivery within the next 90 to 120 days, and although orders are
subject to cancellation, we have not experienced significant cancellations in
the past. The backlog at any 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, in some cases, the timing of licensed product movie
releases. Accordingly, a comparison of backlog from period to period is not
necessarily meaningful and may not be indicative of eventual actual
shipments.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
The
following is a listing of the brands and licensed products we sell:
| |
|
Women’s |
Men’s
and Athletic |
Children’s |
|
AirStep |
Bass(1) |
Airborne |
|
Bass(1) |
Basswood |
Baby
Gund(6) |
|
Basswood |
Big
Country |
Barbie(7) |
|
Bootalinos |
Brown
Shoe |
Bass(1) |
|
b.u.m.
equipment(2) |
b.u.m.
equipment(2) |
Blue
Jean Teddy(8) |
|
Carlos
by Carlos Santana(3) |
Dr.
Scholl’s(4) |
Bob
the Builder(9) |
|
Connie |
F.X.
LaSalle |
b.u.m.
equipment(2) |
|
Dr.
Scholl’s(4) |
FX |
Buster
Brown |
|
Eurosole |
Francois
Xavier Collection |
Chill
Chasers by Buster Brown |
|
Eurostep |
Natural
Soul |
Disney
Standard Characters(10) |
|
Exalt |
Regal |
Mary-Kate
and Ashley(11) |
|
Extremes
by Naturalizer |
TX
Traction |
Matchbox(7) |
|
Fanfares |
|
Miffy
and Friends(12) |
|
F.X.
LaSalle |
|
Mijos(13) |
|
FX |
|
Original
Dr. Scholl’s(4) |
|
Francois
Xavier Collection |
|
Power
Rangers(10) |
|
Hot
Kiss(5) |
|
Red
Goose |
|
LifeStride |
|
Spider-Man
2(14) |
|
LS
Studio |
|
Spidey
and Friends(15) |
|
Marquise |
|
Spy
Kids 3(16) |
|
Maserati |
|
Star
Wars(17) |
|
Naturalizer |
|
Sweet
Kids |
|
NaturalSport |
|
T.R.E.A.T.S. |
|
NightLife |
|
Toe
Zone(18) |
|
Opale |
|
Winnie
The Pooh(10) |
|
Original
Dr. Scholl’s(4) |
|
|
|
TX
Traction |
|
|
|
Vision
Comfort |
|
|
| |
|
|
As
denoted, these brands are used with permission from and, in most cases, are
registered trademarks of:
|
(1)
Phillips-Van Heusen Corporation |
(10)
Disney Enterprises, Inc. |
|
|
(2)
BUM Equipment LLC |
(11)
Dualstar Consumer Products, LLC |
|
|
(3)
Guts & Grace Records, Inc. |
(12)
Big Tent Entertainment LLC |
|
|
(4)
Schering-Plough Healthcare Products, Inc. |
(13)
HomieShop LLP |
|
|
(5)
Hot Kiss, Inc. |
(14)
Marvel Characters, Inc. |
|
|
(6)
Gund, Inc |
(15)
Spider-Man Merchandising LP |
|
|
(7)
Mattel, Inc |
(16)
Dimension Films, a division of Miramax Film Corporation |
|
|
(8)
Springs Licensing Group, Inc. |
(17)
Lucasfilm LTD |
|
|
(9)
HIT Entertainment PLC |
(18)
Sole Concepts, Inc. |
|
| |
|
|
|
All other
brands are owned by and, in most cases, are registered trademarks of Brown Shoe
Company, Inc.
Brown
Shoe Sourcing
The Brown
Shoe Sourcing division sources substantially all of the footwear globally for
our Wholesale Operations division and Specialty Retail division and a portion of
the footwear sold by Famous Footwear. The division, which in 2004 sourced 75.3
million pairs of shoes, has developed a global sourcing capability through its
relationships with approximately 100 third-party independent footwear
manufacturers and, in certain countries, utilizes an agent to facilitate and
manage the development, production and shipment of product. Management
attributes its ability to achieve consistent quality, competitive prices and
on-time delivery to the breadth of our established relationships. We do not have
contractual commitments with these suppliers.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
We have
sourcing offices in Hong Kong, China, Brazil, Italy, Taiwan and Mexico. Our
structure enables us to source footwear at various price levels from significant
shoe manufacturing regions of the world. In 2004, more than 80% of the footwear
we sourced was from manufacturing facilities in China. We believe we have 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 our foreign
sourcing in 2004:
| |
|
Country |
Millions
of Pairs |
|
China |
62.3 |
|
Brazil |
11.4 |
|
Italy |
0.4 |
|
Vietnam |
0.3 |
|
All
other |
0.9 |
|
Total |
75.3 |
We
monitor the quality of the components of our footwear products prior to
production and inspect prototypes of each footwear product before production
runs are commenced. We also perform random in-line quality control checks during
production and before footwear leaves the manufacturing facility.
We
maintain separate design teams for each of our brands. These teams are
responsible for the creation and development of new product styles. Our
designers monitor trends in apparel and footwear fashion and work closely with
retailers to identify consumer footwear preferences. From a design center in
Florence, Italy, we capture European influences like heel shapes and fabrics.
Our Italian design center works closely with our line builders in the United
States, who blend them with the latest U.S. fashion trends. When a new style is
created, our designers work closely with independent footwear manufacturers to
translate our designs into new footwear styles.
Certain
statements in this Form 10-K, as well as other statements made by us 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
we believe 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 (including those
described in Item 7 — “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”) may be significant, presently or in the
future, and the risks set forth below may affect us to a greater extent than
indicated. We disclaim any intent or obligation to update these forward-looking
statements.
Competition
and Changes in Consumer Preferences
Competition
is intense in the footwear industry. Certain of our competitors are larger and
have substantially greater resources than we do. Our success depends upon our
ability to remain competitive in the areas of style, price and quality, among
others, and in part on our ability to anticipate and respond to changing
merchandise and fashion trends and consumer preferences and demands in a timely
manner. If we fail to gauge the fashion tastes of consumers, differentiate and
effectively market our products or build inventory for products that are not
accepted by consumers, this could adversely affect our sales or profit margins.
If that occurs, we may have substantial unsold inventory that we may have to
mark down in order to sell, which would adversely affect our business and
results of operations. Competition in the retail footwear industry has been
impacted by retailers aggressively competing on the basis of price. Accordingly,
there has been competitive pressure on us to keep our selling prices low. If we
are unable to respond effectively to these competitive pressures, our business
and results of operations will be adversely affected.
Furthermore,
consumer preferences and purchasing patterns may be influenced by consumers’
disposable income. Consequently, the success of our operations may depend to a
significant extent upon a number of factors affecting disposable income,
including general economic conditions and factors such as employment, business
conditions, consumer confidence, interest rates and taxation.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Reliance
on Foreign Sources of Production
General
We rely
entirely on broad-based foreign sourcing for our footwear products. We source
footwear products from independent third-party manufacturing facilities located
in China and Brazil and, to a lesser extent, from Italy, Vietnam and other
countries. Typically, we are a major customer of these third-party manufacturing
facilities. However, there is substantial competition in the footwear industry
for quality footwear manufacturers. We believe our relationships with such
third-party manufacturing facilities provide us with a competitive advantage;
thus, our future results will partly depend on maintaining our close working
relationships with our principal manufacturers.
As is
common in the industry, we do not have any long-term contracts with our
independent third-party foreign manufacturers. We cannot ensure that we 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.
We 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 our business, financial condition or results of
operations.
Further,
our products depend on the availability of leather. Any significant shortage of
quantities or increases in the cost of leather or other resources used to
produce our products could have a material adverse effect on our business and
results of operations.
China
We rely
heavily on manufacturing facilities located in China. Historically, the trade
relationship between the United States and China has not had a material adverse
effect on our 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 threats by the United States to
limit trade relations with 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 our business, financial condition or results
of operations will not be materially adversely affected thereby. Further, we
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. For example, manufacturing capacity in China may shift from
footwear to other industries with manufacturing margins that are perceived to be
higher. Although we believe we could find alternative manufacturing sources for
those products we currently source from China through our existing relationships
with independent third-party manufacturing facilities in other countries, the
loss of a substantial portion of our Chinese manufacturing capacity would have a
material adverse effect on the Company.
Currency
Although
we purchase products from certain foreign manufacturers in United States dollars
and otherwise engage in foreign currency hedging transactions, we cannot ensure
that we will not experience cost variations with respect to exchange rate
changes. The Chinese Yuan is currently pegged to the U.S. dollar. If the Chinese
government decides to revalue the Yuan or allows it to float against the U.S.
dollar, such an action could adversely impact our business and financial
results.
Customer
Concentration
Our
wholesale customers include department stores, national chains and mass
merchandisers. Several of our customers operate multiple department store
divisions. Further, we often sell multiple brands and licensed and private-label
footwear to these same department stores, national chains and mass
merchandisers. While we believe purchasing decisions in many cases are made
independently by the buyers and merchandisers of each of the customers, a
decision by our customers that operate multiple department stores, national
chains and/or mass merchandisers or any other significant customer to decrease
the amount of footwear products purchased from us could have a material adverse
effect on our business, financial condition or results of
operations.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
The
retail industry has recently experienced consolidation. If this trend continues,
our customers will likely seek more favorable terms, including pricing, for
their purchases of our products, which could limit our ability to raise prices,
in turn limiting our ability to recoup raw material or other cost increases.
Sales on terms less favorable to us than our current terms will have an adverse
effect on our profitability. In addition, consolidation could lead to a decrease
in the number of stores that carry our products. Consolidation could also lead
to larger retailers deciding to source their products directly from
manufacturers overseas and ceasing to rely on wholesalers. If such retailers are
successful in meeting their footwear needs directly through sourcing from
overseas, this would have a material adverse effect on our business and results
of operations.
Intellectual
Property Risks
Licenses
The
success of our Wholesale Operations division has to date been due, in part, to
our ability to attract and retain licensors which have strong, well-recognized
brands and trademarks. Our license agreements are generally for an initial term
of two to three years, subject to renewal, but even where we have longer-term
licenses or have an option to renew a license, such agreements are dependent
upon our achieving certain results in marketing the licensed products. While we
believe we will generally be able to renew our existing licenses and obtain new
licenses in the future, there can be no assurance we will be able to renew our
current licenses or obtain new licenses to replace lost licenses. In addition,
certain of our license agreements are not exclusive, and new or existing
competitors may obtain similar licenses.
Trademarks
We
believe that our trademarks and trade names are important to our business and
are generally sufficient to permit us to carry on our business as presently
conducted and planned. We cannot, however, know whether we will be able to
secure protection for our intellectual property in the future or if that
protection will be adequate for future operations. Further, we face the risk of
ineffective protection of intellectual property rights in jurisdictions where we
source and distribute our products. We also cannot be certain that our
activities do not infringe on the proprietary rights of others. If we are
compelled to prosecute infringing parties, defend our intellectual property or
defend ourselves from intellectual property claims made by others, we may face
significant expenses and liability.
Dependence
on Leased Locations
Our
Famous Footwear and Specialty Retail divisions operate chains of footwear
stores. We lease all of these stores. Accordingly, the success of our
operations, in part, is dependent on our ability to secure affordable, long-term
leases in desirable locations and to secure renewals of such leases. Although we
believe that our current leases can be renewed on acceptable terms, no assurance
can be given that we will be able to successfully negotiate lease renewals on
existing stores or to obtain similar terms for new stores in desirable
locations, and the failure to do so could have an adverse effect on our
business, financial condition and results of operations.
Dependence
on Major Branded Suppliers
Our
Famous Footwear retail chain purchases a substantial portion of our footwear
products from major branded suppliers. While we believe our relationships with
our current suppliers are good, the loss of any of our major suppliers or
product developed exclusively for Famous Footwear could have a material adverse
effect on our business, financial condition and results of operations. As is
common in the industry, we do not have any long-term contracts with our
suppliers. In addition, the success of our financial performance is dependent on
the ability of Famous Footwear to obtain products from its suppliers on a timely
basis and on acceptable terms.
Litigation
and Other Regulatory Proceedings
We are a
defendant from time to time in lawsuits and regulatory actions relating to our
business. Due to the inherent uncertainties of litigation and regulatory
proceedings, we cannot accurately predict the ultimate outcome of any such
proceedings. An unfavorable outcome could have a material adverse impact on our
business, financial condition and results of operations. In addition, regardless
of the outcome of any litigation or regulatory proceedings, such proceedings are
expensive and will require that we devote substantial resources and executive
time to defend the Company.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Our
Internet address is www.brownshoe.com. Our Internet address is included in this
annual report on Form 10-K as an inactive textual reference only. The
information contained on our Web site is not incorporated by reference into this
annual report on Form 10-K and should not be considered part of this report. We
file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission (SEC). We make available
free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished,
as required by Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
through our Internet Web site as soon as reasonably practicable after we
electronically file such material with or furnish it to the SEC. You may access
these SEC filings via the hyperlink to a third-party SEC filings Web site that
we provide on our Web site.
We own
our principal executive, sales and administrative offices in Clayton (St.
Louis), Missouri. The Famous Footwear division operates from a leased office
building in Madison, Wisconsin. The Canadian wholesale division operates from an
owned office building in Perth, Ontario, and the retail division from leased
office space in Laval, Quebec. A leased sales office and showroom is maintained
in New York, New York.
Most of
the footwear sold through our domestic wholesale divisions is processed through
two Company-owned distribution centers in Sikeston, Missouri, and Fredericktown,
Missouri, which have 720,000 and 465,000 square feet, including mezzanine
levels, respectively. Some distribution activities are handled by a third-party
provider. In 2003, we operated one manufacturing facility and a
150,000-square-foot distribution facility in Perth, Ontario. In March 2004, we
closed the manufacturing facility located in Perth, Ontario. We own these
Canadian facilities in addition to another Canadian manufacturing facility which
was closed during 2002.
Our
retail footwear operations are conducted throughout the United States, Canada,
Puerto Rico and Guam and involve the operation of 1,294 shoe stores, including
171 in Canada. All store locations are leased, with approximately one-half
having renewal options. Famous Footwear operates a leased 750,000-square-foot
distribution center, including a mezzanine level, in Sun Prairie, Wisconsin, and
a leased 800,000-square-foot distribution center, including mezzanine levels, in
Lebanon, Tennessee. Our Canadian retailing division operates a leased
21,000-square-foot distribution center, which is adjacent to the division’s
office in Laval, Quebec.
Our Brown
Shoe Sourcing division leases office space in Hong Kong, China, Taiwan, Italy
and Mexico. In 2004, we opened a new leased office and sample-making facility in
DongGuan, China.
We also
own a building in Denver, Colorado, which is leased to a third party, and land
in New York. See Item 3, “Legal Proceedings,” for further discussion of these
properties.
We are
involved in legal proceedings and litigation arising in the ordinary course of
business. In the opinion of management, the outcome of such ordinary course of
business proceedings and litigation currently pending will not have a material
adverse effect on our results of operations or financial position.
We are
involved in environmental remediation and ongoing compliance activities at
several sites. We are remediating, under the oversight of Colorado authorities,
contamination at and beneath our owned facility in Colorado (also known as the
“Redfield” site) and groundwater and indoor air in residential neighborhoods
adjacent to and near the property, which have been affected by solvents
previously used at the site and surrounding facilities. During 2004, we recorded
no expense related to this remediation. During 2003 and 2002, we recorded
expense of $0.8 million and $4.1 million, respectively.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
In March
2000, a class action lawsuit was filed in Colorado State Court (District Court
for the City and County of Denver) related to the Redfield site described above
against one of our subsidiaries, a prior operator at the site and two
individuals (the Antolovich class action). Plaintiffs, certain current and
former residents living in an area adjacent to the Redfield site, alleged claims
for trespass, nuisance, strict liability, unjust enrichment, negligence and
exemplary damages arising from the alleged release of solvents that are
contaminating the groundwater and indoor air in certain areas adjacent to the
site. In December 2003, a jury returned a verdict finding us negligent and
awarding the class plaintiffs $1.0 million in damages. We have recorded this
award along with the estimated cost of associated pretrial interest and the
estimated costs of sanctions imposed on us by the court resulting from pretrial
discovery disputes between the parties. We recorded a total pretax charge of
$3.1 million for these matters in the fourth quarter of 2003 and recorded an
additional $0.6 million charge in the first quarter of 2004, related to pretrial
interest, to reflect the trial court’s ruling extending the time period for
which pre-judgment interest applied. The plaintiffs have filed an appeal of the
December 2003 jury verdict, and the ultimate outcome and cost to us may vary.
We have
also filed suit in Federal District Court in Denver against a number of former
owner/operators of the Redfield site as well as surrounding businesses seeking
recovery of amounts spent responding to the contamination at and around the
Redfield site. We have reached settlement agreements with all of the defendants
in this case, and as a result, all but one defendant has been dismissed from the
suit. We are awaiting the court’s approval of the settlement agreement reached
with the last remaining defendant. We have also filed a contribution action in
Colorado State Court against the Colorado Department of Transportation, which
owns and operates a facility adjacent to the Redfield site. That case is not yet
set for trial.
We have
also filed suit against our insurance carriers seeking recovery of the costs
incurred for investigation and remediation of the Redfield site, the damages
awarded in the Antolovich class action and other relief. In prior years, we
recorded an anticipated recovery of $4.5 million for remediation costs, of which
$3.3 million is outstanding at January 29, 2005. We believe insurance coverage
in place entitles us to reimbursement for more than the recovery recorded. While
the insurance companies are contesting their indemnity obligations, we believe
the recorded recovery is supported by the fact that the limits of the insurance
policies at issue exceed the amount of the recorded recovery, and certain
insurance companies have made offers to settle the claim. We are unable to
estimate the ultimate recovery from our insurers, but are pursuing resolution of
our claims.
We have
completed our remediation efforts at our closed New York tannery and two
associated landfills. In 1995, state environmental authorities reclassified the
status of these sites as being properly closed and requiring only continued
maintenance and monitoring over the next 19 years. In addition, various federal
and state authorities have identified us as a potentially responsible party for
remediation at certain other landfills.
Based on
information currently available, we had an accrued liability of $8.4 million as
of January 29, 2005, to complete the cleanup, maintenance and monitoring at all
sites. The ultimate cost may vary.
While we
currently do not operate manufacturing facilities, prior operations included
numerous manufacturing and other facilities for which we may have responsibility
under various environmental laws to address conditions that may be identified in
the future.
|
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matter
was submitted to a vote of shareholders during the fourth quarter of 2004.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
|
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES |
Our
common stock is listed on the New York Stock Exchange (the “NYSE”) and the
Chicago Stock Exchange under the trading symbol “BWS.” As of January 29, 2005,
we had approximately 4,600 stockholders of record. The following table sets
forth for each fiscal quarter during 2004 and 2003 the high and low sales prices
per share of our common stock as reported on the NYSE and the dividends paid per
share.
| |
|
|
|
|
| |
2004 |
|
2003 |
|
| |
Low |
|
High |
|
Dividends
Paid |
|
Low |
|
High |
|
Dividends
Paid |
|
|
1st
Quarter |
|
$34.79 |
|
|
$39.95 |
|
|
$0.10 |
|
|
$25.10 |
|
|
$30.36 |
|
|
$0.10 |
|
|
2nd
Quarter |
|
30.33 |
|
|
42.02 |
|
|
0.10 |
|
|
25.00 |
|
|
31.75 |
|
|
0.10 |
|
|
3rd
Quarter |
|
24.18 |
|
|
32.70 |
|
|
0.10 |
|
|
28.30 |
|
|
36.25 |
|
|
0.10 |
|
|
4th
Quarter |
|
27.07 |
|
|
30.10 |
|
|
0.10 |
|
|
31.85 |
|
|
39.73 |
|
|
0.10 |
|
Restrictions
on the Payment of Dividends
Our
credit agreement limits the amount of dividends that can be declared and paid.
However, we do not believe this limitation materially inhibits the Board of
Directors’ ability to declare or our ability to pay regular quarterly dividends
to our common stockholders.
Issuer
Purchases of Equity Securities
During
the quarter ended January 29, 2005, we did not repurchase any of our common
stock.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
The
selected financial data set forth below should be read in conjunction with the
consolidated financial statements and notes thereto and the other information
contained elsewhere in this report. All data has been restated to correct our
treatment of certain lease accounting issues. See Note 2 to the consolidated
financial statements for further details.
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
AS
RESTATED |
|
|
($
thousands, except per share amounts) |
2004
(52
Weeks) |
|
2003
(52
Weeks) |
|
2002
(52
Weeks) |
|
2001
(52
Weeks) |
|
2000
(53
Weeks) |
|
|
Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales |
$ |
1,941,804 |
|
$ |
1,832,108 |
|
$ |
1,841,443 |
|
$ |
1,755,848 |
|
$ |
1,684,859 |
|
|
Cost
of goods sold |
|
1,157,437 |
|
|
1,073,442 |
|
|
1,100,654 |
|
|
1,089,549 |
|
|
1,002,727 |
|
|
Gross
profit |
|
784,367 |
|
|
758,666 |
|
|
740,789 |
|
|
666,299 |
|
|
682,132 |
|
|
Selling
and administrative expenses |
|
720,013 |
|
|
682,674 |
|
|
669,133 |
|
|
655,154 |
|
|
614,555 |
|
|
Provision
for environmental litigation costs |
|
586 |
|
|
3,107 |
|
|
- |
|
|
- |
|
|
- |
|
|
Operating
earnings |
|
63,768 |
|
|
72,885 |
|
|
71,656 |
|
|
11,145 |
|
|
67,577 |
|
|
Interest
expense |
|
(8,410 |
) |
|
(9,781 |
) |
|
(12,236 |
) |
|
(20,240 |
) |
|
(18,823 |
) |
|
Interest
income |
|
929 |
|
|
462 |
|
|
402 |
|
|
1,329 |
|
|
2,245 |
|
|
Loss
on early redemption of debt |
|
- |
|
|
- |
|
|
- |
|
|
(7,556 |
) |
|
- |
|
|
Earnings
(loss) before income taxes |
|
56,287 |
|
|
63,566 |
|
|
59,822 |
|
|
(15,322 |
) |
|
50,999 |
|
|
Income
tax (provision) benefit |
|
(12,982 |
) |
|
(17,330 |
) |
|
(15,664 |
) |
|
10,096 |
|
|
(15,455 |
) |
|
Net
earnings (loss) |
$ |
43,305 |
|
$ |
46,236 |
|
$ |
44,158 |
|
$ |
(5,226 |
) |
$ |
35,544 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns
From Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on net sales |
|
2.2% |
|
|
2.5% |
|
|
2.4% |
|
|
(0.3)% |
|
|
2.1% |
|
|
Return
on beginning shareholders’ equity |
|
12.4% |
|
|
15.8% |
|
|
17.4% |
|
|
(2.0)% |
|
|
14.2% |
|
|
Return
on average invested capital(1) |
|
8.6% |
|
|
10.2% |
|
|
10.1% |
|
|
(1.0)% |
|
|
7.7% |
|
|
Dividends
paid |
$ |
7,266 |
|
$ |
7,163 |
|
$ |
7,043 |
|
$ |
6,988 |
|
$ |
7,202 |
|
|
Capital
expenditures |
$ |
46,227 |
|
$ |
35,108 |
|
$ |
32,226 |
|
$ |
34,466 |
|
$ |
36,309 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) |
$ |
2.42 |
|
$ |
2.62 |
|
$ |
2.54 |
|
$ |
(0.30) |
|
$ |
2.01 |
|
|
Diluted
earnings (loss) |
|
2.30 |
|
|
2.48 |
|
|
2.46 |
|
|
(0.30) |
|
|
1.99 |
|
|
Dividends
paid |
|
0.40 |
|
|
0.40 |
|
|
0.40 |
|
|
0.40 |
|
|
0.40 |
|
|
Ending
shareholders’ equity |
|
21.45 |
|
|
19.37 |
|
|
16.53 |
|
|
14.49 |
|
|
15.34 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Position: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
$ |
97,503 |
|
$ |
81,930 |
|
$ |
82,486 |
|
$ |
68,305 |
|
$ |
64,403 |
|
|
Inventories |
|
421,450 |
|
|
376,210 |
|
|
392,584 |
|
|
396,227 |
|
|
427,830 |
|
|
Working
capital |
|
281,324 |
|
|
292,378 |
|
|
241,692 |
|
|
224,786 |
|
|
266,130 |
|
|
Property
and equipment |
|
114,394 |
|
|
103,624 |
|
|
103,483 |
|
|
103,297 |
|
|
104,328 |
|
|
Total
assets |
|
846,134 |
|
|
739,054 |
|
|
735,069 |
|
|
724,490 |
|
|
760,478 |
|
|
Current
maturities of long-term debt |
|
92,000 |
|
|
19,500 |
|
|
49,000 |
|
|
92,800 |
|
|
76,500 |
|
|
Long-term
debt and capitalized lease obligations |
|
50,000 |
|
|
100,000 |
|
|
103,493 |
|
|
123,491 |
|
|
152,037 |
|
|
Shareholders’
equity |
|
391,303 |
|
|
350,080 |
|
|
292,217 |
|
|
253,279 |
|
|
267,867 |
|
|
Average
common shares outstanding - basic |
|
17,917 |
|
|
17,677 |
|
|
17,367 |
|
|
17,188 |
|
|
17,670 |
|
|
Average
common shares outstanding - diluted |
|
18,808 |
|
|
18,616 |
|
|
17,939 |
|
|
17,539 |
|
|
17,846 |
|
All data
presented reflects the fiscal year ended on the Saturday nearest to January
31.
|
(1) |
Return
on average invested capital is calculated by dividing net earnings (loss)
for the period by the average of each month-end invested capital balance
during the year. Invested capital is defined as total shareholders’ equity
plus long-term debt and capitalized lease obligations and current
maturities of long-term debt. |
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |
All
data reflected in “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” have been restated to correct our treatment of
certain lease accounting issues. See Note 2 to the consolidated financial
statements for further details.
Overall,
2004 was a challenging year for Brown Shoe Company, Inc. in a difficult retail
environment. Although net sales increased 6.0%, we are disappointed in our $2.9
million, or 6.3%, decline in net earnings compared to last year. Our results
reflect increased operating earnings at Famous Footwear, mixed results within
our Wholesale Operations and poor results in our Specialty Retail operations. At
the same time, we invested in our future by improving our talent base, continued
our initiative to improve and streamline our supply chain systems, focused on
targeted consumer marketing at Famous Footwear and continued a remodeling
program at the Famous Footwear stores.
We
renamed our former “Naturalizer Retail” segment to “Specialty Retail” during
2004. The composition of the segment has not changed and includes both concept
and outlet mall Naturalizer retail stores in the United States and Canada and
F.X. LaSalle stores in Canada.
Following
is a summary of our operating results in 2004:
| § |
Famous
Footwear achieved a 16.3% increase in its operating earnings to $60.3
million as a result of higher net sales and operating improvements in a
number of areas. The sales growth reflects positive sales trends during
the second half of 2004. Operating improvements included more focused
marketing programs, a better product mix with more exclusive product from
key vendors and a more inviting store format and presentation. Same-store
sales improved by 0.8% in 2004, the first same-store sales gain in five
years. While retail competition in footwear remains intense, we are
focused on building on this success and believe the new marketing programs
and enhanced product mix provide the opportunity to do
so. |
| § |
The
Wholesale Operations segment’s operating earnings declined $10.9 million
to $44.9 million reflecting mixed results in the various divisions of this
business. On the positive side, the Men’s & Athletic, Women’s Private
Label, Dr. Scholl’s, LifeStride and Santana businesses achieved increased
sales and operating earnings. At the same time, the Naturalizer,
Children’s and Original Dr. Scholl’s sales and margins declined, and the
new Bass business fell short of expectations during this initial
transition year. |
| § |
Our
Specialty Retail segment had a disappointing year, incurring an operating
loss of $11.0 million. Same-store sales declined 1.7% with both the
domestic and Canadian stores reporting decreases. Gross margin rates were
also lower reflecting higher markdowns to move
product. |
| § |
Debt
increased by $22.5 million in 2004 following a reduction of $33.0 million
in 2003, leaving a debt-to-total capital ratio of 26.6% at the end of
2004. The increase in borrowings in 2004 primarily reflects the investment
in accounts receivable and inventory from the new Bass
business. |
Following
is a summary of the more significant factors affecting the comparability of our
financial results for 2004, as compared to 2003:
| § |
During
2004, we recognized income of $2.7 million ($1.7 million on an after-tax
basis), or $0.09 per diluted share, related to share-based compensation,
as compared to share-based compensation expense of approximately $4.8
million ($3.0 million on an after-tax basis), or $0.16 per diluted share,
for 2003. The resulting variance of $7.5 million ($4.7 million on an
after-tax basis), or $0.25 per diluted share, is the result of the lower
expected award value under these plans, primarily the stock performance
plan. The lower expected award value reflects lower than targeted payouts
and a lower stock price at the end of 2004 compared to
2003. |
| § |
During
2004, we recorded compensation cost related to cash-based employee annual
incentive plans of $6.8 million ($4.2 million on an after-tax basis), or
$0.22 per diluted share, as compared to $14.2 million ($8.8 million on an
after-tax basis), or $0.47 per diluted share, in 2003. This decline is due
to our financial performance in 2004 relative to both 2003 and our
targeted performance. |
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
| § |
In
February 2004, we entered into an exclusive three-year license agreement,
renewable through 2013, to design, source and market men’s, women’s and
children’s footwear at wholesale under the Bass brand. During 2004, we
incurred approximately $5.6 million ($3.5 million on an after-tax basis),
or $0.18 per diluted share, of transition and assimilation costs
associated with the acquisition of this
license. |
| § |
During
the fourth quarter of 2004, we recorded a charge of $3.5 million ($2.2
million on an after-tax basis), or $0.12 per diluted share, related to our
guarantee of an Industrial Development Bond financing for a manufacturing
and warehouse facility in Bedford County, Pennsylvania. These facilities
and the business that operated them were sold to another party in 1985,
which assumed the bond obligation. The current owner of the manufacturing
and warehouse facility has filed for bankruptcy protection and is
liquidating its assets. Although we will pursue recovery of these costs,
the ultimate outcome is uncertain. Accordingly, we have recorded our
estimate of the maximum exposure, $3.5 million, as a charge in the fourth
quarter of 2004. |
| § |
During
2004, we recorded a charge of $2.4 million ($1.5 million on an after-tax
basis), or $0.08 per diluted share, relating to the insolvency of an
insurance company that insured us for workers’ compensation and casualty
losses from 1973 to 1989. That company is now in liquidation. Certain
claims from that time period are still outstanding. During 2003, we
recorded a charge of $0.3 million ($0.2 million on an after-tax basis), or
$0.01 per diluted share, related to this
matter. |
| § |
During
the fourth quarter of 2004, we recorded a charge of $1.7 million ($1.1
million on an after-tax basis), or $0.06 per diluted share, for severance
and benefit costs related to reductions in our workforce.
|
| § |
We
recognized $1.0 million of tax benefit in 2004, or $0.05 per diluted
share, related to the elimination of our valuation allowance associated
with our foreign tax credit carryforwards. On October 22, 2004, the
American Jobs Creation Act of 2004 (the “Jobs Creation Act”) was signed
into law. The Jobs Creation Act extends the time in which foreign tax
credit carryforwards can be utilized for federal income tax purposes from
a five-year period to a ten-year period. As a result of this change, we
expect to fully utilize our foreign tax credit
carryforwards. |
| § |
In
the fourth quarter of 2003, we announced the closing of our last Canadian
footwear manufacturing factory located in Perth, Ontario and recorded a
charge of $4.5 million ($2.7 million on an after-tax basis), or $0.14 per
diluted share, related to severance, inventory markdowns and lease
termination costs. |
| § |
In
the fourth quarter of 2003, we recorded a $3.1 million charge ($2.0
million on an after-tax basis), or $0.11 per diluted share, related to the
class action litigation related to our Redfield facility in Denver,
Colorado, and related costs including the verdict, anticipated pretrial
interest and sanction costs. During the first quarter of 2004, we recorded
an additional $0.6 million ($0.4 million on an after-tax basis), or $0.02
per diluted share, related to pretrial interest, to reflect the trial
court’s ruling extending the time period for which pre-judgment interest
applied. |
Looking
ahead, while much has been accomplished, we expect the retail environment will
continue to be extremely competitive. We must continue to improve upon and
leverage our operating platforms to drive profitability improvements in 2005. We
believe the investments we have made and will continue to make in the business
provide the foundation for a successful 2005 and beyond.
In
addition, on March 14, 2005, we announced that we have entered into a Securities
Purchase Agreement to acquire Bennett Footwear Group, LLC (“Bennett”) for $205
million in cash, plus contingent payments of up to $42.5 million based upon the
achievement of certain performance targets over the next three years. The
purchase price is subject to post-closing adjustment based on actual net equity.
The Bennett acquisition is expected to close during April or May of 2005. We
believe this acquisition represents a strategic complement to our business, and
we believe it provides us with several significant growth vehicles.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
| |
|
|
AS
RESTATED |
| |
2004 |
|
2003 |
|
2002 |
|
($
millions) |
|
|
%
of
Net
Sales |
|
|
|
% of
Net
Sales |
|
|
|
% of
Net
Sales |
|
Net
sales |
$ |
1,941.8 |
|
100.0% |
|
$ |
1,832.1 |
|
100.0% |
|
$ |
1,841.4 |
|
100.0% |
|
Cost
of goods sold |
|
1,157.4 |
|
59.6% |
|
|
1,073.4 |
|
58.6% |
|
|
1,100.6 |
|
59.8% |
|
Gross
profit |
|
784.4 |
|
40.4% |
|
|
758.7 |
|
41.4% |
|
|
740.8 |
|
40.2% |
|
Selling
and administrative expenses |
|
720.0 |
|
37.1% |
|
|
682.7 |
|
37.2% |
|
|
669.1 |
|
36.3% |
|
Provision
for environmental litigation costs |
|
0.6 |
|
0.0% |
|
|
3.1 |
|
0.2% |
|
|
- |
|
0.0% |
|
Operating
earnings |
|
63.8 |
|
3.3% |
|
|
72.9 |
|
4.0% |
|
|
71.7 |
|
3.9% |
|
Interest
expense |
|
(8.4 |
) |
(0.4)% |
|
|
(9.8 |
) |
(0.5)% |
|
|
(12.3 |
) |
(0.7)% |
|
Interest
income |
|
0.9 |
|
0.0% |
|
|
0.5 |
|
0.0% |
|
|
0.4 |
|
0.0% |
|
Earnings
before income taxes |
|
56.3 |
|
2.9% |
|
|
63.6 |
|
3.5% |
|
|
59.8 |
|
3.2% |
|
Income
tax provision |
|
(13.0 |
) |
(0.6)% |
|
|
(17.4 |
) |
(1.0)% |
|
|
(15.6 |
) |
(0.8)% |
|
Net
earnings |
$ |
43.3 |
|
2.3% |
|
$ |
46.2 |
|
2.5% |
|
$ |
44.2 |
|
2.4% |
Net
Sales
Net sales
increased $109.7 million, or 6.0%, to $1.942 billion in 2004 compared to 2003
and decreased $9.3 million, or 0.5%, to $1.832 billion in 2003 compared to
2002.
The
increase in net sales in 2004 compared to 2003 reflects higher sales of $43.1
million at Famous Footwear, $54.6 million in Wholesale Operations, $2.4 million
at Specialty Retail and $9.6 million at the Shoes.com e-commerce business.
Same-store sales increased 0.8% in the Famous Footwear stores and declined 2.2%
and 1.1% in the domestic Specialty Retail stores and Canadian Specialty Retail
stores, respectively. Same-store sales changes are calculated by comparing the
sales in stores that have been open at least 13 months. This method avoids the
distorting effect that grand opening sales have in the first month of operation.
Relocated stores are treated as new stores. Closed stores are excluded from the
calculation.
The
decrease in net sales in 2003 compared to 2002 reflects lower sales of $1.6
million at Famous Footwear, $5.1 million at Wholesale and $6.2 million at
Specialty Retail, partially offset by an increase in the Shoes.com e-commerce
business of $3.6 million. Same-store sales declined 2.4% and 4.1% in the Famous
Footwear and Canadian Specialty Retail stores, respectively, and increased 1.1%
in the domestic Specialty Retail stores.
Gross
Profit
Gross
profit increased $25.7 million, or 3.4%, to $784.4 million in 2004 and increased
$17.9 million, or 2.4%, to $758.7 million in 2003. As a percentage of sales,
gross profit decreased to 40.4% in 2004 compared to 41.4% in 2003 and 40.2% in
2002. We record warehousing, distribution, sourcing and other inventory
procurement costs in selling and administrative expenses. Accordingly, our gross
profit and selling and administrative expense rates, as a percentage of sales,
may not be comparable to other companies.
The
increase in gross profit in 2004 is driven by our growth in net sales. Our gross
profit percentage decline in 2004 is due primarily to increased allowances
provided to our Wholesale Operations’ department store customers and lower
initial markups within our Specialty Retail division and a slight decline at
Famous Footwear as a result of higher markdowns.
The
increases in gross profit and the gross profit percentage in 2003 are due
primarily to higher markups at Famous Footwear generated from a fresher mix of
merchandise. Modest gross profit improvements within the Wholesale Operations
division were offset by declines in gross profit at the Specialty Retail
division. Cost of goods sold for 2003 includes a charge of $1.6 million (out of
a total charge of $4.5 million) to liquidate inventory as we closed our last
Canadian factory in 2004.
Selling
and Administrative Expenses
Selling
and administrative expenses, which include warehousing and distribution costs of
$54.3 million in 2004, $50.0 million in 2003 and $51.1 million in 2002,
increased $37.3 million, or 5.5%, to $720.0 million in 2004 and increased $13.6
million, or 2.0%, to $682.7 million in 2003. As a percent of net sales, selling
and administrative expenses were 37.1%, 37.2% and 36.3% in the years 2004, 2003
and 2002, respectively.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
The
increase in selling and administrative expenses in 2004 is due in part to
special charges recorded in 2004. We incurred transition and assimilation costs
of $5.6 million related to the acquisition of the Bass footwear license. We
recorded a charge of $3.5 million related to our guarantee of an Industrial
Development Bond financing for a manufacturing and warehouse facility that was
sold to another party in 1985. We recorded a charge of $2.4 million relating to
the insolvency of an insurance company, now in liquidation, that insured us for
workers’ compensation and casualty losses from 1973 to 1989. We recorded $1.7
million of severance costs related to the reduction in our workforce. We also
experienced increases in 2004 related to selling and marketing, warehousing and
shipping and retail facilities expenses, driven largely by our growth in sales
and number of retail facilities. These increases were partially offset by lower
incentive plan costs.
The
increase in selling and administrative expenses in 2003 is primarily a result of
a charge of $2.9 million (out of a total charge of $4.5 million) to close our
last Canadian factory, $9.9 million of higher retail facilities costs and a $5.0
million increase in buying, merchandising and administrative costs.
Provision
for Environmental Litigation Costs
During
2003, we recorded a charge of $3.1 million, which was an estimate of costs to
settle our Redfield environmental litigation matters, including the $1.0 million
verdict, pre-judgment interest and certain sanctions. We recorded an additional
$0.6 million in expense in the first quarter of 2004, related to pretrial
interest, to reflect the trial court’s ruling extending the time period for
which pre-judgment interest applied.
Interest
Expense
Interest
expense decreased $1.4 million to $8.4 million in 2004 and decreased $2.5
million to $9.8 million in 2003. The decreases primarily reflect lower interest
rates and lower average debt obligations of $3.1 million during 2004 and lower
average debt obligations of $33.5 million in 2003.
Income
Tax Provision
Our
consolidated effective tax rate in 2004, 2003 and 2002 was 23.1%, 27.3% and
26.2%, respectively. The effective tax rate is below the federal statutory rate
of 35% because we do not provide deferred taxes on unremitted foreign earnings,
as it is our intention to reinvest these earnings indefinitely or to repatriate
the earnings only when it is tax-advantageous to do so, and foreign earnings are
subject to lower statutory tax rates. In addition, we recognized $1.0 million of
tax benefit in 2004, related to the elimination of the Company’s valuation
allowance associated with its foreign tax credit carryforwards. On October 22,
2004, the Jobs Creation Act was signed into law. The Jobs Creation Act extends
the time in which foreign tax credit carryforwards can be utilized for federal
income tax purposes from a five-year period to a ten-year period. As a result of
this change, the Company expects to fully utilize its foreign tax credit
carryforwards. See Note 7 to the consolidated financial statements for further
discussion.
Net
Earnings
Net
earnings decreased $2.9 million, or 6.3%, to $43.3 million in 2004 compared to
$46.2 million in 2003 as a result of our lower gross profit percentage and
higher selling and administrative expenses in 2004 compared to
2003.
Net
earnings increased $2.0 million, or 4.7%, to $46.2 million in 2003 compared to
$44.2 million in 2002. The increase in net earnings was driven by improvements
in our gross profit percentage and lower interest expense, partially offset by
higher selling and administrative expenses in 2003 compared to
2002.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Geographic
Results
We have
both domestic and international operations. Domestic operations include the
wholesale distribution of footwear to numerous retail customers and the
nationwide operation of the Famous Footwear and Specialty Retail chains of
footwear stores. Foreign operations primarily consist of wholesale sourcing
operations in the Far East and wholesaling and retailing operations in Canada.
The Far East operations include “first-cost” transactions, where footwear is
sold at foreign ports to customers who then import the footwear into the United
States and other countries. The breakdown of domestic and foreign sales and
pretax earnings were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
AS
RESTATED |
|
| |
2004 |
|
|
2003 |
|
|
2002 |
|
|
($
millions) |
Net
Sales |
|
Earnings
Before
Income
Taxes |
|
|
Net
Sales |
|
Earnings
Before
Income
Taxes |
|
|
Net
Sales |
|
Earnings
Before
Income
Taxes |
|
|
Domestic |
$1,615.7 |
|
$31.9 |
|
|
$1,500.9 |
|
$43.6 |
|
|
$1,494.5 |
|
$29.6 |
|
|
Foreign |
326.1 |
|
24.4 |
|
|
331.2 |
|
20.0 |
|
|
346.9 |
|
30.2 |
|
| |
$1,941.8 |
|
$56.3 |
|
|
$1,832.1 |
|
$63.6 |
|
|
$1,841.4 |
|
$59.8 |
|
The
pretax profitability on foreign sales is higher than on domestic sales because
of a lower cost structure and the inclusion in domestic earnings of the
unallocated corporate administrative and other costs.
Foreign
earnings increased in 2004 as compared to 2003 due to improved results in our
Canadian operations in 2004 and the non-recurrence of the charge taken in 2003
to close our last Canadian manufacturing facility. Domestic earnings decreased
in 2004 as a result of decreased earnings in our domestic Wholesale Operations
division and the domestic Specialty Retail division.
Foreign
earnings declined in 2003 as compared to 2002 due to a reduction in first-cost
sales and lower earnings in Canada, including the charge to close our last
Canadian manufacturing facility. Domestic earnings increased in 2003 as a result
of increased earnings by Famous Footwear and domestic Wholesale Operations as
well as lower interest costs.
| |
|
|
|
AS
RESTATED |
| |
|
2004 |
|
2003 |
|
2002 |
|
($
millions, except sales per square foot) |
|
|
%
of
Net
Sales |
|
|
%
of
Net
Sales |
|
|
%
of
Net
Sales |
|
Operating
Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales |
|
$ |
1,116.7 |
100.0% |
|
$ |
1,073.6 |
100.0% |
|
$ |
1,075.2 |
100.0% |
|
Cost
of goods sold |
|
|
619.9 |
55.5% |
|
|
593.6 |
55.3% |
|
|
612.7 |
57.0% |
|
Gross
profit |
|
|
496.8 |
44.5% |
|
|
480.0 |
44.7% |
|
|
462.5 |
43.0% |
|
Selling
and administrative expenses |
|
|
436.5 |
39.1% |
|
|
428.2 |
39.9% |
|
|
417.8 |
38.8% |
|
Operating
earnings |
|
$ |
60.3 |
5.4% |
|
$ |
51.8 |
4.8% |
|
$ |
44.7 |
4.2% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-store
sales % change |
|
|
0.8% |
|
|
|
(2.4)% |
|
|
|
(1.3)% |
|
|
Same-store
sales $ change |
|
$ |
8.1 |
|
|
$ |
(24.3) |
|
|
$ |
(12.7) |
|
|
Sales
from net new stores |
|
$ |
35.0 |
|
|
$ |
22.7 |
|
|
$ |
43.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
per square foot |
|
$ |
175 |
|
|
$ |
172 |
|
|
$ |
177 |
|
|
Square
footage (thousand sq. ft.) |
|
|
6,438 |
|
|
|
6,216 |
|
|
|
6,163 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
opened |
|
|
70 |
|
|
|
57 |
|
|
|
53 |
|
|
Stores
closed |
|
|
44 |
|
|
|
82 |
|
|
|
55 |
|
|
Ending
stores |
|
|
919 |
|
|
|
893 |
|
|
|
918 |
|
Net
Sales
Net sales
increased $43.1 million, or 4.0%, to $1.117 billion in 2004 and decreased $1.6
million, or 0.1%, to $1.074 billion in 2003.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Famous
Footwear’s higher sales in 2004 reflect an increase in same-store sales of 0.8%
and an average of 908 stores open, the same average as last year. The same-store
sales increase is a result of positive sales trends during the second half of
2004, driven by improvements in customer traffic and the average number of pairs
purchased per transaction. Same-store sales increased $8.1 million and net new
stores provided $35.0 million in sales during 2004. Famous Footwear opened 70
stores and closed 44 during 2004, increasing total square footage by 3.6%, to
6.4 million, reflecting the opening of additional larger-format stores. As a
result of higher store traffic and increased same-store sales, sales per square
foot increased 1.7%, to $175. The conversion rate (the percentage of customers
making purchases) was flat compared to 2003.
During
2003, Famous Footwear’s lower sales reflect a decline in same-store sales of
2.4% and an average of 12 fewer stores open. Same-store sales declined $24.3
million, partially offset by net new stores, which provided $22.7 million in
sales during 2003. Famous Footwear opened 57 stores and closed 82 during 2003,
yet increased total square footage by 0.9%, to 6.2 million, reflecting the
opening of larger-format stores. As a result of opening these larger stores and
lower store traffic, sales per square foot declined 2.8%, to $172. However, the
conversion rate (the percentage of customers making purchases) increased during
2003 compared to 2002, as a result of fresher inventory and an improved product
mix.
Gross
Profit
During
2004, Famous Footwear’s gross profit rate declined to 44.5% from 44.7%
reflecting higher markdowns. Overall, gross profit has increased due to the
growth in net sales during 2004.
During
2003, gross profit as a percent of sales increased to 44.7% from 43.0% in 2002,
or a difference of 1.7%. This improvement is principally due to disciplined
operating and inventory management. We benefited from initiatives to improve the
freshness and velocity of inventory that began during 2001. This gross profit
improvement was driven by higher initial markups of 1.7% and a 0.2% improvement
in inventory shrinkage, partially offset by higher markdowns of
0.4%.
Selling
and Administrative Expenses
Selling
and administrative expenses increased $8.3 million, or 1.9%, to $436.5 million
during 2004 compared to $428.2 million in 2003. As a percent of sales, these
costs decreased to 39.1% in 2004 compared to 39.9% in 2003, resulting from the
effective leveraging of our expense base against our 2004 net sales growth.
Retail facilities costs decreased as a percent of sales by 0.3%, warehouse and
shipping costs declined 0.2% and administrative costs declined 0.3%. We continue
to focus on driving efficiencies through our operating and management
initiatives.
Selling
and administrative expenses increased $10.4 million, or 2.5%, to $428.2 million
during 2003 compared to $417.8 million in 2002. As a percent of sales, these
costs increased to 39.9% in 2003 compared to 38.8% in 2002. This increase
reflects a 0.8% increase in retail facilities costs, consistent with the larger
format stores, a 0.3% increase in marketing costs and a 0.1% increase in
administrative costs, reflecting increased costs of medical and other insurance,
partially offset by a 0.1% reduction in warehousing and shipping costs and lower
incentive plan costs.
Operating
Earnings
During
2004, Famous Footwear achieved operating earnings of $60.3 million, compared to
$51.8 million in 2003, an increase of 16.3%. The improvement was driven
primarily by the growth in net sales and the effective management of our expense
base.
During
2003, Famous Footwear achieved operating earnings of $51.8 million, compared to
$44.7 million in 2002, an increase of 15.9%. The improvement was driven by
stronger gross profit as a percent of sales, partially offset by modest
increases in operating costs.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
The
Company renamed its former “Naturalizer Retail” segment to “Specialty Retail”
during 2004. The composition of the segment has not been changed and includes
both concept and outlet mall Naturalizer retail stores in the United States and
Canada and F.X. LaSalle stores in Canada.
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
AS
RESTATED |
|
($
millions, except sales per square foot) |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
|
%
of
Net
Sales |
|
|
|
%
of
Net
Sales |
|
|
|
%
of
Net
Sales |
|
Operating
Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales |
|
$ |
191.6 |
|
100.0% |
|
$ |
189.2 |
|
100.0% |
|
$ |
195.4 |
|
100.0% |
|
Cost
of goods sold |
|
|
103.1 |
|
53.8% |
|
|
98.9 |
|
52.3% |
|
|
99.0 |
|
50.7% |
|
Gross
profit |
|
|
88.5 |
|
46.2% |
|
|
90.3 |
|
47.7% |
|
|
96.4 |
|
49.3% |
|
Selling
and administrative expenses |
|
|
99.5 |
|
52.0% |
|
|
94.2 |
|
49.8% |
|
|
95.0 |
|
48.6% |
|
Operating
(loss) earnings |
|
$ |
(11.0 |
) |
(5.8)% |
|
$ |
(3.9 |
) |
(2.l)% |
|
$ |
1.4 |
|
0.7% |
|
Key
Metrics |
|
|
|
|
|
|
|
|
|
Same-store
sales % change - Total Segment |
|
|
|
(1.7)% |
|
|
|
(0.8)% |
|
|
|
0.7% |
|
Same-store
sales % change - United States |
|
|
|
(2.2)% |
|
|
|
1.1% |
|
|
|
4.3% |
|
Same-store
sales % change - Canada |
|
|
|
(1.1)% |
|
|
|
(4.1)% |
|
|
|
(6.0)% |
|
Same-store
sales $ change |
|
|
$ |
(3.2) |
|
|
$ |
(1.2) |
|
|
$ |
2.4 |
|
Sales
change from net store count change |
|
|
$ |
1.4 |
|
|
$ |
(13.2) |
|
|
$ |
(13.8) |
|
Impact
of changes in Canadian
exchange
rate on sales |
|
|
$ |
4.2 |
|
|
$ |
8.2 |
|
|
$ |
(0.1) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
per square foot |
|
|
$ |
316 |
|
|
$ |
318 |
|
|
$ |
301 |
|
Square
footage (thousand sq. ft.) |
|
|
|
580 |
|
|
|
572 |
|
|
|
582 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
opened |
|
|
|
20 |
|
|
|
4 |
|
|
|
22 |
|
Stores
closed |
|
|
|
23 |
|
|
|
15 |
|
|
|
89 |
|
Ending
stores |
|
|
|
375 |
|
|
|
378 |
|
|
|
389 |
Net
Sales
Net sales
increased $2.4 million, or 1.3%, to $191.6 million in 2004 and decreased $6.2
million, or 3.2%, to $189.2 million in 2003. The 2004 sales were below
expectations as same-store sales decreased in the United States by 2.2% and in
Canada by 1.1%. Net sales were positively impacted by the effect of changes in
the Canadian dollar exchange rate. In 2004, the division opened 20 stores,
closed 23 and operated 5 fewer average stores in 2004 than in 2003. The decline
in the number of stores to 375 at the end of 2004, from 378 at the end of 2003
and 389 at the end of 2002, reflects the decision to close our underperforming
stores. Sales per square foot decreased to $316 in 2004 from $318 in 2003. Total
square footage increased 1.4% to 580,000. However, using constant exchange rates
for the Canadian stores’ sales, sales per square foot declined to $309 in 2004
from $318 in 2003.
Net sales
decreased $6.2 million, or 3.2%, to $189.2 million in 2003 from $195.4 million
in 2002. The 2003 sales were below expectations and declined as a result of
lower same-store sales in Canada and fewer stores open in the United States,
partially offset by the effect of changes in the Canadian dollar exchange rate.
Same-store sales decreased in Canada by 4.1%, but increased in the United States
by 1.1%, led by sales at the division’s outlet stores. The Canadian stores’
sales declined as a result of a difficult retail climate and additional
markdowns as efforts were begun to transition from a substantial inventory
position in Canadian produced footwear to more fashionable imports. In 2003, the
division opened 4 stores and closed 15 and operated 36 fewer average stores in
2003 than in 2002. Sales per square foot increased to $318 in 2003 from $301 in
2002. However, using constant exchange rates for the Canadian stores’ sales,
sales per square foot were flat in 2003 compared to 2002. Total square footage
declined 1.7% to 572,000.
Gross
Profit
Gross
profit as a percent of sales decreased to 46.2% in 2004 from 47.7% in 2003, or a
difference of 1.5%. This decline, as a percent of sales, is due to a 0.8%
decline in initial markups, a 0.3% increase in markdowns and a 0.9% increase in
inbound freight costs, offset by a favorable LIFO adjustment of 0.5%. Shrinkage
remained flat as a percentage of sales.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Gross
profit as a percent of sales decreased to 47.7% in 2003 from 49.3% in 2002, or a
difference of 1.6%. This decline, as a percent of sales, is principally due to a
0.5% decline in initial markups, a 0.9% increase in markdowns, a 0.1% increase
in inbound freight costs and a 0.1% increase in shrinkage. The increase in
markdowns is principally a result of the transition from a substantial inventory
position in Canadian produced footwear to imports.
Selling
and Administrative Expenses
Selling
and administrative expenses increased $5.3 million, or 5.7%, to $99.5 million
during 2004 compared to $94.2 million in 2003. As a percent of sales, these
costs increased to 52.0% in 2004 compared to 49.8% in 2003. This increase is
primarily due to an increase in retail facilities costs of $2.0 million, or 1.0%
of sales, combined with an increase in selling costs of $1.2 million, or 0.6% of
sales, with the balance of the increase coming from higher administrative
costs.
Selling
and administrative expenses decreased $0.8 million, or 0.8%, to $94.2 million
during 2003 compared to $95.0 million in 2002. As a percent of sales, these
costs increased to 49.8% in 2003 compared to 48.6% in 2002. This increase is
primarily due to an increase in retail facilities costs of 1.4% combined with an
increase in warehousing and shipping costs of 0.2%, partially offset by a
reduction in merchandising and administrative costs of 0.5%. Selling and
administrative expenses for 2003 include a charge of $0.2 million related to the
closing of our last Canadian manufacturing facility.
Operating
Earnings
Specialty
Retail stores incurred an operating loss of $11.0 million in 2004, compared to
an operating loss of $3.9 million in 2003. This operating loss is primarily
attributable to the same-store sales decline, higher inventory markdowns, lower
initial markups and higher expenses.
Specialty
Retail stores incurred an operating loss of $3.9 million in 2003, compared to
operating earnings of $1.4 million in 2002. This change to an operating loss
position in 2003 is primarily attributable to the reduced sales levels, driven
principally by the Canadian stores, increased markdowns to transition to import
footwear in Canada and lower than expected productivity in the domestic
stores.
| |
|
2004 |
|
2003 |
|
2002 |
|
($
Millions) |
|
|
%
of
Net
Sales |
|
|
%
of
Net
Sales |
|
|
%
of
Net
Sales |
|
Operating
Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales |
|
$ |
615.9 |
100.0% |
|
$ |
561.3 |
100.0% |
|
$ |
566.4 |
100.0% |
|
Cost
of goods sold |
|
|
425.1 |
69.0% |
|
|
377.2 |
67.2% |
|
|
385.0 |
68.0% |
|
Gross
profit |
|
|
190.8 |
31.0% |
|
|
184.1 |
32.8% |
|
|
181.4 |
32.0% |
|
Selling
and administrative |
|
|
145.9 |
23.7% |
|
|
128.3 |
22.9% |
|
|
126.9 |
22.4% |
|
Operating
earnings |
|
$ |
44.9 |
7.3% |
|
$ |
55.8 |
9.9% |
|
$ |
54.5 |
9.6% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfilled
order position at year-end |
|
$ |
164.6 |
|
|
$ |
151.1 |
|
|
$ |
141.3 |
|
Net
Sales
Net sales
increased $54.6 million, or 9.7%, to $615.9 million in 2004 and decreased $5.1
million, or 0.9%, to $561.3 million in 2003.
The 2004
sales increase was primarily attributable to the acquisition of the Bass
footwear license at the beginning of 2004. Bass contributed $49.2 million in net
sales during 2004 to the division. The Men’s & Athletic, Women’s Private
Label, LifeStride and Santana businesses posted strong sales gains, which were
partially offset by weakness in the Children’s and Naturalizer businesses. The
Naturalizer business experienced a sales decline of 8.8%. While achieving the
No. 2 market share position within department stores, its market share decreased
from 4.9% in 2003 to 4.7% in 2004, per NPD Group, Inc. data.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
The 2003
sales decline was attributable to a decline in sales in the Women’s Private
Label division and the Children’s division, partially offset by gains in both
the Men’s & Athletic division and the LifeStride division. In addition, the
West Coast dock strike at the end of 2002 caused some customers to accelerate
their orders of spring product prior to the end of 2002. Also, reductions in
purchases by a few major customers, as they worked to reduce their inventories,
negatively impacted 2003 sales. Naturalizer sales declined slightly in 2003,
reflecting the difficult retail environment, but the brand increased its
department store market share to 4.9% in 2003 from 4.7% in 2002, per NPD Group,
Inc. The LifeStride brand’s sales increased 17.5% in 2003, reflecting strong
acceptance of its casual and dress footwear, and increased its department store
market share to 2.1% in 2003 from 1.9% in 2002, per NPD Group, Inc.
data.
Gross
Profit
Gross
profit as a percent of sales decreased to 31.0% in 2004 from 32.8% in 2003, or a
difference of 1.8%. Wholesale Operations achieved a gross profit improvement of
$6.7 million due primarily to the increase in sales. Gross profit as a
percentage of sales was negatively impacted by higher provisions for allowances
and inventory markdowns. The Bass business experienced lower than expected
margins as we transitioned this business into the Company in 2004.
Gross
profit as a percent of sales increased to 32.8% in 2003 from 32.0% in 2002, or a
difference of 0.8%. Wholesale Operations achieved a gross profit improvement of
$2.7 million despite the slight decrease in sales. This increase is attributable
to a higher mix of branded product sales and higher gross profits in both the
branded and discount channels, partially offset by a lower gross profit
percentage in the Canadian wholesale division and the charge of $1.6 million to
write down unusable raw materials from the closing of our last Canadian factory
in Perth, Ontario.
Selling
and Administrative Expenses
Selling
and administrative expenses increased $17.6 million, or 13.8%, to $145.9 million
during 2004 compared to $128.3 million in 2003. As a percent of sales, these
costs increased to 23.7% in 2004 compared to 22.9% in 2003. The increase in
selling and administrative expenses was driven in part by transition and
assimilation costs of $5.6 million related to the acquisition of the Bass
footwear license during 2004. The remainder of the increase is due to increased
selling and marketing and warehousing and shipping expenses associated with the
increase in sales volume, partially offset by lower incentive plan costs.
Selling
and administrative expenses increased $1.4 million, or 1.1%, to $128.3 million
during 2003 compared to $126.9 million in 2002. As a percent of sales, these
costs increased to 22.9% in 2003 compared to 22.4% in 2002, or an increase of
0.5%. The increase was principally due to a charge of $2.7 million to close the
division’s last Canadian footwear manufacturing facility and additional
investment in product development and sales talent, partially offset by a $1.4
million reduction in marketing costs, a $0.4 million reduction in warehousing
and distribution costs and lower incentive plan costs.
Operating
Earnings
Operating
earnings for the Wholesale Operations segment decreased $10.9 million, or 19.6%,
to $44.9 million for 2004 compared to $55.8 million for 2003. The decrease is
driven by transition and assimilation costs of $5.6 million related to the
acquisition of the Bass footwear license during 2004, an operating loss for the
Bass business, lower sales in several divisions and higher allowances and
markdowns across the division.
Operating
earnings for the Wholesale Operations segment increased $1.3 million, or 2.4%,
to $55.8 million for 2003 compared to $54.5 million for 2002. Operating earnings
increased slightly despite a modest decline in sales as a result of improved
gross profit percentages due to the greater mix of branded product sales and
higher gross profit percentages in both the branded and discount channels,
partially offset by the lower Canadian results.
The Other
segment includes our majority-owned subsidiary, Shoes.com, Inc., a footwear
e-commerce company, and unallocated corporate administrative and other
costs.
Net
Sales
Net sales
of Shoes.com increased $9.6 million, or 120%, to $17.7 million in 2004 and
increased $3.6 million, or 81.8%, to $8.0 million in 2003. The increases in both
years in net sales reflect strong sales growth due to increased Web site traffic
and improved conversion rates.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Operating
Earnings
The
Shoes.com business generated an operating loss of $0.2 million in 2004,
improving upon its $0.7 million operating loss in 2003. The improvement is
primarily attributed to leveraging fixed expenses over the increased sales.
The
Shoes.com business generated an operating loss of $0.7 million in 2003,
improving upon its $1.6 million operating loss in 2002. The improvement is
primarily attributed to a $0.7 million impairment charge recorded in 2002 to
reduce the value of the domain name intangible asset. In addition, the
substantial growth in the Shoes.com business has resulted in better leveraging
of fixed costs.
Other
Corporate Expenses
Unallocated
corporate administrative and other costs were $30.2 million, $30.2 million and
$27.4 million in 2004, 2003 and 2002, respectively.
The 2004
expenses include a number of special charges, including a $3.5 million charge
related to our guarantee of an Industrial Development Bond in Pennsylvania for a
business we divested in 1985, a $2.4 million charge related to the insolvency of
an insurance company which is now in liquidation that insured us for workers’
compensation and casualty losses from 1973 to 1989 and a $1.7 million charge for
severance and benefit costs related to reductions in our workforce. Removing the
impact of the special items noted above impacting 2004 and the Redfield
litigation charge in 2003 described below, unallocated corporate expenses have
declined $4.5 million compared to 2003, which is largely due to lower
compensation costs associated with both stock-based and cash-based incentive
compensation plans.
The 2003
expenses include a $3.1 million charge for costs related to the class action
litigation related to the Redfield site and associated costs, including the
verdict, anticipated pretrial interest and sanction costs. Removing the impact
of the litigation charge in 2003 and the severance recovery in 2002, corporate
expenses decreased $1.4 million in 2003 compared to 2002. This decrease is
primarily attributable to lower environmental costs of $3.3 million, lower
charitable contributions of $1.0 million and lower consulting costs of $0.8
million, partially offset by higher salaries of $1.5 million, higher legal fees
of $0.4 million and higher recruiting costs of $0.4 million. Incentive plan
costs were approximately the same as in 2002.
The 2002
expenses are net of a recovery of $1.1 million of a severance charge taken in
2001 and, in comparison to 2001, include higher environmental costs of $3.0
million, primarily related to our Redfield property in Denver, Colorado, as
described in Note 17 to the consolidated financial statements, higher incentive
plan costs of $3.3 million, higher salaries and benefits of $1.6 million, higher
charitable contributions of $1.0 million and the nonrecurrence of a $1.9 million
gain on the sale of our aircraft in 2001, partially offset by $2.9 million of
lower consulting costs, which were associated with the implementation of the
shared-services platform.
|
RESTRUCTURING
INITIATIVES |
Closure
of Canadian Manufacturing Facility
In the
fourth quarter of 2003, we made the decision to close our last Canadian footwear
manufacturing factory and recorded a pretax charge of $4.5 million, the
components of which were as follows:
●
Severance and benefit costs for approximately 300 factory employees — $2.3
million
●
Inventory markdowns to liquidate factory inventory — $1.6 million
● Cost to
buy out leases prior to their normal expiration date — $0.6 million
Of the
$4.5 million charge, $1.6 million was reflected in cost of goods sold, and $2.9
million was reflected in selling and administrative expenses. A tax benefit of
$1.8 million was associated with this charge. In 2004, the closing was
completed, and the actual costs incurred were in line with our estimates
recorded at the end of 2003.
Closure
of Underperforming Naturalizer Retail Stores
In the
fourth quarter of 2001, we made the decision to close 97 underperforming
Naturalizer retail stores in the United States and recorded a pretax charge of
$16.8 million, the components of which were as follows:
● Costs
to buy out leases prior to their normal expiration date — $8.3
million
●
Inventory markdowns to liquidate quantities in closing stores — $4.1
million
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
● Fixed
asset write-downs to net realizable value — $4.1 million
●
Severance and benefit costs for employees terminated by the store closings —
$0.3 million
During
2002, we decided to keep 4 of the originally identified stores open and to close
an additional 13 stores. As a result, a total of 106 stores were included under
this program. In the fourth quarter of 2002, we completed negotiations with
landlords to buy out store leases and completed the closing of all but one
store. An assessment of remaining reserve needs indicated $0.9 million of the
originally established reserve was not needed, and we reversed it to income. In
early 2003, we paid $0.4 million to landlords to complete all
obligations.
The
effects of inflation on our business and results of operations have been minor
over the last several years, and we do not expect inflation to have a
significant impact in the foreseeable future.
|
LIQUIDITY
AND CAPITAL RESOURCES |
Borrowings
| |
|
|
|
|
|
|
|
($
millions) |
January
29, 2005 |
|
January
31, 2004 |
|
Increase/
(Decrease) |
|
|
Long-term
debt, including current maturities |
$ |
142.0 |
|
$ |
119.5 |
|
$ |
22.5 |
|
In
December 2001, we entered into a five-year, secured $350 million revolving bank
Credit Agreement. We entered into an Amended and Restated Credit Agreement (the
“Agreement”) effective July 21, 2004, which amended and restated our existing
$350 million revolving bank Credit Agreement. The Agreement provides for a
maximum line of credit of $350 million, subject to the calculated borrowing base
restrictions. In addition to extending the credit term, the Agreement also
provides other benefits to us, including expanding the definition of eligible
inventory in certain circumstances and reducing the interest rate spread paid on
outstanding borrowings. Borrowing Availability under the Agreement is based upon
the sum of eligible accounts receivable and inventory, less outstanding
borrowings, letters of credit and applicable reserves. The Agreement matures on
July 21, 2009, and our obligations are secured by accounts receivable and
inventory of the Company and our wholly owned domestic and Canadian
subsidiaries. Borrowings under the Agreement bear interest at a variable rate
determined based upon the level of Availability under the Agreement. If
Availability falls below specified levels, we may be required to reclassify all
borrowings under the Agreement to a current liability. Certain covenants would
be triggered if Availability were to fall below specified levels, including
fixed charge coverage requirements. In addition, if Availability falls below $25
million and the fixed charge coverage ratio is less than 1.0 to 1, we would be
in default. The Agreement also contains certain other covenants and
restrictions. Interest on borrowings is at variable rates based on the LIBOR
rate or the base rate, as defined. There is a fee payable on the unused amount
of the facility.
We
believe that borrowing capacity under this facility will be adequate to meet our
operational needs and capital expenditure plans for the foreseeable
future.
At the
end of 2004, we had $142.0 million of borrowings and $16.2 million of letters of
credit outstanding under the Agreement. Of the borrowings, we classified $50
million as long-term debt on the balance sheet, as we expect this amount to be
outstanding throughout the following year. We have entered into an interest rate
swap contract that expires in October 2006 to fix the interest rate on this $50
million of debt at 6.53%. Total additional borrowing Availability was
approximately $173 million at the end of 2004.
In 2004,
our total debt increased $22.5 million to $142.0 million, due to lower cash
provided by operating activities, primarily due to the investment in accounts
receivable and inventory from the new Bass business. Our ratio of debt-to-total
capital increased to 26.6% at the end of 2004, from 25.4% at the end of
2003.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Working
Capital and Cash Flow
| |
|
|
|
|
|
|
|
($
millions) |
January
29, 2005 |
|
(AS
RESTATED)
January
31, 2004 |
|
Increase/
(Decrease) |
|
|
Working
capital |
$ |
281.3 |
|
$ |
292.4 |
|
$ |
(11.1 |
) |
| |
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
Increase/
(Decrease) |
|
|
Net
cash provided by operating activities |
$ |
53.3 |
|
$ |
93.4 |
|
|
(40.1 |
) |
|
Net
cash used by investing activities |
|
(46.1 |
) |
|
(34.6 |
) |
|
(11.5 |
) |
|
Net
cash provided (used) by financing activities |
|
16.6 |
|
|
(35.3 |
) |
|
51.9 |
|
|
Increase
in cash and cash equivalents |
$ |
23.8 |
|
$ |
23.5 |
|
$ |
0.3 |
|
Working
capital at January 29, 2005, was $281.3 million, which was $11.1 million lower
than at January 31, 2004. Our current ratio, the relationship of current assets
to current liabilities, decreased from 2.24 to 1 at January 31, 2004, to 1.82 to
1 at January 29, 2005. The decrease in working capital is primarily due to
higher current maturities of long-term debt.
At
January 29, 2005, we had $79.4 million of cash and cash equivalents, which
represents cash and cash equivalents of our Canadian and other foreign
subsidiaries. Our intention is to maintain this cash within our foreign
operations indefinitely or to repatriate it only when it is tax-effective to do
so. On October 22, 2004, the Jobs Creation Act was signed into law. The Jobs
Creation Act provides for a special tax reduction for certain foreign earnings
that are repatriated to the United States if certain conditions are met. Based
on initial estimates, we may be able to repatriate approximately $70 million to
$80 million, which would generate tax expense of approximately $10 million.
However, the ultimate amount of tax expense could vary. We are evaluating the
terms of the Jobs Creation Act, but as of January 29, 2005, have made no
decisions regarding repatriation and, accordingly, have not provided deferred
taxes on unremitted foreign earnings.
Cash
provided by operating activities in 2004 was $53.3 million, compared to $93.4
million in 2003. The decrease is primarily due to higher inventory and accounts
receivable balances, due in part to the new Bass business, partially offset by
higher accounts payable.
Cash used
by investing activities in 2004 included capital expenditures of $46.2 million,
primarily for new store openings and store remodelings at Famous Footwear and
Specialty Retail. In 2005, we expect capital expenditures of approximately $40
million, primarily for new stores and store remodeling at Famous
Footwear.
Cash
provided by financing activities was $16.6 million, representing an increase of
debt obligations of $22.5 million, the payment of $7.3 million in dividends,
proceeds from stock option exercises of $2.6 million and debt issuance costs of
$1.3 million associated with our Amended and Restated Credit
Agreement.
In May
2000, we announced a stock repurchase program authorizing the repurchase of up
to 2 million shares of our outstanding common stock. In 2004, 2003 and 2002, we
did not purchase any shares. Since the inception of this program, we have
repurchased a total of 928,900 shares for $11.3 million.
We paid
dividends totaling $0.40 per share in each of 2004, 2003 and 2002. The 2004
dividends marked the 82nd year of consecutive quarterly dividends.
Acquisition
of Bennett Footwear Group
In
connection with signing the agreement to acquire Bennett, we received a
commitment letter from a lender to provide a senior unsecured loan to fund up to
$100 million, which will bear interest at the greater of 8.25% or a floating
rate based on three-month LIBOR, increasing at the end of each three-month
period that the loan is outstanding (“the Bridge Loan”). The Bridge Loan will be
guaranteed by all of our existing and future subsidiaries that are guarantors
under our existing revolving Credit Agreement. We will fund the remaining
portion of the purchase price from existing cash and available borrowings under
the existing revolving Credit Agreement. We anticipate that we will refinance
the acquisition cost by issuing long-term notes totaling approximately $150
million to $175 million during 2005. The debt securities may not be offered or
sold in the United States absent registration or an applicable exemption from
the registration requirements.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
|
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES |
Certain
accounting issues require management estimates and judgments for the preparation
of financial statements. Our most significant policies requiring the use of
estimates and judgments are listed below.
Inventories
Inventories
are our most significant asset, representing 50% of total assets at the end of
2004. We value inventories at the lower of cost or market, with 94% of
consolidated inventories using the last-in, first-out (LIFO)
method.
We
continually apply our judgment in valuing our inventories by assessing the net
realizable value of our inventories based on current selling prices. At our
Famous Footwear division, we recognize markdowns when it becomes evident that
inventory items will be sold at retail prices less than cost, plus the cost to
sell the product. This policy causes gross profit rates at Famous Footwear to be
lower than the initial markup during periods when permanent price reductions are
taken to clear product. At all other divisions, we provide markdown reserves to
reduce the carrying values of inventories to a level where, upon sale of the
product, we will realize our normal gross profit rate. We believe these policies
reflect the difference in operating models between Famous Footwear and our other
divisions. Famous Footwear continually runs promotional events to drive seasonal
sales to clear seasonal inventories. The other divisions rely on permanent price
reductions to clear slower-moving inventory.
Income
Taxes
We
provide taxes for the effects of timing differences between financial and tax
reporting. These differences relate principally to employee benefit plans,
accrued expenses, bad debt reserves, depreciation and inventory.
We do not
provide deferred taxes on the accumulated unremitted earnings of our Canadian
and other foreign subsidiaries. Based on the current United States and Canadian
income tax rates, we anticipate that no additional taxes would be due if the
Canadian earnings were distributed. With regard to our other foreign
subsidiaries, our intention is to reinvest these earnings indefinitely or to
repatriate the earnings only when it is tax-effective to do so. See the
discussion of the Jobs Creation Act above, under the caption “Working Capital
and Cash Flow,” for a discussion of potential repatriation of foreign earnings
under the Jobs Creation Act. If these amounts were not considered indefinitely
reinvested, additional deferred taxes of approximately $32.6 million would have
been provided.
At
January 29, 2005, we have foreign tax credit carryfowards and, at certain of our
subsidiaries, net operating loss carryforwards. We evaluate these carryforwards
for realization based upon their expiration dates and our expectations of future
taxable income. As deemed appropriate, valuation reserves are recorded to adjust
the recorded value of these carryforwards to the expected realizable
value.
Lease
Accounting
Construction
Allowances Received From Landlords
At the
time our retail facilities are initially leased, we often receive consideration
from landlords, to be applied against the cost of leasehold improvements
necessary to open the store. We treat these construction allowances as a lease
incentive, as defined by FASB Technical Bulletin 88-1. The allowances are
recorded as a deferred rent obligation upon receipt and amortized to income over
the lease term as a reduction of rent expense. The allowances are reflected as a
component of other accrued expenses and deferred rent on the consolidated
balance sheets.
Straight-Line
Rents and Rent Holidays
We record
rent expense on a straight-line basis over the lease term for all of our leased
facilities, in accordance with SFAS No. 13. For leases that have predetermined
fixed escalations of the minimum rentals, we recognize the related rental
expense on a straight-line basis and record the difference between the
recognized rental expense and amounts payable under the lease as deferred rent.
At the time our retail facilities are leased, we are frequently not charged rent
for a specified period of time, typically 60 days, while the store is being
prepared for opening. This rent-free period is referred to as a “rent holiday.”
In accordance with FASB Technical Bulletin 85-3, we recognize rent expense over
the lease term, including any rent holiday.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Store
Closing and Impairment Charges
We
regularly analyze the results of all of our stores and assess the viability of
underperforming stores to determine whether they should be closed or whether
their long-lived assets have been impaired. We perform asset impairment tests at
least annually, on a store-by-store basis. After allowing for an appropriate
start-up period, unusual nonrecurring events or favorable trends, we write down
to fair value the fixed assets of stores indicated as impaired.
Litigation
and Tax Contingencies
We are
the defendant in several claims and lawsuits arising in the ordinary course of
business. We do not believe any of these ordinary course of business proceedings
will have a material adverse effect on our consolidated financial position or
results of operations. We accrue our best estimate of the cost of resolution of
these claims. Legal defense costs of such claims are recognized in the period in
which we incur the costs.
We are
audited periodically by domestic and foreign tax authorities. In evaluating
issues raised in such audits, we provide reserves for exposures as
appropriate.
Environmental
Matters
We are
involved in environmental remediation and ongoing compliance activities at
several sites. We are remediating, under the oversight of Colorado authorities,
contamination at and beneath our owned facility in Colorado (also known as the
“Redfield” site) and groundwater and indoor air in residential neighborhoods
adjacent to and near the property, which have been affected by solvents
previously used at the site and surrounding facilities. In addition, various
federal and state authorities have identified the Company as a potentially
responsible party for remediation at certain landfills. While we currently do
not operate manufacturing facilities, prior operations included numerous
manufacturing and other facilities for which we may have responsibility under
various environmental laws to address conditions that may be identified in the
future. See Note 17 to the consolidated financial statements for a further
description of specific properties.
We
provide reserves for estimated costs associated with our environmental
remediation matters. We continually assess the level of reserves required. We
base such assessments on the most recent information available as to the actions
that will be required by the various federal and state authorities responsible
for the various sites. We believe the reserves carried at January 29, 2005, of
$8.4 million, are appropriate, but changes in estimates and actions necessary to
complete the regulatory requirements may cause the required levels of reserves
to change.
Impact
of Prospective Accounting Pronouncements - Share-Based
Compensation
During
December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R),
Share-Based
Payment, which
is a revision of SFAS No. 123. SFAS No. 123(R) requires all share-based payments
to employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair values. We have historically
provided pro forma disclosures of stock option expense in the notes to our
financial statements as previously allowed by SFAS No. 123, rather than
recognizing the impact of such expense in the financial statements. We expect to
adopt the provisions of SFAS No. 123(R), utilizing the modified-prospective
transition method, effective at the beginning of fiscal year 2005. This change
is expected to result in a reduction of net income of approximately $3.8
million, or $0.20 per diluted share, during 2005, including stock awards that
are expected to be granted during 2005. Furthermore, we have historically
utilized the Black-Scholes formula in determining the fair value of stock
options and the related pro forma expense disclosures. Upon adoption of SFAS No.
123(R) in the first quarter of 2005, we will utilize a binomial valuation model,
as we believe that the binomial valuation model will result in a more accurate
estimate of fair value. Under the modified-prospective transition method, the
expense associated with awards that were granted but not vested upon adoption of
SFAS No. 123(R) is based upon the same estimate of the fair value at grant date
as previously used under SFAS No. 123 (i.e., utilizing the Black-Scholes
methodology). New grants will be valued under a binomial valuation model. We do
not anticipate the recognition of any cumulative effect of a change in
accounting principle, and prior periods will not be restated.
|
OFF-BALANCE
SHEET ARRANGEMENTS |
At
January 29, 2005, we were contingently liable for remaining lease commitments of
approximately $8.6 million in the aggregate, which relate to the Cloth World and
Meis specialty retailing chains and a manufacturing facility, which were sold in
prior years. These obligations will continue to decline over the next several
years as leases expire. In order for us to incur any liability related to these
lease commitments, the current owners would have to default. At this time, we do
not believe this is reasonably likely to occur.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
In the
normal course of business, we enter into contracts and commitments which
obligate us to make payments in the future. The table below sets forth our
significant future obligations by time period. Further information on these
commitments is provided in the notes to our consolidated financial statements,
which are cross-referenced in this table. Our obligations outstanding as of
January 29, 2005, include the following:
| |
|
| |
Payments
Due by Period |
|
($
millions) |
Total |
Less
Than
1
Year |
1-3
Years |
3-5
Years |
More
Than
5
Years |
|
Current
maturities of long-term debt(1) |
$ |
92.0 |
$ |
92.0 |
$ |
- |
$ |
- |
$ |
- |
|
Long-term
debt(2) |
|
50.0 |
|
- |
|
- |
|
50.0 |
|
- |
|
Operating
lease commitments (Note 11) |
|
569.5 |
|
121.0 |
|
190.5 |
|
132.7 |
|
125.3 |
|
Minimum
license commitments |
|
13.8 |
|
7.5 |
|
6.3 |
|
- |
|
- |
|
Purchase
obligations(3) |
|
388.1 |
|
387.8 |
|
0.3 |
|
- |
|
- |
|
Total |
$ |
1,113.4 |
$ |
608.3 |
$ |
197.1 |
$ |
182.7 |
$ |
125.3 |
|
(1) |
Current
maturities of long-term debt bear interest at the LIBOR rate plus 1.50%.
Interest obligations are not included in the table above. See Note 10 to
the consolidated financial statements. |
|
(2) |
Long-term
debt bears interest at the LIBOR rate plus 1.50%. We have an interest rate
swap agreement, with a notional amount of $50 million expiring in October
2006, that converts variable rate interest payable on $50 million of
long-term borrowings under the revolving credit agreement to a fixed rate
of 6.53%. Interest obligations are not included in the table above. See
Note 10 to the consolidated financial statements. |
|
(3) |
Purchase
obligations include agreements to purchase goods or services in the normal
course of business that specify all significant terms, including quantity
and price provisions. |
|
SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 AND FORWARD-LOOKING
STATEMENTS |
This
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” 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 risks and uncertainties include, without limitation, the
risks detailed in Item 1, “Business,” under the caption “Risk Factors,” and
those described in other documents and reports filed from time to time with the
Securities and Exchange Commission, press releases and other communications. We
do not undertake any obligation or plan to update these forward-looking
statements, even though our situation may change.
|
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
The
market risk inherent in our financial instruments and positions represents the
potential loss arising from adverse changes in foreign currency exchange rates
and interest rates. To address these risks, we enter into various hedging
transactions to the extent described below. All decisions on hedging
transactions are authorized and executed pursuant to our policies and
procedures, which do not allow the use of financial instruments for trading
purposes. We also are exposed to credit-related losses in the event of
nonperformance by counterparties to these financial instruments. Counterparties
to these agreements, however, are major international financial institutions,
and we believe the risk of loss due to nonperformance is minimal.
A
description of our accounting policies for derivative financial instruments is
included in Note 12 to the consolidated financial statements.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
|
FOREIGN
CURRENCY EXCHANGE RATES |
In the
normal course of business, we are exposed to foreign currency exchange rate
risks as a result of having assets, liabilities and inventory purchase
commitments outside the United States. We employ 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, accordingly, is not subject
to exchange rate fluctuations. However, where the purchase price is to be paid
in a foreign currency, we enter into foreign exchange contracts or option
contracts, with maturity periods of normally less than one year, to reduce our
exposure to foreign exchange risk. The level of outstanding contracts during the
year is dependent on the seasonality of our business and 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
our net currency positions at January 29, 2005, resulting from a hypothetical
10% adverse change in all foreign currency exchange rates would not be
material.
Assets
and liabilities outside the United States are primarily located in Canada, Hong
Kong and China. Our investments in foreign subsidiaries with a functional
currency other than the United States dollar are generally considered long-term
and thus are not hedged. The net investment in such foreign subsidiaries
translated into dollars using the year-end exchange rates was approximately $45
million at January 29, 2005. The potential loss in fair value resulting from a
hypothetical 10% adverse change in foreign exchange rates would be approximately
$4.5 million. Any loss in fair value would be reflected as a cumulative
translation adjustment in other comprehensive income and would not impact net
earnings.
Our
financing arrangements include $142.0 million of outstanding variable rate debt
at January 29, 2005. We have an interest rate swap derivative instrument
outstanding at year-end to fix the interest rate on $50 million of the
borrowings outstanding under the revolving bank credit facility. Changes in
interest rates impact fixed and variable rate debt differently. For fixed rate
debt, a change in interest rates will only impact the fair value of the debt,
whereas a change in the interest rates on variable rate debt will impact
interest expense and cash flows.
Under the
bank credit agreement, after consideration of our interest rate swap
instruments, the only portion of our outstanding debt obligation subject to
variable interest rates is $92.0 million. A hypothetical 10% adverse change in
interest rates on the average outstanding borrowings during 2004 would not have
been material to our net earnings or cash flows.
At
January 29, 2005, the fair value of our long-term debt is estimated at
approximately $50.0 million, based upon the borrowing rate currently available
to us for financing arrangements with similar terms and maturities. The fair
value of our interest rate swap instrument associated with this debt at January
29, 2005, was an unrealized loss of $1.4 million. Market risk is viewed as the
potential change in fair value of our debt resulting from a hypothetical 10%
adverse change in interest rates and would be zero for our long-term debt and
approximately $0.1 million related to the interest rate swap agreement at
January 29, 2005.
Information
appearing under the caption “Derivative Financial Instruments” in Note 12 of the
consolidated financial statements is incorporated herein by
reference.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
|
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA |
Management’s Report on Internal Control Over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting as of January 29, 2005 based on the framework in
Internal
Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on that evaluation, our principal executive officer and principal
financial officer have concluded that the Company’s internal control over
financial reporting was ineffective as of January 29, 2005 because of the
restatement described in the following paragraph.
The
Company identified a material weakness in internal control related to the
selection and monitoring of appropriate accounting methods for leasehold
improvements funded by landlord incentives and the recognition of straight-line
rent on leased facilities. As a result, management determined that fixed assets,
current liabilities and expenses, as well as operating and investing cash flow
activities over the last several years had been understated. The Company has
restated its prior financial statements related to these misapplications of
generally accepted accounting principles related to lease accounting.
A
material weakness in internal controls over financial reporting is a control
deficiency within the meaning of the Public Company Accounting Oversight Board
(“PCAOB”) Auditing Standard No. 2, or a combination of control deficiencies,
that results in there being more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. According to the Public Company Accounting Oversight Board’s
Auditing Standard No. 2, a “restatement of previously issued financial
statements to reflect the correction of a misstatement should be regarded as at
least a significant deficiency and as a strong indicator that a material
weakness in internal control over financial reporting exists.” We, in
consultation with our independent registered public accountants, Ernst &
Young LLP, have determined that our failure to prevent or detect the accounting
errors until this restatement indicates a material weakness in our internal
control over financial reporting, as they existed on January 29, 2005, the end
of the period covered by this report.
Management’s
assessment of the effectiveness of our internal control over financial reporting
as of January 29, 2005 has been audited by Ernst & Young LLP, an independent
registered public accounting firm, as stated in their report which is included
elsewhere herein.
Remediation
Steps to Address Material Weakness
The
evaluation has not revealed any fraud, intentional misconduct or concealment on
the part of Company personnel. The Company’s management has identified and
implemented the steps necessary to address this material weakness, including the
implementation of additional controls over the accounting for leases.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
The
Board of Directors and Shareholders of Brown Shoe Company,
Inc.
We have
audited management’s assessment, included in the accompanying Management's
Report on Internal Control Over Financial Reporting, that Brown Shoe Company,
Inc. did not maintain effective internal control over financial reporting as of
January 29, 2005, because of the effect of insufficient controls over the
selection and monitoring of appropriate accounting for and classification of
tenant allowances on leased facilities and the recognition of straight-line rent
on leased facilities, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Brown Shoe Company, Inc.’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management’s assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management’s assessment: In its assessment as of January 29, 2005, management
identified as a material weakness the Company’s insufficient controls over the
selection and monitoring of accounting methods for tenant allowances and rent
holidays provided by lessors, resulting in an understatement of fixed assets,
current liabilities and expenses, as well as operating and investing cash flow
activities. The Company has restated its previously issued financial statements
to reflect the appropriate treatment of generally accepted accounting principles
for leases. This material weakness was considered in determining the nature,
timing, and extent of audit tests applied in our audit of the 2004 financial
statements, and this report does not affect our report dated March 8, 2005,
except for Note 18 as to which the date is March 14, 2005, on those financial
statements.
In our
opinion, management’s assessment that Brown Shoe Company, Inc. did not maintain
effective internal control over financial reporting as of January 29, 2005, is
fairly stated, in all material respects, based on the COSO control criteria.
Also, in our opinion, because of the effect of the material weakness described
above on the achievement of the objectives of the control criteria, Brown Shoe
Company, Inc. had not maintained effective internal control over financial
reporting as of January 29, 2005, based on the COSO control criteria.
/s/ ERNST
& YOUNG LLP
St.
Louis, Missouri
March 8,
2005
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Report of Independent Registered Public Accounting Firm on
Consolidated Financial Statements
The
Shareholders and Board of Directors of Brown Shoe Company,
Inc.
We have
audited the accompanying consolidated balance sheets of Brown Shoe Company, Inc.
as of January 29, 2005, and January 31, 2004, and the related consolidated
statements of earnings, shareholders’ equity, and cash flows for each of the
three years in the period ended January 29, 2005. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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, 2005, and January 31, 2004, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended January 29, 2005, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
As
discussed in Note 2 to the consolidated financial statements, the Company has
restated its financial statements for the years ended January 31, 2004, and
February 1, 2003, to correct its accounting for leases.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Brown Shoe Company, Inc.’s
internal control over financial reporting as of January 29, 2005, based on
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated March 8, 2005, expressed an unqualified opinion on management’s assertion
and an adverse opinion on the
effectiveness of internal control over financial reporting because of the
existence of a material weakness.
/s/ ERNST
& YOUNG LLP
St.
Louis, Missouri
March 8,
2005,
except
for Note 18 as to which the date is March 14, 2005
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
| |
|
|
AS
RESTATED
(See
Note 2) |
|
|
($
thousands, except number of shares and per share
amounts) |
January
29,
2005 |
|
January
31,
2004 |
|
|
ASSETS |
|
|
|
|
|
|
|
Current
Assets |
|
|
|
|
|
|
|
Cash
and cash equivalents |
$ |
79,448 |
|
$ |
55,657 |
|
|
Receivables,
net of allowances of $8,231 in 2004 and $5,899 in 2003 |
|
97,503 |
|
|
81,930 |
|
|
Inventories,
net of adjustment to last-in, first-out cost of $11,463 in 2004 and
$12,350 in 2003 |
|
421,450 |
|
|
376,210 |
|
|
Deferred
income taxes |
|
12,370 |
|
|
2,412 |
|
|
Prepaid
expenses and other current assets |
|
12,068 |
|
|
11,250 |
|
|
Total
current assets |
|
622,839 |
|
|
527,459 |
|
|
Prepaid
pension costs |
|
55,915 |
|
|
53,876 |
|
|
Other
assets |
|
31,512 |
|
|
29,816 |
|
|
Deferred
income taxes |
|
- |
|
|
3,874 |
|
|
Property
and equipment, net |
|
114,394 |
|
|
103,624 |
|
|
Goodwill
and intangible assets, net |
|
21,474 |
|
|
20,405 |
|
|
Total
assets |
$ |
846,134 |
|
$ |
739,054 |
|
| |
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
Current
Liabilities |
|
|
|
|
|
|
|
Current
maturities of long-term debt |
$ |
92,000 |
|
$ |
19,500 |
|
|
Trade
accounts payable |
|
143,982 |
|
|
116,677 |
|
|
Employee
compensation and benefits |
|
37,263 |
|
|
40,547 |
|
|
Other
accrued expenses |
|
60,833 |
|
|
55,397 |
|
|
Income
taxes |
|
7,437 |
|
|
2,960 |
|
|
Total
current liabilities |
|
341,515 |
|
|
235,081 |
|
|
Other
Liabilities |
|
|
|
|
|
|
|
Long-term
debt |
|
50,000 |
|
|
100,000 |
|
|
Deferred
rent |
|
34,055 |
|
|
27,625 |
|
|
Deferred
income taxes |
|
2,211 |
|
|
- |
|
|
Other
liabilities |
|
27,050 |
|
|
26,268 |
|
|
Total
other liabilities |
|
113,316 |
|
|
153,893 |
|
|
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; 18,241,791 and
18,076,589 shares outstanding in 2004 and 2003,
respectively |
|
68,406 |
|
|
67,787 |
|
|
Additional
paid-in capital |
|
62,639 |
|
|
62,772 |
|
|
Unamortized
value of restricted stock |
|
(2,661 |
) |
|
(3,408 |
) |
|
Accumulated
other comprehensive loss |
|
(983 |
) |
|
(4,934 |
) |
|
Retained
earnings |
|
263,902 |
|
|
227,863 |
|
|
Total
shareholders’ equity |
|
391,303 |
|
|
350,080 |
|
|
Total
liabilities and shareholders’ equity |
$ |
846,134 |
|
$ |
739,054 |
|
See notes
to consolidated financial statements.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Consolidated Statements of
Earnings |
| |
|
|
AS
RESTATED
(See
Note 2) |
|
|
($
thousands, except per share amounts) |
2004 |
|
2003 |
|
2002 |
|
|
Net
sales |
$ |
1,941,804 |
|
$ |
1,832,108 |
|
$ |
1,841,443 |
|
|
Cost
of goods sold |
|
1,157,437 |
|
|
1,073,442 |
|
|
1,100,654 |
|
|
Gross
profit |
|
784,367 |
|
|
758,666 |
|
|
740,789 |
|
|
Selling
and administrative expenses |
|
720,013 |
|
|
682,674 |
|
|
669,133 |
|
|
Provision
for environmental litigation costs |
|
586 |
|
|
3,107 |
|
|
- |
|
|
Operating
earnings |
|
63,768 |
|
|
72,885 |
|
|
71,656 |
|
|
Interest
expense |
|
(8,410 |
) |
|
(9,781 |
) |
|
(12,236 |
) |
|
Interest
income |
|
929 |
|
|
462 |
|
|
402 |
|
|
Earnings
before income taxes |
|
56,287 |
|
|
63,566 |
|
|
59,822 |
|
|
Income
tax provision |
|
(12,982 |
) |
|
(17,330 |
) |
|
(15,664 |
) |
|
Net
earnings |
$ |
43,305 |
|
$ |
46,236 |
|
$ |
44,158 |
|
|
Basic
earnings per common share |
$ |
2.42 |
|
$ |
2.62 |
|
$ |
2.54 |
|
|
Diluted
earnings per common share |
$ |
2.30 |
|
$ |
2.48 |
|
$ |
2.46 |
|
See notes
to consolidated financial statements.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
| |
|
|
AS
RESTATED
(See
Note 2) |
|
|
($
thousands) |
2004 |
|
2003 |
|
2002 |
|
|
Operating
Activities |
|
|
|
|
|
|
|
|
|
|
Net
earnings |
$ |
43,305 |
|
$ |
46,236 |
|
$ |
44,158 |
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
31,895 |
|
|
30,665 |
|
|
28,092 |
|
|
Amortization |
|
15 |
|
|
15 |
|
|
695 |
|
|
Share-based
compensation (income) expense |
|
(2,698 |
) |
|
4,773 |
|
|
2,071 |
|
|
Tax
benefit related to share-based plans |
|
1,350 |
|
|
1,543 |
|
|
- |
|
|
Loss
on disposal of facilities and equipment |
|
1,071 |
|
|
1,653 |
|
|
3,394 |
|
|
Impairment
charges for facilities and equipment |
|
3,089 |
|
|
3,721 |
|
|
2,538 |
|
|
(Recoveries
from) provision for doubtful accounts |
|
(203 |
) |
|
(194 |
) |
|
652 |
|
|
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Receivables |
|
(15,370 |
) |
|
750 |
|
|
(14,833 |
) |
|
Inventories |
|
(45,240 |
) |
|
16,374 |
|
|
3,643 |
|
|
Prepaid
expenses and other current assets |
|
(818 |
) |
|
(1,569 |
) |
|
4,518 |
|
|
Trade
accounts payable and accrued expenses |
|
29,457 |
|
|
(16,242 |
) |
|
22,180 |
|
|
Income
taxes |
|
4,477 |
|
|
(2,392 |
) |
|
4,802 |
|
|
Deferred
rent |
|
6,430 |
|
|
1,612 |
|
|
2,407 |
|
|
Deferred
income taxes |
|
(3,873 |
) |
|
6,534 |
|
|
6,981 |
|
|
Other,
net |
|
437 |
|
|
(84 |
) |
|
(962 |
) |
|
Net
cash provided by operating activities |
|
53,324 |
|
|
93,395 |
|
|
110,336 |
|
| |
|
|
|
|
|
|
|
|
|
|
Investing
Activities |
|
|
|
|
|
|
|
|
|
|
Capital
expenditures |
|
(46,227 |
) |
|
(35,108 |
) |
|
(32,226 |
) |
|
Other |
|
153 |
|
|
486 |
|
|
148 |
|
|
Net
cash used by investing activities |
|
(46,074 |
) |
|
(34,622 |
) |
|
(32,078 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Financing
Activities |
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in current maturities of long term debt, net of
reclassifications |
|
22,500 |
|
|
(9,500 |
) |
|
(35,250 |
) |
|
Debt
issuance costs |
|
(1,274 |
) |
|
- |
|
|
(265 |
) |
|
Principal
payments of long-term debt |
|
- |
|
|
(23,500 |
) |
|
(28,550 |
) |
|
Proceeds
from stock options exercised |
|
2,581 |
|
|
4,926 |
|
|
2,259 |
|
|
Dividends
paid |
|
(7,266 |
) |
|
(7,163 |
) |
|
(7,043 |
) |
|
Net
cash provided (used) by financing activities |
|
16,541 |
|
|
(35,237 |
) |
|
(68,849 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents |
|
23,791 |
|
|
23,536 |
|
|
9,409 |
|
|
Cash
and cash equivalents at beginning of year |
|
55,657 |
|
|
32,121 |
|
|
22,712 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year |
$ |
79,448 |
|
$ |
55,657 |
|
$ |
32,121 |
|
See notes
to consolidated financial statements.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Unamortized |
|
Accumulated |
|
|
|
|
|
| |
|
|
|
Additional |
|
Value
of |
|
Other |
|
|
|
Total |
|
| |
|
Common
Stock |
|
Paid-In |
|
Restricted |
|
Comprehensive |
|
Retained |
|
Shareholders’ |
|
|
($
thousands, except number of shares and per share
amounts) |
|
Shares |
|
Dollars |
|
Capital |
|
Stock |
|
Income
(Loss) |
|
Earnings |
|
Equity |
|
|
BALANCE
FEBRUARY 2, 2002
AS
RESTATED (SEE NOTE 2) |
|
|
17,483,585 |
|
$ |
65,564 |
|
$ |
47,948 |
|
$ |
(1,909 |
) |
$ |
(9,975 |
) |
$ |
151,651 |
|
$ |
253,279 |
|
|
Net
earnings (As Restated, See Note 2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,158 |
|
|
44,158 |
|
|
Currency
translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,607 |
|
|
|
|
|
1,607 |
|
|
Unrealized
losses on derivative instruments,
net
of tax benefit of $1,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,779 |
) |
|
|
|
|
(2,779 |
) |
|
Comprehensive
income (As Restated, See Note 2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,986 |
|
|
Dividends
($0.40 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,043 |
) |
|
(7,043 |
) |
|
Stock
issued under employee benefit
and
restricted stock plans |
|
|
199,097 |
|
|
747 |
|
|
2,276 |
|
|
(764 |
) |
|
|
|
|
|
|
|
2,259 |
|
| Share-based
compensation expense |
|
|
|
|
|
|
|
|
|
|
|
712 |
|
|
|
|
|
24 |
|
|
736 |
|
|
BALANCE
FEBRUARY 1, 2003
AS
RESTATED (SEE NOTE 2) |
|
|
17,682,682 |
|
$ |
66,311 |
|
$ |
50,224 |
|
$ |
(1,961 |
) |
$ |
(11,147 |
) |
$ |
188,790 |
|
$ |
292,217 |
|
|
Net
earnings (As Restated, See Note 2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,236 |
|
|
46,236 |
|
|
Currency
translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,553 |
|
|
|
|
|
5,553 |
|
|
Unrealized
gains on derivative instruments,
net
of tax provision of $301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
660 |
|
|
|
|
|
660 |
|
|
Comprehensive
income (As Restated, See Note 2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,449 |
|
|
Dividends
($0.40 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,163 |
) |
|
(7,163 |
) |
|
Stock
issued under employee benefit
and
restricted stock plans |
|
|
393,907 |
|
|
1,476 |
|
|
5,715 |
|
|
(2,265 |
) |
|
|
|
|
|
|
|
4,926 |
|
|
Tax
benefit related to share-based plans |
|
|
|
|
|
|
|
|
1,543 |
|
|
|
|
|
|
|
|
|
|
|
1,543 |
|
|
Share-based
compensation expense |
|
|
|
|
|
|
|
|
5,290 |
|
|
818 |
|
|
|
|
|
|
|
|
6,108 |
|
|
BALANCE
JANUARY 31, 2004
AS
RESTATED (SEE NOTE 2) |
|
|
18,076,589 |
|
$ |
67,787 |
|
$ |
62,772 |
|
$ |
(3,408 |
) |
$ |
(4,934 |
) |
$ |
227,863 |
|
$ |
350,080 |
|
|
Net
earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,305 |
|
|
43,305 |
|
|
Currency
translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,684 |
|
|
|
|
|
2,684 |
|
|
Unrealized
gains on derivative instruments,
net
of tax provision of $787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,738 |
|
|
|
|
|
1,738 |
|
|
Minimum
pension liability,
net
of tax benefit of $278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(471 |
) |
|
|
|
|
(471 |
) |
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,256 |
|
|
Dividends
($0.40 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,266 |
) |
|
(7,266 |
) |
|
Stock
issued under employee benefit
and
restricted stock plans |
|
|
165,202 |
|
|
619 |
|
|
2,096 |
|
|
(134 |
) |
|
|
|
|
|
|
|
2,581 |
|
|
Tax
benefit related to share-based plans |
|
|
|
|
|
|
|
|
1,350 |
|
|
|
|
|
|
|
|
|
|
|
1,350 |
|
|
Share-based
compensation (income) expense |
|
|
|
|
|
|
|
|
(3,579 |
) |
|
881 |
|
|
|
|
|
|
|
|
(2,698 |
) |
|
BALANCE
JANUARY 29, 2005 |
|
|
18,241,791 |
|
$ |
68,406 |
|
$ |
62,639 |
|
$ |
(2,661 |
) |
$ |
(983 |
) |
$ |
263,902 |
|
$ |
391,303 |
|
See notes
to consolidated financial statements.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
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. 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 1,294 retail
shoe stores in the United States and Canada primarily under the Famous Footwear
and Naturalizer names. In addition, through its Wholesale Operations division,
the Company designs, sources and markets footwear to retail stores domestically
and internationally, including department stores, mass merchandisers and
specialty shoe stores. In 2004, approximately 68% of the Company’s sales were at
retail, compared to 69% in 2003 and 2002. See Note 8 for additional information
regarding the Company’s business segments.
Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly owned and majority-owned subsidiaries, after the elimination of
intercompany accounts and transactions.
Accounting
Period
The
Company’s fiscal year is the 52- or 53-week period ending the Saturday nearest
to January 31. Fiscal years 2004, 2003 and 2002 ended on January 29, 2005,
January 31, 2004, and February 1, 2003, respectively. Fiscal years 2004, 2003
and 2002 each included 52 weeks.
Reclassifications
Certain
prior period amounts have been reclassified to conform to current period
presentation. These reclassifications did not affect net earnings. See Note 2
for details regarding the restatement of the Company’s consolidated financial
statements.
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. Cash and cash equivalents are stated
at cost, which approximates fair value.
Receivables
The
Company evaluates the collectibility of selected accounts receivable on a
case-by-case basis and makes adjustments to the bad debt reserve for expected
losses. The Company considers factors such as ability to pay, bankruptcy, credit
ratings and payment history. For all other accounts, the Company estimates
reserves for bad debts based on experience and past due status of the accounts.
If circumstances related to customers change, estimates of recoverability would
be further adjusted. During 2004, 2003 and 2002, the Company recognized
(recoveries from) provision for doubtful accounts of $(0.2) million, $(0.2)
million and $0.7 million, respectively.
Inventories
All
inventories are valued at the lower of cost or market, with 94% 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 $11.5 million
and $12.4 million higher at January 29, 2005, and January 31, 2004,
respectively. Substantially all inventory is finished goods.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
The cost
of inventory, inbound freight and duties, markdowns, shrinkage and royalty
expense is reflected in cost of goods sold. Costs of warehousing and
distribution are reflected in selling and administrative expense and are
expensed as incurred. Such warehousing and distribution costs totaled $54.3
million, $50.0 million and $51.1 million in 2004, 2003 and 2002, respectively.
Costs of overseas sourcing offices and other inventory procurement costs are
reflected in selling and administrative expense and are expensed as incurred.
Such sourcing and procurement costs totaled $21.1 million, $17.6 million and
$17.7 million in 2004, 2003 and 2002, respectively.
Markdowns
are recorded to reflect expected adjustments to sales prices. In determining
markdowns, management considers current and recently recorded sales prices, the
length of time the product is held in inventory and quantities of various
product styles contained in inventory, among other factors. The ultimate amount
realized from the sale of certain products could differ from management
estimates.
Computer
Software Costs
The
Company capitalizes in Other Assets certain costs, including internal payroll
costs, incurred in connection with the development or acquisition of software
for internal use.
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 lease terms, where applicable, using the straight-line
method.
Goodwill
and Intangible Assets
Goodwill
and intangible assets deemed to have indefinite lives are not amortized, but are
subject to annual impairment tests, using a discounted cash flow approach. The
Company performs impairment tests during the fourth quarter of each fiscal year,
unless events indicate an interim test is required. Other intangible assets are
amortized over their useful lives.
As of
January 29, 2005, goodwill of $20.3 million (net of $11.5 million accumulated
amortization) and intangible assets of $1.2 million (net of $1.1 million
accumulated amortization) were attributable to the Company’s operating segments
as follows: $3.5 million for Famous Footwear, $10.2 million for Wholesale
operations, $5.7 million for Specialty Retailing and $2.1 million for the Other
segment. Intangible assets of $0.7 million related to the Company’s minimum
pension liability adjustment and other intangible assets of $0.4 million are not
subject to amortization.
As a
result of its annual impairment testing, the Company did not record any
impairment charges during 2004 or 2003 related to goodwill or intangible assets.
During 2002, the Company recorded an impairment charge of $0.7 million related
to an intangible asset of the Company’s e-commerce business, which is part of
the Company’s Other business segment. This impairment charge was reflected as a
component of selling and administrative expenses.
Revenue
Recognition
Retail
sales are net of returns and exclude sales tax. Wholesale sales and sales
through the Company’s Web sites are recorded, net of returns, allowances and
discounts, when the merchandise has been shipped and title and risk of loss have
passed to the customer. Retail items sold through the Company’s Web sites are
made pursuant to a sales agreement that provides for transfer of both title and
risk of loss upon our delivery to the carrier. Reserves for projected
merchandise returns, discounts and allowances are carried based on experience.
Revenue is recognized on license fees related to Company-owned brand names,
where the Company is licensor, when the related sales of the licensee are
made.
Store
Closing and Impairment Charges
The costs
of closing stores, including lease termination costs, property and equipment
write-offs and severance, as applicable, are recorded when the store is closed
or when a binding agreement is reached with the landlord to close the store.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Asset
impairment tests are performed at least annually, on a store-by-store basis.
After allowing for an appropriate start-up period, unusual nonrecurring events
or favorable trends, property and equipment at stores indicated as impaired are
written down to fair value using a discounted cash flow technique. The Company
recorded asset impairment charges related to underperforming retail stores of
$3.1 million during 2004, of which $1.6 million relates to the Specialty Retail
segment and $1.5 million relates to our Famous Footwear segment. During 2003,
the Company recorded asset impairment charges of $3.7 million, of which $2.5
million relates to our Famous Footwear segment and $1.2 million relates to the
Specialty Retail segment. During 2002, the Company recorded asset impairment
charges of $2.5 million, of which $2.3 million relates to our Famous Footwear
segment and $0.2 million relates to the Specialty Retail segment. Impairment
charges are recorded within selling and administrative expenses on the
consolidated statements of earnings.
Advertising
and Marketing Expense
All
advertising and marketing costs are expensed at the time the event occurs or the
promotion first appears in media or in the store, except for direct response
advertising that relates primarily to the production and distribution of the
Company’s catalogs. Direct response advertising costs are amortized over the
expected future revenue stream, which is two months from the date catalogs are
mailed.
In
addition, the Company participates in co-op advertising programs with certain of
its wholesale customers. For those co-op advertising programs where the Company
has validated the fair value of the advertising received, co-op advertising
costs are reflected as advertising expense. Otherwise, co-op advertising costs
are reflected as a reduction of net sales.
Total
advertising and marketing expense was $54.2 million, $52.9 million and $55.0
million in 2004, 2003 and 2002, respectively. In 2004, 2003 and 2002, these
costs include co-op advertising costs provided to wholesale customers of $0,
$3.7 million and $6.4 million and are offset by co-op advertising allowances
recovered by the Company’s retail divisions of $5.3 million, $5.4 million and
$4.5 million, respectively. Total co-op advertising costs reflected as a
reduction of net sales were $8.0 million, $4.6 million and $0 for 2004, 2003 and
2002, respectively. Total advertising costs attributable to future periods that
are deferred and recognized as a component of prepaid expenses and other current
assets were $0.7 million and $1.6 million at January 29, 2005, and January 31,
2004, respectively.
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,
accrued expenses, foreign tax credit carryforwards, bad debt reserves, inventory
and depreciation.
Operating
Leases
The
Company leases its store premises under operating leases. Many leases entered
into by the Company include options under which the Company may extend the lease
term beyond the initial commitment period, subject to terms agreed to at lease
inception. Some leases also include early termination options which can be
exercised under specific conditions.
Contingent
Rentals
Many of
the leases covering retail stores require contingent rentals in addition to the
minimum monthly rental charge, based on retail sales volume. The Company records
expense for contingent rentals during the period in which the retail sales
volume exceeds the respective targets.
Construction
Allowances Received From Landlords
At the
time our retail facilities are initially leased, the Company often receives
consideration from landlords, to be applied against the cost of leasehold
improvements necessary to open the store. The Company treats these construction
allowances as a lease incentive, as defined by FASB Technical Bulletin 88-1. The
allowances are recorded as a deferred rent obligation upon receipt and amortized
to income over the lease term as a reduction of rent expense. The allowances are
reflected as a component of other accrued expenses and deferred rent on the
consolidated balance sheets.
Straight-Line
Rents and Rent Holidays
The
Company records rent expense on a straight-line basis over the lease term for
all of its leased facilities, in accordance with SFAS No. 13. For leases that
have predetermined fixed escalations of the minimum rentals, the Company
recognizes the related rental expense on a straight-line basis and records the
difference between the recognized rental expense and amounts payable under the
lease as deferred rent. At the time our retail facilities are leased, the
Company is frequently not charged rent for a specified period of time, typically
60 days, while the store is being prepared for opening. This rent-free period is
referred to as a “rent holiday.” In accordance with FASB Technical Bulletin
85-3, the Company recognizes rent expense over the lease term, including any
rent holiday.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Earnings
per Share
Basic
earnings per common share is computed using the weighted average number of
common shares outstanding during the year. Diluted earnings per common share is
computed using the weighted average number of common shares and potential
dilutive securities outstanding during the period. Potential dilutive securities
consist of outstanding stock options and unvested restricted stock
awards.
Comprehensive
Income
Comprehensive
income includes the effect of foreign currency translation adjustments,
unrealized gains and losses on derivative instruments and minimum pension
liability adjustments.
Share-Based
Compensation
As of
January 29, 2005, the Company had four share-based compensation plans, which are
described more fully in Note 16. Through 2004, the Company has accounted for
those plans under the recognition and measurement principles of Accounting
Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and
related interpretations. See “Impact of Prospective Accounting Pronouncements”
below for discussion of changes in share-based compensation for 2005.
Compensation income or expense is recognized in net earnings for stock
performance plans, restricted stock grants and stock appreciation units. No
compensation cost has been reflected in net earnings for stock options, as all
option grants had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect on
net earnings and earnings per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, to stock
options outstanding:
| |
|
|
|
|
|
|
|
($
thousands, except per share amounts) |
2004 |
|
2003 |
|
2002 |
|
|
Net
earnings, as reported |
$ |
43,305 |
|
$ |
46,236 |
|
$ |
44,158 |
|
|
Add:
Total share-based compensation (income) expense included in
reported
net
earnings, net of related tax effect |
|
(1,700 |
) |
|
3,102 |
|
|
1,346 |
|
|
Deduct:
Total share-based compensation expense determined
under
the fair value-based method for all awards, net of related tax
effect |
|
(1,467 |
) |
|
(5,387 |
) |
|
(3,323 |
) |
|
Pro
forma net earnings |
$ |
40,138 |
|
$ |
43,951 |
|
$ |
42,181 |
|
|
Earnings
per share: |
|
|
|
|
|
|
|
|
|
|
Basic
- as reported |
$ |
2.42 |
|
$ |
2.62 |
|
$ |
2.54 |
|
|
Basic
- pro forma |
|
2.24 |
|
|
2.49 |
|
|
2.43 |
|
|
Diluted
- as reported |
|
2.30 |
|
|
2.48 |
|
|
2.46 |
|
|
Diluted
- pro forma |
|
2.13 |
|
|
2.36 |
|
|
2.35 |
|
Impact
of Prospective Accounting Pronouncements
During
December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R),
Share-Based
Payment, which
is a revision of SFAS No. 123. SFAS No. 123(R) requires all share-based payments
to employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair values. The Company has
historically provided pro forma disclosures of stock option expense in the notes
to the Company’s financial statements as previously allowed by SFAS No. 123,
rather than recognizing the impact of such expense in the financial statements.
The Company expects to adopt the provisions of SFAS No. 123(R), utilizing the
modified-prospective transition method, effective at the beginning of fiscal
year 2005. This change is expected to result in a reduction of net income of
approximately $3.8 million, or $0.20 per diluted share, during 2005, including
stock awards that are expected to be granted during 2005. Furthermore, the
Company has historically utilized the Black-Scholes formula in determining the
fair value of its stock options and the related pro forma expense disclosures.
Upon adoption of SFAS No. 123(R) in the first quarter of 2005, the Company will
utilize a binomial valuation model, as it believes that the binomial valuation
model will result in a more accurate estimate of fair value. Under the
modified-prospective transition method, the expense associated with awards that
were granted but not vested upon adoption of SFAS No. 123(R) is based upon the
same estimate of the fair value at grant date as previously used under SFAS No.
123 (i.e., utilizing the Black-Scholes methodology). New grants will be valued
under a binomial valuation model. The Company does not anticipate the
recognition of any cumulative effect of a change in accounting principle and
prior periods will not be restated.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
|
2. |
RESTATEMENT
OF CONSOLIDATED FINANCIAL
STATEMENTS |
On
February 28, 2005, the Company announced that it would restate its consolidated
financial statements for 2003 and 2002 to correct its method of accounting for
certain lease issues.
Construction
Allowances
Consistent
with many other companies having retail operations, the Company historically
accounted for construction allowances received from landlords as a reduction of
property and equipment and amortized the allowances over the useful lives of the
assets to which they were assigned. The Company determined that, in some cases,
the lives assigned to amortize the construction allowances were shorter than the
lease term, thereby understating rent expense. In its restated consolidated
financial statements, the Company has treated these construction allowances as a
lease incentive, as defined by FASB Technical Bulletin 88-1. The allowances are
recorded as a deferred rent obligation upon receipt, rather than a reduction of
property and equipment, and amortized to income over the lease term as a
reduction of rent expense.
Rent
Holidays
The
Company also determined that its calculation of straight-line rent expense
should be modified. The Company had previously recognized straight-line rent
expense for leases beginning on the commencement date of the lease, which had
the effect of excluding the store build-out periods from the calculation of the
period over which it expensed rent. In its restated consolidated financial
statements, the Company has recognized straight-line rent expense over the lease
term, including any rent-free build-out periods.
The
adjustment to net earnings in each period is a noncash item. The cumulative
adjustment to retained earnings for construction allowances and rent holidays
was $5.0 million as of January 31, 2004, and $3.4 million as of February 2,
2002. All data reflected in our consolidated financial statements, including the
related notes, have been restated to correct our treatment of these lease
accounting issues. A summary of the significant effects of the restatement for
these lease accounting issues is as follows:
| |
|
|
|
|
| |
As
of January 31, 2004 |
|
|
|
|
($
thousands) |
As
Previously
Reported |
|
As
Restated |
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Deferred
income taxes |
$ |
4,638 |
|
$ |
2,412 |
|
|
|
|
|
|
|
| |
Total
current assets |
|
529,685 |
|
|
527,459 |
|
|
|
|
|
|
|
| |
Deferred
income taxes |
|
- |
|
|
3,874 |
|
|
|
|
|
|
|
| |
Property
and equipment, net |
|
85,548 |
|
|
103,624 |
|
|
|
|
|
|
|
| |
Total
assets |
|
719,330 |
|
|
739,054 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other
accrued expenses |
|
49,876 |
|
|
55,397 |
|
|
|
|
|
|
|
| |
Total
current liabilities |
|
229,560 |
|
|
235,081 |
|
|
|
|
|
|
|
| |
Deferred
rent |
|
6,744 |
|
|
27,625 |
|
|
|
|
|
|
|
| |
Deferred
income taxes |
|
1,645 |
|
|
- |
|
|
|
|
|
|
|
| |
Other
liabilities |
|
26,253 |
|
|
26,268 |
|
|
|
|
|
|
|
| |
Total
other liabilities |
|
134,642 |
|
|
153,893 |
|
|
|
|
|
|
|
| |
Retained
earnings |
|
232,911 |
|
|
227,863 |
|
|
|
|
|
|
|
| |
Total
shareholders’ equity |
|
355,128 |
|
|
350,080 |
|
|
|
|
|
|
|
| |
Total
liabilities and shareholders’ equity |
|
719,330 |
|
|
739,054 |
|
|
|
|
|
|
|
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
| |
|
|
|
|
| |
For
the Year Ended
January
31, 2004 |
|
For
the Year Ended
February
1, 2003 |
|
|
($
thousands, except per share amounts) |
As
Previously
Reported |
|
As
Restated |
|
As
Previously
Reported |
|
As
Restated |
|
|
CONSOLIDATED
STATEMENTS OF EARNINGS |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Selling
and administrative expenses |
$ |
681,585 |
|
$ |
682,674 |
|
$ |
667,456 |
|
$ |
669,133 |
|
| |
Operating
earnings |
|
73,974 |
|
|
72,885 |
|
|
73,333 |
|
|
71,656 |
|
| |
Earnings
before income taxes |
|
64,655 |
|
|
63,566 |
|
|
61,499 |
|
|
59,822 |
|
| |
Income
tax provision |
|
(17,761 |
) |
|
(17,330 |
) |
|
(16,327 |
) |
|
(15,664 |
) |
| |
Net
earnings |
|
46,894 |
|
|
46,236 |
|
|
45,172 |
|
|
44,158 |
|
| |
Earnings
per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic |
|
2.65 |
|
|
2.62 |
|
|
2.60 |
|
|
2.54 |
|
| |
Diluted |
|
2.52 |
|
|
2.48 |
|
|
2.52 |
|
|
2.46 |
|
| |
|
|
|
|
| |
For
the Year Ended
January
31, 2004 |
|
For
the Year Ended
February
1, 2003 |
|
|
($
thousands) |
As
Previously
Reported |
|
As
Restated |
|
As
Previously
Reported |
|
As
Restated |
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS |
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net
earnings |
$ |
46,894 |
|
$ |
46,236 |
|
$ |
45,172 |
|
$ |
44,158 |
|
| |
Depreciation |
|
25,457 |
|
|
30,665 |
|
|
23,484 |
|
|
28,092 |
|
| |
Impairment
charges for facilities and equipment |
|
2,693 |
|
|
3,721 |
|
|
1,687 |
|
|
2,538 |
|
| |
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Trade
accounts payable and accrued expenses |
|
(16,119 |
) |
|
(16,242 |
) |
|
21,097 |
|
|
22,180 |
|
| |
Deferred
rent |
|
992 |
|
|
1,612 |
|
|
697 |
|
|
2,407 |
|
| |
Deferred
taxes |
|
6,965 |
|
|
6,534 |
|
|
7,644 |
|
|
6,981 |
|
| |
Other,
net |
|
(81 |
) |
|
(84 |
) |
|
(964 |
) |
|
(962 |
) |
| |
Net
cash provided by operating activities |
|
87,754 |
|
|
93,395 |
|
|
103,759 |
|
|
110,336 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Capital
expenditures |
|
(29,467 |
) |
|
(35,108 |
) |
|
(25,648 |
) |
|
(32,226 |
) |
| |
Net
cash provided by investing activities |
|
(28,981 |
) |
|
(34,622 |
) |
|
(25,500 |
) |
|
(32,078 |
) |
In order
to improve the comparability of the information presented in the above tables,
certain reclassifications were reflected in the columns labeled “As Previously
Reported” in both the consolidated balance sheets and the consolidated
statements of cash flows. These reclassifications were made to identify balances
that were not previously presented as separate line items on our consolidated
balance sheets and statements of cash flows and to conform to the current period
classification and presentation. Such reclassifications had no impact on the
consolidated statements of earnings.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
The
following table sets forth the computation of basic and diluted earnings per
share:
| |
|
|
|
|
|
|
|
($
thousands, except per share amounts) |
2004 |
|
2003 |
|
2002 |
|
|
NUMERATOR |
|
|
|
|
|
|
|
|
|
|
Net
earnings |
$ |
43,305 |
|
$ |
46,236 |
|
$ |
44,158 |
|
|
DENOMINATOR
(thousand shares) |
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per common share |
|
17,917 |
|
|
17,677 |
|
|
17,367 |
|
|
Dilutive
effect of unvested restricted stock and stock options |
|
891 |
|
|
939 |
|
|
572 |
|
|
Denominator
for diluted earnings per common share |
|
18,808 |
|
|
18,616 |
|
|
17,939 |
|
|
Basic
earnings per common share |
$ |
2.42 |
|
$ |
2.62 |
|
$ |
2.54 |
|
|
Diluted
earnings per common share |
$ |
2.30 |
|
$ |
2.48 |
|
$ |
2.46 |
|
Options
to purchase 308,633, 34,982 and 311,325 shares of common stock in 2004, 2003 and
2002, respectively, were not included in the denominator for diluted earnings
per common share because their effect would be antidilutive.
Comprehensive
income includes changes in shareholders’ equity related to foreign currency
translation adjustments, unrealized gains and losses from derivatives used for
hedging activities and minimum pension liability adjustments.
The
following table sets forth the reconciliation from net earnings to comprehensive
income for the periods ended January 29, 2005, and January 31,
2004.
| |
|
|
|
|
|
|
|
($
thousands) |
2004 |
|
2003 |
|
2002 |
|
|
Net
earnings |
$ |
43,305 |
|
$ |
46,236 |
|
$ |
44,158 |
|
|
Other
comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment |
|
2,684 |
|
|
5,553 |
|
|
1,607 |
|
|
Minimum
pension liability adjustment |
|
(471 |
) |
|
- |
|
|
- |
|
|
Unrealized
losses on derivative instruments |
|
(154 |
) |
|
(1,199 |
) |
|
(4,278 |
) |
|
Net
loss from derivatives reclassified into earnings |
|
1,892 |
|
|
1,859 |
|
|
1,499 |
|
| |
|
3,951 |
|
|
6,213 |
|
|
(1,172 |
) |
|
Comprehensive
Income |
$ |
47,256 |
|
$ |
52,449 |
|
$ |
42,986 |
|
The
accumulated other comprehensive loss for the Company is comprised of cumulative
foreign currency gains (losses) of $0.6 million, $(2.1) million and $(7.6)
million in 2004, 2003 and 2002, respectively, unrealized losses on derivative
financial instruments used for hedging activities, net of related tax effect, of
$1.1 million, $2.8 million and $3.5 million in 2004, 2003 and 2002,
respectively, and a minimum pension liability adjustment, net of related tax
effect, of $0.5 million in 2004.
See
additional information related to derivative instruments in Note
12.
Closure
of Canadian Manufacturing Facility
In the
fourth quarter of 2003, the Company announced the closing of its last Canadian
footwear manufacturing factory located in Perth, Ontario, and recorded a pretax
charge of $4.5 million, the components of which are as follows:
●
Severance and benefit costs for approximately 300 factory employees — $2.3
million
●
Inventory markdowns to liquidate factory inventory — $1.6 million
● Cost to
buy out leases prior to their normal expiration date — $0.6 million
Of the
$4.5 million charge, $1.6 million was reflected in cost of goods sold, and $2.9
million was reflected in selling and administrative expenses. A tax benefit of
$1.8 million was associated with this charge.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
The
following is a summary of the activity in the reserve, by category of
costs:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
($
millions) |
Employee
Severance |
|
Inventory
Markdowns |
|
Lease
Buyouts |
|
Total |
|
|
Original
charge and reserve balance |
$ |
2.3 |
|
$ |
1.6 |
|
$ |
0.6 |
|
$ |
4.5 |
|
|
Adjustments |
|
(0.3 |
) |
|
0.4 |
|
|
(0.1 |
) |
|
- |
|
|
Expenditures
in 2004 |
|
(2.0 |
) |
|
(2.0 |
) |
|
(0.4 |
) |
|
(4.4 |
) |
|
Reserve
balance October 30, 2004 |
$ |
- |
|
$ |
- |
|
$ |
0.1 |
|
$ |
0.1 |
|
In March
2004, the manufacturing facility was closed. The Company anticipates that the
remaining lease buyout costs will be completed during 2005.
|
6. |
RETIREMENT
AND OTHER BENEFIT PLANS |
The
Company sponsors pension plans in both the United States and Canada. The
Company’s domestic pension plans cover substantially all United States
employees. Under the domestic plans, 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 Canadian pension plans cover certain employees based on
plan specifications. Under the Canadian plans, employees’ pension benefits are
based on the employee’s highest consecutive five years of compensation during
the ten years before retirement. The Company’s funding policy for all plans is
to make the minimum annual contributions required by applicable regulations. The
Company uses a measurement date of December 31 for its pension and
postretirement plans.
The
Company also maintains an unfunded Supplemental Executive Retirement Plan
(SERP). As of January 29, 2005, the projected benefit obligation of this plan
was $13.9 million, and the accumulated benefit obligation was $9.7 million. The
Company has recognized a minimum pension liability adjustment during 2004 of
$0.7 million ($0.5 million on an after-tax basis) as a component of accumulated
other comprehensive income.
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 $38,000 for qualifying retired employees.
Benefit
Obligations
The
following table sets forth changes in benefit obligations, including all
domestic and Canadian plans:
| |
|
|
|
| |
Pension
Benefits |
|
Other
Postretirement
Benefits |
|
($
thousands) |
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
Benefit
obligation at beginning of year |
$ |
139,095 |
|
$ |
126,353 |
|
$ |
4,801 |
|
$ |
4,732 |
|
|
Service
cost |
|
6,176 |
|
|
5,269 |
|
|
- |
|
|
- |
|
|
Interest
cost |
|
8,699 |
|
|
7,999 |
|
|
261 |
|
|
272 |
|
|
Plan
participants’ contribution |
|
26 |
|
|
35 |
|
|
94 |
|
|
175 |
|
|
Plan
amendments |
|
46 |
|
|
120 |
|
|
- |
|
|
- |
|
|
Actuarial
loss (gain) |
|
10,246 |
|
|
6,854 |
|
|
(71 |
) |
|
10 |
|
|
Benefits
paid |
|
(7,600 |
) |
|
(8,256 |
) |
|
(419 |
) |
|
(388 |
) |
|
Special
termination benefits |
|
56 |
|
|
- |
|
|
- |
|
|
- |
|
|
Curtailment
gain |
|
(96 |
) |
|
- |
|
|
- |
|
|
- |
|
|
Foreign
exchange rate changes |
|
398 |
|
|
721 |
|
|
- |
|
|
- |
|
|
Benefit
obligation at end of year |
$ |
157,046 |
|
$ |
139,095 |
|
$ |
4,666 |
|
$ |
4,801 |
|
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
The
accumulated benefit obligation for the United States pension plans was $137.6
million and $119.6 million as of January 29, 2005, and January 31, 2004,
respectively. The accumulated benefit obligation for the Canadian pension plans
was $5.6 million and $4.9 million as of January 29, 2005, and January 31, 2004,
respectively.
| |
|
|
|
| |
Pension
Benefits |
|
Other
Postretirement
Benefits |
|
Weighted
Average Assumptions
Used
to Determine Benefit Obligations, End of Year |
2004 |
|
2003 |
|
2004 |
|
2003 |
|
Discount
rate |
|
5.75% |
|
|
6.00% |
|
|
5.75% |
|
|
6.00% |
|
|
Rate
of compensation increase |
|
4.00% |
|
|
4.25% |
|
|
N/A |
|
|
N/A |
|
Assumed
health care cost trend rates have a minor effect on the benefit obligations
reported for health care plans. A 1-percentage-point change in the assumed
health care cost trend rates would have the following effect:
| |
|
|
|
|
|
($
thousands) |
1-Percentage-
Point
Increase |
|
1-Percentage-
Point
Decrease |
|
|
Effect
on postretirement benefit obligation |
$11 |
|
$(10 |
) |
Plan
Assets
The
following table sets forth changes in the fair value of plan assets, including
all domestic and Canadian plans:
| |
|
|
|
|
| |
Pension
Benefits |
|
Other
Postretirement
Benefits |
|
|
($
thousands) |
2004 |
|
2003 |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year |
$ |
191,551 |
|
$ |
163,238 |
|
$ |
- |
|
$ |
- |
|
|
Actual
return on plan assets |
|
25,901 |
|
|
35,695 |
|
|
- |
|
|
- |
|
|
Employer
contributions |
|
31 |
|
|
31 |
|
|
325 |
|
|
213 |
|
|
Plan
participants’ contributions |
|
26 |
|
|
35 |
|
|
94 |
|
|
175 |
|
|
Benefits
paid |
|
(7,600 |
) |
|
(8,256 |
) |
|
(419 |
) |
|
(388 |
) |
|
Foreign
exchange rate changes |
|
439 |
|
|
808 |
|
|
- |
|
|
- |
|
|
Fair
value of plan assets at end of year |
$ |
210,348 |
|
$ |
191,551 |
|
$ |
- |
|
$ |
- |
|
Employer
contributions and benefits paid in the above table include both those amounts
contributed directly to and paid directly from plan assets and those amounts
paid directly to plan participants.
The asset
allocation for the Brown Shoe Company, Inc. Retirement Plan at the end of 2004
and 2003 and the target allocation for 2005, by asset category, are as
follows:
| |
|
|
|
|
| |
Target
Allocation
for 2005 |
|
Percentage
of Plan
Assets
at Year-End |
|
| |
|
|
2004 |
|
2003 |
|
|
Asset
Category |
|
|
|
|
|
|
|
Domestic
equities |
65% |
|
64% |
|
67% |
|
|
Debt
securities |
30% |
|
31% |
|
29% |
|
|
Foreign
equities |
5% |
|
5% |
|
4% |
|
|
Total |
100% |
|
100% |
|
100% |
|
Domestic
equities do not include any Company stock at January 29, 2005, or January 31,
2004. Plan assets are valued at fair value based on quoted market
values.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Pension
assets are managed in accordance with the “prudent investor” standards of ERISA.
The plan’s investment objective is to earn a competitive total return on assets,
while also ensuring plan assets are adequately managed to provide for future
pension obligations. This results in the protection of plan surplus and is
accomplished by matching the duration of the projected benefit obligation using
leveraged fixed income instruments and, while maintaining a 70% overall (U.S.
and international) equity commitment, managing an equity overlay strategy. The
overlay strategy is intended to protect the managed equity portfolios against
adverse stock market environments. The Company delegates investment management
to specialists in each asset class and regularly monitors manager performance
and compliance with investment guidelines.
Assets of
the Canadian pension plans, which total approximately $6.8 million at January
29, 2005, were invested 58% in equity funds, 39% in bond funds and 3% in money
market funds. The Canadian pension plans did not include any Company stock as of
January 29, 2005, or January 31, 2004.
Funded
Status
The
following table reconciles the funded status of all plans, including domestic
and Canadian plans:
| |
|
|
|
|
| |
Pension
Benefits |
|
Other
Postretirement
Benefits |
|
|
($
thousands) |
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
Over
(under) funded status at end of year |
$ |
53,302 |
|
$ |
52,456 |
|
$ |
(4,666 |
) |
$ |
(4,801 |
) |
|
Unrecognized
net actuarial (gain) loss |
|
(5,770 |
) |
|
(4,928 |
) |
|
(55 |
) |
|
(136 |
) |
|
Unrecognized
prior service cost |
|
1,306 |
|
|
1,574 |
|
|
- |
|
|
(1 |
) |
|
Unrecognized
net transition obligation (asset) |
|
(1,101 |
) |
|
(1,203 |
) |
|
- |
|
|
- |
|
|
Net
amount recognized at end of year |
$ |
47,737 |
|
$ |
47,899 |
|
$ |
(4,721 |
) |
$ |
(4,938 |
) |
Amounts
recognized in the consolidated balance sheets consist of:
| |
|
|
|
|
| |
Pension
Benefits |
|
Other
Postretirement
Benefits |
|
|
($
thousands) |
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
Prepaid
benefit cost |
$ |
55,915 |
|
$ |
53,876 |
|
$ |
- |
|
$ |
- |
|
|
Accrued
benefit cost |
|
(9,650 |
) |
|
(5,977 |
) |
|
(4,721 |
) |
|
(4,938 |
) |
|
Intangible
asset |
|
723 |
|
|
- |
|
|
- |
|
|
- |
|
|
Accumulated
other comprehensive income |
|
749 |
|
|
- |
|
|
- |
|
|
- |
|
|
Net
amount recognized at end of year |
$ |
47,737 |
|
$ |
47,899 |
|
$ |
(4,721 |
) |
$ |
(4,938 |
) |
The
projected benefit obligation, the accumulated benefit obligation and the fair
value of plan assets for pension plans with a projected benefit obligation in
excess of plan assets and for pension plans with an accumulated benefit
obligation in excess of plan assets, which includes only the Company’s SERP,
were as follows:
| |
|
|
|
|
| |
Projected
Benefit
Obligation
Exceeds the
Fair
Value of Plan Assets |
|
Accumulated
Benefit
Obligation
Exceeds the
Fair
Value of Plan Assets |
|
|
($
thousands) |
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
End
of Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
benefit obligation |
$ |
13,920 |
|
$ |
10,621 |
|
$ |
13,920 |
|
$ |
10,621 |
|
|
Accumulated
benefit obligation |
|
9,650 |
|
|
5,587 |
|
|
9,650 |
|
|
5,587 |
|
|
Fair
value of plan assets |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
The
accumulated postretirement benefit obligation exceeds assets for all of the
Company’s other postretirement benefit plans.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Net
Periodic Benefit Cost
Net
periodic benefit cost (income) for 2004, 2003 and 2002 for all domestic and
Canadian plans included the following components:
| |
|
|
|
| |
Pension
Benefits |
|
Other
Postretirement Benefits |
|
($
thousands) |
2004 |
|
2003 |
|
2002 |
|
2004 |
|
2003 |
|
2002 |
|
|
Service
cost |
$ |
6,176 |
|
$ |
5,269 |
|
$ |
4,675 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
|
Interest
cost |
|
8,699 |
|
|
7,999 |
|
|
7,694 |
|
|
261 |
|
|
272 |
|
|
299 |
|
|
Expected
return on assets |
|
(15,315 |
) |
|
(14,810 |
) |
|
(13,575 |
) |
|
- |
|
|
- |
|
|
- |
|
|
Amortization
of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial
(gain) loss |
|
538 |
|
|
380 |
|
|
172 |
|
|
(141 |
) |
|
(194 |
) |
|
(319 |
) |
|
Prior
service cost |
|
314 |
|
|
313 |
|
|
235 |
|
|
- |
|
|
(105 |
) |
|
(209 |
) |
|
Net
transition asset |
|
(177 |
) |
|
(166 |
) |
|
(147 |
) |
|
- |
|
|
- |
|
|
- |
|
|
Settlement
cost |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
Total
net periodic benefit cost (income) |
$ |
235 |
|
$ |
(1,015 |
) |
$ |
(946 |
) |
$ |
120 |
|
$ |
(27 |
) |
$ |
(229 |
) |
| |
|
|
|
| |
Pension Benefits |
|
Other Postretirement Benefits |
|
Weighted Average Assumptions Used to Determine Net
Cost |
2004 |
|
2003 |
|
2002 |
|
2004 |
|
2003 |
|
2002 |
|
|
Discount rate |
6.00% |
|
6.25% |
|
6.75% |
|
6.00% |
|
6.25% |
|
6.75% |
|
|
Rate of compensation increase |
4.00% |
|
4.25% |
|
4.50% |
|
N/A |
|
N/A |
|
N/A |
|
|
Expected return on plan assets |
9.00% |
|
9.00% |
|
9.00% |
|
N/A |
|
N/A |
|
N/A |
|
|
Health care cost trend on covered charges |
N/A |
|
N/A |
|
N/A |
|
8.00% |
|
8.00% |
|
8.00% |
|
The prior
service cost is amortized on a straight-line basis over the average future
service of active plan participants benefiting under the plan at the time of
each plan amendment. The net actuarial loss (gain) subject to amortization is
amortized on a straight-line basis over the average future service of active
plan participants as of the measurement date. The net transition asset is
amortized over the estimated service life.
The
expected long-term rate of return on plan assets is based on historical and
projected rates of return for current and planned asset classes in the plan’s
investment portfolio. Assumed projected rates of return for each asset class
were selected after analyzing experience and future expectations of the returns.
The overall expected rate of return for the portfolio was developed based on the
target allocation for each asset class.
Assumed
health care cost trend rates have a negligible effect on the cost reported for
health care plans.
Expected
Cash Flows
Information
about expected cash flows for all pension and postretirement benefit plans
follows:
| |
|
|
|
|
| |
Pension
Benefits |
|
|
|
|
($
thousands) |
Funded
Plans |
|
|
SERP |
|
|
Total |
|
|
Other
Postretirement
Benefits |
|
|
Employer
Contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
expected contributions to plan trusts |
$ |
60 |
|
$ |
- |
|
$ |
60 |
|
|
$ |
- |
|
|
2005
expected contributions to plan participants |
|
- |
|
|
300 |
|
|
300 |
|
|
|
500 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
Benefit Payments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
$ |
7,547 |
|
$ |
300 |
|
$ |
7,847 |
|
|
$ |
500 |
|
|
2006 |
|
7,179 |
|
|
100 |
|
|
7,279 |
|
|
|
500 |
|
|
2007 |
|
7,380 |
|
|
100 |
|
|
7,480 |
|
|
|
500 |
|
|
2008 |
|
7,582 |
|
|
2,900 |
|
|
10,482 |
|
|
|
500 |
|
|
2009 |
|
7,885 |
|
|
800 |
|
|
8,685 |
|
|
|
400 |
|
|
2010
- 2014 |
|
44,294 |
|
|
16,300 |
|
|
60,594 |
|
|
|
1,800 |
|
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Defined
Contribution Plans
The
Company’s domestic defined contribution 401(k) plan covers salaried and certain
hourly employees. Company contributions represent a partial matching of employee
contributions generally up to a maximum of 3.5% of the employee’s salary. The
Company’s expense for this plan was $2.8 million, $3.0 million and $2.4 million
in 2004, 2003 and 2002, respectively.
The
Company’s Canadian defined contribution plan covers certain salaried and hourly
employees. The Company makes contributions for all eligible employees, ranging
from 3% to 8% of the employee’s salary. In addition, eligible employees may
voluntarily contribute to the plan. The Company’s expense for this plan was $0.2
million, $0.2 million and $0.1 million in 2004, 2003 and 2002,
respectively.
The
components of earnings before income taxes consisted of domestic earnings before
income taxes of $31.9 million, $43.6 million and $29.6 million in 2004, 2003 and
2002, respectively, and foreign earnings before income taxes of $24.4 million,
$20.0 million and $30.2 million in 2004, 2003 and 2002, respectively.
The
components of income tax provision (benefit) on earnings were as
follows:
| |
|
|
|
|
|
|
|
($
thousands) |
2004 |
|
2003 |
|
2002 |
|
|
FEDERAL |
|
|
|
|
|
|
|
|
|
|
Current |
$ |
14,706 |
|
$ |
11,749 |
|
$ |
6,669 |
|
|
Deferred |
|
(3,846 |
) |
|
6,319 |
|
|
4,948 |
|
| |
|
10,860 |
|
|
18,068 |
|
|
11,617 |
|
|
STATE |
|
347 |
|
|
761 |
|
|
2,456 |
|
|
FOREIGN |
|
1,775 |
|
|
(1,499 |
) |
|
1,591 |
|
|
Total
income tax provision |
$ |
12,982 |
|
$ |
17,330 |
|
$ |
15,664 |
|
The
Company made federal, state and foreign tax payments, net of refunds, of $10.4
million, $12.9 million and $1.8 million in 2004, 2003 and 2002,
respectively.
The
differences between the tax expense reflected in the financial statements and
the amounts calculated at the federal statutory income tax rate of 35% were as
follows:
| |
|
|
|
|
|
|
|
($
thousands) |
2004 |
|
2003 |
|
2002 |
|
|
Income
taxes at statutory rate |
$ |
19,700 |
|
$ |
22,248 |
|
$ |
20,938 |
|
|
State
income taxes, net of federal tax benefit |
|
226 |
|
|
495 |
|
|
1,596 |
|
|
Foreign
earnings taxed at lower rates |
|
(5,423 |
) |
|
(5,616 |
) |
|
(7,874 |
) |
|
Operating
loss of majority-owned subsidiary
with
no tax benefit |
|
- |
|
|
66 |
|
|
396 |
|
|
Other |
|
(1,521 |
) |
|
137 |
|
|
608 |
|
|
Total
income tax provision (benefit) |
$ |
12,982 |
|
$ |
17,330 |
|
$ |
15,664 |
|
The Other
category of income tax provision includes $1.0 million of tax benefit recorded
in 2004, related to the elimination of the Company’s valuation allowance
associated with its foreign tax credit carryforwards. On October 22, 2004, the
American Jobs Creation Act of 2004 (the “Jobs Creation Act”) was signed into
law. The Jobs Creation Act extends the time in which foreign tax credit
carryforwards can be utilized for federal income tax purposes from a five-year
period to a ten-year period. As a result of this change, the Company expects to
fully utilize its foreign tax credit carryforwards.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Significant
components of the Company’s deferred income tax assets and liabilities were as
follows:
| |
|
|
|
|
|
($
thousands) |
January
29, 2005 |
|
January
31, 2004 |
|
|
Deferred
Tax Assets |
|
|
|
|
|
|
|
Employee
benefits, compensation and insurance |
$ |
8,021 |
|
$ |
8,412 |
|
|
Accrued
expenses |
|
7,031 |
|
|
4,727 |
|
|
Foreign
tax credit carryforwards |
|
6,696 |
|
|
6,173 |
|
|
Postretirement
and postemployment benefit plans |
|
2,385 |
|
|
2,620 |
|
|
Deferred
rent |
|
3,664 |
|
|
4,444 |
|
|
Allowance
for doubtful accounts |
|
1,664 |
|
|
2,525 |
|
|
Depreciation |
|
1,150 |
|
|
3,585 |
|
|
Net
operating loss (NOL) carryforward |
|
4,065 |
|
|
2,507 |
|
|
Unrealized
loss on derivative activities |
|
606 |
|
|
1,393 |
|
|
Inventory
capitalization and inventory reserves |
|
2,212 |
|
|
999 |
|
|
Other |
|
4,414 |
|
|
3,278 |
|
|
Total
deferred tax assets, before valuation allowance |
|
41,908 |
|
|
40,663 |
|
|
Valuation
allowance for NOL carryforward |
|
(2,378 |
) |
|
(2,507 |
) |
|
Total
deferred tax assets, net of valuation allowance |
|
39,530 |
|
|
38,156 |
|
|
Deferred
Tax Liabilities |
|
|
|
|
|
|
|
Retirement
plans |
|
(16,223 |
) |
|
(16,544 |
) |
|
LIFO
inventory valuation |
|
(11,757 |
) |
|
(14,051 |
) |
|
Other |
|
(1,391 |
) |
|
(1,275 |
) |
|
Total
deferred tax liabilities |
|
(29,371 |
) |
|
(31,870 |
) |
|
Net
deferred tax asset |
$ |
10,159 |
|
$ |
6,286 |
|
At the
end of 2004, the Company had foreign tax credit carryforwards of $6.7 million,
which expire in fiscal 2011. No valuation allowance is deemed necessary for the
foreign tax credit carryforward, as management believes it is more likely than
not the foreign tax credit will be fully realized. At the end of 2004, the
Company had a net operating loss carryforward with a tax value of $2.4 million,
related to a majority-owned subsidiary, which expires in fiscal 2019. A
valuation allowance of $2.4 million has been established to fully reserve this
deferred tax asset. At the end of 2004, the Company had a net operating loss
carryforward with a tax value of $1.7 million, related to its Canadian
operations, which expires in fiscal 2010. No valuation allowance is deemed
necessary for this net operating loss carryforward, as management believes it is
more likely than not the net operating loss carryforward will be fully
realized.
As of
January 29, 2005, no deferred taxes have been provided on the accumulated
unremitted earnings of the Company’s foreign subsidiaries that are not subject
to United States income tax. At January 29, 2005, the Company had $79.4 million
of cash and cash equivalents, which represents cash and cash equivalents of our
Canadian and other foreign subsidiaries. Our intention is to maintain this cash
within our foreign operations indefinitely or to repatriate it only when it is
tax-effective to do so. On October 22, 2004, the Jobs Creation Act was signed
into law. The Jobs Creation Act provides for a special tax reduction for certain
foreign earnings that are repatriated to the United States if certain conditions
are met. Based on initial estimates, the Company may be able to repatriate
approximately $70 million to $80 million, which would generate tax expense of
approximately $10 million. However, the ultimate amount of tax expense could
vary. We are evaluating the terms of the Jobs Creation Act, but, as of January
29, 2005, have made no decisions regarding repatriation and, accordingly, have
not provided deferred taxes on unremitted foreign earnings. The Company will
make its decision regarding repatriation during 2005. If these amounts were not
considered indefinitely reinvested, additional deferred taxes of approximately
$32.6 million would have been provided.
|
8. |
BUSINESS
SEGMENT INFORMATION |
The
Company’s reportable segments include Famous Footwear, Wholesale operations,
Specialty Retail and Other.
Famous
Footwear, which represents the Company’s largest division, operated 919 stores
at the end of 2004, primarily selling branded footwear for the entire
family.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Wholesale
Operations source and market branded, licensed and private-label footwear
primarily to department stores, mass merchandisers, independent retailers and
Company-owned Naturalizer Retail and Famous Footwear stores. Beginning in 2004,
the Company began accounting for its Irish financing subsidiary, Brown Group
Dublin Limited, which holds cash and short-term investments relating to offshore
earnings other than in Canada, within the Other segment. Brown Group Dublin
Limited had previously been accounted for within the Wholesale Operations
segment. Prior year amounts have been reclassified to conform to the current
year presentation. This reclassification resulted in a transfer of operating
earnings of $0.2 million from the Wholesale Operations segment to the Other
segment in both 2003 and 2002. The reclassification also resulted in a transfer
of assets of $52.0 million and $30.4 million at January 31, 2004, and February
1, 2003, respectively, to the Other segment. This reclassification had no effect
on consolidated operating earnings or consolidated assets.
The
Specialty Retail operations include 204 stores in the United States and 171
stores in Canada at year-end, selling primarily Naturalizer brand footwear in
regional malls and outlet centers. The Company renamed its former “Naturalizer
Retail” segment to “Specialty Retail” during 2004. The composition of the
segment has not changed.
The Other
segment includes the corporate assets and administrative and other expenses
which are not allocated to the operating units. It also includes the Company’s
investment in its majority-owned subsidiary, Shoes.com, Inc., a footwear
e-commerce company.
The
Company’s reportable segments are operating units that market to different
customers and are each managed separately as they distribute their products on a
retail or wholesale basis. An operating segment’s performance is evaluated and
resources are allocated based on operating earnings. Operating earnings
represent gross profit less selling and administrative expenses and, in 2004 and
2003, a provision for environmental litigation costs. The accounting policies of
the reportable segments are the same as those described in Note 1. Intersegment
sales are generally recorded at a profit to the selling division. All
intersegment earnings related to inventory on hand at the purchasing division
are eliminated against the earnings of the selling division.
| |
|
|
|
|
|
|
|
|
|
|
|
($
thousands) |
Famous
Footwear |
|
Wholesale
Operations |
|
Specialty
Retail |
|
Other |
|
Total |
|
|
Fiscal
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
sales |
$ |
1,116,686 |
|
$ |
615,884 |
|
$ |
191,577 |
|
$ |
17,657 |
|
$ |
1,941,804 |
|
|
Intersegment
sales |
|
1,589 |
|
|
160,861 |
|
|
- |
|
|
- |
|
|
162,450 |
|
|
Depreciation
and amortization |
|
22,319 |
|
|
1,349 |
|
|
6,047 |
|
|
2,195 |
|
|
31,910 |
|
|
Operating
earnings (loss) |
|
60,290 |
|
|
44,877 |
|
|
(11,034 |
) |
|
(30,365 |
) |
|
63,768 |
|
|
Operating
segment assets |
|
385,981 |
|
|
242,775 |
|
|
65,060 |
|
|
152,318 |
|
|
846,134 |
|
|
Capital
expenditures |
|
34,117 |
|
|
2,934 |
|
|
6,903 |
|
|
2,273 |
|
|
46,227 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
sales |
$ |
1,073,611 |
|
$ |
561,288 |
|
$ |
189,195 |
|
$ |
8,014 |
|
$ |
1,832,108 |
|
|
Intersegment
sales |
|
1,090 |
|
|
138,224 |
|
|
- |
|
|
- |
|
|
139,314 |
|
|
Depreciation
and amortization |
|
22,561 |
|
|
1,244 |
|
|
4,624 |
|
|
2,251 |
|
|
30,680 |
|
|
Operating
earnings (loss) |
|
51,830 |
|
|
55,808 |
|
|
(3,908 |
) |
|
(30,845 |
) |
|
72,885 |
|
|
Operating
segment assets |
|
356,635 |
|
|
201,474 |
|
|
59,793 |
|
|
121,152 |
|
|
739,054 |
|
|
Capital
expenditures |
|
26,273 |
|
|
2,878 |
|
|
4,851 |
|
|
1,106 |
|
|
35,108 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
sales |
$ |
1,075,193 |
|
$ |
566,410 |
|
$ |
195,426 |
|
$ |
4,414 |
|
$ |
1,841,443 |
|
|
Intersegment
sales |
|
687 |
|
|
136,527 |
|
|
- |
|
|
- |
|
|
137,214 |
|
|
Depreciation
and amortization |
|
20,215 |
|
|
2,585 |
|
|
4,137 |
|
|
1,850 |
|
|
28,787 |
|
|
Operating
earnings (loss) |
|
44,674 |
|
|
54,543 |
|
|
1,366 |
|
|
(28,927 |
) |
|
71,656 |
|
|
Operating
segment assets |
|
380,533 |
|
|
197,010 |
|
|
66,904 |
|
|
90,622 |
|
|
735,069 |
|
|
Capital
expenditures |
|
25,016 |
|
|
1,844 |
|
|
5,156 |
|
|
210 |
|
|
32,226 |
|
Following
is a reconciliation of operating earnings to earnings before income
taxes:
| |
|
|
|
|
|
|
|
($
thousands) |
2004 |
|
2003 |
|
2002 |
|
|
Total
operating earnings |
$ |
63,768 |
|
$ |
72,885 |
|
$ |
71,656 |
|
|
Interest
expense |
|
(8,410 |
) |
|
(9,781 |
) |
|
(12,236 |
) |
|
Interest
income |
|
929 |
|
|
462 |
|
|
402 |
|
|
Earnings
before income taxes |
$ |
56,287 |
|
$ |
63,566 |
|
$ |
59,822 |
|
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
In 2004,
the impact of special charges and costs included in operating earnings was as
follows:
●
Wholesale Operations — $5.6 million in transition and assimilation costs related
to the acquisition of the Bass footwear license
● Other —
$3.5 million charge related to the Company’s guarantee of an Industrial
Development Bond in Pennsylvania for a business it had divested in 1985; $2.4
million related to the insolvency of an insurance company which is now in
liquidation that insured the Company for workers’ compensation and casualty
losses from 1973 to 1989; $1.7 million for severance and benefit costs related
to the reductions in our workforce across the Company
In 2003,
the impact of special charges included in operating earnings was as
follows:
●
Wholesale Operations — $4.3 million charge related to costs to close a Canadian
manufacturing facility
●
Specialty Retail — $0.2 million charge related to costs to close a Canadian
manufacturing facility
● Other —
$3.1 million related to the Company’s class action litigation related to its
Redfield facility in Denver, Colorado, and related costs, including the verdict,
anticipated pretrial interest and sanction costs
In 2002,
the impact of the recoveries from special charges recorded in 2001 included in
operating earnings was as follows:
●
Specialty Retail — $0.9 million of excess store closing reserve
● Other —
$1.1 million of excess severance reserve
For
geographic purposes, the domestic operations include the wholesale distribution
of branded, licensed and private-label footwear to a variety of retail customers
and nationwide operation of our retail chains, including Famous Footwear and
Specialty Retail.
The
Company’s foreign operations primarily consist of wholesale distribution
operations in the Far East and wholesale and retail operations in Canada. The
Far East operations include “first-cost” transactions, where footwear is sold at
foreign ports to customers who then import the footwear into the United States
and other countries.
A summary
of the Company’s net sales and long-lived assets by geographic area were as
follows:
| |
|
|
|
|
|
|
|
($
thousands) |
2004 |
|
2003 |
|
2002 |
|
|
Net
Sales |
|
|
|
|
|
|
|
|
|
|
United
States |
$ |
1,615,735 |
|
$ |
1,500,936 |
|
$ |
1,494,506 |
|
|
Far
East |
|
261,154 |
|
|
258,724 |
|
|
277,314 |
|
|
Canada |
|
80,382 |
|
|
77,154 |
|
|
71,151 |
|
|
Latin
America, Europe and other |
|
- |
|
|
54 |
|
|
247 |
|
|
Inter-area
sales |
|
(15,467 |
) |
|
(4,760 |
) |
|
(1,775 |
) |
| |
$ |
1,941,804 |
|
$ |
1,832,108 |
|
$ |
1,841,443 |
|
|
Long-Lived
Assets |
|
|
|
|
|
|
|
|
|
|
United
States |
$ |
192,842 |
|
$ |
182,775 |
|
$ |
184,082 |
|
|
Far
East |
|
13,873 |
|
|
12,820 |
|
|
11,077 |
|
|
Canada |
|
16,244 |
|
|
15,638 |
|
|
13,333 |
|
|
Latin
America, Europe and other |
|
336 |
|
|
362 |
|
|
334 |
|
| |
$ |
223,295 |
|
$ |
211,595 |
|
$ |
208,826 |
|
Long-lived
assets consisted primarily of property and equipment, prepaid pension costs,
goodwill, trademarks and other noncurrent assets.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
|
9. |
PROPERTY
AND EQUIPMENT |
Property
and equipment consisted of the following:
| |
|
|
|
|
|
($
thousands) |
January
29, 2005 |
|
January
31, 2004 |
|
|
Land
and buildings |
$ |
31,115 |
|
$ |
30,944 |
|
|
Leasehold
improvements |
|
138,310 |
|
|
117,440 |
|
|
Technology
equipment |
|
33,895 |
|
|
27,289 |
|
|
Machinery
and equipment |
|
24,659 |
|
|
24,319 |
|
|
Furniture
and fixtures |
|
107,298 |
|
|
101,903 |
|
|
Construction
in progress |
|
3,861 |
|
|
6,009 |
|
| |
|
339,138 |
|
|
307,904 |
|
|
Allowances
for depreciation and amortization |
|
(224,744 |
) |
|
(204,280 |
) |
| |
$ |
114,394 |
|
$ |
103,624 |
|
Useful
lives of property and equipment are as follows:
| |
|
|
Buildings |
15-30
years |
|
Leasehold
improvements |
5-20
years |
|
Technology
equipment |
3-5
years |
|
Machinery
and equipment |
8-20
years |
|
Furniture
and fixtures |
3-10
years |
Selling
and administrative expenses include charges for impaired assets of $3.1 million,
$3.7 million and $2.5 million, which were recognized in 2004, 2003 and 2002,
respectively. Fair value was based on estimated future cash flows to be
generated by retail stores, discounted at a market rate of
interest.
|
10. |
LONG-TERM
AND SHORT-TERM FINANCING
ARRANGEMENTS |
In
December 2001, the Company entered into a five-year, secured $350 million
revolving bank Credit Agreement. The Company entered into an Amended and
Restated Credit Agreement (the “Agreement”) effective July 21, 2004, which
amended and restated its existing $350 million revolving bank Credit Agreement.
The Agreement provides for a maximum line of credit of $350 million, subject to
the calculated borrowing base restrictions. In addition to extending the credit
term, the Agreement also provides other benefits to the Company, including
expanding the definition of eligible inventory in certain circumstances and
reducing the interest rate spread paid on outstanding borrowings. Borrowing
Availability under the Agreement is based upon the sum of eligible accounts
receivable and inventory, less outstanding borrowings, letters of credit and
applicable reserves. The Agreement matures on July 21, 2009 and the Company’s
obligations are secured by accounts receivable and inventory of the Company and
its wholly owned domestic and Canadian subsidiaries. Borrowings under the
Agreement bear interest at a variable rate determined based upon the level of
Availability under the Agreement. If Availability falls below specified levels,
the Company may be required to reclassify all borrowings under the Agreement to
a current liability. Certain covenants would be triggered if Availability were
to fall below specified levels, including fixed charge coverage requirements. In
addition, if Availability falls below $25 million and the fixed charge coverage
ratio is less than 1.0 to 1, the Company would be in default. The Agreement also
contains certain other covenants and restrictions. Interest on borrowings is at
variable rates based on the LIBOR rate or the base rate, as defined. There is a
fee payable on the unused amount of the facility.
In
connection with amending the Agreement, the Company incurred approximately $1.3
million of issuance costs during 2004, which, together with remaining
unamortized debt issuance costs of approximately $2.7 million associated with
the original bank credit agreement, are now being amortized over the five-year
term of the Agreement.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
At
January 29, 2005, the Company had $142.0 million of borrowings outstanding and
$16.2 million in letters of credit outstanding under the revolving bank credit
agreement. Total additional borrowing Availability was approximately $173
million at the end of 2004. Of these borrowings, $50 million has been classified
as long-term on the balance sheet, as the Company does not expect these to be
repaid in 2005. The Company has an interest rate swap agreement, with a notional
amount of $50 million expiring in October 2006, that converts variable rate
interest payable on $50 million of long-term borrowings under the revolving
credit agreement to a fixed rate of 6.53%. See Note 12 for further information
related to the interest rate swap agreement. The other $92.0 million of
borrowings under the revolving bank credit agreement (classified as current
maturities of long-term debt on the balance sheet) has an average interest rate
of 4.11%.
The
maximum amount of short-term borrowings under the current revolving bank credit
arrangement at the end of any month was $92.0 million in 2004 and $53.0 million
in 2003. The average daily borrowings during the year were $129.8 million in
2004 and $132.4 million in 2003. The weighted average short-term interest rates
approximated 3.8% in 2004 and 2003.
Cash
payments of interest for 2004, 2003 and 2002 were $8.5 million, $10.2 million
and $12.9 million, respectively.
In the
fourth quarter of 2003, the Company redeemed its capitalized lease obligation of
$3.5 million, which was scheduled to mature in October 2009.
The
Company leases all of its retail locations and certain office locations,
distribution centers and equipment. The minimum lease terms for our retail
stores generally range from five to ten years. The term of the leases for the
office facilities and distribution centers averages approximately 20 years.
Approximately one-half of the retail store leases are subject to renewal options
for varying periods. The office and distribution centers have renewal options of
15 to 20 years. In addition to minimum rental payments, certain of the retail
store leases require contingent payments based on sales levels.
Rent
expense for operating leases was:
| |
|
|
|
|
|
|
|
($
thousands) |
2004 |
|
2003 |
|
2002 |
|
|
Minimum
rents |
$ |
123,325 |
|
$ |
119,310 |
|
$ |
116,089 |
|
|
Contingent
rents |
|
707 |
|
|
469 |
|
|
699 |
|
| |
$ |
124,032 |
|
$ |
119,779 |
|
$ |
116,788 |
|
Future
minimum payments under noncancelable operating leases with an initial term of
one year or more were as follows at January 29, 2005:
| |
|
|
|
|
($
thousands) |
|
|
|
|
2005 |
$ |
121,033 |
|
|
2006 |
|
102,117 |
|
|
2007 |
|
88,421 |
|
|
2008 |
|
73,953 |
|
|
2009 |
|
58,709 |
|
|
Thereafter |
|
125,313 |
|
|
Total
minimum operating lease payments |
$ |
569,546 |
|
|
12. |
DERIVATIVE
FINANCIAL INSTRUMENTS |
The
Company uses derivative financial instruments, primarily foreign exchange
contracts and interest rate swaps, to reduce its exposure to market risks from
changes in foreign exchange rates and interest rates. These derivatives,
designated as cash flow hedges, are used to hedge the procurement of footwear
from foreign countries and the variability of cash flows paid on variable rate
debt. The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to these financial instruments. Counterparties
to these agreements are, however, major international financial institutions,
and the risk of loss due to nonperformance is believed to be minimal.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
The
Company enters into foreign exchange instruments, designated as cash flow
hedges, to hedge foreign currency transactions primarily related to the purchase
of inventory, as well as to fund foreign office expenses and royalty income
denominated in foreign currencies. The Company enters into instruments that
mature at the same time the transactions denominated in the same currency are
scheduled or expected to occur. The term of the instruments is generally less
than one year. As such, the unrealized gains or losses associated with these
instruments are deferred and recognized in other comprehensive income until such
time as the hedged item affects earnings. Continuous monitoring of the
outstanding instruments is performed, and if some portion of the instruments is
deemed ineffective, the changes in fair value are immediately recognized in
earnings. Unrealized gains and losses on these instruments are included in other
assets or other accrued expenses, as applicable, on the consolidated balance
sheets. Gains and losses on these instruments are reclassified to net sales,
cost of goods sold or selling and administrative expenses, consistent with the
recognition in net earnings and classification of the underlying hedged
transaction.
The
Company’s outstanding derivative financial instruments related to foreign
exchange risk consisted of the following:
| |
|
|
|
|
|
(U.S.
$ thousands) |
January
29, 2005 |
|
January
31, 2004 |
|
|
Deliverable
Financial Instruments |
|
|
|
|
|
|
|
United
States dollars (purchased by our Canadian division with Canadian
dollars) |
$ |
15,600 |
|
$ |
11,500 |
|
|
Euro |
|
8,000 |
|
|
9,800 |
|
|
Japanese
yen and other currencies |
|
1,300 |
|
|
1,100 |
|
| |
|
|
|
|
|
|
|
Non-Deliverable
Financial Instruments |
|
|
|
|
|
|
|
New
Taiwanese dollars |
|
4,300 |
|
|
2,400 |
|
| |
$ |
29,200 |
|
$ |
24,800 |
|
Unrealized
(losses) gains related to these instruments, based on dealer-quoted prices, were
$(0.2) million and $0.1 million at January 29, 2005 and January 31, 2004,
respectively. We expect to reclassify this unrealized loss from other
comprehensive income to net earnings in 2005.
At the
end of 2004, the Company had an interest rate swap agreement, expiring in
October 2006, that converts variable rate interest payable on $50 million of
long-term borrowings under its revolving bank credit agreement to a fixed rate
of 6.53%. At the end of 2003, the Company had interest rate swap agreements
converting variable rate interest payable for a total of $100 million of
long-term borrowings under its revolving bank credit agreement to a fixed rate
of 6.88%. Unrealized losses on the swap agreements, based on order-quoted
prices, were $1.4 million at January 29, 2005, and $4.5 million at January 31,
2004. Since the Company expects to hold the swap agreement and the related debt
until maturity, the accumulated unrealized loss on the swap agreement will
decline to zero over the remaining life of the agreement, through October 2006.
During
2004 and 2003, ineffective hedges were not material.
|
13. |
FAIR
VALUE OF FINANCIAL INSTRUMENTS |
The
carrying amounts and fair values of the Company’s financial instruments at
January 29, 2005 and January 31, 2004 are:
| |
|
|
|
| |
January
29, 2005 |
|
January
31, 2004 |
|
($
thousands) |
Carrying
Amount |
|
Fair
Value |
|
Carrying
Amount |
|
Fair
Value |
|
|
Long-term
debt, including current maturities |
$ |
142,000 |
|
$ |
142,000 |
|
$ |
119,500 |
|
$ |
119,500 |
|
|
Unrealized
gains (losses) on derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap agreement |
|
(1,350 |
) |
|
(1,350 |
) |
|
(4,510 |
) |
|
(4,510 |
) |
|
Foreign
exchange contracts |
|
(233 |
) |
|
(233 |
) |
|
102 |
|
|
102 |
|
The fair
value of the Company’s long-term debt was based upon the borrowing rates
available to the Company at January 29, 2005, and January 31, 2004, as
applicable, for financing arrangements with similar terms and maturities. The
fair value of the Company’s derivative instruments is based on order-quoted or
dealer-quoted prices.
Carrying
amounts reported on the balance sheets for cash, cash equivalents and
receivables approximate fair value due to the short-term maturity of these
instruments.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
|
14. |
CONCENTRATIONS
OF CREDIT RISK |
Financial
instruments which potentially subject the Company to significant concentration
of credit risk consisted 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 and historical
trends.
The
Company’s common stock has a par value of $3.75 per share, and 100,000,000
shares are authorized. At January 29, 2005, and January 31, 2004, there were
18,241,791 shares and 18,076,589 shares outstanding, net of 3,764,106 and
3,929,308 shares held in treasury, respectively. The stock is listed and traded
on the New York and Chicago Stock Exchanges (symbol BWS).
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.
The
Company has share-based incentive compensation plans, under which certain
officers, employees and members of the Board of Directors are participants, and
may be granted stock option, stock appreciation, restricted stock and stock
performance awards. During 2004, the Company recognized income of $2.7 million
related to share-based compensation, as compared to share-based compensation
expense of approximately $4.8 million for 2003. The resulting variance of $7.5
million is the result of the lower expected award value under these plans,
primarily the stock performance plan. The lower expected award value reflects
lower than targeted payouts and a lower stock price at the end of 2004 compared
to 2003.
Stock
Options and Stock Appreciation Units
All stock
options are granted with an exercise price equal to the quoted market value of
the Company’s common stock on the date of grant. Stock appreciation units also
have been granted in tandem with certain 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
generally become exercisable one year from the date of grant at a rate of 25%
per year and are exercisable for up to ten years from the date of grant. Since
the stock appreciation rights are issued in tandem with stock options, the
exercise of either cancels the other. Variable plan accounting is used to
determine compensation expense related to stock appreciation units. Such expense
is recorded over the period the units vest and is remeasured at the end of each
reporting period based on the current market price of the Company’s stock on
that date and the expected number of such units to be exercised. The ultimate
measure of compensation expense will be based on the market price of the
Company’s stock on the date the stock appreciation unit is exercised. As of
January 29, 2005, 580,420 additional shares of common stock were available to be
granted in the form of options, restricted stock or stock performance units.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Through
2004, the Company has elected to follow APB No. 25, Accounting
for Stock Issued to Employees, and
related interpretations in accounting for its employee stock options instead of
the alternative fair value accounting provided for under SFAS No. 123,
Accounting
for Stock-Based Compensation. Under
APB No. 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. See “Impact of Prospective Accounting
Pronouncements” in Note 1 for discussion of changes in share-based compensation
for 2005.
Pro forma
information regarding net earnings 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 2004, 2003 and
2002, respectively: risk-free interest rates of 3.5%, 3.3% and 4.9%; dividend
yields of 1.0%, 1.3% and 2.2%; volatility factors of the expected market price
of the Company’s common stock of 0.43, 0.46 and 0.47; and a weighted average
expected life of the option of seven years. The weighted average fair value of
options granted during 2004, 2003 and 2002 was $17.17, $13.70 and $8.13 per
share, respectively. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense on a straight-line basis over the
options’ vesting period. The Company’s pro forma information is presented in
Note 1.
The
following summary sets forth the Company’s stock option and stock appreciation
rights activity for the three years ended January 29, 2005:
| |
|
|
|
|
|
|
| |
Number
of
Option
Shares |
|
Number
of
Appreciation
Units |
|
Weighted
Average
Exercise
Price |
|
|
Outstanding
February 2, 2002 |
|
1,814,500 |
|
|
150,661 |
|
$ |
16 |
|
|
Granted |
|
454,750 |
|
|
- |
|
|
18 |
|
|
Exercised |
|
(172,000 |
) |
|
- |
|
|
14 |
|
|
Terminated |
|
(215,500 |
) |
|
(57,015 |
) |
|
16 |
|
|
Outstanding
February 1, 2003 |
|
1,881,750 |
|
|
93,646 |
|
|
16 |
|
|
Granted |
|
366,500 |
|
|
- |
|
|
27 |
|
|
Exercised |
|
(326,557 |
) |
|
- |
|
|
15 |
|
|
Terminated |
|
(19,250 |
) |
|
(13,963 |
) |
|
18 |
|
|
Outstanding
January 31, 2004 |
|
1,902,443 |
|
|
79,683 |
|
|
18 |
|
|
Granted |
|
345,450 |
|
|
- |
|
|
39 |
|
|
Exercised |
|
(186,391 |
) |
|
- |
|
|
18 |
|
|
Terminated |
|
(28,475 |
) |
|
- |
|
|
29 |
|
|
Outstanding
January 29, 2005 |
|
2,033,027 |
|
|
79,683 |
|
$ |
22 |
|
Following
is a summary of stock options outstanding as of January 29, 2005, which have
exercise prices ranging from $10 to $39:
| |
|
|
|
|
|
|
|
Range
of Exercise Prices |
Number
of
Options |
|
Weighted
Average
Exercise
Price |
|
Weighted
Average
Remaining
Life
(Years) |
|
|
Options
Outstanding |
|
|
|
|
|
|
|
|
|
|
$10
- $15 |
|
386,075 |
|
$ |
12 |
|
|
4 |
|
|
$15
- $18 |
|
385,500 |
|
|
17 |
|
|
4 |
|
|
$18
- $23 |
|
548,752 |
|
|
19 |
|
|
6 |
|
|
$23
- $30 |
|
335,600 |
|
|
25 |
|
|
7 |
|
|
$30
- $39 |
|
377,100 |
|
|
39 |
|
|
9 |
|
| |
|
2,033,027 |
|
$ |
22 |
|
|
6 |
|
| |
|
|
|
|
|
|
|
|
|
|
Options
Exercisable |
|
|
|
|
|
|
|
|
|
|
$10
- $15 |
|
385,763 |
|
$ |
12 |
|
|
4 |
|
|
$15
- $18 |
|
356,438 |
|
|
17 |
|
|
4 |
|
|
$18
- $23 |
|
388,176 |
|
|
19 |
|
|
6 |
|
|
$23
- $30 |
|
104,100 |
|
|
25 |
|
|
6 |
|
|
$30
- $39 |
|
12,500 |
|
|
37 |
|
|
9 |
|
| |
|
1,246,977 |
|
$ |
17 |
|
|
5 |
|
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
At
January 31, 2004, 1,144,439 options with a weighted average exercise price of
$16 were exercisable. At February 1, 2003, 1,162,688 options with a weighted
average exercise price of $17 were exercisable.
Restricted
Stock
Under the
Company’s incentive compensation plans, restricted stock of the Company may be
granted at no cost to certain officers and key employees. Plan participants are
entitled to cash dividends and voting rights for 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 four years,
25% after six years and the remaining 25% after eight 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. In 2004, 2003 and 2002,
restricted shares granted were 16,500, 78,700 and 50,500, and restricted shares
terminated were 19,350, 2,875 and 12,500, respectively. Compensation expense
related to restricted shares was $0.9 million, $0.8 million and $0.7 million in
2004, 2003 and 2002, respectively.
Stock
Performance Awards
Under the
Company’s incentive compensation plans, common stock may 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 of shares to be awarded. In
2004, projections indicated that there would be no awards at the end of the
performance period for grants made in 2003 and the award under the 2002 grant
would decline from previous estimates. Accordingly, accrued expenses for those
plans were reduced, resulting in income in 2004 of $3.6 million. Compensation
expense for performance shares was $4.0 million in 2003 and $1.3 million in
2002.
|
17. |
COMMITMENTS
AND CONTINGENCIES |
Environmental
Remediation
The
Company is involved in environmental remediation and ongoing compliance
activities at several sites. The Company is remediating, under the oversight of
Colorado authorities, the groundwater and indoor air at its owned facility in
Colorado (also known as the Redfield site) and residential neighborhoods
adjacent to and near the property that have been affected by solvents previously
used at the facility. During 2004, we recorded no expense related to this
remediation. During 2003 and 2002, we recorded expense of $0.8 million and $4.1
million, respectively. The anticipated future cost of remediation activities at
January 29, 2005, is $5.9 million and is accrued within other accrued expenses
and other liabilities, but the ultimate cost may vary. The cumulative costs
incurred through January 29, 2005, are $14.9 million.
The
Company assesses future recoveries from insurance companies related to
remediation costs by estimating a range of probable recoveries and recording the
low end of the range. Recoveries from other responsible parties are recorded
when a contractual agreement is reached. As of January 29, 2005, recorded
recoveries totaled $3.3 million and are recorded in other noncurrent assets on
the consolidated balance sheet. $3.3 million of the recorded recoveries are
expected from certain insurance companies as indemnification for amounts spent
for remediation associated with the Redfield site. The insurance companies are
contesting their indemnity obligations, and the Company has sued its insurers
seeking recovery of defense costs, indemnity and other damages related to the
former operations and the remediation at the site. The Company believes
insurance coverage in place entitles it to reimbursement for more than the
recovery recorded. The Company believes the recorded recovery is supported by
the fact the limits of the insurance policies at issue exceed the amount of the
recorded recovery, and certain insurers have offered to settle these claims. The
Company is unable to estimate the ultimate recovery from the insurance carriers,
but is pursuing resolution of its claims.
The
Company has completed its remediation efforts at its closed New York tannery and
two associated landfills. In 1995, state environmental authorities reclassified
the status of these sites as being properly closed and requiring only continued
maintenance and monitoring over the next 19 years. The Company has an accrued
liability of $2.2 million at January 29, 2005, related to these sites, which has
been discounted at 6.4%. On an undiscounted basis, this liability would be $3.7
million. The Company expects to spend approximately $0.2 million in each of the
next five succeeding years and $2.7 million thereafter related to these sites.
In addition, various federal and state authorities have identified the Company
as a potentially responsible party for remediation at certain other
landfills.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Based on
information currently available, the Company had an accrued liability of $8.4
million as of January 29, 2005, to complete the cleanup, maintenance and
monitoring at all sites. Of the $8.4 million liability, $1.7 million is included
in other accrued expenses, and $6.7 million is included in other noncurrent
liabilities in the consolidated balance sheet. The ultimate costs may vary, and
it is possible costs may exceed the recorded amounts; however, the Company is
not able to determine a range of possible additional costs, if any.
While the
Company currently does not operate 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.
Litigation
In March
2000, a class action lawsuit was filed in Colorado State Court (District Court
for the City and County of Denver) related to the Redfield site described above.
Plaintiffs alleged claims for trespass, nuisance, strict liability, unjust
enrichment, negligence and exemplary damages arising from the alleged release of
solvents contaminating the groundwater and indoor air in the areas adjacent to
and near the site. In December 2003, the jury hearing the claims returned a
verdict finding the Company’s subsidiary negligent and awarded the class
plaintiffs $1.0 million in damages. The Company recorded this award along with
estimated pretrial interest on the award and estimated costs related to
sanctions imposed by the court related to a pretrial discovery dispute between
the parties. The total pretax charge recorded for these matters in the fourth
quarter of 2003 was $3.1 million. The Company recorded an additional $0.6
million in expense in the first quarter of 2004, related to pretrial interest,
to reflect the trial court’s ruling extending the time period for which
pre-judgment interest applied. The plaintiffs have filed an appeal of the
December 2003 jury verdict, and the ultimate outcome and cost to the Company may
vary.
As
described above in “Environmental Remediation,” the Company has filed suit
against its insurance carriers and is seeking recovery of certain defense costs,
indemnity for the costs incurred for remediation related to the Redfield site
and for the damages awarded in the class action and other related
damages.
The
Company also is involved in legal proceedings and litigation arising in the
ordinary course of business. In the opinion of management, the outcome of such
ordinary course of business proceedings and litigation currently pending will
not have a material adverse effect on the Company’s results of operations or
financial position. All legal costs associated with litigation are expensed as
incurred.
Other
During
the fourth quarter of 2004, the Company recorded a charge of $3.5 million
related to its guarantee of an Industrial Development Bond financing for a
manufacturing and warehouse facility in Bedford County, Pennsylvania. These
facilities and the business that operated them were sold to another party in
1985, which assumed the bond obligation. The current owner of the manufacturing
and warehouse facility has filed for bankruptcy protection and is liquidating
its assets. Although the Company will pursue recovery of these costs, the
ultimate outcome is uncertain. Accordingly, the Company has recorded its
estimate of the maximum exposure, $3.5 million, as a charge in the fourth
quarter of 2004.
During
2004, the Company recorded a charge of $2.4 million relating to the insolvency
of an insurance company that insured the Company for workers’ compensation and
casualty losses from 1973 to 1989. That company is now in liquidation. Certain
claims from that time period are still outstanding. During 2003, the Company
recorded a charge of $0.3 million related to this matter. While management has
recorded its best estimate of loss, the ultimate outcome and cost to the Company
may vary.
The
Company is contingently liable for lease commitments of approximately $8.6
million in the aggregate, which relate to the Cloth World and Meis specialty
retailing chains and a manufacturing facility, which were sold in prior years.
In order for the Company to incur any liability related to these lease
commitments, the current owners would have to default. At this time, the Company
does not believe this is reasonably likely to occur.
|
18. |
SUBSEQUENT
EVENT - ACQUISITION OF BENNETT FOOTWEAR
GROUP |
On March
14, 2005, the Company announced that it had entered into a Securities Purchase
Agreement to acquire Bennett Footwear Group, LLC (“Bennett”) for $205 million in
cash, plus contingent payments of up to $42.5 million based upon the achievement
of certain performance targets over the next three years. The purchase price is
subject to post-closing adjustment based on actual net equity. The Bennett
acquisition is expected to close during April or May of 2005.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Bennett’s
owned and licensed footwear brands, which include Via Spiga, Franco Sarto,
Etienne Aigner and Nickels Soft, are primarily sold in footwear departments of
many major U.S. department and specialty stores. The Bennett acquisition
complements the Company’s existing portfolio of well-known wholesale brands such
as Naturalizer, LifeStride, Bass and Dr. Scholl’s, which are sold primarily in
the moderately priced range, by adding strong brands in the better and bridge
footwear zones. Bennett had revenues of approximately $200 million in
2004.
The
Company has received a commitment letter from a lender to provide a senior
unsecured loan to fund up to $100 million for the Bennett acquisition, which
will bear interest at the greater of 8.25% or a floating rate based on
three-month LIBOR, increasing at the end of each three-month period that the
loan is outstanding (“the Bridge Loan”). The Bridge Loan will be guaranteed by
all existing and future subsidiaries of the Company that are guarantors under
its existing revolving Credit Agreement. The Company will fund the remaining
portion of the purchase price from existing cash and available borrowings under
the existing revolving Credit Agreement. The Company anticipates that it will
refinance the acquisition cost by issuing long-term notes totaling approximately
$150 million to $175 million during 2005.
|
19. |
QUARTERLY
FINANCIAL DATA (Unaudited) |
As
discussed in Note 2, the Company has restated its consolidated financial
statements. Quarterly financial results (unaudited) for the years 2004 and 2003,
including the effect of the restatement, are as follows:
| |
|
|
|
Quarters |
|
|
First
Quarter
(13
Weeks) |
Second
Quarter
(13
weeks) |
Third
Quarter
(13
weeks) |
Fourth
Quarter
(13
weeks) |
| |
As
Previously
Reported |
As
Restated |
As
Previously
Reported |
As
Restated |
As
Previously
Reported |
As
Restated |
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
Net
sales |
$491,832 |
$491,832 |
$458,657 |
$458,657 |
$514,825 |
$514,825 |
$476,490 |
|
|
Gross
profit |
199,364 |
199,364 |
189,246 |
189,246 |
208,043 |
208,043 |
187,714 |
|
|
Net
earnings |
8,567 |
8,526 |
7,814 |
7,668 |
18,820 |
18,566 |
8,545 |
|
|
Per
share of common stock: |
|
|
|
|
|
|
|
|
|
Earnings
— basic |
0.48 |
0.48 |
0.44 |
0.43 |
1.05 |
1.03 |
0.48 |
|
|
Earnings
— diluted |
0.45 |
0.45 |
0.41 |
0.40 |
1.01 |
1.00 |
0.46 |
|
|
Dividends
paid |
0.10 |
0.10 |
0.10 |
0.10 |
0.10 |
0.10 |
0.10 |
|
|
Market
value: |
|
|
|
|
|
|
|
|
|
High |
39.95 |
39.95 |
42.02 |
42.02 |
32.70 |
32.70 |
30.10 |
|
|
Low |
34.79 |
34.79 |
30.33 |
30.33 |
24.18 |
24.18 |
27.07 |
|
| |
|
|
|
|
|
|
|
|
| |
Quarters |
| |
First Quarter
(13 Weeks) |
Second Quarter
(13 weeks) |
Third Quarter
(13 weeks) |
Fourth Quarter
(13 weeks) |
| |
As
Previously
Reported |
As
Restated |
As
Previously
Reported |
As
Restated |
As
Previously
Reported |
As
Restated |
As
Previously
Reported |
As
Restated |
|
2003 |
|
|
|
|
|
|
|
|
|
Net sales |
$446,444 |
$446,444 |
$458,384 |
$458,384 |
$493,433 |
$493,433 |
$433,847 |
$433,847 |
|
Gross profit |
185,127 |
185,127 |
187,865 |
187,865 |
204,712 |
204,712 |
180,962 |
180,962 |
|
Net earnings |
9,003 |
9,035 |
11,556 |
11,532 |
21,200 |
21,013 |
5,135 |
4,656 |
|
Per share of common stock: |
|
|
|
|
|
|
|
|
|
Earnings — basic |
0.51 |
0.52 |
0.66 |
0.65 |
1.19 |
1.18 |
0.29 |
0.26 |
|
Earnings — diluted |
0.49 |
0.49 |
0.62 |
0.62 |
1.13 |
1.12 |
0.27 |
0.25 |
|
Dividends paid |
0.10 |
0.10 |
0.10 |
0.10 |
0.10 |
0.10 |
0.10 |
0.10 |
|
Market value: |
|
|
|
|
|
|
|
|
|
High |
30.36 |
30.36 |
31.75 |
31.75 |
36.25 |
36.25 |
39.73 |
39.73 |
|
Low |
25.10 |
25.10 |
25.00 |
25.00 |
28.30 |
28.30 |
31.85 |
31.85 |
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
|
($
thousands) |
Col.
A |
Col.
B |
Col.
C |
Col.
D |
Col.
E |
| |
Balance
at
Beginning
of
Period |
Charged
to
Costs
and
Expenses |
Charged
to
Other
Accounts-
Describe |
Deductions
Describe |
Balance
at
End
of
Period |
| |
|
|
|
|
|
|
YEAR
ENDED JANUARY 29, 2005 |
|
|
|
|
|
| |
|
|
|
|
|
|
Deducted
from assets or accounts: |
|
|
|
|
|
|
Doubtful
accounts, discounts and allowances |
$ 5,899 |
$34,065 |
|
$31,733-A |
$ 8,231 |
|
Inventory
valuation allowances |
15,903 |
48,098 |
|
47,459-B |
16,542 |
| |
|
|
|
|
|
|
YEAR
ENDED JANUARY 31, 2004 |
|
|
|
|
|
| |
|
|
|
|
|
|
Deducted
from assets or accounts: |
|
|
|
|
|
|
Doubtful
accounts, discounts and allowances |
$ 6,674 |
$24,587 |
|
$25,362-A |
$ 5,899 |
|
Inventory
valuation allowances |
18,966 |
44,212 |
|
47,275-B |
15,903 |
| |
|
|
|
|
|
|
YEAR
ENDED FEBRUARY 1, 2003 |
|
|
|
|
|
| |
|
|
|
|
|
|
Deducted
from assets or accounts: |
|
|
|
|
|
|
Doubtful
accounts, discounts and allowances |
$ 5,605 |
$21,615 |
|
$20,546-A |
$ 6,674 |
|
Inventory
valuation allowances |
36,704 |
42,772 |
|
60,510-B |
18,966 |
(A) Accounts
written off, net of recoveries, discounts and allowances taken.
(B) Adjustment
upon disposal of related inventories.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE |
None.
It is the
Chief Executive Officer’s and Chief Financial Officer’s ultimate responsibility
to ensure the Company maintains disclosure controls and procedures designed to
provide reasonable assurance that material information, both financial and
non-financial, and other information required under the securities laws to be
disclosed is identified and communicated to senior management on a timely basis.
The Company’s disclosure controls and procedures include mandatory communication
of material events, automated accounting processing and reporting, management
review of monthly, quarterly and annual results, an established system of
internal controls and internal control reviews by the Company’s internal
auditors.
As of the
end of the Company’s fiscal year, management of the Company, including the Chief
Executive Officer and Chief Financial Officer, conducted an evaluation of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). In
performing this evaluation, management reviewed the Company’s lease accounting
for leasehold improvements funded by landlord incentives and the recognition of
straight-line rent on leased facilities. Consistent with many other retailers,
the Company historically has accounted for construction allowances received from
landlords on its balance sheets as a reduction of fixed assets, and amortized
the allowances over the lives of the assets to which they were assigned. The
Company also determined that its calculation of straight-line rent expense
should be modified to include the build-out periods prior to store openings.
After consultation with its independent auditors and its
Audit Committee, the Company determined its previously established lease
accounting practices were not appropriate and that the Company’s annual rent and
depreciation expense over the last several years had been understated.
Accordingly, the Company has restated its prior financial statements to reflect
the appropriate treatment of generally accepted accounting principles related to
lease accounting. Based on this evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure
controls and procedures were not effective as of January 29, 2005.
The
evaluation has not revealed any fraud, intentional misconduct or concealment on
the part of Company personnel. The Company’s management has identified and
implemented the steps necessary to address this material weakness.
A control
system, no matter how well conceived or operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
controls. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be
detected.
Internal Control Over Financial
Reporting
Management’s
assessment of the effectiveness of internal control over financial reporting as
of January 29, 2005 can be found in Item 8 of this report. Management’s
assessment of the effectiveness of internal control over financial reporting as
of January 29, 2005, was audited by Ernst & Young LLP, an independent
registered public accounting firm, as stated in their report, which can also be
found in Item 8 of this report.
Based on
the evaluation of internal control over financial reporting, the Chief Executive
Officer and Chief Financial Officer have concluded that, there have been no
changes in the Company’s internal controls over financial reporting or in other
factors during the quarter ended January 29, 2005, that has materially affected
or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
As
described in Item 8, the Company has restated its previously issued financial
statements related to the misapplication of generally accepted accounting
principles related to lease accounting. Subsequent to January 29, 2005, the
Company’s management identified and implemented the steps necessary to address
the identified material weakness in internal control over financial reporting,
including the implementation of additional controls over the accounting for
leases.
None.
|
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT |
Information
regarding Directors of the Company is set forth under the caption “Election of
Directors (Proxy Item No. 1)” in the Proxy Statement for the Annual Meeting of
Shareholders to be held May 26, 2005, which information is incorporated herein
by reference.
The
following is a list of the names and ages of the executive officers of the
Company 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 in May 2005.
|
Executive
Officers of the Registrant |
|
Name |
Age |
Current
Position |
|
Ronald
A. Fromm |
54 |
Chairman
of the Board and Chief Executive Officer |
|
Michael
I. Oberlander |
36 |
Vice
President, General Counsel and Corporate Secretary |
|
Gary
M. Rich |
54 |
President,
Brown Shoe Wholesale Division |
|
Andrew
M. Rosen |
54 |
Senior
Vice President and Chief Financial Officer |
|
Richard
C. Schumacher |
57 |
Senior
Vice President and Chief Accounting Officer |
|
David
H. Schwartz |
59 |
Chief
Administrative Officer and President, Brown Shoe International
Division |
|
Diane
M. Sullivan |
49 |
President |
|
Joseph
W. Wood |
57 |
President,
Famous Footwear Division |
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 and Chief Executive Officer of the Company since January 2004.
Chairman of the Board, President and Chief Executive Officer of the Company from
January 1999 to December 2003. Vice President of the Company from April 1998 to
January 1999. Executive Vice President, Famous Footwear from September 1992 to
March 1998.
Michael
I. Oberlander, Vice
President, General Counsel and Corporate Secretary since September 2000.
Attorney, Bryan Cave LLP from 1993 to September 2000.
Gary
M. Rich,
President, Brown Shoe Wholesale since August 2000. President, Brown Pagoda from
March 1993 to August 2000.
Andrew
M. Rosen, Senior
Vice President and Chief Financial Officer of the Company since October 2004.
Senior Vice President, Chief Financial Officer and Treasurer of the Company from
October 1999 to October 2004. Senior Vice President and Treasurer of the Company
from March 1999 to October 1999. Vice President and Treasurer of the Company
from January 1992 to March 1999.
Richard
C. Schumacher, Senior
Vice President and Chief Accounting Officer since March 2003. Vice President and
Chief Accounting Officer from March 2002 to March 2003. Vice President and
Controller of the Company from June 1994 to March 2002.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
David
H. Schwartz, Chief
Administrative Officer since March 2004, Chief Operating Officer from March 2002
to March 2004, and President, Brown Shoe International since August 2000.
President, Brown Sourcing from February 1996 to August 2000.
Diane
M. Sullivan, President
since January 2004. Vice Chairman of the Footwear Group of Phillips-Van Heusen
from September 2001 to December 2003. Series of management positions with Stride
Rite Corporation from April 1995 to September 2001, most recently as President
and Chief Operating Officer.
Joseph
W. Wood,
President, Famous Footwear since January 2002. Executive Vice President —
Merchandise for Finish Line chain of athletic footwear stores from April 2000 to
December 2001. Senior Vice President — Merchandise and Marketing for Finish Line
from March 1992 to April 2000.
Information
regarding Section 16 Beneficial Ownership Reporting Compliance is set forth
under the caption “Section 16 Beneficial Ownership Reporting Compliance” in the
Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2005,
which information is incorporated herein by reference.
Information
regarding the Audit Committee and the Audit Committee financial expert is set
forth under the captions “Board Meetings and Committees” and “Audit Committee,”
respectively, in the Proxy Statement for the Annual Meeting of Shareholders to
be held May 26, 2005, which information is incorporated herein by
reference.
Information
regarding the Corporate Governance Guidelines, Code of Business Conduct and Code
of Ethics is set forth under the caption “Corporate Governance” in the Proxy
Statement for the Annual Meeting of Shareholders to be held May 26, 2005, which
information is incorporated herein by reference.
Information
regarding Executive Compensation is set forth under the captions “Executive
Compensation,” “Employment and Severance Agreements,” “Retirement Plans,”
“Director Compensation,” and “Compensation Committee Interlocks and Insider
Participation” in the Proxy Statement for the Annual Meeting of Shareholders to
be held May 26, 2005, which information is incorporated herein by reference.
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS |
Information
regarding Company Stock Ownership by Directors and Officers is set forth under
the caption “Stock Ownership by Directors and Executive Officers” in the Proxy
Statement for the Annual Meeting of Shareholders to be held May 26, 2005, which
information is incorporated herein by reference.
Information
regarding the Principal Holders of Our Stock is set forth under the caption
“Principal Holders of Our Stock” in the Proxy Statement for the Annual Meeting
of Shareholders to be held May 26, 2005, which information is incorporated
herein by reference.
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Equity
Compensation Plan Information
The
following table sets forth aggregate information regarding the Company’s equity
compensation plans as of January 29, 2005:
| |
|
|
|
|
Plan
Category |
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a) |
Weighted
average exercise price of outstanding options, warrants and
rights
(b) |
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c) |
|
Equity
compensation plans approved by security holders (1) |
|
2,384,527 |
|
$21.82 |
|
580,420 |
|
Equity
compensation plans not approved by security holders |
|
- |
|
- |
|
- |
|
Total |
|
2,384,527 |
|
$21.82 |
|
580,420 |
|
(1)
|
Included
in column (a) are 351,500 rights to receive common shares that have been
awarded under the Company’s stock performance plan at the target level.
The maximum amount of shares that may be issued under these stock
performance awards is 703,000, and the minimum is zero, depending on the
accomplishment of certain objectives by the end of fiscal 2005 and 2006.
These rights were disregarded for purposes of computing the weighted
average exercise price in column (b). |
Information
regarding share-based plans is set forth in Note 16 of the consolidated
financial statements and is hereby incorporated by reference.
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS |
Information
regarding Certain Relationships and Related Transactions is set forth under the
caption “Certain Relationships” in the Proxy Statement for the Annual Meeting of
Shareholders to be held May 26, 2005, which information is incorporated herein
by reference.
|
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES |
Information
regarding our Principal Accountant Fees and Services is set forth under the
caption “Independent Auditors” in the Proxy Statement for the Annual Meeting of
Shareholders to be held May 26, 2005, which information is incorporated herein
by reference.
|
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES |
|
(a) |
(1)
and (2) The list of financial statements and Financial Statement Schedules
required by this item is included in the Index on page 2. All other
schedules specified under Regulation S-X have been omitted because they
are not applicable, because they are not required or because the
information required is included in the financial statements or notes
thereto. |
|
(a) |
(3)
Exhibits |
|
Exhibit
No.: |
Description |
| |
2.(a) |
Securities
Purchase Agreement by and among Brown Shoe Company, Inc. and Heritage Fund
III, L.P., Heritage Fund IIIA, L.P., Heritage Investors III, L.P., BICO
Business Trust, Pentland U.S.A., Inc., Donna Siciliano, Michael Smith,
Bruce Ginsberg, Hal Parton, Gregg Ribatt, Bennett Footwear Holdings, LLC,
Bennett Footwear Group LLC, Bennett Footwear Acquisition LLC, Bennett
Footwear Retail LLC and Bennett Investment Corporation dated as of March
14, 2005, filed herewith. |
| |
|
Form
of Earnout Agreement by and among the Heritage Fund III, L.P., Heritage
Fund IIIA, L.P. and Heritage Investors III, L.L.C. (collectively,
“Heritage”), BICO Business Trust (“BICO”), Pentland U.S.A., Inc.
(“Pentland”), Donna Siciliano and Michael Smith, Heritage Partners
Management Company, LLP, as representative, and Brown Shoe Company, Inc.,
incorporated herein by reference to the Company’s Form 8-K dated March 14,
2005. |
| |
3.(a) |
Certificate
of Incorporation of the Company incorporated herein by reference to
Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 4, 2002. |
| |
(b) |
Bylaws
of the Company as amended through February 5, 2004, incorporated herein by
reference to Exhibit 3(b) to the Company’s Form 10-K dated January 31,
2004. |
| |
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. |
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
| |
Exhibit
No.: |
Description |
| |
(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. |
| |
(a)
(ii) |
Second
Amendment to Rights Agreement between Brown Shoe Company, Inc., First
Chicago Trust Company of New York and EquiServe Trust Company, N.A., dated
and effective as of December 6, 2001, incorporated herein by reference to
the Company's Form 10-Q for the quarter ended November 3,
2001. |
| |
(b)
|
Amended
and Restated Credit Agreement, dated as of July 21, 2004, among the
Company, as Borrower, Bank of America, N.A., as lead issuing bank, lead
arranger, administrative agent, and collateral agent, LaSalle Bank,
National Association, as syndication agent, Wells Fargo Foothill, LLC as
documentation agent and the other financial institutions party thereto, as
lenders, incorporated herein by reference to the Company’s Form 8-K dated
July 21, 2004. |
| |
(b)(i) |
First
Amendment dated as of March 14, 2005, to the Amended and Restated Credit
Agreement among the Company, as lead borrower for itself and on behalf of
certain of its subsidiaries, and Bank of America, N.A., as administrative
agent and collateral agent, LaSalle Bank, National Association, as
syndication agent, Wells Fargo Foothill, LLC, as documentation agent, and
the other financial institutions party thereto, as lenders, and the
Security Agreement, incorporated herein by reference to the Company’s Form
8-K dated March 14, 2005. |
| |
10.(a)* |
Fourth
Amendment to the Brown Group, Inc. Executive Retirement Plan, amended and
restated as of January 1, 1998, incorporated herein by reference to the
Company's Form 10-K for the year ended January 29,
2000. |
| |
(a)(i)* |
Fifth
Amendment to the Brown Group, Inc. Executive Retirement Plan, dated
January 7, 2000, incorporated herein by reference to the Company's Form
10-K for the year ended January 29, 2000. |
| |
(b)* |
Stock
Option and Restricted Stock Plan of 1994, as amended, incorporated herein
by reference to Exhibit 3 to the Company's definitive proxy statement
dated April 17, 1996. |
| |
(c)* |
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. |
| |
(d)* |
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. |
| |
(d)(i)* |
Amendment
to Incentive and Stock Compensation Plan of 1999, dated May 27, 1999,
incorporated herein by reference to the Company's Form 10-K for the year
ended January 29, 2000. |
| |
(d)(ii)* |
First
Amendment to the Incentive and Stock Compensation Plan of 1999, dated
January 7, 2000, incorporated herein by reference to the Company's Form
10-K for the year ended January 29, 2000. |
| |
(e)* |
Incentive
and Stock Compensation Plan of 2002, incorporated herein by reference to
Exhibit C to the Company's definitive proxy statement dated April 16,
2002. |
| |
(f)* |
Employment
Agreement, dated October 5, 2000, between the Company and Ronald A. Fromm,
incorporated herein by reference to the Company's Form 10-Q for the
quarter ended October 28, 2000. |
| |
(g)* |
Severance
Agreement, dated January 21, 2002, between the Company and Joseph W. Wood,
incorporated herein by reference to the Company's Form 10-K for the year
ended February 1, 2003. |
| |
(h)* |
Severance
Agreement, dated October 5, 2000, between the Company and Gary M. Rich,
incorporated herein by reference to the Company's Form 10-Q for the
quarter ended October 28, 2000. |
| |
(i)* |
Severance
Agreement, dated October 5, 2000, between the Company and David H.
Schwartz, incorporated herein by reference to the Company's Form 10-Q for
the quarter ended October 28, 2000. |
| |
(j)* |
Severance
Agreement, dated October 5, 2000, between the Company and Andrew M. Rosen,
incorporated herein by reference to the Company's Form 10-K for the year
ended February 2, 2002. |
| |
(k)* |
Severance
Agreement, dated May 24, 2004, between the Company and Diane M. Sullivan,
incorporated herein by reference to the Company’s Form 10-Q for the
quarter ended May 1, 2004. |
| |
(l)* |
Severance
Agreement, dated March 8, 2001, between the Company and Michael
Oberlander, incorporated herein by reference to the Company’s Form 10-Q
for the quarter ended May 1, 2004. |
| |
(m)* |
Severance
Agreement, dated October 5, 2000, between the Company and Richard C.
Schumacher, incorporated herein by reference to the Company’s Form 10-Q
for the quarter ended May 1, 2004. |
| |
(n)* |
Brown
Shoe Company, Inc. Deferred Compensation Plan for Non-Employee Directors,
incorporated by reference to the Company's Form 10-K for the year ended
January 29, 2000. |
| |
(o)* |
Brown
Shoe Company, Inc. Deferred Compensation Plan effective February 1, 2003,
incorporated by reference to the Company's Form 10-K for the year ended
February 1, 2003. |
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
| |
Exhibit
No.: |
Description |
| |
(p)* |
Summary
of the salaries for the named executive officers of the registrant,
incorporated herein by reference to the Company’s Form 8-K dated March 3,
2005. |
| |
(q)* |
Summary
of the award levels and performance goals for the named executive officers
of the registrant, incorporated herein by reference to the Company’s Form
8-K dated March 3, 2005. |
| |
(r)* |
Form
of Incentive Stock Option Award Agreement under the Brown Shoe Company,
Inc. Incentive and Stock Compensation Plan of 2002, incorporated by
reference to Exhibit 10.4 to the registrant’s Quarterly Report on Form
10-Q for the quarter ended July 31, 2004. |
| |
(s)* |
Form
of Non-Qualified Stock Option Award Agreement under the Brown Shoe
Company, Inc. Incentive and Stock Compensation Plan of 2002, incorporated
by reference to Exhibit 10.3 to the registrant’s Quarterly Report on Form
10-Q for the quarter ended July 31, 2004. |
|
|
(t)* |
Summary
of Non-Employee Directors’ Compensation, effective as of May 26, 2005,
incorporated herein by reference to the Company’s 8-K dated March 3,
2005. |
| |
(u)* |
Form
of Restricted Stock Unit Agreement between the Company and each of its
Non-Employee Directors, filed herewith. |
| |
21. |
Subsidiaries
of the registrant. |
| |
23. |
Consent
of Independent Auditors. |
| |
24. |
Power
of attorney (contained on signature page). |
| |
31.1 |
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
| |
31.2 |
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
| |
32.1 |
Certification
of the Chief Executive and Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
|
(c) |
Exhibits: |
| |
|
| |
See
Item 15(a)(3) above. On request, copies of any exhibit will be furnished
to shareholders upon payment of the Company’s reasonable expenses incurred
in furnishing such exhibits. |
| |
|
|
(d) |
Financial
Statement Schedules: |
| |
|
| |
See
Item 8 above. |
* Denotes
management contract or compensatory plan arrangements.
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.
| |
BROWN
SHOE COMPANY, INC. |
| |
|
|
By: |
/s/
Andrew M. Rosen |
| |
Andrew
M. Rosen, |
| |
Senior
Vice President and Chief Financial Officer |
Date:
April 1, 2005
|
BROWN
SHOE COMPANY, INC. |
2004
FORM 10-K |
Know all
men by these presents, that each person whose signature appears below
constitutes and appoints Andrew M. Rosen his or her true and lawful attorney in
fact and agent, with full power of substitution and resubstitution, for him or
her and in his or her 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
or she 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 1, 2005, 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 and Chief Executive Officer on behalf of the
Company and as Principal Executive Officer |
|
Ronald
A. Fromm |
|
| |
|
|
|
/s/
Andrew M. Rosen |
|
Senior
Vice President and Chief Financial Officer on behalf of the Company and as
Principal Financial Officer |
|
Andrew
M. Rosen |
|
| |
|
|
|
/s/
Richard C. Schumacher |
|
Senior
Vice President and Chief Accounting Officer on behalf of the Company and
as Principal Accounting Officer |
|
Richard
C. Schumacher |
|
| |
|
|
|
/s/
Joseph L. Bower |
|
Director |
|
Joseph
L. Bower |
|
|
| |
|
|
|
/s/
Julie C. Esrey |
|
Director |
|
Julie
C. Esrey |
|
|
| |
|
|
|
/s/
Steven W. Korn |
|
Director |
|
Steven
W. Korn |
|
|
| |
|
|
|
/s/
Richard A. Liddy |
|
Director |
|
Richard
A. Liddy |
|
|
| |
|
|
|
/s/
Patricia G. McGinnis |
|
Director |
|
Patricia
G. McGinnis |
|
|
| |
|
|
|
/s/
W. Patrick McGinnis |
|
Director |
|
W.
Patrick McGinnis |
|
|
| |
|
|
|
/s/
Jerry E. Ritter |
|
Director |
|
Jerry
E. Ritter |
|
|
| |
|
|
|
/s/
Hal J. Upbin |
|
Director |
|
Hal
J. Upbin |
|
|
