SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| [X] |
Quarterly report pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended July 31, 2004 |
| [ ] |
Transition report pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____________ to _____________ |
Commission file number 1-2191
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(Exact name of registrant as specified in its charter) |
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(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification Number) |
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St. Louis, Missouri (Address of principal executive offices) |
(Zip Code) |
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(Registrant's telephone number, including area code) |
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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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of August 28, 2004, 18,189,166 common shares were outstanding.
Page 1
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PART I
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FINANCIAL INFORMATION
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ITEM 1
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FINANCIAL STATEMENTS
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BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS |
|||||||||
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($ thousands)
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July 31, 2004
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August 2, 2003
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January 31, 2004
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|||
| Assets | |||||||||
| Current Assets | |||||||||
| Cash and cash equivalents |
$
|
71,478
|
$
|
50,406
|
$
|
55,657
|
|||
| Receivables |
83,938
|
75,271
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81,930
|
||||||
| Inventories |
453,016
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417,731
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376,210
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||||||
| Prepaid expenses and other current assets |
21,718
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26,405
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15,888
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||||||
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| Total current assets |
630,150
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569,813
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529,685
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||||||
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| Other assets |
85,274
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83,883
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83,692
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||||||
| Goodwill and intangible assets, net |
20,382
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18,999
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20,405
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||||||
| Property and equipment |
283,399
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268,754
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272,151
|
||||||
| Allowances for depreciation and amortization |
(196,426
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) |
(181,155
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) |
(186,603
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) | |||
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|
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|
|
|
|
|
|
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| Total property and equipment |
86,973
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87,599
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85,548
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||||||
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| Total assets |
$
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822,779
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$
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760,294
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$
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719,330
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|||
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| Liabilities and Shareholders' Equity | |||||||||
| Current Liabilities | |||||||||
| Notes payable |
$
|
27,500
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$
|
19,000
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$
|
19,500
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|||
| Trade accounts payable |
192,243
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174,541
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116,677
|
||||||
| Accrued expenses |
96,420
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90,653
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96,707
|
||||||
| Income taxes |
7,377
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12,422
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2,960
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||||||
| Current maturities of long-term debt |
-
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10,000
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-
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| Total current liabilities |
323,540
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306,616
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235,844
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||||||
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| Other Liabilities | |||||||||
| Long-term debt and capitalized lease obligations |
100,000
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103,494
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100,000
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||||||
| Other liabilities |
27,373
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29,411
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28,358
|
||||||
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| Total other liabilities |
127,373
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132,905
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128,358
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| Shareholders' Equity | |||||||||
| Common stock |
68,209
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67,308
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67,787
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||||||
| Additional capital |
65,155
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53,902
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62,772
|
||||||
| Unamortized value of restricted stock |
(3,188
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) |
(2,896
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) |
(3,408
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) | |||
| Accumulated other comprehensive loss |
(3,974
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) |
(7,726
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) |
(4,934
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) | |||
| Retained earnings |
245,664
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210,185
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232,911
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||||||
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|
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| Total shareholders' equity |
371,866
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320,773
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355,128
|
||||||
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|
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| Total liabilities and shareholders' equity |
$
|
822,779
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$
|
760,294
|
$
|
719,330
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|||
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Page 2
BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
($ thousands, except per
share amounts)
Net sales
$
$
Cost of goods sold
Gross profit
Selling and administrative
expenses
Operating earnings
Interest expense
Interest income
)
)
)
)
Earnings before
income taxes
Income tax provision
Net earnings
$
$
Basic net earnings per common
share
$
$
Diluted net earnings per common
share
$
$
Dividends per common share
$
$
Page 3
BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ thousands)
Operating Activities:
Net earnings
Adjustments to reconcile net
earnings to net cash provided by operating activities:
Depreciation and
amortization
Share-based compensation
expense
Tax benefit related
to share-based plans
Loss on disposal
of facilities and equipment
Impairment charges
for facilities and equipment
Provision for
(recoveries from) doubtful accounts
)
Changes in operating
assets and liabilities:
Receivables
)
Inventories
)
)
Prepaid expenses and other current assets
)
)
Trade accounts payable and accrued expenses
Income taxes
Other, net
)
Net cash provided
by operating activities
Investing Activities:
Capital expenditures
)
)
Other
Net cash used for
investing activities
)
)
Financing Activities:
Increase (decrease) in short-term
notes payable
)
Principal repayments of long-term
debt
)
Debt issuance costs
)
Proceeds from stock options
exercised
Dividends paid
)
)
Net cash provided
by (used for) financing activities
)
Increase in cash
and cash equivalents
Cash and cash equivalents at
beginning of period
Cash and cash equivalents
at end of period
Page 4
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BROWN SHOE COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
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Note 1.
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Basis of Presentation
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The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and reflect all adjustments which management believes necessary (which include only normal recurring accruals) to present fairly the Company's financial position, results of operations, and cash flows. These statements, however, do not include all information and footnotes necessary for a complete presentation of the Company's financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States.
Certain prior period amounts on the condensed consolidated balance sheets, statements of earnings and statements of cash flows have been reclassified to conform to the current period presentation. These reclassifications did not affect net earnings.
The Company's business is subject to seasonal influences, particularly the back-to-school selling season at Famous Footwear which falls in the Company's third quarter. Interim results may not necessarily be indicative of results which may be expected for any other interim period or for the year as a whole.
For further information, refer to the consolidated financial
statements and footnotes included in the Company's Annual Report on Form
10-K for the year ended January 31, 2004.
The following table sets forth the computation of basic
and diluted earnings per common share for the periods ended July 31, 2004
and August 2, 2003:
Note 2.
Earnings Per Share
($ thousands, except per
share data)
NUMERATOR
$
Net earnings
$
DENOMINATOR (thousand shares)
Denominator for basic earnings
per common share
Dilutive effect of unvested
restricted stock and stock options
Denominator for diluted earnings
per common share
Basic earnings per common share
$
$
Diluted earnings per common
share
$
$
Options to purchase 231,167 and 15,000 shares of common
stock for the thirteen week periods and 233,667 and 15,167 for the twenty-six
week periods ended July 31, 2004 and August 2, 2003, respectively, were
not included in the denominator for diluted earnings per common share because
their effect would be antidilutive.
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Note 3.
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Comprehensive Income
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Comprehensive income includes changes in shareholders' equity related to foreign currency translation adjustments and unrealized gains or losses from derivatives used for hedging activities.
Page 5
The following table sets forth the reconciliation from
net earnings to comprehensive income for the periods ended July 31, 2004
and August 2, 2003:
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Note 4.
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Business Segment Information
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Applicable business segment information is as follows
for the periods ended July 31, 2004 and August 2, 2003:
The Other segment includes corporate administrative and other expenses, which are not allocated to the operating units, and the Company's investment in its majority-owned subsidiary, Shoes.com, Inc., a footwear e-commerce company.
Effective February 1, 2004, the Company began accounting
for its Irish financing subsidiary, Brown Group Dublin Limited, which holds
cash earned offshore 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
Page 6
conform to the current year presentation. This reclassification
had no effect on operating earnings, but resulted in a transfer of assets
of $62.4 million and $41.3 million at July 31, 2004 and August 2, 2003,
respectively, to the Other segment.
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Note 5.
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Restructuring Reserves
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Closure of Canadian Manufacturing Facility
In the fourth quarter of fiscal year 2003, the Company announced the closing of its last Canadian footwear manufacturing facility, located in Perth, Ontario, and recorded a pre-tax charge of $4.5 million, the components of which were as follows:
The Company anticipates that the restructuring activities
associated with the closure of the Canadian manufacturing facility will
be substantially completed by the end of fiscal 2004.
Goodwill and intangible assets were attributable to the
Company's operating segments as follows:
Note 6.
Goodwill and Other Intangible
Assets
($ thousands)
Famous Footwear
Wholesale Operations
Naturalizer Retail
Other
The change between periods for the Naturalizer Retail
segment reflects changes in the Canadian dollar exchange rate. The change
in the Other segment from August 2, 2003 to July 31, 2004 of $1.1 million
reflects the acquisition of additional shares of Shoes.com Inc. by the
Company.
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Note 7.
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Share-Based Compensation
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As of July 31, 2004, the Company had four share-based compensation plans, which are described more fully in Note 16 to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended January 31, 2004. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Compensation expense is recognized in net earnings for stock appreciation units, stock performance plans and restricted stock grants. No share-based employee compensation cost is reflected in net earnings for stock options, as all option grants had an exercise price equal to the market value of the
Page 7
underlying common stock on the date of grant. The following
table illustrates the effect on net income 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:
The Company issued 55,387 and 150,347 shares of common
stock for the thirteen week periods, and 112,577 and 266,153 shares of
common stock for the twenty-six week periods, ended July 31, 2004 and August
2, 2003, respectively, for stock options exercised and restricted stock
grants. The Company recognized $0.5 million of share-based compensation
income during the thirteen weeks ended July 31, 2004 as a result of the
decline in the Company's net earnings and stock price during that period.
The following table sets forth the components of net periodic
benefit cost or income for the Company, including all domestic and Canadian
plans:
Note 8.
Retirement and Other Benefit
Plans
($ thousands)
Service cost
Interest cost
Expected return on assets
)
)
Amortization of:
Actuarial (gain)
loss
)
)
Prior service
costs
)
Net transition
assets
)
)
Total net periodic benefit
cost (income)
)
)
Page 8
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Note 9.
|
Amended and Restated 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 the Company's accounts receivable and inventory. 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 would then be subject to certain financial covenants. 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.
In connection with the Agreement, the Company incurred
$1.1 million of issuance costs in the second quarter, which, together with
remaining unamortized debt issuance costs of approximately $2.7 million
associated with the existing bank credit agreement, will be amortized over
the five-year term of the Agreement.
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Note 10.
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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. The anticipated
future cost of remediation activities at July 31, 2004 is $7.1 million
and is accrued within accrued expenses and other liabilities on the condensed
consolidated balance sheet, but the ultimate cost may vary. The cumulative
costs incurred through July 31, 2004 are $13.8 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 July 31, 2004, recorded recoveries totaled $3.8 million and are recorded
in other noncurrent assets on the condensed consolidated balance sheet.
$3.6 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.
Page 9
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 20 years. In addition, various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other landfills.
Based on information currently available, the Company had an accrued liability of $9.1 million as of July 31, 2004 to complete the cleanup, maintenance and monitoring at all sites. Of the $9.1 million liability, $6.8 million is included in accrued expenses and $2.3 million is included in other liabilities on the condensed consolidated balance sheet. The ultimate costs may vary, and it is possible costs may exceed the recorded amounts.
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
one of the Company's subsidiaries negligent and awarded the class plaintiffs
$1.0 million in damages. The Company has recorded this award along with
pre-trial interest on the award and estimated costs related to sanctions
imposed by the court related to a pre-trial discovery dispute between the
parties. The total pre-tax charge recorded for these matters in the fourth
quarter of fiscal 2003 was $3.1 million ($2.0 million after tax). The Company
recorded an additional $0.6 million in expense in the first quarter of
2004, related to pre-trial interest, to reflect the trial court's ruling
extending the time period for which pre-judgment interest applied. In April
2004, the plaintiffs filed a motion for a new trial; the court has denied
that motion. Several other post-trial motions are still pending before
the trial court. The plaintiffs have appealed the judgment to the Colorado
Court of Appeals and have asked for a retrial. The Company has cross-appealed
the trial court's ruling as to the amount of pre-judgment interest, and
has conditionally appealed a number of the trial court's rulings in the
event of a retrial. 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.
Other
The Company is a guarantor of an Industrial Development
Bond financing of $3.5 million 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 this obligation.
This financing is scheduled to be paid annually beginning in 2004 through
2009.
The Company is contingently liable for lease commitments of approximately $10 million in the aggregate, which primarily relate to the Cloth World and Meis specialty retailing chains, which were sold in prior years.
In order for the Company to incur any liability related to these guarantees and lease commitments, the current owners would have to default. At this time, the Company does not believe this is reasonably likely to occur.
Page 10
Overall, the second quarter was a difficult one for the
Company as net earnings declined from the second quarter last year, despite
a slight increase in net sales. Consolidated net sales rose 0.1% to $458.7
million for the second quarter of fiscal 2004, as compared to $458.4 million
for the second quarter of the prior year. Net earnings were $7.8 million,
or $0.41 per diluted share, for the second quarter compared to $0.62 per
diluted share for the second quarter of last year. Each of our operating
segments reported lower operating earnings than in last year's second quarter.
Following is a summary of the more significant factors
affecting our results in the second quarter of fiscal 2004:
Net Sales
Net sales increased $45.7 million, or 5.0%, to $950.5
million in the first half of 2004 as compared to $904.8 million in the
first half of the prior year. The increase is primarily attributable to
the acquisition of the Bass footwear license at the beginning of 2004,
which contributed $24.4 million in net sales during the first half of 2004.
In addition, the net sales improvement was driven by first quarter sales
gains within our private label, Dr. Scholl's and LifeStride lines, and
from new Famous Footwear stores.
Gross Profit
Gross profit increased $15.6 million, or 4.2%, to $388.6
million in the first half of 2004 as compared to $373.0 million in the
first half of the prior year. The overall increase in gross profit is primarily
driven by the $45.7 million increase in net sales. As a percent of net
sales, our gross profit rate decreased to 40.9% in the first half of 2004
as compared to 41.2% in the first half of the prior year. The decline in
the gross profit rate reflects a greater mix of wholesale sales, which
carry a lower gross margin rate than our overall retail sales, and a lower
gross profit rate in our Wholesale Operations segment.
Selling and Administrative Expenses
Selling and administrative expenses increased $21.4 million,
or 6.3%, to $360.4 million in the first half of 2004 as compared to $339.0
million in the first half of the prior year. This increase is due to both
transition and assimilation costs related to the Bass footwear line of
approximately $4.8 million and our ongoing investments in talent, systems
and infrastructure intended to position the Company for future growth.
Page 12
Interest Expense
Interest expense decreased $0.9 million, or 14.8%, to
$4.6 million in the first half of 2004 as compared to $5.5 million in the
first half of the prior year due to a decline in the average daily borrowings.
Income Tax Provision
For the first half of 2004, our consolidated effective
income tax rate was 31.4% as compared to 28.4% for the first half of the
prior year, reflecting a greater projected annual mix of domestic income.
closed stores, net
Net Sales
Page 13
Net sales increased $11.9 million, or 2.2%, to $541.9
million in the first half of 2004 as compared to $530.0 million in the
first half of the prior year. While same-store sales for the first half
of 2004 were flat compared to the first half of the prior year, sales from
net new stores totaled $11.9 million. We opened 38 new stores and closed
16 during the first half of 2004, resulting in 915 stores at the end of
the second quarter.
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. Sales change from new and closed stores,
net reflects the change in net sales due to stores that have been opened
or closed during the period and are thereby excluded from the same-store
sales calculation.
Gross Profit
Gross profit increased $7.8 million, or 3.3%, to $242.8
million in the first half of 2004 as compared to $235.0 million in the
first half of the prior year. The gross profit increase of 3.3% is primarily
attributed to the 2.2% increase in net sales. As a percent of net sales,
our gross profit rate increased to 44.8% in the first half of 2004 as compared
to 44.3% in the first half of the prior year, reflecting reduced shrinkage
costs and a fresher product mix.
Selling and Administrative Expenses
Selling and administrative expenses increased $6.3 million,
or 2.9%, to $217.8 million in the first half of 2004 as compared to $211.5
million in the first half of the prior year due to increased marketing
costs and higher selling salaries, due in part to store openings during
the first half of 2004.
Operating Earnings
Operating earnings increased $1.5 million, or 6.5%, to
$25.0 million in the first half of 2004 as compared to $23.5 million in
the first half of the prior year. This increase was driven by both the
increase in net sales and the improvement in the gross profit rate, partially
offset by the increase in selling and administrative expenses.
Page 14
Net Sales
Net sales increased $1.1 million, or 1.2%, to $93.6 million
in the first half of 2004 as compared to $92.5 million in the first half
of the prior year. However, same-store sales for the first half of 2004
declined 0.8%, led by weakness in our Canadian stores. The increase in
net sales is attributable to the impact of changes in the Canadian exchange
rate, which improved net sales by $1.6 million during the first half of
2004. Sales per square foot increased slightly to $154 for the first half
of 2004 from $153 for the first half of the prior year.
Gross Profit
Page 15
Gross profit remained flat at $43.7 million in the first
half of 2004 as compared to the first half of the prior year. As a percent
of sales, our gross profit rate decreased to 46.7% in the first half of
2004 as compared to 47.2% in the first half of the prior year, due primarily
to the transition in the Canadian stores from domestically produced footwear
to higher-grade imported product.
Selling and Administrative Expenses
Selling and administrative expenses increased $2.4 million,
or 5.3%, to $48.5 million in the first half of 2004 as compared to $46.1
million in the first half of the prior year. Approximately $0.6 million
of the increase is due to changes in the Canadian exchange rate. The remaining
increase is due to a combination of increased retail facilities costs,
increased consulting fees, and increased employee benefit costs.
Operating Earnings
The operating loss of $4.8 million in the first half of
2004 increased from an operating loss of $2.4 million in the first half
of the prior year, due principally to the increase in selling and administrative
expenses.
Net Sales
Net sales increased $29.5 million, or 10.6%, to $308.4
million in the first half of 2004 as compared to $278.9 million in the
first half of the prior year. This increase was due to approximately $24.4
million of sales for the Bass footwear line. In addition, although our
Dr. Scholl's and Santana businesses have posted wholesale sales gains,
weakness in our children's division has partially offset those gains.
Page 16
Gross Profit
Gross profit increased $6.5 million, or 7.0%, to $98.9
million in the first half of 2004 as compared to $92.4 million in the first
half of the prior year. As a percent of net sales, our gross profit decreased
to 32.1% in the first half of 2004 as compared to 33.1% in the first half
of the prior year. The decline in our gross profit rate is principally
due to higher allowances related to the disposal of Bass closeout footwear
acquired under an asset purchase agreement.
Selling and Administrative Expenses
Selling and administrative expenses increased $10.3 million,
or 15.5%, to $77.1 million in the first half of 2004 as compared to $66.8
million in the first half of the prior year. This increase is due to transition
and assimilation costs related to the Bass footwear line of approximately
$4.8 million and an additional $5.8 million of typical selling and administrative
costs associated with Bass footwear, including selling costs, warehousing
and distribution, marketing, sourcing, etc.
Operating Earnings
Operating earnings decreased $3.8 million, or 15.1%, to
$21.8 million in the first half of 2004 as compared to $25.6 million in
the first half of the prior year. This decrease is due to weakness in our
children's business as well as Bass transition and assimilation costs of
$4.8 million.
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
Operating Earnings
For the first half of 2004, the Shoes.com business generated
an operating loss of $0.1 million compared to an operating loss of $0.3
million for the prior year. The earnings improvement is due to the $0.5
million settlement received in the second quarter, offset by increased
warehouse expenses to move facilities to accommodate the Bass acquisition.
Page 17
Other Corporate Expenses
For the first half of 2004, unallocated corporate administrative
and other costs were $13.7 million as compared to $12.4 million in the
first half of the prior year. The increase is attributable to both increased
consulting costs associated with Project ExCEL and a charge of $0.6 million
recorded in the first quarter related to pre-trial interest awarded in
connection with the Redfield litigation. For further information on the
Redfield litigation, see Part II - Item 1 - Legal Proceedings.
Borrowings
Total debt obligations have declined by $5.0 million,
or 3.8%, to $127.5 million at July 31, 2004 as compared to $132.5 million
at August 2, 2003. Interest expense decreased $0.3 million, or 14.9%, to
$2.2 million in the second quarter of 2004 as compared to $2.5 million
in the second quarter of the prior year. The reduction in interest expense
was due to lower average daily borrowings compared with the second quarter
of the prior year.
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 the Company's accounts receivable
and inventory. 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 would then be
subject to certain financial covenants. 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.
At July 31, 2004, the Company had $127.5 million of borrowings
outstanding and $21.0 million in letters of credit outstanding under the
Amended and Restated Credit Agreement. Total additional availability was
approximately $194.5 million at July 31, 2004.
Working Capital and Cash Flow
Page 18
A summary of key financial data and ratios at the dates
indicated is as follows:
Working capital at July 31, 2004 was $306.6 million, which
was $12.8 million higher than at January 31, 2004 and $43.4 million higher
than at August 2, 2003. The improvement in our working capital is attributable
to continued growth in cash and cash equivalents as a result of our positive
financial results over the past twelve months as well as effective management
of our outstanding debt obligations and other current liabilities. Our
current ratio, the relationship of current assets to current liabilities,
decreased to 1.9 to 1 at July 31, 2004 from 2.2 to 1 at January 31, 2004
and remained flat compared to August 2, 2003. The current ratio is generally
lower at the end of the second quarter as compared to the year-end ratio
due to the seasonality of inventory purchases in preparation for the back-to-school
selling season that occurs during the third quarter.
At July 31, 2004, the Company had $71.5 million of cash
and cash equivalents, substantially all of 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.
Cash provided by operating activities was $25.0 million
in the first half of 2004 as compared to $54.4 million last year, a difference
of $29.4 million. This difference primarily reflects the investment of
approximately $13.4 million in Bass inventory and approximately $5.9 million
of accounts receivable from sales of Bass footwear.
Cash used for investing activities was $14.1 million in
the first half of 2004 as compared to $15.9 million last year. Investing
activities primarily include capital expenditures. Our capital expenditures
are relatively consistent with the prior year and are in line with our
planned levels. The majority of our capital expenditures in the second
quarter were used to both retrofit existing stores and open new stores
in our retail divisions.
Cash provided by financing activities was $4.9 million
in the first half of 2004 as compared to cash used for financing activities
of $20.2 million last year, a difference of $25.1 million. This difference
represents an increase in our short-term notes payable of $8.0 million
since the beginning of the year as compared to debt reductions totaling
$20.0 million in the first half of last year. The increase in short-term
notes payable was used to fund operations, including the Bass inventory
and accounts receivable as well as the related transition and assimilation
costs. In connection with its Amended and Restated Credit Agreement, the
Company incurred $1.1 million in debt issuance costs in the second quarter,
which are being deferred and amortized to expense over the five-year term
of the agreement.
In May 2000, we announced a stock repurchase program authorizing
the repurchase of up to 2 million shares of our outstanding common stock.
Since the inception of this program, we have purchased a total of 928,900
shares for $11.3 million. No shares were purchased under the plan in either
the first half of 2004 or during any of fiscal 2003.
The Company paid dividends of $0.10 per share in the second
quarter of 2004 and the second quarter of the prior year.
No material changes have occurred related to critical
accounting policies and estimates since the end of the most recent fiscal
year. For further information, see Item 7 of the Company's Annual Report
on Form 10-K for the year ended January 31, 2004.
This Form 10-Q contains forward-looking statements. Such
statements are subject to various risks and uncertainties that could cause
actual results to differ materially. These include (i) general economic
conditions and the consumer's preferences
Page 19
and purchasing patterns, which may be influenced by consumers'
disposable income; (ii) the uncertainties of currently pending litigation;
(iii) intense competition within the footwear industry; and (iv) political
and economic conditions or other threats to continued and uninterrupted
flow of inventory from Brazil and China, where the Company relies heavily
on third-party manufacturing facilities for a significant amount of its
inventory. In Item 1 of the Company's Annual Report on Form 10-K for the
year ended January 31, 2004, detailed risk factors that could cause variations
in results to occur are listed and further described. Such description
is incorporated herein by reference.
No material changes have taken place in the quantitative
and qualitative information about market risk since the end of the most
recent fiscal year. For further information, see Item 7A of the Company's
Annual Report on Form 10-K for the year ended January 31, 2004.
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 July 31, 2004, management of the Company, including
the Chief Executive Officer and Chief Financial Officer, conducted an evaluation
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures with respect to the information generated for use
in this Quarterly Report. Based upon and as of the date of that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded
the Company's disclosure controls were effective to provide reasonable
assurance that information required to be disclosed in the reports that
the Company files or submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms. There have been no changes
in the Company's internal control over financial reporting during the quarter
ended July 31, 2004, that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
It should be noted that while the Company's management,
including
the Chief Executive Officer and Chief Financial Officer, believes the Company's
disclosure controls and procedures provide a reasonable level of assurance,
they do not expect that the Company's disclosure controls and procedures
or internal control over financial reporting will prevent all errors and
all fraud. A control system, no matter how well conceived or operated,
can provide only reasonable, not absolute, assurance the objectives of
the control system are met. Further, the design of a control system must
reflect the fact 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 all control issues and instances of fraud, if any, have been
detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and 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 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 errors or fraud may occur and not be detected.
Page 20
ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
CONSOLIDATED RESULTS
($ millions)
Net
Sales
Net
Sales
Net
Sales
Net
Sales
Net sales
$
$
Cost of goods sold
Gross profit
Selling and
administrative expenses
Operating earnings
Interest expense
Interest income
)
)
)
)
Earnings before
income taxes
Income tax provision
)
)
)
)
Net earnings
$
$
Net sales increased $0.3 million, or 0.1%, to $458.7
million in the second quarter of 2004 as compared to $458.4 million in
the second quarter of the prior year. This increase is primarily attributable
to the acquisition of the Bass footwear license at the beginning of fiscal
2004, which contributed $9.1 million of net sales during the second quarter.
Offsetting the impact of the Bass sales increase was weakness in both the
children's and women's private label wholesale divisions as well as a decline
in sales at the Naturalizer Retail stores.
Gross profit increased $1.4 million, or 0.7%, to $189.3
million for the second quarter of 2004 as compared to $187.9 million in
the second quarter of the prior year. As a percent of net sales, our gross
margin percentage increased to 41.3% in the second quarter from 41.0% in
the second quarter of the prior year as a result of higher gross profit
rates at Famous Footwear due to the fresher product mix and lower markdowns.
Selling and administrative expenses increased $6.7 million,
or 4.0%, to $176.0 million for the second quarter as compared to $169.3
million in the second quarter of the prior year. This increase is attributable
to both transition and assimilation costs related to the Bass footwear
line of approximately $1.5 million and to our ongoing investments in talent,
systems, and infrastructure intended to position the Company for future
growth. Offsetting these factors were benefits from reduced compensation
costs associated with stock-based and incentive compensation plans of $2.4
million compared to last year.
Interest expense decreased $0.3 million, or 14.9%, to
$2.2 million in the second quarter as compared to $2.5 million in the second
quarter of the prior year. The decrease in interest expense is due to a
decline in the average daily borrowings. In addition, on July 21, 2004,
the Company amended and restated its credit agreement, which resulted in
more favorable interest rates near the end of the second quarter.
Our consolidated effective tax rate was 30.9% in the
second quarter of 2004 as compared to 28.7% in the second quarter of the
prior year, reflecting a greater projected annual mix of domestic income.
We do not provide deferred taxes on unremitted foreign earnings, as it
is our intention to reinvest those earnings indefinitely or to repatriate
the earnings only when it is tax-advantageous to do so.
FAMOUS FOOTWEAR
($ millions)
Net
Sales
Net
Sales
Net
Sales
Net
Sales
Operating Results
Net sales
Cost of goods sold
Gross profit
Selling and
administrative expenses
Operating earnings
Key Metrics
Same-store sales % change
Same-store sales $ change
Sales change from new and
Sales per square foot
Square footage
(thousand sq. ft.)
Stores opened
Stores closed
Ending stores
Net sales increased $0.9 million, or 0.3%, to $269.8
million in the second quarter of 2004 as compared to $268.9 million in
the second quarter of the prior year. This increase is primarily attributable
to sales growth from net new stores. During the second quarter of 2004,
we opened 26 new stores and closed 8, resulting in 915 stores at the end
of the second quarter as compared to 909 at the end of the second quarter
of the prior year. Sales per square foot were $43, even with the year ago
period. Same-store sales were down 2.5% during the second quarter due to
lower traffic counts, a later start to the back-to-school season and a
shift in tax-free days between the second and third quarters. In addition,
we experienced some weakness in our women's casual business, sandals and
our junior category.
Gross profit increased $2.8 million, or 2.3%, to $121.8
million in the second quarter of 2004 as compared to $119.0 million in
the second quarter of the prior year. As a percentage of net sales, we
achieved a slight improvement in gross profit to 45.1% in the second quarter
of 2004 from 44.3% in the second quarter of the prior year. This improvement
was driven by our fresher product mix and lower markdowns.
Selling and administrative expenses increased $3.1 million,
or 2.8%, to $109.2 million for the second quarter of 2004 as compared to
$106.1 million in the second quarter of the prior year. This increase is
primarily attributable to increased marketing costs and higher selling
salaries, due in part to the large number of store openings during the
second quarter. As a percentage of net sales, these costs increased to
40.4% from 39.5% last year.
Operating earnings decreased $0.3 million, or 2.1%, to
$12.6 million for the second quarter of 2004 as compared to $12.9 million
in the second quarter of the prior year. This decrease was driven by increases
in selling and administrative expenses, partially offset by the improvement
in the gross profit rate.
NATURALIZER RETAIL
($ millions)
Net
Sales
Net
Sales
Net
Sales
Net
Sales
Operating Results
Net sales
$
$
Cost of goods sold
Gross profit
Selling and
administrative expenses
Operating earnings
)
$
)
)
)
Key Metrics
Same-store sales % change
Same-store sales $ change
Sales change from new and
closed stores, net
Impact of changes in
Canadian exchange
rate on sales
Sales per square foot
Square footage
(thousand sq. ft.)
Stores opened
Stores transferred, net
Stores closed
Ending stores
Net sales decreased $1.4 million, or 2.8%, to $48.3 million
in the second quarter of 2004 as compared to $49.7 million in the second
quarter of the prior year. This decrease is attributable to a decrease
in same-store sales of 3.9%. However, the favorable impact of the Canadian
exchange rate improved net sales by $0.2 million. During the second quarter
of 2004, we opened 4 new stores and closed 3, resulting in 380 stores at
the end of the second quarter of 2004 as compared to 386 at the end of
the second quarter of the prior year. Sales per square foot declined to
$80 from $83 in the year ago period. Our net sales decline is partly attributable
to our emphasis on sandals and casual footwear, while the market was favoring
dressy looks, leading to a poor performance in Canada and in our U.S. outlet
stores. We are focused on providing better-fashion, higher-grade imported
product in our Canadian stores and providing trend-right merchandise in
our U.S. outlet stores, both priced to deliver better margins.
Gross profit decreased $0.9 million, or 4.3%, to $21.3
million in the second quarter of 2004 as compared to $22.2 million in the
second quarter of the prior year. As a percentage of net sales, gross profit
declined to 44.1% in the second quarter from 44.8% in the year ago quarter.
This decline was driven by higher markdowns in our Canadian stores to clear
domestically- produced footwear as we transition to higher-grade imported
product.
Selling and administrative expenses increased $0.7 million,
or 2.5%, to $23.9 million for the second quarter of 2004 as compared to
$23.2 million in the second quarter of the prior year. Approximately $0.1
million of the increase is due to changes in the Canadian exchange rate.
The remaining $0.6 million relates to a combination of increased consulting
fees and increased employee benefit costs.
Naturalizer Retail's operating loss increased to $2.6
million in the second quarter of 2004 as compared to a loss of $1.0 million
in the second quarter of the prior year. The current period loss was due
to the same-store sales decline, lower gross profit rates and higher markdowns
in Canada.
WHOLESALE OPERATIONS
($ millions)
Net
Sales
Net
Sales
Net
Sales
Net
Sales
Operating Results
Net sales
$
$
$
Cost of goods sold
Gross profit
Selling and
administrative
expenses
Operating earnings
$
$
Key Metrics
Unfilled order
position at
End of period
Net sales decreased $1.0 million, or 0.7%, to $136.9
million in the second quarter of 2004 as compared to $137.9 million in
the second quarter of the prior year. Although net sales for the Bass footwear
line contributed $9.1 million in the quarter, weakness in children's and
women's private label markets more than offset the increase from net sales
of Bass footwear. A shortage of trucks in the Midwest and delays at the
West Coast ports at the end of the second quarter also negatively impacted
net sales for that period.
Gross profit decreased $1.0 million, or 2.1%, to $44.6
million in the second quarter of 2004 as compared to $45.6 million in the
second quarter of the prior year. As a percentage of net sales, gross profit
declined to 32.6% in the second quarter from 33.1% in the second quarter
of the prior year. This decline is primarily due to higher allowances granted
to our department store customers within our Bass and Dr. Scholl's wholesale
divisions.
Selling and administrative expenses increased $2.6 million,
or 8.2%, to $35.6 million for the second quarter of 2004 as compared to
$33.0 million in the second quarter of the prior year. Selling and administrative
costs include $1.5 million to transition the Bass business to our headquarters
and distribution centers. In addition, the acquisition of the Bass footwear
license resulted in an additional $2.8 million of typical selling and administrative
costs during the quarter, including selling costs, warehousing and distribution,
marketing, sourcing, etc. Offsetting these factors were benefits from reduced
compensation costs associated with stock-based and incentive compensation
plans.
Operating earnings decreased $3.6 million, or 29.1%,
to $9.0 million for the second quarter of 2004 as compared to $12.6 million
in the second quarter of the prior year. This decrease is due to weakness
in our children's and women's private label markets, lower gross profit
rates and $1.5 million in expenses related to transition and assimilation
of the Bass business incurred during the second quarter of 2004.
OTHER SEGMENT
Net sales of Shoes.com increased $1.8 million, or 96.9%,
to $3.7 million in the second quarter of 2004 as compared to $1.9 million
in the second quarter of the prior year. Net sales increased $3.1 million,
or 92.7%, to $6.5 million in the first half of 2004 as compared to $3.4
million in the first half of the prior year. This increase reflects continuing
strong sales growth due to increased Web site traffic and improved conversion
rates.
The Shoes.com business generated operating earnings of
$0.1 million in the second quarter of 2004 as compared to an operating
loss of $0.2 million in the second quarter of the prior year. The earnings
improvement is due to a favorable settlement of $0.5 million received in
the second quarter of 2004 to discontinue operation of a former affiliate's
Web site.
Unallocated corporate administrative and other costs
were $5.9 million in the second quarter of 2004 as compared to $5.7 million
in the second quarter of the prior year. Corporate expenses increased due
to higher consulting costs related to Project ExCEL - our supply chain
management improvement initiative, partially offset by lower compensation
costs of $1.3 million associated with stock-based and incentive compensation
plans.
LIQUIDITY AND CAPITAL RESOURCES
($ millions)
(Decrease)
Notes payable
Long-term debt, including current
maturities
)
Total short- and long-term
debt
)
($ millions)
(Decrease)
Net cash provided by (used
for) operating activities
)
Net cash provided by (used
for) investing activities
)
)
Net cash provided by (used
for) financing activities
)
Increase in cash and cash equivalents
)
Working capital
($ millions
)
Current ratio
Total debt as a
percentage of total capitalization
CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
FORWARD-LOOKING STATEMENTS
ITEM 3
QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
ITEM 4
CONTROLS AND PROCEDURES
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.
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 one of our subsidiaries negligent and awarding the class
plaintiffs $1.0 million in damages. We have recorded this award along with
the cost of associated pre-trial interest and the estimated costs of sanctions
imposed on us by the court resulting from pre-trial discovery disputes
between the parties. We have recorded total pre-tax charges of $3.7 million
for these matters. In April 2004, the plaintiffs filed a motion for a new
trial; the court has denied that motion. The plaintiffs have appealed the
judgment to the Colorado Court of Appeals and have asked for a retrial.
The Company has cross-appealed the trial court's ruling as to the amount
of pre-judgment interest, and has conditionally appealed a number of the
trial court's rulings in the event of a retrial. Several other post-trial
motions are still pending before the trial court, 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 owners/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 consummated
settlements with several of these defendants and have reached agreements
in principle to settle with the remaining defendants and currently do not
anticipate the case will be tried. 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 approximately $3.6 million
is outstanding at July 31, 2004. We believe insurance coverage in place
entitles us to reimbursement for more than the recorded recovery. 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 20
years. In addition, various federal and state authorities have identified
the Company as a potentially responsible party for remediation at certain
other 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.
There have been no material developments during the quarter
ended July 31, 2004 in any other legal proceedings described in the Company's
Annual Report on Form 10-K for the year ended January 31, 2004.
Page 21
The following table provides information relating to the
Company's repurchase of common stock during the second quarter of 2004.
None
None
None
Page 22
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Page 23
PART II
OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
ITEM 2
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
Fiscal Period
of Shares
Purchased
Price Paid
per Share
of Shares Purchased
as Part of Publicly
Announced Program
of Shares that
May Yet Be
Purchased Under
the Program
(1) (2)
(2)
(2)
(2)
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
ITEM 4
SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
ITEM 5
OTHER INFORMATION
ITEM 6
EXHIBITS
(3)
(i)
Certificate of Incorporation of
the Company incorporated herein by reference from Exhibit 3 (a) to the
Company's Quarterly Report on Form 10-Q for the quarter ended May 4, 2002.
(ii)
Bylaws of the Company as amended
through February 5, 2004, incorporated herein by reference from Exhibit
3 (b) to the Company's Annual Report on Form 10-K for the year ended January
31, 2004.
(10.1)
Amended and Restated Credit Agreement,
dated as of July 21, 2004, among Brown Shoe Company, Inc., as lead 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.
(10.2)
Form of Performance Share Award
Agreement, filed herewith, to be issued under the Incentive and Stock Compensation
Plan of 2002.
(10.3)
Form of Non-Qualified Stock Option
Plan Award Agreement, filed herewith, to be issued under the Incentive
and Stock Compensation Plan of 2002.
(10.4)
Form of Incentive Stock Option
Agreement, filed herewith, to be issued under the Incentive and Stock Compensation
Plan of 2002.
(10.5)
Form of Restricted Stock Agreement,
filed herewith, to be issued under the Incentive and Stock Compensation
Plan of 2002.
(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
Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
SIGNATURES
Date: September 8, 2004
Chief Financial Officer and Treasurer
On Behalf of the Corporation and as the
Principal Financial Officer
BROWN SHOE COMPANY, INC.
INCENTIVE AND STOCK COMPENSATION PLAN OF 2002
PERFORMANCE SHARE AWARD AGREEMENT
You have been selected to be a Participant in the Brown Shoe Company, Inc. Performance Share Award Plan under the Incentive and Stock Compensation Plan of 2002 (the "Plan"), as specified below:
Participant : _______________________________________________________________________
Target Number of Performance Shares : ________________________________________________
Performance Period : February 1, 2004 to February 3, 2007
Performance Measure : Cumulative earnings per share for three fiscal years and compound annual revenue growth for three fiscal years.THIS AGREEMENT, effective March 4, 2004, represents the grant of Performance Shares (the "Award") by Brown Shoe Company, Inc., a New York corporation (the "Company"), to the Participant named above, pursuant to the provisions of the Plan.
The Plan provides a complete description of the terms and conditions governing the Award. If there is any inconsistency between the terms of this Award Agreement and the terms of the Plan, the Plan's terms shall completely supersede and replace the conflicting terms of this Award Agreement. All capitalized terms shall have the meanings ascribed to them in the Plan, unless specifically set forth otherwise herein. The parties hereto agree as follows:
The percent of Target Number of Performance Shares earned shall then be determined based on the following chart:
|
Annual Sales Growth Rate |
9%
7-9% 4-7% < 4% |
0%
0% 0% 0% |
125%
75% 50% 50% |
150%
100% 75% 75% |
175%
150% 125% 100% |
200%
175% 150% 125% |
| EPS |
<$10.25
|
$10.60
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$11.25
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$11.65
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$11.95
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Interpolation shall be used to determine the percent of the Award earned in the event the Company's EPS measure and revenue growth measure do not fall directly on one of the ranks listed in the above chart. However, no payoff is earned unless the minimum EPS of $10.25 is achieved.
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By:
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BROWN SHOE COMPANY, INC.
INCENTIVE AND STOCK COMPENSATION PLAN OF 2002
NON-QUALIFIED STOCK OPTION PLAN AGREEMENT
BROWN SHOE COMPANY, INC., a New York corporation (the "Company"), and ________________________________ (the "Optionee") hereby agree as follows:
Section 1 . Grant of Option .
In conformity with the Brown Shoe Company, Inc. Incentive and Stock Compensation Plan of 2002 ("Plan") and pursuant to action of the Compensation Committee charged with the administration thereof, the Company has granted to the Optionee on March 4, 2004 ("Date of Grant"), subject to the conditions and limitations hereinafter stated in this Agreement, the option to purchase at the price specified in Section 2 hereof, up to _______ shares of the Common Stock of the Company reserved for options under the Plan during a period commencing one (1) year after the Date of Grant and ending ten (10) years after the Date of Grant as follows:
The purchase price per share of Common Stock shall be $39.01 .
Section 3 . Conditions and Limitations on Right To Exercise Option .
Notwithstanding the provisions of Section 1 hereof:
Section 4 . Method of Exercise of Option and Payment of Option Price .
- Time for Exercise . This option may not, in any event, be exercised prior to the commencement of the second (2nd) year after the Date of Grant or after the expiration of ten (10) years from the Date of Grant.
- Exercise While on Leave of Absence . This option may not be exercised by the Optionee while on a leave of absence until he has returned to active employment with the Company, unless such exercise is expressly approved in writing by the Compensation Committee.
- Exercise if No Longer an Employee .
- Termination . Except as set forth in (2) below, the option herein granted must be exercised by the Optionee only while he is an employee of the Company or one of its subsidiaries (as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code)), or within sixty (60) days after termination as an employee, but no later than ten (10) years from the Date of Grant.
- Death . If the Optionee dies while employed by the Company or one of its subsidiaries or dies within sixty (60) days after termination of such employment, his option may be exercised to the extent the Optionee was entitled to exercise it at the date of his death, by a legatee or legatees of the Optionee under his last will, or by his personal representatives or distributees at any time within one (1) year after his death, but not after ten (10) years from the Date of Grant.
Section 5 . Delivery of Shares .
- Exercise . The option herein granted may be exercised (in whole or in part) at any time or from time to time after the right to exercise said option arises and before termination of said right, by delivering to the Treasurer of the Company or by sending by registered mail, postage prepaid, to the Company for the attention of the Treasurer (i) a written request designating the number of shares of Common Stock to be purchased, signed by the Optionee or the purchaser acting under Section 3(c)(2) hereof, and (ii) payment to the Company of the full purchase price of the shares of Common Stock with respect to which the option is exercised.
- Payment . The purchase price is to be paid in full upon the exercise of an option, either (i) in cash, or (ii) in the discretion of the Compensation Committee, by the tender (either actual or by attestation) to the Company of shares of the Common Stock owned by the Optionee and registered in his name having a fair market value equal to the cash exercise price of the option being exercised, with the fair market value of such stock to be determined in such appropriate manner as may be provided by the Compensation Committee or as may be required in order to comply with, or to conform to the requirements of, any applicable law or regulation, or (iii) in the discretion of the Compensation Committee, by any combination of the payment methods specified in clauses (i) and (ii) hereof, or (iv) cashless exercise as permitted under Federal Reserve Board's Regulation T, subject to applicable securities law restrictions; provided, however, that no shares of Common Stock may be tendered in exercise of an option if such shares have not been held by the Optionee for at least six months. The proceeds of sale of stock subject to option are to be added to the general funds of the Company or to the shares of the Common Stock held in treasury and used for the corporate purposes of the Company, as the Board of Directors shall determine.
The Company shall not be required to issue or deliver any certificates for shares of Common Stock, pursuant to the exercise of this option, prior to (i) the admission of such shares to listing on any stock exchange on which the Company's Common Stock may then be listed, (ii) the completion of any registration and/or qualification of such shares under any state or federal laws or rulings or regulations of any governmental regulatory body, which the Company shall determine to be necessary or advisable, or (iii) if the Company so requests, the filing with the Company by the Optionee or the purchaser acting under Section 3(c)(2) hereof of a representation in writing that at the time of such exercise, it is his present intention to acquire the shares being purchased for investment and not for resale or distribution.
Section 6 . Conditions to Exercise of Option .
| BROWN SHOE COMPANY, INC. | |
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| Andrew M. Rosen | |
| Chief Financial Officer and Treasurer | |
| ACKNOWLEDGED AND ACCEPTED; | |
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| Optionee |
BROWN SHOE COMPANY, INC.
INCENTIVE AND STOCK COMPENSATION PLAN OF 2002
INCENTIVE STOCK OPTION AGREEMENT
BROWN SHOE COMPANY, INC., a New York corporation (the "Company"), and ______________________________ (the "Optionee") hereby agree as follows:
Section 1 . Grant of Option .
In conformity with the Brown Shoe Company, Inc. Incentive and Stock Compensation Plan of 2002 ("Plan") and pursuant to action of the Compensation Committee charged with the administration thereof, the Company has granted to the Optionee on March 4, 2004 ("Date of Grant"), subject to the conditions and limitations hereinafter stated in this Agreement, the option to purchase at the price specified in Section 2 hereof, up to _______ shares of the Common Stock of the Company reserved for options under the Plan during a period commencing one (1) year after the Date of Grant and ending ten (10) years after the Date of Grant as follows:
The purchase price per share of Common Stock shall be $39.01.
Section 3 . Conditions and Limitations on Right To Exercise Option .
Notwithstanding the provisions of Section 1 hereof:
The Company shall not be required to issue or deliver any certificates for shares of Common Stock, pursuant to the exercise of this option, prior to (i) the admission of such shares to listing on any stock exchange on which the Company's Common Stock may then be listed, (ii) the completion of any registration and/or qualification of such shares under any state or federal laws or rulings or regulations of any governmental regulatory body, which the Company shall determine to be necessary or advisable, or (iii) if the Company so requests, the filing with the Company by the Optionee or the purchaser acting under Section 3(c)(2) hereof of a representation in writing that at the time of such exercise, it is his present intention to acquire the shares being purchased for investment and not for resale or distribution.
Section 6 . Conditions to Exercise of Option .
| BROWN SHOE COMPANY, INC. | |
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| Andrew M. Rosen | |
| Chief Financial Officer and Treasurer | |
| ACKNOWLEDGED AND ACCEPTED: | |
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| Optionee |
Name
Address
City, State, Zip
Dear _________________________:
Enclosed are three certificates for Brown Shoe Company, Inc. Common Stock representing _________ shares of restricted stock (the "Shares) awarded to you on _______________, ____ by the Brown Shoe Company, Inc. Compensation Committee and granted under the Brown Shoe Company, Inc. Incentive and Stock Compensation Plan of 2002, as amended (the "Plan"). The following summarizes some of the more important provisions of the Plan and provides an explanation of the tax consequences.
Restrictions
The Shares are restricted as to disposition and are subject to forfeiture
unless certain conditions are met. Each certificate representing Shares
includes a legend referring to the Plan. This legend provides that Shares
cannot be sold, transferred, re-registered or disposed of until said legend
has been removed from the certificate. Shares shall vest and the legend
shall be removed as follows:
provided, however, you shall only be entitled to receive Shares
free of restrictions if, at the time of the lapse of such restrictions,
you are then in the employ of the Company and shall have been continuously
so employed since the date of grant of the Shares. If you do not meet these
conditions, such Shares shall be forfeited. In the case of death, retirement
at age 65, or early retirement approved by the Compensation Committee,
all Shares shall vest immediately and be free of restrictions. Separate
certificates have been registered in your name in amounts that correspond
with the above vesting schedule.
Voting Rights and Dividend Rights
You will be entitled to full voting rights and dividend rights for all Shares of restricted stock, beginning with the date of grant, regardless of restriction periods. Dividends may be paid directly to you or may be credited to your dividend re-investment plan account. Dividend rights and voting rights will be cancelled in the event the shares are forfeited.
Tax Considerations
In accordance with Section 83 of the Internal Revenue Code of 1986 as amended, when property is transferred to an employee, income becomes recognizable to the employee at the first time such property is not subject to a substantial risk of forfeiture. Therefore, the above vesting restriction would prevent immediate taxation to you and would give rise to income only when the restriction on the Shares lapses. Notwithstanding the restriction, you may make an irrevocable election to include in your taxable income at the time of grant, the market value of the Shares at the date of grant ($________ per share). If you make this Section 83 election, income will be recognized immediately based on the market price at grant, but you will avoid tax on any appreciation that occurs between the grant date and the date you dispose of the Shares in a taxable transaction. If you do not make a Section 83 election, then the market value of the Shares on the date restrictions lapse will be includable as ordinary income on the date such restrictions lapse.
Please note that should you make a Section 83 election to immediately include the Share value as ordinary income, any tax paid by you now cannot be recovered in the event your shares are subsequently forfeited. This risk together with your view of future stock performance and tax rates may impact your decision as to when you elect to recognize income. Any Section 83 election must be tendered to the Treasurer's office no later than _______________________. You may want to review your individual tax circumstances with your tax advisor prior to selecting your tax treatment.
Enclosed is a copy of the Offering Circular for the Brown Shoe Company, Inc. Incentive and Stock Compensation Plan. Reference should be made to this document for specific Plan details and information.
If you have any questions or would like to discuss specific Plan provisions, please let me know.
Sincerely,
Enclosures
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CERTIFICATIONS
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I, Ronald A. Fromm, Chairman and Chief Executive Officer
of Brown Shoe Company, Inc. (the "registrant"), certify that:
| Date: September 8, 2004 |
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CERTIFICATIONS
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I, Andrew M. Rosen, Senior Vice President, Chief Financial
Officer and Treasurer of Brown Shoe Company, Inc. (the "registrant"), certify
that:
| Date: September 8, 2004 |
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I n connection with the Quarterly Report of Brown Shoe Company, Inc. (the "Registrant") on Form 10-Q for the quarter ended July 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Ronald A. Fromm, Chairman and Chief Executive Officer of the Registrant, and Andrew M. Rosen, Senior Vice President, Chief Financial Officer and Treasurer of the Registrant, certify, to the best of our knowledge, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
/s/ Andrew M. Rosen
Andrew M. Rosen
Senior Vice President, Chief Financial Officer and Treasurer
Brown Shoe Company, Inc.
September 8, 2004