SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 1998 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the fiscal year ended January 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from ____________ to __________ ____________ Commission file number 1-2191 ____________ BROWN GROUP, INC. (Exact name of registrant as specified in its charter) New York 43-0197190 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 8300 Maryland Avenue St. Louis, Missouri 63105 (Address of principal executive offices) (Zip Code) (314) 854-4000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - ---------------------------------------- ------------------------- Common Stock - par value $3.75 a share New York Stock Exchange with Common Stock Purchase Rights Chicago Stock Exchange 9-1/2% Senior Notes due October 15, 2006 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ x ] As of April 3, 1999, 18,204,290 common shares were outstanding, and the aggregate market value of the common shares held by non-affiliates of the registrant was approximately $247 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual shareholders report for the year ended January 30, 1999, are incorporated by reference into Parts I and II. Portions of the proxy statement for the annual meeting of shareholders to be held May 27, 1999, are incorporated by reference into Part III. PART I ------ ITEM 1 - BUSINESS - ----------------- The Company, founded in 1878 and incorporated in 1913, operates in the Footwear industry. Current activities include the operation of retail shoe stores and the sourcing and marketing of footwear for women, men and children. During 1998, categories of footwear sales were approximately 59% women's footwear, 25% men's footwear and 16% children's footwear. This composition has remained relatively constant over the past few years. Approximately 68% of 1998 footwear sales were made at retail compared to 66% in 1997 and 63% in 1996. See Note 6 of Notes to Consolidated Financial Statements on page 29 of the Annual Report to Shareholders for the year ended January 30, 1999, which is incorporated herein by reference, for additional information regarding the Company's business segments. The Company's business is seasonal in nature due to consumer spending patterns with higher back-to-school, Easter and Christmas holiday season sales. Traditionally, the third fiscal quarter accounts for a substantial portion of the Company's operating earnings for the year. The Company has approximately 11,000 full and part-time employees. Approximately 100 employees engaged in the warehousing of footwear in the United States are employed under a union contract, which will expire in September, 1999. In Canada, approximately 300 factory and warehouse employees are employed under union contracts, which expire in October, 1999 and October, 2000. Retail Operations - ----------------- The Company's retail operations at January 30, 1999 include 1,289 retail shoe stores in the United States and Canada under the Famous Footwear, Naturalizer and F.X. LaSalle names. A portion of the retail sales includes Company-owned and licensed brand names. In retail sales of footwear, the Company competes in a highly fragmented market with many organizations of various sizes operating retail shoe stores and departments. Competitors include local, regional and national shoe store chains, department stores, discount stores and numerous independent retail operators of various sizes. Quality, customer service, store location, merchandise selection and pricing are important components of retail competition. Famous Footwear Famous Footwear with over 800 stores is America's largest chain selling branded footwear for the entire family. Founded over 30 years ago, Famous Footwear was purchased by the Company in 1981 as a 32 store chain and has grown to 827 stores in the United States as of the end of fiscal 1998. Famous Footwear stores feature a wide selection of "brand name shoes for less for the entire family" of athletic, casual and dress shoes for women, men and children typically priced at 10% to 50% off manufacturers' suggested retail prices. Famous Footwear stores average approximately 5,500 square feet in size and are primarily located in strip centers and regional and outlet malls in the United States. Famous Footwear's branded product offering at discounted prices is designed to appeal to the needs of its target customers - value-oriented families. Footwear brands include Nike, Reebok, adidas, Skechers, Rockport, What's What, Naturalizer, Connie, Keds, Nunn Bush and Buster Brown. ITEM 1 - BUSINESS (Continued) - ----------------- Famous Footwear has developed store model stocks which reflect consumer demand, historical brand preferences, styles and sizes. These inventory models are adjusted based upon store location and promotional opportunities. Product and promotional mix are managed to control gross margins. The Company in fiscal 1999 expects to complete the replacement of all existing store information systems. The new systems will improve inventory controls, training and communication between headquarters and the stores as well as reduce store technology costs. With two distribution centers located in Madison, Wisconsin and Lebanon, Tennessee, Famous Footwear's distribution systems allow for merchandise to be delivered typically every week. In addition to the delivery of new styles and current promotional items, these systems provide item replenishment of the prior week's sales and redistribution of product to stores demonstrating the greatest item sell-through from stores with lower item sell-through. These systems of replenishment and distribution are designed to ensure that the right product is at the right place at the right time, and to control markdowns and maximize gross margins. Famous Footwear's marketing program includes television and newspaper advertising, in-store signage and database marketing, all of which are designed to further develop and reinforce the Famous Footwear concept with the target customer. In 1998, management invested over $27 million to communicate Famous Footwear's philosophy: delivering the customer the best value and service on quality, branded footwear, typically, on a weekly basis. Naturalizer The Company's Naturalizer stores are showcases for the Company's flagship brand of women's shoes. The Company owns and operates 331 Naturalizer stores located in the United States and 115 stores in Canada. Naturalizer specialty stores located in regional malls average approximately 1,200 square feet in size, and outlet stores located in outlet malls and shopping centers average approximately 2,600 square feet in size. These stores are designed and merchandised to appeal to the Naturalizer target customer who is a style and comfort conscious woman between 40-60 years old, who seeks quality and value in her footwear selections. In addition, the Company is repositioning certain styles to focus on a younger, active woman aged between 35-45 years old. The Naturalizer stores offer a selection of women's footwear styles, including dress, casual and athletic shoes, primarily under the Naturalizer brand, but also under the Naturalsport brand of casual shoes. The Naturalizer brand is one of North America's leading women's footwear brands, providing stylish, comfortable and quality footwear in a variety of patterns and sizes. Retail price points are typically between $50 and $85 per pair. Marketing programs for the Naturalizer stores have complemented the Company's Naturalizer brand advertising, building on the brand's consumer recognition and reinforcing the brand's added focus on style and quality. The Company has invested in additional Naturalizer sales force training commensurate with the brand image of style, quality and comfort, and utilizes a database marketing program, which targets and rewards frequent customers. In 1998, the Company installed updated point-of-sale registers and in 1999 a new merchandising reporting system will become operational. These systems will enhance management information and capture consumer preferences. ITEM 1 - BUSINESS (Continued) - ----------------- The Company also operates 16 F.X. LaSalle retail stores, primarily in the Montreal, Canada market, which sell better-grade men's and women's footwear brands. This footwear, primarily imported from Italy, retails at price points ranging from $100 to $250. These stores average approximately 2,100 square feet. A summary of retail footwear stores operated by the Company at the prior three fiscal year-ends is as follows: Company-Owned Retail Footwear Stores 1998 1997 1996 ---- ---- ---- Famous Footwear Family footwear stores which feature "brand names for less"; located in strip centers and regional and outlet malls. 827 815 794 Naturalizer Stores selling the Naturalizer and Naturalsport brands of women's footwear; located in major malls, shopping centers and outlet centers throughout the U.S. and Canada. 446 448 446 F. X. LaSalle Stores selling men's and women's better-grade branded footwear in major malls in Canada. 16 16 16 ----- ----- ----- Total 1,289 1,279 1,256 ===== ===== ===== Wholesale Operations - -------------------- Footwear is distributed by the Company's Brown Branded, Pagoda and Canada Wholesale divisions to approximately 2,800 retailers including department stores, mass merchandisers and independent retailers in the United States, Canada and to affiliates. These divisions import substantially all of their footwear through the Brown Shoe Sourcing division, except for the Canadian Wholesale division which also produces footwear in two Company-owned manufacturing facilities. Most of the Company's wholesale customers also sell shoes bought from competing footwear suppliers. The nature of the Company's wholesale shoe business is such that orders for shoes are solicited by the Company's sales force throughout the year for the two major selling seasons, spring and fall. Orders placed as a result of these sales efforts are taken before the shoes are sourced with delivery generally within three to four months thereafter. Footwear is sold to wholesale customers on both a first-cost and landed basis. First-cost sales are those sales in which the Company obtains title to footwear from its overseas suppliers and typically relinquishes title to customers at a designated overseas port. Landed sales are those sales in which the Company obtains title to footwear from its overseas suppliers and maintains title until the footwear is inside the United States borders. After importing, the footwear may be sold directly to customers; certain high volume styles are inventoried to allow prompt shipment on reorders. - - ITEM 1 - BUSINESS (Continued) - ----------------- At February 27, 1999, the Company's core wholesale operations had a backlog of unfilled orders of approximately $129 million compared to $134 million on February 28, 1998. Most orders are for delivery within the next 90-120 days, and although orders are subject to cancellation, the Company has not experienced significant cancellations in the past. The backlog at a particular time is affected by a number of factors, including seasonality, the continuing trend among customers to reduce the lead time on their orders and the timing of licensed product releases such as movies or sporting events. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments. In the past, the Company also has distributed footwear through its Pagoda International division. This division marketed the Company's branded and licensed athletic, casual and dress footwear for men, women and children, typically at moderate price points primarily to better specialty retailers in Europe, Latin America and the Far East. In 1997, the Company made a decision to reduce its investment in the Pagoda International division as a result of excessive inventories and declining performance. The restructuring plan included the sale of the remaining Brazilian inventory of licensed products and the shift of European inventory ownership and marketing of its licensed footwear to other parties. See Note 4 of Notes to Consolidated Financial Statements on page 28 of the Annual Report to Shareholders for the year ended January 30, 1999, which is incorporated herein by reference, for additional information regarding the restructuring of the Pagoda International division. Brown Branded Division The Brown Branded division is one of the nation's leading marketers of women's footwear. This division designs and markets the Company's Naturalizer, Naturalsport, Life Stride, LS Studio, and Night Life brands. Each of the Company's brands is targeted to a specific customer segment representing different footwear styles and taste levels at different price points. The keystone of the Company's brand portfolio is the Naturalizer brand, which has a tradition of combining style and comfort. Introduced over 65 years ago, Naturalizer is one of the nation's leading women's footwear brands. Naturalizer and Naturalsport products emphasize style, comfort, quality and value. These brands provide a wide range of casual and dress footwear products, which combine comfort and fit with classic, relevant and up-to-date styling. Life Stride, and its brand extension, LS Studio, is a leading entry-level price point, women's brand in department stores, offering fashion-right styling. The Night Life brand is the Company's line of women's shoes for special occasions. The division's brands are sold in department stores, multi- line shoe stores and branded specialty stores. Currently the Company sells footwear products to substantially all the nation's major department store companies, including Dayton-Hudson, Dillard's, Federated, The May Company and Sak's. The Brown Branded division maintains an independent sales force to market its Naturalizer, Naturalsport, Life Stride, LS Studio and Night Life brands primarily to department and specialty footwear stores domestically. The sales force is responsible for developing and implementing marketing programs for each brand, planning promotional events, assisting in product development and managing the Company's relationships with its wholesale customers. ITEM 1 - BUSINESS (Continued) - ----------------- The Company continues to build on and take advantage of the heritage and consumer recognition of its traditional brands, and it also is more clearly defining the independent brand images of certain other brands. In each of the past two years, the division has invested approximately $19 million in advertising and marketing in support of its brands. The Company continues to focus on these marketing efforts by augmenting its market research, product development and marketing communications. Pagoda Division The Pagoda division designs and markets branded, licensed and private label athletic, casual and dress footwear products to men, women and children at a variety of price points via mass merchandisers, mid-tier retailers, chains and department stores in the United States and Canada. Major brand names owned by the Pagoda division include Air Step, Buster Brown, Connie, Larry Stuart and Wildcats. The division is a resource for many of the nation's larger retailers, including Dillard's, Famous Footwear, Federated, Kmart, Nordstrom, Payless ShoeSource, Sak's, Sears, Spiegel, Target and Wal-Mart, providing its wholesale customers with over 45 million pairs of shoes in 1998. The Pagoda division also seeks opportunities to develop additional brands through selective acquisitions or licenses. Products sold under license agreements, which are generally for an initial term of two to three years and subject to renewal, were responsible for approximately 8%, 11% and 13% of consolidated sales in 1998, 1997, and 1996, respectively. Pagoda has a long-term licensing agreement which is renewable through 2014 to market the Dr. Scholl's brand of affordable, casual and work shoes for men and women both in the United States and in Canada. The Company's other significant license agreements include Barbie, Russell Athletic, Star Wars, Unionbay and various Walt Disney properties, including Mickey & Co., Mulan, Simba's Pride and Tarzan. No single licensor represented greater than 4 percent of consolidated net sales for 1998. Canada Wholesale Division The Canada Wholesale division markets branded and licensed footwear products to women and children at a variety of price points to department stores, specialty stores and mass merchandisers. Similar to the Brown Branded division, the Canada Wholesale division markets the Company's Naturalizer and Naturalsport brands in Canada. The division manufactures in two Company-owned facilities a significant portion of the Naturalizer and Naturalsport brands sold by them. In addition, the division provides all Naturalizer related product for the Naturalizer stores located in Canada. Other brands and licensed footwear sold by the division include Barbie, Buster Brown, Connie, Star Wars and Westport. ITEM 1 - BUSINESS (Continued) - ----------------- Brown Shoe Sourcing Division The Brown Shoe Sourcing Division sources essentially all of the footwear globally for the Brown Branded division, the Naturalizer Retail division, the Pagoda division, and a portion of the footwear sold by Famous Footwear. The division, which in 1998 sourced 58.8 million pairs of shoes, has developed a global sourcing capability through its relationships with over 75 third- party independent footwear manufacturers. Management attributes its ability to achieve consistent quality, competitive prices and on-time delivery to the breadth of its established relationships. The Company currently maintains sourcing offices in Brazil, China, Hong Kong, Indonesia, Italy, Mexico and Taiwan. This structure enables the Company to source footwear at various price levels from significant shoe manufacturing regions of the world. In 1998, over three-fourths of the footwear sourced by Brown Shoe Sourcing was from manufacturing facilities in China. The Company has the ability to shift sourcing to alternative countries, over time, based upon trade conditions, economic advantages, production capabilities and other factors, if conditions warrant. The following table provides an overview of the Company's foreign sourcing in 1998: Country Millions of Pairs ------- ----------------- China 45.4 Brazil 7.2 Indonesia 3.8 Italy 0.9 Mexico 0.4 All Other 1.1 ---- Total 58.8 ==== The Company monitors the quality of the components of its footwear products prior to production and inspects prototypes of each footwear product before production runs are commenced. The Company also performs random in-line quality control checks during and after production before footwear leaves the manufacturing facility. The Company maintains separate design teams for each of its brands and the Company maintains a staff of footwear designers who are responsible for the creation and development of new product styles. The Company's designers monitor trends in apparel and footwear fashion and work closely with retailers to identify consumer footwear preferences. When a new style is created, the Company's designers work closely with independent footwear manufacturers to translate their designs into new footwear styles. ITEM 1 - BUSINESS (Continued) - ----------------- Risk Factors - ------------ Certain statements herein and in the documents incorporated herein by reference as well as statements made by the Company from time to time contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially. The considerations listed below represent certain important factors that the Company believes could cause such results to differ. These considerations are not intended to represent a complete list of the general or specific risks that may affect the Company. It should be recognized that other risks may be significant, presently or in the future, and the risks set forth below may affect the Company to a greater extent than indicated. Competition; Changes in Consumer Preferences Competition is intense in the footwear industry. Certain of the Company's competitors are larger and have substantially greater resources than the Company. The Company's success depends upon its ability to remain competitive in the areas of style, price and quality, among others, and in part on its ability to anticipate and respond to changing merchandise trends and consumer preferences and demands in a timely manner. Furthermore, consumer preferences and purchasing patterns may be influenced by consumers' disposable income. Consequently, the success of the Company's operations may depend to a significant extent upon a number of factors affecting disposable income, including economic conditions and factors such as employment, business conditions, interest rates and taxation. Reliance on Foreign Sources of Production The Company relies entirely on broad-based foreign sourcing for its footwear products. The Company sources footwear products from independent third-party manufacturing facilities located in China, Brazil, Indonesia, and to a lesser extent from Italy, Mexico, Taiwan and two Company-owned manufacturing facilities in Canada. Typically, the Company is a major, and in some cases the exclusive, customer of these third-party manufacturing facilities. The Company believes that its relationships with such third-party manufacturing facilities provide it with a competitive advantage; thus the Company's future results will partly depend on maintaining its close working relationships with its principal manufacturers. The Company relies heavily on independent third-party manufacturing facilities, primarily located in China. Historically, the trade relationship between the United States and China has not had a material adverse effect on the Company's business, financial condition or results of operations. There have been, however, and may in the future be, threats to the trade relationships between the United States and China, including past and future threats by the United States to deny Normal Trading Relations status to China. There can be no assurance that the trade relationship between the United States and China will not worsen, and if it does worsen, there can be no assurance that the Company's business, financial condition or results of operations will not be materially adversely affected thereby. Further, the Company cannot predict the effect that changes in the economic and political conditions in China could have on the economics of doing business with Chinese manufacturers. Although the Company believes that it could find alternative manufacturing sources for those products it currently sources from China through its existing relationships with independent third-party manufacturing facilities in other countries, the loss of a substantial portion of its Chinese manufacturing capacity could have a material adverse effect on the Company. ITEM 1 - BUSINESS (Continued) - ----------------- As is common in the industry, the Company does not have any long-term contracts with its independent third-party foreign manufacturers. There can be no assurance that the Company will not experience difficulties with such manufacturers, including reduction in the availability of production capacity, failure to meet production deadlines, or increases in manufacturing costs. Foreign manufacturing is subject to a number of risks, including work stoppages, transportation delays and interruptions, political instability, expropriation, nationalization, foreign currency fluctuations, changing economic conditions, the imposition of tariffs, import and export controls and other non- tariff barriers and changes in governmental policies. Although the Company purchases products from certain foreign manufacturers in United States dollars and otherwise engages in foreign currency hedging transactions, there can be no assurance that the Company will not experience foreign currency losses. The Company cannot predict whether additional United States or foreign customs quotas, duties, taxes or other changes or restrictions will be imposed upon the importation of non-domestically produced products in the future or what effect such actions could have on its business, financial condition or results of operations. Customer Concentration The customers of the Company's wholesaling business include department stores and mass merchandisers. Several of the Company's customers control more than one department store and/or mass merchandiser chain. While the Company believes that purchasing decisions in many cases are made independently by each department store or mass merchandiser chain under such common ownership, a decision by the controlling owner of a group of department stores and/or mass merchandisers, or any other significant customer, to decrease the amount of footwear products purchased from the Company could have a material adverse effect on the Company's business, financial condition or results of operations. In addition, the retail industry has periodically experienced consolidation and other ownership changes, and in the future the Company's wholesale customers may consolidate, restructure, reorganize or realign, any of which could decrease the number of stores that carry the Company's products. Dependence on Licenses The success of the Company's Pagoda division has to date been due, in part, to the Company's ability to attract licensors which have strong, well-recognized characters and trademarks. The Company's license agreements are generally for an initial term of two to three years, subject to renewal, but even where the Company has longer term licenses or has an option to renew a license, such license is dependent upon the Company's achieving certain results in marketing the licensed material. While the Company believes that its relationships with its existing licensors are good and it believes that it will be able to renew its existing licenses and obtain new licenses in the future, there can be no assurance that the Company will be able to renew its current licenses or obtain new licenses to replace lost licenses. In addition, certain of the Company's license agreements are not exclusive and new or existing competitors may obtain similar licenses. Dependence on Major Branded Suppliers The Company's Famous Footwear retail business purchases a substantial portion of its footwear products from major branded suppliers. While the Company believes that its relationship with its existing suppliers is good, the loss of any of its major suppliers could have a material adverse effect on the Company's business, financial condition or results of operations. As is common in the industry, the Company does not have any long-term contracts with its suppliers. In addition, the Company's financial performance is in part dependent on the ability of Famous Footwear to obtain product from its suppliers on a timely basis and on acceptable terms. ITEM 2 - PROPERTIES - ------------------- The principal executive, sales and administrative offices of the Company are located in Clayton (St. Louis), Missouri, and consist of an owned office building. The Company's wholesale footwear operations are carried out at two distribution centers located in Missouri and two manufacturing and one distribution facility located in Ontario, Canada. All of the facilities are owned. A leased sales office and showroom is maintained in New York City. The Company's retail footwear operations are conducted throughout the United States and Canada and involve the operation of 1,289 shoe stores, including 131 in Canada. All store locations are leased with more than half having renewal options. In addition, Famous Footwear has leased office space, a leased 750,000 square foot distribution center, including a mezzanine level, in Madison, Wisconsin, and a leased 800,000 square foot distribution center, including mezzanine levels, in Lebanon, Tennessee. ITEM 3 - LEGAL PROCEEDINGS - -------------------------- The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, after consulting with legal counsel, the outcome of such proceedings and litigation currently pending will not have a materially adverse effect on the Company's results of operations or financial position. The Company is involved in environmental remediation and ongoing compliance activities at several sites. The Company is remediating a residential area adjacent to owned property in Colorado, under the oversight of Colorado authorities. This residential area has been affected by types of solvents that previously were used at the facility. Monitoring of the residential area continues. The Company also is evaluating remediation alternatives for the owned property. During 1998, the Company incurred charges of $2.3 million related to this site. At its closed New York tannery and two associated landfills, the Company has completed its remediation efforts, and in 1995, state environmental authorities reclassified the status of the site to one that has been properly closed and that requires only continued maintenance and monitoring over the next 25 years. In addition, various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain landfills from the sale or disposal of solvents and other by-products from the closed tannery and shoe manufacturing facilities. Based on information currently available, the Company is carrying an accrued liability of $4.2 million, as of January 30, 1999, to complete the clean up at all sites. The ultimate cost may vary. While the Company currently operates no domestic manufacturing facilities, prior operations included numerous manufacturing and other facilities for which the Company may have responsibility under various environmental laws for the remediation of conditions that may be identified in the future. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ No matter was submitted to a vote of shareholders during the fourth quarter of fiscal 1998. EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------ The following is a list of the names and ages of the executive officers of the registrant and of the offices held by each such person. There is no family relationship between any of the named persons. The terms of the following executive officers will expire May, 1999. Name Age Current Position - ---- --- ---------------- Ronald A. Fromm 48 Chairman of the Board, President, Chief Executive Officer, Brown Group, Inc. and President, Brown Shoe Company Theodore L. Anderson 50 Senior Vice President, Retail Sales and Operations, Famous Footwear Brian C. Cook 59 Executive Vice President, Brown Group, Inc. and President, Famous Footwear William A. Dandy 41 Senior Vice President, Marketing, Famous Footwear Charles C. Gillman 37 Senior Vice President and Director, Far East Operations, Brown Shoe Sourcing J. Martin Lang 42 Senior Vice President and Chief Financial Officer, Famous Footwear Byron D. Norfleet 37 Senior Vice President and General Manager, Naturalizer Retail Gary M. Rich 48 President, Pagoda Harry E. Rich 59 Director, Executive Vice President, Chief Financial Officer James M. Roe 53 Senior Vice President, Real Estate, Famous Footwear Andrew M. Rosen 48 Senior Vice President and Treasurer Richard C. Schumacher 51 Vice President and Controller David H. Schwartz 53 President, Brown Shoe Sourcing Gregory J. Van Gasse 48 President, Brown Branded George J. Zelinsky 50 Senior Vice President and General Merchandise Manager, Famous Footwear EXECUTIVE OFFICERS OF THE REGISTRANT (Continued) - ------------------------------------ The period of service of each officer in the positions listed and other business experience are set forth below. Ronald A. Fromm, Chairman of the Board, President and Chief Executive Officer of the registrant since January 1999; President, Brown Shoe Company since March 1998. Vice President of the registrant from April 1998 to January 1999. Executive Vice President, Famous Footwear from September 1992 to March 1998. Vice President and Chief Financial Officer of Famous Footwear from 1988 to 1992. Theodore L. Anderson, Senior Vice President, Retail Sales and Operations, Famous Footwear since October 1997. Senior Vice President of Stores for Thom McAn, a division of Melville Corporation, from 1992 to October 1997. Brian C. Cook, Executive Vice President of the registrant since January 1999; Vice President of the registrant from March 1992 to January 1999; President of Famous Footwear since 1981. William A. Dandy, Senior Vice President, Marketing, Famous Footwear since February 1997. Vice President of Marketing and Advertising for Michael's Arts and Crafts Stores from July 1993 to February 1997. Charles C. Gillman, Senior Vice President and Director, Far East Operations, Brown Shoe Sourcing since February 1997. Senior Vice President, Far East Operations, Brown Shoe Sourcing from 1995 to 1997. Senior Vice President, Women's Division - Far East, Pagoda from 1992 to 1995. J. Martin Lang, Senior Vice President and Chief Financial Officer, Famous Footwear since March 1998. Vice President and Chief Financial Officer, Famous Footwear from 1995 through March 1998. From 1991 to 1995, served United States Shoe Corporation as Vice President of Finance - Footwear Group from 1993 to 1995 and as Vice President and Chief Financial Officer - Footwear Retailing Group from 1991 to 1993. Byron D. Norfleet, Senior Vice President and General Manager, Naturalizer Retail since July 1998. Series of management positions with Genesco, Inc. since 1984, most recently as Vice President - Jarman Lease. Gary M. Rich, President of Pagoda since March 1993. President, Pagoda Trading Company, Inc. from June 1989 through March 1993. Executive Vice President, Sidney Rich Associates, Inc. from December 1980 through June 1989. Harry E. Rich, Executive Vice President and Chief Financial Officer of the registrant since 1988. Senior Vice President and Chief Financial Officer of the registrant from 1984 to 1988. James M. Roe, Senior Vice President, Real Estate, Famous Footwear since August 1997. Senior Vice President, Sales and Operations, Famous Footwear from December 1994 to August 1997. Vice President, Real Estate, Famous Footwear from January 1992 to 1994. Director, Strip Center Real Estate of the registrant from 1987 to 1992. Andrew M. Rosen, Senior Vice President and Treasurer since March 1999. Vice President and Treasurer of the registrant since January 1992. Treasurer of the registrant from 1983 to 1992. Richard C. Schumacher, Vice President and Controller of the registrant since June 1994. Vice President and Chief Financial Officer of Wohl Shoe Company from November 1992 to June 1994. Assistant Controller of the registrant from 1985 to 1992. EXECUTIVE OFFICERS OF THE REGISTRANT (Continued) - ------------------------------------ David H. Schwartz, President, Brown Shoe Sourcing since February 1996. President, Men's, Athletic and Children's Divisions from March 1995 to February 1996. President, Marathon Division, Pagoda from March 1981 to March 1995. Gregory J. Van Gasse, President, Brown Branded since September 1998. Senior Vice President - Marketing and Sales for Florsheim Group, Inc. from 1990 to September 1998. George J. Zelinsky, Senior Vice President and General Merchandise Manager, Famous Footwear since June 1989. Vice President, Women's Better Grade Division, Wohl Shoe Company from 1986 to 1989. PART II ------- ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS - -------------------------------------------------- Common Stock market prices and dividends on page 42 of the Annual Report to Shareholders and the number of shareholders of record on page 44 of the Annual Report to Shareholders for the year ended January 30, 1999, are incorporated herein by reference. ITEM 6 - SELECTED FINANCIAL DATA - -------------------------------- Selected Financial Data on page 20 of the Annual Report to Shareholders for the year ended January 30, 1999, is incorporated herein by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------ Management's Discussion and Analysis of Operations and Financial Condition on pages 14 through 19 of the Annual Report to Shareholders for the year ended January 30, 1999, is incorporated herein by reference. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------- Information appearing under the caption "Financial Instruments" on pages 17 through 18 of the Annual Report for Shareholders to the year ended January 30, 1999, is incorporated herein by reference. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- The consolidated financial statements of the Company and its subsidiaries on pages 21 through 41, and the supplementary financial information on page 42 of the Annual Report to Shareholders for the year ended January 30, 1999, are incorporated herein by reference. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------------------------------------------------------ None. PART III -------- ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ Information regarding Directors of the Company on pages 4 through 9 of the Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 1999, is incorporated herein by reference. Information regarding Executive Officers of the Company is included in Part I of this Form 10-K following Item 4. ITEM 11 - EXECUTIVE COMPENSATION - -------------------------------- Information regarding Executive Compensation on pages 10 through 21 and 23 through 29 of the Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 1999, is incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ Security Holdings of Directors and Management on page 4 of the Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 1999, is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- None. PART IV ------- ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - ------------------------------------------------------ (a) (1) and (2) The response to this portion of Item 14 is submitted as a separate section of this report. (a) (3) Exhibits Exhibit No.: - ----------- 3. (a) Certificate of Incorporation of the Company as amended through February 16, 1984, incorporated herein by reference to Exhibit 3 to the Company's Report on Form 10-K for the fiscal year ended November 1, 1986. (a) (i) Amendment of Certificate of Incorporation of the Company filed February 20, 1987, incorporated herein by reference to Exhibit 3 to the Company's Report on Form 10-K for the fiscal year ended January 30, 1988. (b) Bylaws of the Company as amended through April 20, 1999, filed herewith. 4. (a) Rights Agreement dated as of March 7, 1996 between the Company and First Chicago Trust Company of New York, which includes as Exhibit A the form of Rights Certificate evidencing the Company's Common Stock Purchase Rights, incorporated herein by reference to the Company's Form 8-K dated March 7, 1996. (a) (i) Amendment to Rights Agreement between Brown Group, Inc. and First Chicago Trust Company of New York, dated as of July 8, 1997, effective August 11, 1997, incorporated herein by reference to the Company's Form 8-K dated August 8, 1997. (b) Credit Agreement dated as of January 9, 1997, between the Company and the Lenders named therein, The Boatmen's National Bank of St. Louis, as Agent, and First Chicago Capital Markets, Inc., as Syndication Agent, incorporated herein by reference to the Company's Form 8-K dated January 9, 1997. (b) (i) Amendment No. 1, dated October 8, 1997, to the Credit Agreement between the Company and the Lenders named therein, NationsBank, N.A., as Agent, and First Chicago Capital Markets, Inc., as Syndication Agent, incorporated herein by reference to the Company's Form 10-Q dated November 1, 1997. (b) (ii) Amendment No. 2, dated January 7, 1999, to the Credit Agreement between the Company and the Lenders named therein NationsBank, N.A., as Agent, and First Chicago Capital Markets, Inc., as Syndication Agent, filed herewith. (c) Indenture dated as of October 1, 1996, between the Company and State Street Bank and Trust Company, as Trustee, incorporated herein by reference to the Company's Form 8-K dated October 7, 1996. (c) (i) First Supplemental Indenture dated as of January 9, 1997, between the Company and State Street Bank and Trust Company, as Trustee, incorporated herein by reference to the Company's Form 8-K dated January 9, 1997. (c) (ii) Second Supplemental Indenture dated as of January 23, 1998, between the Company and State Street Bank and Trust Company, as Trustee, incorporated herein by reference to the Company's Form 10-K dated January 31, 1998. (d) Senior Note Agreement, dated as of October 24, 1995, between the Company and Prudential Insurance Company of America, as amended, incorporated herein by reference to the Company's Form 10-K dated February 1, 1997. (d) (i) Amendment No. 2, dated October 7, 1997, to the Senior Note Agreement between the Company and Prudential Insurance Company of America, as amended, incorporated herein by reference to the Company's Form 10-Q dated November 1, 1997. (d) (ii) Amendment No. 3, dated January 7, 1999, to the Senior Note Agreement between the Company and Prudential Insurance Company of America, as amended, filed herewith. (e) Certain instruments with respect to the long- term debt of the Company are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K since the amount of debt authorized under each such omitted instrument does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request. 10. (a)* Stock Option and Restricted Stock Plan of 1987, as amended, incorporated herein by reference to Exhibit 3 to the Company's definitive proxy statement dated April 26, 1988. (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)* Transition and Consulting Agreement, dated September 11, 1997, between the Company and B. A. Bridgewater, Jr., incorporated herein by reference to the Company's Form 10-K dated January 31, 1998. (d)* Stock Option and Restricted Stock Plan of 1998, incorporated herein by reference to Exhibit 3 to the Company's definitive proxy statement dated April 24, 1998. (e)* Employment Agreement, dated May 14, 1998 between the Company and Ronald A. Fromm, incorporated herein by reference to the Company's Form 10-Q dated May 2, 1998. (f)* Severance Agreement, dated July 27, 1998 between the Company and Brian C. Cook, incorporated herein by reference to the Company's Form 10-Q dated August 1, 1998. (g)* Severance Agreement, dated July 27, 1998 between the Company and Ronald A. Fromm, incorporated herein by reference to the Company's Form 10-Q dated August 1, 1998. (h)* Severance Agreement, dated July 27, 1998 between the Company and Gary M. Rich, incorporated herein by reference to the Company's Form 10-Q dated August 1, 1998. (i)* Severance Agreement, dated July 27, 1998 between the Company and Harry E. Rich, incorporated herein by reference to the Company's Form 10-Q dated August 1, 1998. (j)* Severance Agreement, dated July 27, 1998 between the Company and David H. Schwartz, incorporated herein by reference to the Company's Form 10-Q dated August 1, 1998. 13. Annual Report to Shareholders of Brown Group, Inc. for the fiscal year ended January 30, 1999. Such report, except for portions specifically incorporated by reference herein, is furnished for the information of the SEC and is not "filed" as part of this report. 21. Subsidiaries of the registrant. 23. Consent of Independent Auditors. 24. Power of attorney (contained on signature page). 27. Financial Data Schedule for fiscal 1998. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended January 30, 1999. (c) Exhibits: Exhibits begin on page 22 of this Form 10-K. On request copies of any exhibit will be furnished to shareholders upon payment of the Company's reasonable expenses incurred in furnishing such exhibits. (d) Financial Statement Schedule. *Denotes management contract or compensatory plan arrangements. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATE: April 26, 1999 BROWN GROUP, INC. (Registrant) By /s/ Harry E. Rich ------------------------------- Harry E. Rich Executive Vice President and on behalf of the Company as Principal Financial Officer Know all men by these presents, that each person whose signature appears below constitutes and appoints Harry E. Rich his true and lawful attorney in fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney in fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney in fact and agent or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on April 26, 1999, 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 Ronald A. Fromm President and Chief Executive Officer and on behalf of the Company as Principal Executive Officer /s/ Harry E. Rich - ----------------------------- Director, Executive Vice President Harry E. Rich and Chief Financial Officer /s/ Richard C. Schumacher - ----------------------------- Vice President and Controller and Richard C. Schumacher on behalf of the Company as Principal Accounting Officer Signature Title --------- ----- - --------------------------------- Director Joseph L. Bower /s/ B. A. Bridgewater, Jr. - --------------------------------- Director B. A. Bridgewater, Jr. /s/ Julie C. Esrey - ---------------------------------- Director Julie C. Esrey /s/ Richard A. Liddy - ---------------------------------- Director Richard A. Liddy /s/ John Peters MacCarthy - ---------------------------------- Director John Peters MacCarthy - ---------------------------------- Director John D. Macomber - ---------------------------------- Director William E. Maritz - ---------------------------------- Director General Edward C. Meyer, Retired - ---------------------------------- Director Jerry E. Ritter ANNUAL REPORT ON FORM 10-K ITEM 14 (a) (1) and (2), and (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE YEAR ENDED JANUARY 30, 1999 BROWN GROUP, INC. ST. LOUIS, MISSOURI FORM 10-K - ITEM 14 (a) (1) and (2), and (d) BROWN GROUP, INC. AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE The following consolidated financial statements of Brown Group, Inc. and subsidiaries included in the annual report of the registrant to shareholders for the year ended January 30, 1999, are incorporated by reference in Item 8: Consolidated Balance Sheets - January 30, 1999, and January 31, 1998. Consolidated Earnings - Years ended January 30, 1999, January 31, 1998, and February 1, 1997. Consolidated Cash Flows - Years ended January 30, 1999, January 31, 1998, and February 1, 1997. Consolidated Shareholders' Equity - Years ended January 30, 1999, January 31, 1998, and February 1, 1997. Notes to Consolidated Financial Statements. Report of Independent Auditors. The following consolidated financial statement schedule of Brown Group, Inc. and subsidiaries is included in Item 14(d): Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. SCHEDULE II ----------- VALUATION AND QUALIFYING ACCOUNTS BROWN GROUP, INC. <TABLE> <CAPTION> COL. A. COL. B COL. C COL. D COL. E - ---------------------------------------------------------------------------------------- ADDITIONS ----------------------- (1) (2) Balance Charged to at Charged to Other Balance Beginning Costs and Accounts- Deductions- at End of Period Expenses Describe Describe of Period --------- ---------- ---------- ----------- --------- <S> <C> <C> <C> <C> <C> (Thousands) YEAR ENDED JANUARY 30, 1999 Deducted from assets: For doubtful accounts and discounts $ 9,925 $2,772 - $2,877-A $ 9,820 YEAR ENDED JANUARY 31, 1998 Deducted from assets: For doubtful accounts and discounts 10,203 5,145 - 5,423-A 9,925 YEAR ENDED FEBRUARY 1, 1997 Deducted from assets: For doubtful accounts and discounts 11,267 5,982 - 7,046-A 10,203 A. Accounts written off, net of recoveries and discounts taken. </TABLE> BROWN GROUP, INC. ANNUAL REPORT TO SHAREHOLDERS ON FORM 10-K INDEX TO EXHIBITS Exhibit ------- 3. (b) Bylaws as amended through April 20, 1999. 4. (b)(ii) Amendment No. 2, dated January 7, 1999, to the Credit Agreement between the Company and the Lenders named thereof NationsBank, N.A., as Agent, and First Chicago Capital Markets, Inc., as Syndication Agent. 4. (d)(ii) Amendment No. 3, dated January 7, 1999, to the Senior Note Agreement between the Company and Prudential Insurance Company of America. 13. 1998 Annual Report to Shareholders of Brown Group, Inc. 21. Subsidiaries of the registrant 23. Consent of Independent Auditors 24. Power of Attorney (see signature page) 27. Financial Data Schedule - fiscal 1998