UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| [X] | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended |
| [ ] | 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
(Exact name of registrant as specified in its charter) | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
St. Louis, Missouri (Address of principal executive offices) | (Zip Code) |
(Registrant's telephone number, including area code) | |
Indicate by check markcheckmark whether the registrantregistrant: (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][X] No [ ]
Indicate by check markcheckmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Exchange Act)12b-2). Yes [X] No [ ]
As of NovemberMay 29, 2003, 18,041,0392004, 18,171,166 common shares of the registrant's common stock were outstanding.
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ITEM 1 - FINANCIAL STATEMENTSPART I FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS
See notes to condensed consolidated financial statements.BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS ($ thousands) Assets Current Assets Cash and cash equivalents Receivables Inventories Prepaid expenses and other current assets Total current assets Other assets Goodwill and intangible assets, net Property and equipment Allowances for depreciation and amortization ) ) ) Total property and equipment Total assets Liabilities and Shareholders' Equity Current Liabilities Notes payable Trade accounts payable Accrued expenses Income taxes Current maturities of long-term debt Total current liabilities Other Liabilities Long-term debt and capitalized lease obligations Other liabilities Total other liabilities Shareholders' Equity Common stock Additional capital Unamortized value of restricted stock ) ) ) Accumulated other comprehensive loss ) ) ) Retained earnings Total shareholders' equity Total liabilities and shareholders' equity
BROWN SHOE COMPANY, INC.2CONDENSED CONSOLIDATED BALANCE SHEETS
BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS | ||||||||||||
| ($ thousands, except per share amounts) | May 1, 2004 | May 3, 2003 | ||||||||||
| Net sales | $ | 491,832 | $ | 446,444 | ||||||||
| Cost of goods sold | 292,468 | 261,317 | ||||||||||
| Gross profit | 199,364 | 185,127 | ||||||||||
| Selling and administrative expenses | 184,447 | 169,790 | ||||||||||
| Operating earnings | 14,917 | 15,337 | ||||||||||
| Interest expense | 2,479 | 2,906 | ||||||||||
| Interest income | (126 | ) | (96 | ) | ||||||||
| Earnings before income taxes | 12,564 | 12,527 | ||||||||||
| Income tax provision | (3,997 | ) | (3,524 | ) | ||||||||
| Net earnings | $ | 8,567 | $ | 9,003 | ||||||||
| Basic net earnings per common share | $ | 0.48 | $ | 0.51 | ||||||||
| Diluted net earnings per common share | $ | 0.45 | $ | 0.49 | ||||||||
| Dividends per common share | $ | 0.10 | $ | 0.10 | ||||||||
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(Thousands)
2003
2002
2003 ASSETS Current Assets Cash and Cash Equivalents $ 52,750 $ 35,192 $ 32,121 Receivables 64,534 65,400 82,486 Inventories 376,602 381,444 392,584 Prepaid Expenses and Other Current Assets 24,717 32,226 20,978 Total Current Assets 518,603 514,262 528,169 Other Assets 84,056 82,834 83,292 Goodwill and Intangible Assets, Net 20,435 19,178 18,602 Property and Equipment 271,405 249,560 255,966 Allowances for Depreciation
and Amortization (186,598 ) (167,742 ) (171,153 ) 84,807 81,818 84,813 $ 707,901 $ 698,092 $ 714,876 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes Payable $ 16,000 $ 37,000 $ 29,000 Accounts Payable 107,894 112,928 129,209 Accrued Expenses 93,613 97,296 100,801 Income Taxes 14,272 8,950 5,352 Current Maturities of Long-Term Debt 3,500 20,000 20,000 Total Current Liabilities 235,279 276,174 284,362 Long-Term Debt and Capitalized
Lease Obligations 100,000 103,492 103,493 Other Liabilities 28,317 31,216 30,414 Shareholders' Equity Common Stock 67,640 66,171 66,311 Additional Capital 55,135 49,798 50,224 Unamortized Value of Restricted Stock (2,691 ) (2,191 ) (1,961 ) Accumulated Other Comprehensive Loss (5,366 ) (12,166 ) (11,147 ) Retained Earnings 229,587 185,598 193,180 344,305 287,210 296,607 $ 707,901 $ 698,092 $ 714,876
| BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
| ($ thousands) | May 1, 2004 | May 3, 2003 | |||||
| Operating Activities: | |||||||
| Net earnings | $ | 8,567 | $ | 9,003 | |||
| Adjustments to reconcile net earnings to net cash provided (used) by operating activities: | |||||||
| Depreciation | 5,767 | 6,121 | |||||
| Amortization | 4 | 4 | |||||
| Share-based compensation expense | 1,405 | 1,039 | |||||
| Loss on disposal of facilities and equipment | 315 | 348 | |||||
| Impairment charges for facilities and equipment | 409 | 350 | |||||
| Provision for (recoveries from) doubtful accounts | (167 | ) | 161 | ||||
| Changes in operating assets and liabilities: | |||||||
| Receivables | (5,975 | ) | 17,572 | ||||
| Inventories | 9,308 | 23,347 | |||||
| Prepaid expenses and other current assets | (3,387 | ) | (3,472 | ) | |||
| Trade accounts payable and accrued expenses | (21,993 | ) | (39,400 | ) | |||
| Income taxes | 2,229 | 3,098 | |||||
| Other, net | (1,121 | ) | 1,565 | ||||
| Net cash provided (used) by operating activities | (4,639 | ) | 19,736 | ||||
| Investing Activities: | |||||||
| Capital expenditures | (7,049 | ) | (6,856 | ) | |||
| Other | 115 | 125 | |||||
| Net cash used by investing activities | (6,934 | ) | (6,731 | ) | |||
| Financing Activities: | |||||||
| Increase (decrease) in short-term notes payable | 23,500 | (4,500 | ) | ||||
| Proceeds from stock options exercised | 649 | 1,174 | |||||
| Dividends paid | (1,811 | ) | (1,775 | ) | |||
| Net cash provided (used) by financing activities | 22,338 | (5,101 | ) | ||||
| Increase in cash and cash equivalents | 10,765 | 7,904 | |||||
| Cash and cash equivalents at beginning of period | 55,657 | 32,121 | |||||
| Cash and cash equivalents at end of period | $ | 66,422 | $ | 40,025 | |||
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BROWN SHOE COMPANY, INC.CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS(Unaudited)
(Thousands, except per share amounts)
2003 Net Sales $ 493,433 $ 486,318 $ 1,398,261 $ 1,389,311 Cost of Goods Sold 288,721 287,681 820,557 832,231 Gross Profit 204,712 198,637 577,704 557,080 Selling & Administrative Expenses 172,278 167,123 511,317 497,786 Operating Earnings 32,434 31,514 66,387 59,294 Interest Expense 2,256 2,840 7,679 9,506 Interest Income (118 ) (128 ) (318 ) (275 ) Earnings Before Income Taxes 30,296 28,802 59,026 50,063 Income Tax Provision 9,096 7,780 17,267 14,239 NET EARNINGS $ 21,200 $ 21,022 $ 41,759 $ 35,824 BASIC EARNINGS PER
COMMON SHARE$ 1.19 $ 1.21 $ 2.37 $ 2.06 DILUTED EARNINGS PER
COMMON SHARE$ 1.13 $ 1.18 $ 2.25 $ 2.01 DIVIDENDS PER COMMON SHARE $ .10 $ .10 $ .30 $ .30
| BROWN SHOE COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT |
| Note 1. | Basis of Presentation |
See Notes to Condensed Consolidated Financial Statements.
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BROWN SHOE COMPANY, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
(Thousands)
| Operating Activities: | |||||||
| Net earnings | $ | 41,759 | $ | 35,824 | |||
| Adjustments to reconcile Net earnings to Net | |||||||
| Cash Provided by Operating Activities: | |||||||
| Depreciation and amortization | 19,657 | 17,803 | |||||
| Loss on disposal or impairment of facilities & equipment | 3,746 | 1,961 | |||||
| Provision for losses on accounts receivable | 278 | 485 | |||||
| Changes in Operating Assets and Liabilities: | |||||||
| Receivables | 17,674 | 2,420 | |||||
| Inventories | 15,982 | 14,783 | |||||
| Prepaid expenses and other current assets | (3,739 | ) | 7,012 | ||||
| Accounts payable and accrued expenses | (28,503 | ) | 3,343 | ||||
| Income taxes | 8,920 | 8,400 | |||||
| Other assets and liabilities | (182 | ) | (4,863 | ) | |||
| Net Cash Provided by Operating Activities | 75,592 | 87,168 | |||||
| Investing Activities: | |||||||
| Capital expenditures | (21,668 | ) | (15,097 | ) | |||
| Other | 368 | 130 | |||||
| Net Cash Used by Investing Activities | (21,300 | ) | (14,967 | ) | |||
| Financing Activities: | |||||||
| Decrease in notes payable | (13,000 | ) | (27,250 | ) | |||
| Principal payments of long-term debt | (20,000 | ) | (28,550 | ) | |||
| Proceeds from stock options exercised | 4,696 | 1,624 | |||||
| Debt issuance costs | - | (265 | ) | ||||
| Dividends paid | (5,359 | ) | (5,280 | ) | |||
| Net Cash Used by Financing Activities | (33,663 | ) | (59,721 | ) | |||
| Increase in Cash and Cash Equivalents | 20,629 | 12,480 | |||||
| Cash and Cash Equivalents at Beginning of Period | 32,121 | 22,712 | |||||
| Cash and Cash Equivalents at End of Period | $ | 52,750 | $ | 35,192 | |||
See Notes to Condensed Consolidated Financial Statements.
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BROWN SHOE COMPANY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and reflect all adjustments which management believes necessary (which include only normal recurring accruals) 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 earningscash flows have been reclassified to conform to 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 February 1, 2003.January 31, 2004.
| Note 2. | Earnings Per Share |
Note 2 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per common share for the periods ended NovemberMay 1, 2004 and May 3, 2003:
| ($ thousands, except per share data) | May 1, 2004 | May 3, 2003 | |||||
| NUMERATOR | |||||||
| Net earnings | $ | 8,567 | $ | 9,003 | |||
| DENOMINATOR (thousand shares) | |||||||
| Denominator for basic earnings per common share | 17,841 | 17,510 | |||||
| Dilutive effect of unvested restricted stock and stock options | 1,078 | 883 | |||||
| Denominator for diluted earnings per common share | 18,919 | 18,393 | |||||
| Basic earnings per common share | $ | 0.48 | $ | 0.51 | |||
| Diluted earnings per common share | $ | 0.45 | $ | 0.49 | |||
Options to purchase 236,167 and 38,745 shares of common stock at May 1, 2004 and May 3, 2003, and November 2, 2002 (000's, except per share data):
2003
2002
2003
2002 Numerator: Net earnings - Basic and Diluted $ $ Denominator: Weighted average shares
outstanding - Basic Effect of potentially dilutive securities Weighted average shares
outstanding - Diluted Basic earnings per common share $ $ $ $ Diluted earnings per common share $ $ $ $
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The following optionsrespectively, were not included in the computation ofdenominator for diluted earnings per common share because the options' exercise prices were greater than the average market price of the common shares (000's):their effect would be antidilutive.
| Note 3. | ||||||||
Note 3 - Comprehensive Income
Comprehensive Income includes changes in equity related to foreign currency translation adjustments and unrealized gains/losses from derivatives used for hedging activities.
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The following table sets forth the reconciliation from Net Earnings to Comprehensive Income for the periods ended NovemberMay 1, 20032004 and November 2, 2002 (000's):May 3, 2003:
Net Earnings $ 21,200 $ 21,022 $ 41,759 $ 35,824 Other Comprehensive Income: Foreign Currency Translation Adjustment 2,448 649 5,707 722 Unrealized Gains (Losses) on Derivative Instruments (88 ) (1,045 ) 74 (2,913 ) 2,360 (396 ) 5,781 (2,191 ) Comprehensive Income $ 23,560 $ 20,626 $ 47,540 $ 33,633
| ($ Thousands) | May 1, 2004 | May 3, 2003 | |||||
| Net Earnings | $ | 8,567 | $ | 9,003 | |||
| Other Comprehensive Income (Loss), net of tax: | |||||||
| Foreign currency translation adjustment | (1,310 | ) | 2,697 | ||||
| Unrealized gains (losses) on derivative instruments | 102 | (767 | ) | ||||
| Net loss reclassified into earnings | 491 | 345 | |||||
(717 | ) | 2,275 | |||||
| Comprehensive Income | $ | 7,850 | $ | 11,278 | |||
| Note 4. | Business Segment Information |
Note 4 - Business Segment Information
Applicable business segment information is as follows for the periods ended NovemberMay 1, 20032004 and November 2, 2002 (000's):May 3, 2003:
Footwear
Operations
Retail Thirteen Weeks Ended November 1, 2003 External Sales $ 301,588 $ 140,062 $ 49,789 $ 1,994 $ 493,433 Intersegment Sales - 35,968 - - 35,968 Operating earnings (loss) 23,427 15,421 (166 ) (6,248 ) 32,434 Thirteen Weeks Ended November 2, 2002 External Sales $ 294,535 $ 140,795 $ 49,898 $ 1,090 $ 486,318 Intersegment Sales - 38,502 - - 38,502 Operating earnings (loss) 22,585 11,712 1,535 (4,318 ) 31,514
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Footwear | Operations | Retail | |||||||||||||
| Thirty-nine Weeks Ended November 1, 2003 | |||||||||||||||
| External Sales | $ | 831,634 | $ | 418,950 | $ | 142,296 | $ | 5,381 | $ | 1,398,261 | |||||
| Intersegment Sales | - | 100,718 | - | - | 100,718 | ||||||||||
| Operating earnings (loss) | 46,914 | 40,980 | (2,534 | ) | (18,973 | ) | 66,387 | ||||||||
| Thirty-nine Weeks Ended November 2, 2002 | |||||||||||||||
| External Sales | $ | 832,896 | $ | 403,824 | $ | 149,375 | $ | 3,216 | $ | 1,389,311 | |||||
| Intersegment Sales | - | 97,835 | - | - | 97,835 | ||||||||||
| Operating earnings (loss) | 40,237 | 36,932 | 246 | (18,121 | ) | 59,294 | |||||||||
| ($ thousands) | Famous Footwear | Wholesale Operations | Naturalizer Retail | Other | Totals | ||||||||||
| Thirteen Weeks Ended May 1, 2004 | |||||||||||||||
| External Sales | $ | 272,124 | $ | 171,545 | $ | 45,331 | $ | 2,832 | $ | 491,832 | |||||
| Intersegment Sales | - | 38,378 | - | - | 38,378 | ||||||||||
| Operating earnings (loss) | 12,384 | 12,805 | (2,220 | ) | (8,052 | ) | 14,917 | ||||||||
| Operating segment assets | 329,856 | 197,855 | 70,730 | 132,116 | 730,557 | ||||||||||
| Thirteen Weeks Ended May 3, 2003 | |||||||||||||||
| External Sales | $ | 261,115 | $ | 140,985 | $ | 42,834 | $ | 1,510 | $ | 446,444 | |||||
| Intersegment Sales | - | 32,401 | - | - | 32,401 | ||||||||||
| Operating earnings (loss) | 10,582 | 13,012 | (1,356 | ) | (6,901 | ) | 15,337 | ||||||||
| Operating segment assets | 353,661 | 153,945 | 73,718 | 105,167 | 686,491 | ||||||||||
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.
Certain priorEffective 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 operating earnings (losses)amounts have been recast to include amounts that were previously classified as non-operating expensesreclassified to conform to current year presentation. This reclassification had no effect on operating earnings, but resulted in a transfer of assets of $57.9 million and $34.3 million in 2004 and 2003, respectively, to the "Other" segment.
| Note 5. | Restructuring Reserves |
Note 5 - Restructuring ReservesClosure of Canadian Manufacturing Facility
In the fourth quarter of fiscal 2001,year 2003, the Company announced the closing of its last Canadian footwear manufacturing facility located in Perth, Ontario, and recorded chargesa pretax charge of $4.5 million, the components of which were as follows:
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| ($ millions) | Employee Severance | Inventory Markdowns | Lease Buyouts | Total | ||||||||
| Original charge and reserve balance | $ | 2.3 | $ | 1.6 | $ | 0.6 | $ | 4.5 | ||||
| Adjustments | (0.3 | ) | 0.4 | (0.1 | ) | - | ||||||
| Expenditures in quarter ending May 1, 2004 | (1.8 | ) | (2.0 | ) | (0.1 | ) | (3.9 | ) | ||||
| Reserve balance May 1, 2004 | $ | 0.2 | $ | - | $ | 0.4 | $ | 0.6 | ||||
Also inThe Company anticipates that the fourthrestructuring activities associated with the closure of the Canadian manufacturing facility will be substantially completed during the second fiscal quarter of fiscal 2001, the Company established a reserve of $3.5 million for severance costs related to the elimination of 117 positions as the Company moved to a new Shared Services platform for its Human Resources, Finance and Information Systems functions. At February 1, 2003, the reserve balance was $0.3 million. During the first quarter of fiscal 2003, the reserve balance was depleted due to payments related to the terminated employees and the reversal of $0.1 million of unrequired reserve.2004.
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| Note 6. | Goodwill and Other Intangible Assets |
Note 6 - Goodwill and Other Intangible Assets
Goodwill and intangible assets were attributable to the Company's operating segments as follows (000's):follows:
2003
2002
2003 Famous Footwear $ 3,529 $ 3,529 $ 3,529 Wholesale Operations 10,248 10,263 10,259 Naturalizer Retail 5,323 4,506 4,614 Other 1,335 880 200 $ 20,435 $ 19,178 $ 18,602
| ($ thousands) | May 1, 2004 | May 3, 2003 | January 31, 2004 | ||||||
| Famous Footwear | $ | 3,529 | $ | 3,529 | $ | 3,529 | |||
| Wholesale Operations | 10,241 | 10,255 | 10,245 | ||||||
| Naturalizer Retail | 5,117 | 4,947 | 5,296 | ||||||
| Other | 1,335 | 200 | 1,335 | ||||||
$ | 20,222 | $ | 18,931 | $ | 20,405 | ||||
The change between periods for the Naturalizer Retail segment reflects changes in the Canadian dollar exchange rate. The change in the Other segment from February 1,May 3, 2003 to NovemberMay 1, 20032004 of $1.1 million reflects the acquisition of additional shares of Shoes.com Inc. by the Company.
| Note 7. | Share-Based Compensation |
Note 7 - Stock-Based Compensation
As of NovemberMay 1, 2003,2004, the Company had four stock-basedshare-based compensation plans, which are described more fully in Note 16 of the Company's fiscal 2002 Annual Report on Form 10-K.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 stock-basedshare-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 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 (000's, except per share amounts):outstanding:
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2003 | 2002 | 2003 | 2002 | ||||||||||
| Net earnings, as reported | $ | 21,200 | $ | 21,022 | $ | 41,759 | $ | 35,824 | |||||
| Deduct: Total stock-based employee compensation expense determined under the fair value based method for stock option awards, net of related tax effect | 548 | 509 | 1,732 | 1,478 | |||||||||
| Pro forma net earnings | $ | 20,652 | $ | 20,515 | $ | 40,027 | $ | 34,346 | |||||
| Earnings per share: | |||||||||||||
| Basic - as reported | $ | 1.19 | $ | 1.21 | $ | 2.37 | $ | 2.06 | |||||
| Basic - pro forma | $ | 1.16 | $ | 1.18 | $ | 2.27 | $ | 1.98 | |||||
| Diluted - as reported | $ | 1.13 | $ | 1.18 | $ | 2.25 | $ | 2.01 | |||||
| Diluted - pro forma | $ | 1.10 | $ | 1.15 | $ | 2.16 | $ | 1.92 | |||||
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| ($ thousands, except per share amounts) | May 1, 2004 | May 3, 2003 | |||||
| Net earnings, as reported | $ | 8,567 | $ | 9,003 | |||
| Add: Total share-based employee compensation expense included in reported net earnings, net of related tax effect | 913 | 675 | |||||
| Deduct: Total share-based employee compensation expense determined under the fair value based method for all awards, net of related tax effect | (1,654 | ) | (1,272 | ) | |||
| Pro forma net earnings | $ | 7,826 | $ | 8,406 | |||
| Earnings per share: | |||||||
| Basic - as reported | $ | 0.48 | $ | 0.51 | |||
| Basic - pro forma | 0.44 | 0.48 | |||||
| Diluted - as reported | 0.45 | 0.49 | |||||
| Diluted - pro forma | 0.41 | 0.46 | |||||
Note 8 - Off-Balance Sheet ArrangementsThe Company issued 57,190 and 115,806 shares of common stock, respectively, for the periods ended May 1, 2004 and May 3, 2003 for stock options exercised and restricted stock grants.
| Note 8. | Retirement and Other Benefit Plans |
The following table sets forth the components of net periodic benefit cost (income) for the Company, including all domestic and Canadian plans:
| ($ thousands) | May 1, 2004 | May 3, 2003 | May 1, 2004 | May 3, 2003 | ||||||||
| Service cost | $ | 1,383 | $ | 1,283 | $ | - | $ | - | ||||
| Interest cost | 2,103 | 1,978 | 63 | 75 | ||||||||
| Expected return on assets | (3,608 | ) | (3,601 | ) | - | - | ||||||
| Amortization of: | ||||||||||||
| Actuarial (gain) loss | 78 | 78 | (50 | ) | (50 | ) | ||||||
| Prior service costs | 75 | 75 | - | (25 | ) | |||||||
| Net transition assets | (43 | ) | (39 | ) | - | - | ||||||
| Settlement cost | - | - | - | - | ||||||||
| Total net periodic benefit cost (income) | $ | (12 | ) | $ | (226 | ) | $ | 13 | $ | - | ||
| Note 9. | Commitments and Contingencies |
Environmental Remediation
The Company is contingently liableinvolved 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 total anticipated future cost of remediation activities at May 1, 2004 is $7.7 million and is accrued within other accrued expenses and other liabilities, but the ultimate cost may vary. The cumulative costs incurred through May 1, 2004 are $12.9 million.
8
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 May 1, 2004, recorded recoveries totaled $4.8 million and are recorded in other noncurrent assets on the consolidated balance sheet. $4.5 million of the recorded recoveries are expected from certain insurance companies as indemnification for remaining lease commitmentsamounts 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 approximately $13 million, which primarily relatedefense costs, indemnity and other damages related to the Cloth Worldformer operations and Meis specialty retailing chains, which were soldthe remediation at the site. The Company believes insurance coverage in prior years. These obligations will continueplace entitles it to declinereimbursement for more than the recovery recorded. The Company believes the recorded recovery is supported by the fact the limits of the insurance policies at issue exceed the amount of the recorded recovery, and certain insurers have offered to settle these claims. The Company is unable to estimate the ultimate recovery from the insurance carriers, but is pursuing resolution of its claims.
The Company has completed its remediation efforts at its closed New York tannery and two associated landfills. In 1995, state environmental authorities reclassified the status of these sites as being properly closed and requiring only continued maintenance and monitoring over the next several years as leases expire.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 $9.8 million as of May 1, 2004, to complete the cleanup, maintenance and monitoring at all sites. Of the $9.8 million liability, $2.3 million is included in other accrued expenses and $7.5 million is included in other liabilities in the 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 the Company's subsidiary negligent and awarded the class plaintiffs $1.0 million in damages. The Company has recorded this award along with estimated pretrial interest on the award and estimated costs related to sanctions imposed by the court related to a pretrial discovery dispute between the parties. The total pretax charge recorded for these matters in the fourth quarter of 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 pretrial 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 not yet ruled on that motion. Several other post-trial motions are still pending before the trial court and the ultimate outcome and cost to the Company may vary.
As described above in "Environmental Remediation," the Company has filed suit against its insurance carriers and is seeking recovery of certain defense costs, indemnity for the costs incurred for remediation related to the Redfield site and for the damages awarded in the class action, and other related damages.
The Company also is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending will not have a material adverse effect on the Company's results of operations or financial position.
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. In 1985, this facilityThese facilities and the business that operated the facilitythem 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 $11 million in the aggregate, which primarily relate to the Cloth World and Meis specialty retailing chains, which were sold in prior years.
9
In order for the Company to incur any liability related to this guarantee,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.
| ITEM 2 | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
| OVERVIEW |
Note 9 - ContingenciesOverall, we are pleased with our first quarter results, even though net earnings declined slightly from last year, as we increased sales, assimilated the Bass licensed footwear business and achieved improved results at Famous Footwear.
The Company has been remediating, underConsolidated net sales rose 10.2% to $491.8 million for the oversightfirst quarter of Colorado authorities,fiscal 2004, as compared to $446.4 million for the groundwaterfirst quarter of the prior year. Net earnings were $8.6 million for the quarter, or $0.45 per diluted share compared to $0.49 per diluted share for the first quarter of the prior year. Net earnings for the first quarter of 2004 include $3.3 million, pretax, or $0.11 per diluted share, of transition and indoor air at its owned property in Denver, Colorado and residential neighborhoods adjacent to and near the property, which have been affected by solvents previously used at and near the property. In March 2000, a class-action lawsuitassimilation costs related to this Colorado site was filed in Colorado State Court againstthe Bass license. On February 2, 2004, the Company entered into a long-term license agreement to sell Bass footwear.
Following is a summary of the more significant factors affecting our results in the first quarter of fiscal 2004:
On December 8, 2003, a Colorado State Court jury found$2.2 million in the Company partially responsible for alleged environmental impacts on the neighborhood and entered a verdict against the Companyfirst quarter of $1.0 million for2004 as compared to an operating loss of use$1.4 million in the first quarter of the prior year. We are transitioning from domestically-produced footwear to higher-grade imported product in the Canadian market through the Company's worldwide sourcing network. The increased loss was due primarily to the same-store sales decline in Canada as we are focused on strengthening our Naturalizer Retail platform and enjoyment and annoyance and discomfort.
In connection with this lawsuit,expect to realize synergies as we integrate the court held hearings on motions filed by plaintiffsCanadian and the co-defendant seeking various sanctions againstUnited States organizations. We look to achieve improved performance in the Company alleging certain improper discovery practices. Rulings on such hearings are pending. The Company is not ablefall.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Quarter ended November 1, 2003remain strong. As compared to the Quarter ended November 2, 2002first quarter of the prior year, our debt-to-total capital ratio has improved to 28.2% from 32.5%, up slightly from the year-end ratio of 25.2%. Our current ratio of 2.3 to 1 continued to improve from 2.2 to 1 at year end and 2.0 to 1 at the end of the first quarter of the prior year.
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The third
| CONSOLIDATED RESULTS |
| ($ millions) | % of Net Sales | % of Net Sales | ||||||||
| Net sales | $ | 491.8 | 100.0% | $ | 446.4 | 100.0% | ||||
| Cost of goods sold | 292.5 | 59.5% | 261.3 | 58.5% | ||||||
| Gross profit | 199.3 | 40.5% | 185.1 | 41.5% | ||||||
| Selling & administrative expenses | 184.4 | 37.5% | 169.8 | 38.0% | ||||||
| Operating earnings | 14.9 | 3.0% | 15.3 | 3.5% | ||||||
| Interest expense | 2.4 | 0.5% | 2.9 | 0.7% | ||||||
| Interest income | (0.1 | ) | 0.0% | (0.1 | ) | 0.0% | ||||
| Earnings before income taxes | 12.6 | 2.5% | 12.5 | 2.8% | ||||||
| Income tax provision | (4.0 | ) | (0.8)% | (3.5 | ) | (0.8)% | ||||
| Net earnings | $ | 8.6 | 1.7% | $ | 9.0 | 2.0% | ||||
Net Sales
Net sales increased $45.4 million, or 10.2%, to $491.8 million in the first quarter of 2004 as compared to $446.4 million in the first quarter of the prior year. This increase is traditionallyprimarily attributable to the Company's highestfollowing factors. First, the acquisition of the Bass footwear license at the beginning of fiscal 2004 contributed $15.3 million of sales volumeduring the first quarter. Second, in addition to the incremental Bass business, the Wholesale segment achieved $15.0 million of sales gains within our private label, Dr. Scholl's and LifeStride lines, including some sandal shipments that typically ship in the second quarter. Third, Famous Footwear delivered an additional $11.0 million in net sales, driven by a 2.6% same-store sales increase and sales growth from new stores.
Gross Profit
Gross profit increased $14.2 million, or 7.7%, to $199.3 million for the first quarter which generates a significant portion of annual earnings. The high sales volume2004 as compared to $185.1 million in the first quarter of the prior year. This increase is primarily driven by the back-to-school selling season at Famous Footwear, which occurs primarily10.2% increase in net sales. However, as a percent of sales, our gross margin percentage declined from 41.5% in the monthfirst quarter of August. Famous Footwear's resultsthe prior year to 40.5% in the first quarter of 2004 as a result of a greater mix of wholesale sales, which carry a lower gross margin rate than our retail sales.
Selling and Administrative Expenses
Selling and administrative expenses increased $14.6 million, or 8.6%, to $184.4 million for the first quarter reflect a successful back-to-school season. The Company's Wholesale operations also performed well in the quarter. Improved results over the prior year's comparable quarter at these divisions were partially offset by lower results at the Naturalizer Retail segment and higher Corporate administrative costs.
Consolidated net sales increased $7.1 million, or 1.5%, from $486.3of 2004 as compared to $169.8 million in the thirdfirst quarter last yearof the prior year. This increase is attributable to $493.4both transition and assimilation costs related to the Bass footwear line of approximately $3.3 million and to our investments in talent, systems, and infrastructure to position the Company for future growth. Although selling and administrative costs have increased in absolute dollars, they have declined as a percent of sales due to the effective leveraging of our increase in net sales.
Interest Expense
Interest expense decreased $0.5 million, or 14.7%, to $2.4 million in this year's third quarter. Thethe first quarter of 2004 as compared to $2.9 million in the first quarter of the prior year. While average daily borrowings are relatively consistent with the first quarter of the prior year, our average interest rate declined.
Income Tax Provision
Our consolidated effective tax rate was 31.8% in the first quarter of 2004 as compared to 28.1% in the first quarter of the prior year, reflecting a greater projected annual mix of domestic income. We do not provide deferred taxes on unremitted foreign earnings, as it is our intention to reinvest those earnings indefinitely or to repatriate the earnings only when it is tax-advantageous to do so.
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| FAMOUS FOOTWEAR |
| ($ millions, except sales per square foot) | % of Net Sales | % of Net Sales | ||||||||
| Operating Results | ||||||||||
| Net sales | $ | 272.1 | 100.0% | $ | 261.1 | 100.0% | ||||
| Cost of goods sold | 151.1 | 55.5% | 145.1 | 55.6% | ||||||
| Gross profit | 121.0 | 44.5% | 116.0 | 44.4% | ||||||
| Selling & administrative expenses | 108.6 | 39.9% | 105.4 | 40.4% | ||||||
| Operating earnings | $ | 12.4 | 4.6% | $ | 10.6 | 4.0% | ||||
| Key Metrics | ||||||||||
| Same-store sales % change | 2.6% | (5.4)% | ||||||||
| Same-store sales $ change | $ | 6.4 | $ | (13.6) | ||||||
| Sales change from new and closed stores, net | $ | 4.6 | $ | 7.1 | ||||||
| Sales per square foot | $ | 44 | $ | 42 | ||||||
| Square footage (thousands sq. ft.) | 6,249 | 6,218 | ||||||||
| Stores opened | 12 | 20 | ||||||||
| Stores closed | 8 | 25 | ||||||||
| Ending stores | 897 | 913 | ||||||||
Net Sales
Net sales increased $11.0 million, or 4.2%, to $272.1 million in the first quarter of 2004 as compared to $261.1 million in the first quarter of the prior year. This increase is primarily reflected higherattributable to an increase in same-store sales of 2.6% and sales growth from net new stores. During the first quarter of 2004, we opened 12 new stores and closed 8, resulting in 897 stores at the Company's Famous Footwear divisionend of $7.1 million. Salesthe first quarter of 2004 as compared to 913 at the Company's Wholesale operations decreased $0.7 million, or 0.5%,end of the first quarter of the prior year. Sales per square foot improved to $44 from $42 in the year ago period. In addition, during the first quarter, and decreased $0.1 million, or 0.2%, at Naturalizer Retail. Same-store salesfor the quarterwe experienced increased 0.7% at Famous Footwear and 1.9% in the domestic Naturalizer stores, but decreased 6.2% in the Canadian Naturalizertraffic into our stores.
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 or expanded 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 sales due to stores that have been opened or closed during the period and are thereby excluded from the same-store sales calculation.
Consolidated grossGross Profit
Gross profit as a percent of sales forincreased $5.0 million, or 4.3%, to $121.0 million in the thirdfirst quarter of 2003 increased2004 as compared to 41.5% from 40.8% during$116.0 million in the same period lastfirst quarter of the prior year. This increase was due to higher marginsis consistent with our 4.2% increase in net sales. As a percentage of net sales, we achieved a slight improvement in gross margin from 44.4% in the Company's Famous Footwear and Wholesale segments primarily as a result of higher initial markups. The gross profit rate in the Naturalizer Retail segment declined from last year primarily due to higher markdowns in the Canadian stores.
Selling and administrative expenses, which include warehousing and distribution costs of $12.1 million in 2003 and $12.5 million in 2002, increased to 34.9% as a percent of sales for the thirdfirst quarter of 2003 from 34.4% for the same period last year. This increase was primarily attributable to higher Famous Footwear and Naturalizer Retail store operating costs of $3.6 million and higher administrative costs of $4.4 million, partially offset by lower marketing costs of $1.9 million. The Company records warehousing and distribution costs in selling and administrative expenses. Accordingly, the Company's Gross Profit and Selling and administrative expense rates, as a percent of sales, may not be comparable to other companies
Consolidated operating earnings for the third quarter of 2003 of $32.4 million, or 6.6% of sales, were 2.9% above the $31.5 million, or 6.5% of sales, for the same period lastprior year as the effect of higher sales and gross profit rates were partially offset by higher selling and administrative expenses.
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The decrease in interest expense of $0.6 million was a result of lower average borrowings during the third quarter of 2003.
The consolidated tax rate was 30.0% of pre-tax earnings for the third quarter of 2003 an increase from 27.0% last year. The increase in the rate reflects a higher percentage of income being generated by domestic operations, which have higher tax rates than those in the foreign jurisdictions in which the Company operates. The Company's effective tax rate is below the Federal statutory rate of 35% because the foreign jurisdictions have lower tax rates. The Company does not provide deferred taxes on unremitted foreign earnings as it is the Company's intention to reinvest these earnings indefinitely, or to repatriate the earnings only when it is tax advantageous to do so.
Net earnings of $21.2 million for the third quarter of 2003 were 0.8% higher than net earnings of $21.0 million in the third quarter of 2002. Diluted earnings per share were $1.13 in the third quarter of 2003 compared to $1.18 in the third quarter of 2002, a decrease of 4.2%. The percentage change in net earnings differs from the percentage change in diluted earnings per share as the result of an increased number of shares outstanding and a greater dilutive effect of outstanding stock options in 2003, reflecting an increase in the market price of the Company's stock.
Famous Footwear
Famous Footwear's total sales increased 2.4%, or $7.1 million, during the third quarter of 2003 to $301.6 million. The increase was due to a same-store sales increase of 0.7%, or $1.9 million, reflecting higher purchase conversion ratios, which more than offset lower traffic counts in the stores, and a net $5.2 million of sales from new stores, net of closures.
Famous Footwear's gross profit as a percent of sales increased 1.0% from 43.5% in the third quarter of 2002 to 44.5% in the thirdfirst quarter of 2003.2004. This improvement was principally due to a 1.1% increase in initial markups, due to a fresher mix of product, and 0.2% from loweris driven by reduced shrinkage partially offset by a higher markdown provision of 0.3%.costs.
Selling and administrative expenses in the quarter were $110.9 million, an increase of $5.3 million from last year. As a percent of sales, such costs were 36.8% this year, an increase of 0.9% from last year's rate of 35.9%. This increase principally reflected a 0.6% increase in retail facilities costs due to new stores not yet being leveraged with corresponding higher sales.
As a result of the higher sales and gross profit rates, operating earnings for the third quarter of 2003 of $23.4 million, or 7.8% of sales, were 3.7% above the $22.6 million, or 7.7% of sales, for the same period last year.
During the third quarter of 2003, Famous Footwear opened 19 stores and closed 20, ending the quarter with 908 stores, compared with 922 stores at the end of the third quarter last year.Administrative Expenses
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Wholesale Operations
The Company's Wholesale operations had net sales of $140.1 million during the third quarter of 2003 compared to $140.8 million in the same quarter last year, a decrease of 0.5%. This sales decrease was primarily due to lower sales to the Company's mass merchandise customers by the Buster Brown and Co. children's footwear group of 14.2% and by the women's private label footwear group of 25.2%. Offsetting those sales declines were increases in the LifeStride brand, which had a sales gain of 18.3% in the quarter, as well as an increase in sales in the men's and athletic footwear group. Sales of the Naturalizer brand increased 2.9%. The sales changes in all brands and groups were due to unit variations as average prices did not change significantly.
The gross profit rate, as a percent of sales, increased from 31.8% in the third quarter of last year to 32.4% in this year's quarter, due to better margin rates and a greater mix of higher-margin, branded product sales partially offset by higher markdowns in Canada.
Selling and administrative expenses decreased 9.7% from last year's $33.2 million to this year's $30.0 million, and as a percent of sales from 23.6% last year to 21.4% this year. This decrease of 2.2% is principally due to lower marketing costs of 2.0%. Expenses for the quarter include a $0.6 million impairment charge to reduce the carrying value of the Company's footwear manufacturing facility in Canada based on expected future cash flows. In the fourth quarter of fiscal 2003, the Company announced that it would be closing its remaining Canadian manufacturing facility in early 2004, and that an aftertax charge of $3.8 - $4.2 million would be recorded in the fourth quarter for severance and asset writedowns.
As a result of the improved margin rate and lower expenses, Wholesale operating earnings of $15.4 million were up 31.7% from the $11.7 million earned in the third quarter of 2002.
Naturalizer Retail
In the Company's Naturalizer Retail operations, which includes stores in both the United States and Canada, net sales decreased 0.2% to $49.8 million in the third quarter of 2003 compared to $49.9 million in the same period last year. The decrease of $0.1 million was due to a $2.1 million decline from fewer stores open than last year and by a net $0.3 million decrease in same-store sales (1.9% gain in the United States stores and a 6.2% decrease in the Canadian stores), offset by a $2.3 million increase from the effect of changes in the Canadian exchange rate.
Gross profit as a percent of sales of 48.6% in the third quarter of 2003 was 1.3% below last year's level of 49.9%. The decrease was principally due to higher markdowns in the Canadian stores.
Selling and administrative expenses increased $0.9$3.2 million, or 3.0%, to $108.6 million for the first quarter of 2004 as compared to $105.4 million in the thirdfirst quarter of the prior year. This increase is primarily attributable to increased marketing costs and higher selling salaries. As a percentage of sales, these costs declined to 39.9% from 40.4% last year reflecting the leveraging effect of the sales increase and higher productivity in our stores.
Operating Earnings
Operating earnings increased $1.8 million, or 17.0%, to $12.4 million for the first quarter of 2004 as compared to $10.6 million in the first quarter of the prior year. This increase was driven by the sales increase, coupled with the improvement in gross profit as a percentpercentage of sales, increased to 48.9% this year from 46.9% last year. The increase, as a percent of sales, of 2.0% was principally due to higher marketing expenses of 0.5%, higher store selling costs of 0.3% and higher retail facilities costs of 1.7% partially offset by lower merchandising costs of 0.7%.modest increases in operating expenses.
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| NATURALIZER RETAIL |
| ($ millions, except sales per square foot) | % of Net Sales | % of Net Sales | ||||||||
| Operating Results | ||||||||||
| Net sales | $ | 45.3 | 100.0% | $ | 42.8 | 100.0% | ||||
| Cost of goods sold | 22.9 | 50.6% | 21.4 | 50.0% | ||||||
| Gross profit | 22.4 | 49.4% | 21.4 | 50.0% | ||||||
| Selling & administrative expenses | 24.6 | 54.3% | 22.8 | 53.2% | ||||||
| Operating loss | $ | (2.2 | ) | (4.9)% | $ | (1.4 | ) | (3.2)% | ||
| Key Metrics | ||||||||||
| Same-store sales % change - domestic | 4.1% | (2.5)% | ||||||||
| Same-store sales % change - Canadian | (1.0)% | (8.1)% | ||||||||
| Same-store sales $ change | $ | 1.0 | $ | (1.8) | ||||||
| Sales change from new and closed stores, net | $ | 0.1 | $ | (5.5) | ||||||
| Impact of changes in Canadian exchange rate on sales | $ | 1.4 | $ | 0.9 | ||||||
| Sales per square foot | $ | 75 | $ | 70 | ||||||
| Square footage (thousands sq. ft.) | 578 | 580 | ||||||||
| Stores opened | 9 | - | ||||||||
| Stores closed | 8 | 3 | ||||||||
| Ending stores | 379 | 387 | ||||||||
As a result of the lowerNet Sales
Net sales and gross profit and higher expenses, an operating loss of $0.2increased $2.5 million, occurred in the third quarter of 2003, which was below the operating earnings of $1.5or 5.8%, to $45.3 million in the thirdfirst quarter of 2002. The decline in operating earnings was primarily attributable to the Canadian operations where same-store sales declines have been incurred over the past two years. In response to this trend, the Company is repositioning the product mix in these stores to carry a greater proportion of the United States Naturalizer product line to present a more relevant and younger product line to its customer base.
During the third quarter of 2003, no stores were opened and 3 were closed in the United States, resulting in 210 stores open2004 as of November 1, 2003, compared to 232 at the same time last year. In Canada, 1 store was opened and 1 store closed, resulting in 173 stores open this year compared to 172 at the same time last year.
Other Segment
Net sales in the Other segment increased from $1.1$42.8 million in the thirdfirst quarter of 2002the prior year. This increase is attributable, in part, to $2.0 millionan increase in 2003, as the e-commercesame-store sales of our Shoes.com majority-owned subsidiary continued to strengthen. An operating loss of $0.2 million was incurred for this business, which was equal to the loss in the same period last year. The most significant component of this "Other" segment is unallocated Corporate administrative and other expenses. These costs increased by $1.9 million, or 47.7% in the third quarter of 2003 principally as a result of higher consulting costs of $0.5 million and higher salaries and incentive and benefit plan costs of $1.0 million.
Nine Months ended November 1, 2003 compared to the Nine Months ended November 2, 2002
Consolidated net sales for the first nine months of 2003 were $1.398 billion, an increase of 0.6% from the first nine months of 2002 total of $1.389 billion. Sales of the Wholesale segment were up 3.7% to $419.0 million. Sales decreased in the Famous Footwear segment by $1.3 million, or 0.2%, and in the Naturalizer Retail segment by $7.1 million, or 4.7%, substantially offsetting Wholesale's increase. Same-store sales decreased 2.5% at Famous Footwear and 4.9% in the Canadian Naturalizer stores, and increased 1.3%4.1% in the domestic Naturalizer stores.
Consolidated gross profit as a percentmarket. In Canada, same-store sales declined 1.0%. However, the favorable impact of sales for the nine months of 2003 increased to 41.3% from 40.1% for the same period last year. This increase was primarily due to higher margins at the Company's Famous Footwear and Wholesale segments. The gross profit rate in the Naturalizer Retail segment declined from last year primarily due to higher markdowns in the Canadian stores.
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Selling and administrative expenses for the first nine months of 2003, which include warehousing and distribution costs of $37.9 million ($38.8 million in 2002), increased $13.5 million to 36.6% from 35.8% as a percent ofexchange rate improved sales for the same period last year. This increase reflects approximately $1.6 million in increased spending for marketing, $3.9 million for selling and product development to support the further building of the Company's brands and licenses, $6.5 million of higher store operating costs primarily related to larger and remodeled stores in the Famous Footwear segment and higher general and administrative costs of $2.4by $1.4 million.
Consolidated operating earnings for the first nine months of 2003 of $66.4 million, or 4.7% of sales, were 12.0% above the $59.3 million, or 4.3% of sales, for the same period last year, as the effect of higher gross profit rates were partially offset by higher selling and administrative expenses.
The decrease in interest expense of $1.8 million was a result of lower average borrowings outstanding.
The consolidated tax rate was 29.3% of pre-tax earnings for the first nine months of 2003 compared to 28.4% last year. The increase in the rate reflects a higher percentage of earnings being generated by domestic operations with higher tax rates.
Net earnings of $41.8 million for the first nine months of 2003 were 16.6% higher than net earnings of $35.8 million for the first nine months of 2002. Diluted earnings per share were $2.25 for the first nine months of 2003 compared to $2.01 in the first nine months of 2002, an increase of 11.9%. The percentage change in earnings per share is less than the percentage change in net earnings as a result of an increase in the number of outstanding shares and a greater dilutive effect of outstanding stock options in 2003.
Famous Footwear
Sales at Famous Footwear for the first nine months of 2003 decreased 0.2%, or $1.3 million, from the first nine months of last year to $831.6 million. This decrease reflects a 2.5% decrease in same-store sales, or $19.2 million, offset by a net $17.9 million of sales from new stores, net of closures.
Gross profit as a percent of sales increased 2.2% from 42.2% in the first nine months of last year to 44.4% this year. The improvement, as a percent of sales, principally reflects a 1.8% increase from higher initial markups, a 0.2% decrease in shrinkage, and a 0.2% decrease in the markdown provision.
Selling and administrative expenses for the first nine months of 2003 were $322.8 million, an increase of $10.9 million or 3.5% from the prior year. As a percent of sales, such costs were 38.8% in 2003 compared to 37.4% last year, an increase of 1.4%, principally from a 0.8% increase in retail facilities costs, a 0.2% increase in marketing costs and a 0.5% increase in merchandising and administrative expenses.
14
The effect of higher margins was greater than the increase in selling and administrative expenses, resulting in an increase in operating earnings for the first nine months of 2003 of 16.6% to $46.9 million. As a percent of sales, operating earnings were 5.6% in 2003 compared to 4.8% in 2002.
During the first nine monthsquarter of fiscal 2003, Famous2004, we opened 519 new stores and closed 61, ending the first nine months with 908 stores, compared with 9228, resulting in 379 stores at the end of the first nine months last year.
Wholesale Operations
The Company's Wholesale operations' net sales forquarter of 2004 as compared to 387 at the end of the first nine monthsquarter of 2003 increased 3.7%the prior year. Sales per square foot improved to $419.0 million$75 from the same period last year. This increase included a 25.7% increase in LifeStride and a 31.0% increase$70 in the men'syear ago period. We are focused on strengthening our Naturalizer Retail platform and athletichave combined our U.S. and Canadian organizations under centralized management. We expect to realize synergies as we integrate these organizations. We anticipate improvements as we transition from domestically-produced footwear group, partially offset by declinesto higher-grade imported product in the women's private label and children's divisions. The Naturalizer brand was even with last year's sales.Canadian market sourced through the Company's worldwide sourcing network.
Gross Profit
Gross profit increased $1.0 million, or 4.7%, to 32.9% as a percent of sales for$22.4 million in the first nine monthsquarter of 20032004 as compared to $21.4 million in the first quarter of the prior year. As a percentage of net sales, gross profit declined from 32.0% last year, primarily due50.0% to higher margins on49.4%. This decline is driven by the Company's brandedtransition in the Canadian chain from domestically produced footwear to imported product.
Selling and licensed product sales.
Administrative Expenses
Selling and administrative expenses increased $4.2 million. As a percent of sales, such expenses were 23.1% this year compared$1.8 million, or 7.9%, to 23.0% last year, an increase of 0.1%. This increase is principally due to a 0.9% increase in costs in the selling, product development and merchandising areas as new positions were added, partially offset by lower administrative and sourcing costs of 0.6%.
Operating earnings$24.6 million for the first nine monthsquarter of 2003 of $41.0 million were 11.0% higher than the same period last year2004 as the effect of higher sales and gross profit rates were partially offset by higher expenses.
Naturalizer Retail
In the Company's Naturalizer Retail operations, net sales decreased 4.7%compared to $142.3$22.8 million in the first nine monthsquarter of 2003 compared to $149.4the prior year. Approximately $0.8 million inof the same period last year. The decrease of $7.1 million wasincrease is due to a $11.3 million decline from fewer stores open than last year, a net $1.1 million decrease in same-store sales (1.3% gain in the United States stores and a 4.9% decrease in the Canadian stores), partially offset by a $5.3 million increase from the effect of changes in the Canadian exchange rate.
Gross profit The remaining $1.0 million relates to a combination of increased retail facilities expenses and increased store selling salaries. Retail facilities expenses have increased as a percentresult of salesnormal rent escalations. Store selling salaries have increased due to a recently implemented compensation structure in the domestic stores that ties store manager compensation more directly to the level of 47.7%individual store sales.
13
Operating Earnings
Naturalizer Retail's operating loss increased to $2.2 million in the first nine monthsquarter of 20032004 as compared to a loss of $1.4 million in the first quarter of the prior year. The current period loss was 1.5% below last year's level of 49.2%. The decrease was principally due primarily to higher markdowns, which were necessary to clear seasonal merchandise, particularlythe same-store sales decline in the Canadian stores.stores and slightly lower margins during the quarter.
| WHOLESALE OPERATIONS |
15
| ($ millions) | % of Net Sales | % of Net Sales | ||||||||
| Operating Results | ||||||||||
| Net sales | $ | 171.5 | 100.0% | $ | 141.0 | 100.0% | ||||
| Cost of goods sold | 117.2 | 68.3% | 94.2 | 66.8% | ||||||
| Gross profit | 54.3 | 31.7% | 46.8 | 33.2% | ||||||
| Selling & administrative expenses | 41.5 | 24.2% | 33.8 | 24.0% | ||||||
| Operating earnings | $ | 12.8 | 7.5% | $ | 13.0 | 9.2% | ||||
| Key Metrics | ||||||||||
| Unfilled order position at end of period | $ | 184.8 | $ | 161.5 | ||||||
Net Sales
Net sales increased $30.5 million, or 21.7%, to $171.5 million in the first quarter of 2004 as compared to $141.0 million in the first quarter of the prior year. This increase was due to approximately $15.3 million of sales for the Bass footwear line. We also achieved sales gains within our private label, Dr. Scholl's and LifeStride lines, due in part to our success in capitalizing on a new fashion cycle in women's footwear that is colorful and dressy. In addition, some sandal shipments to certain key customers shifted to the first quarter. Wholesale sales of our flagship Naturalizer brand were slightly lower than last year. Our LifeStride brand of women's footwear had a wholesale sales gain of 14%. The Company's Dr. Scholl's licensed footwear business, and the private label footwear it sells to mass merchants, also posted increases over last year, while the Children's business was down 9%.
Gross Profit
Gross profit increased $7.5 million, or 16.0%, to $54.3 million in the first quarter of 2004 as compared to $46.8 million in the first quarter of the prior year. As a percentage of net sales, gross profit declined from 33.2% to 31.7%. This decline is due, in part, to the disposal of Bass closeout footwear acquired under an asset purchase agreement.
Selling and Administrative Expenses
Selling and administrative expenses increased $7.7 million, or 22.8%, to $41.5 million for the first quarter of 2004 as compared to $33.8 million in the first quarter of the prior year. Selling and administrative costs include $3.3 million in expenses to transition the Bass line to our headquarters and distribution centers. In addition, the acquisition of the Bass footwear license resulted in an additional $2.5 million of typical selling and administrative costs during the quarter, including selling costs, warehousing and distribution, marketing, sourcing, etc. The remaining increases are individually immaterial.
Operating Earnings
Operating earnings decreased $0.2 million, or 1.6%, to $12.8 million for the first quarter of 2004 as compared to $13.0 million in the first quarter of the prior year. This decrease is due to the $3.3 million in expenses related to transition and assimilation of the Bass business that were recognized during the first quarter of 2004.
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| OTHER SEGMENT |
The Other segment includes our majority-owned subsidiary, Shoes.com, Inc., a footwear e-commerce company, and unallocated corporate administrative and other costs.
Net Sales
Net sales of Shoes.com increased $1.3 million, or 87.5%, to $2.8 million in the first quarter of 2004 as compared to $1.5 million in the first quarter of the prior year. This increase reflects strong sales growth due to increased Web site traffic and improved conversion rates.
Operating Earnings
The Shoes.com business generated an operating loss of $0.3 million in the first quarter of 2004 as compared to an operating loss of $0.2 million in the first quarter of the prior year. The decline is due to higher selling and administrative expenses as the division continues to invest for further growth.
Other Corporate Expenses
Unallocated corporate administrative and other costs were $7.8 million in the first quarter of 2004 as compared to $6.7 million in the first quarter of the prior year. During the first quarter of 2004, we recorded an additional $0.6 million in expense related to pretrial interest for our Redfield litigation. For further information on the Redfield litigation, see Part II - Item 1 - Legal Proceedings. In addition, corporate expenses increased due to higher employee compensation, incentive plans and consulting costs related to Project ExCEL - our supply chain management improvement initiative.
| LIQUIDITY AND CAPITAL RESOURCES |
Borrowings
| ($ millions) | May 1, 2004 | May 3, 2003 | Increase/ (Decrease) | ||||||
| Notes payable | $ | 43.0 | $ | 24.5 | $ | 18.5 | |||
| Long-term debt, including current maturities | 100.0 | 123.5 | (23.5 | ) | |||||
| Total short- and long-term debt | $ | 143.0 | $ | 148.0 | $ | (5.0 | ) | ||
Total debt obligations have declined by $5.0 million, or 3.3%, to $143.0 million at May 1, 2004 as compared to $148.0 million at May 3, 2003. Although average daily borrowings are relatively consistent with the first quarter of the prior year, our average interest rates have declined compared to the prior year, resulting in a reduction of interest expense. Interest expense decreased $0.5 million, or 14.7%, to $2.4 million in the first quarter of 2004 as compared to $2.9 million in the first nine months due to fewer stores. As a percent of sales, such expenses were 49.5% in the first nine months of 2003, up 0.5% from last year's 49.0%. The increase principally reflects a 0.9% increase in retail facilities costs and 0.2% in higher warehousing costs, partially offset by a 0.6% decrease in merchandising and administrative costs.
As a resultquarter of the lower salesprior year.
Working Capital and margins, an operating loss of $2.5 million was incurred in the first nine months of 2003 compared to operating earnings of $0.2 million for the same period in 2002.
During the first nine months of 2003, 2 stores were opened and 9 were closed in the United States, resulting in 210 stores open as of November 1, 2003, compared to 232 at the same time last year. In Canada, 2 stores were opened and 1 was closed, resulting in 173 stores open this year compared to 172 at the same time last year.
Other Segment
For the first nine months of 2003, the Other segment's net sales increased to $5.4 million from $3.2 million for the comparable period last year, reflecting higher e-commerce sales at Shoes.com Inc. Shoes.com's operating loss of $0.5 million declined in 2003 from the $0.9 million loss incurred in the first nine months of 2002. Unallocated Corporate administrative and other expenses increased $1.3 million, or 6.9%, in the first nine months of 2003, principally due to higher salaries, benefits, and incentive plan costs of $3.5 million, partially offset by lower remediation costs of $1.1 million and consulting costs of $1.6 million.
Liquidity and Capital ResourcesCash Flow
| ($ millions) | May 1, 2004 | May 3, 2003 | Increase/ (Decrease) | ||||||
| Net cash provided (used) by operating activities | $ | (4.6 | ) | $ | 19.7 | $ | (24.3 | ) | |
| Net cash (used by) investing activities | (6.9 | ) | (6.7 | ) | (0.2 | ) | |||
| Net cash provided (used in) financing activities | 22.3 | (5.1 | ) | 27.4 | |||||
| Increase in cash and cash equivalents | $ | 10.8 | $ | 7.9 | $ | 2.9 | |||
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A summary of key financial data and ratios at the dates indicated is as follows: of Total Capitalization
2003
2002
2003Working Capital (millions) $283.3 $238.1 $243.8 Current Ratio 2.2:1 1.9:1 1.9:1 Total Debt as a Percentage 25.8% 35.8% 34.0%
Cash provided from operating activities for the first nine months of fiscal 2003
May 1, 2004 | May 3, 2003 | January 31, 2004 | |||
| Working capital ($ millions) | $301.1 | $254.1 | $293.8 | ||
| Current ratio | 2.3:1 | 2.0:1 | 2.2:1 | ||
| Total debt as a percentage of total capitalization | 28.2% | 32.5% | 25.2% |
Working capital at May 1, 2004 was $75.6$301.1 million, compared to $87.2 million for the same period last year.
At November 1, 2003, receivables were $64.5 million, a decrease of $0.9 million from the level at November 2, 2002, reflecting substantially flat Wholesale sales in the third quarter of 2003.
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Inventories, substantially all of which were finished goods in all periods, of $376.6 million at November 1, 2003 were $4.8 million or 1.3% lower than at the same time in 2002 but $68.5 million or 15.4% lower than the level as of November 3, 2001. The significant decrease achieved in fiscal 2002 was part of the Company's initiative to reduce inventories and improve "freshness and velocity." This program is continuing and is a significant factor in the improved gross profit rates being achieved, particularly at Famous Footwear.
Additions to property and equipment of $21.7 million for the first nine months of 2003 were $6.6$7.3 million higher than additionsat January 31, 2004 and $47.0 million higher than at May 3, 2003. Our current ratio, the relationship of $15.1current assets to current liabilities, increased to 2.3 to 1 at May 1, 2004 from 2.2 to 1 at January 31, 2004 and 2.0 to 1 at May 3, 2003. The improvement in both our working capital and current ratio is attributed to continued growth in cash and cash equivalents as a result of our strong financial results over the past twelve months as well as effective management of our outstanding debt obligations and other current liabilities.
At May 1, 2004, the Company had $66.4 million of cash and cash equivalents. Of this total, approximately $64.6 million 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 used by operating activities was $4.6 million in the first nine monthsquarter of 2002.2004 as compared to cash provided by operating activities of $19.7 million last year, a difference of $24.3 million. This increasedifference primarily relatesreflects the investment of approximately $14 million in Bass inventory and the buildup of approximately $13 million of accounts receivable from sales of Bass product. Traditionally, inventories and accounts payable both decline in our first quarter compared to the major store remodel initiative startedprior year end levels. Excluding the effect of the Bass inventory acquisition, our inventories declined by approximately the same amount as last year. At Famous Footwear, in the fourth quarter of 2002 and ending in the second quarter of 2003. Approximately 70% of the 2003 capital expenditures relate to the Famous Footwear division, primarily for new stores and remodels of existing stores. The remaining expendituresour inventories were primarily for new and remodeled stores at the Company's domestic and Canadian Naturalizer stores. Depreciation and amortization expense was $19.7 million in the nine months of 2003 compared to $17.8 million for the same period last year.
The Company's total outstanding debt at November 1, 2003 was $119.5 million, which is $41.0 million6% lower per square foot than at the same time last year. At November 1, 2003, $16.0
Cash used by investing activities was $6.9 million was borrowed and $17.0 million of letters of credit were outstanding under the Company's revolving bank Credit Agreement, which leaves additional borrowing availability of approximately $145 million. Total debt as a percentage of total capitalization is calculated by dividing total debt by the sum of total debt plus shareholders' equity. The decrease in the ratio at November 1, 2003 to 25.8%first quarter of 2004 as compared to 34.0% at$6.7 million in the end of fiscal 2002 and 35.8% at November 2, 2002 was due to the decrease in outstanding debt and increases in shareholders' equity.
In the fourthfirst quarter of fiscal 2003, the Company plansprior 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 first quarter were used to prepay its Industrial Revenue Bonds capital lease obligationsretrofit stores in our retail divisions.
Cash provided by financing activities was $22.3 million in the first quarter of $3.52004 as compared to cash used by financing activities of $5.1 million, a difference of $27.4 million. Accordingly, this capital lease obligation was classified as a current liability asThis difference represents an increase in our short-term notes payable of $23.5 million since the beginning of the endfirst quarter of 2004 as compared to a reduction in our short-term notes payable of $4.5 million in the first quarter of the third quarter of 2003.prior 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 May 2000, the Companywe announced a stock repurchase program under whichauthorizing the Company was authorized to repurchase of up to 2 million shares of the Company'sour outstanding common stock. In the first nine months of fiscal 2003, no shares were purchased under this authorization. Since the inception of this program, the Company has repurchasedwe have purchased a total of 928,900 shares for approximately $11.3 million. No shares were purchased under the plan in either the first quarter of 2004 or the first quarter of the prior year.
The Company paid dividends of $0.10 per share in the first quarter of 2004 and the first quarter of the prior year.
| CRITICAL ACCOUNTING POLICIES AND ESTIMATES |
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.
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Forward-Looking StatementsFORWARD-LOOKING STATEMENTS
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 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) and 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 fiscal 2002 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.
| ITEM 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
No material changes have taken place in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further information, see Item 7A of the Company's Annual Report on Form 10-K for the year ended February 1, 2003.January 31, 2004.
| ITEM 4 | CONTROLS AND PROCEDURES |
ITEM 4 - CONTROLS AND PROCEDURES
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 NovemberMay 1, 2003,2004, 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 NovemberMay 1, 2003,2004, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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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.
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
| PART II | OTHER INFORMATION |
| ITEM 1 | LEGAL PROCEEDINGS |
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 at its owned property in Denver, Colorado and residential neighborhoods adjacent to and near the property, which have been affected by solvents previously used at the site and near the property. surrounding facilities.
In March 2000, a class-actionclass action lawsuit related to this Colorado site was filed in Colorado State Court (District Court for the City and County of Denver) related to the Redfield site described above against the Company, andone of our subsidiaries, a prior operator at the site.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 had contaminatedare contaminating the groundwater and indoor air in thecertain areas adjacent to the site. In December 2003, a jury returned a verdict finding us negligent and nearawarding the siteclass plaintiffs $1.0 million in damages. We have recorded this award along with the estimated cost of associated pretrial interest and were seeking damages in excessthe estimated costs of $380sanctions imposed on us by the court resulting from pretrial discovery disputes between the parties. We have recorded total pretax charges of $3.7 million for diminutionthese matters. In April 2004, the plaintiffs filed a motion for a new trial; the court has not yet ruled on that motion. 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 property values, remediation damages, lossFederal District Court in Denver against a number of useformer owner/operators of the Redfield site as well as surrounding businesses seeking recovery of amounts spent responding to the contamination at and enjoyment, annoyancearound the Redfield site. We have reached settlement agreements with several of these defendants in this action and discomfort, and punitive damages.On December 8, 2003,currently anticipate the case will be tried against the remaining defendants in late 2004. We have also filed a contribution action in Colorado State Court jury foundagainst 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. 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 partiallyas a potentially responsible party for allegedremediation 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 impacts onlaws to address conditions that may be identified in the neighborhood and entered a verdict against the Company of $1.0 million for loss of use and enjoyment and annoyance and discomfort.future.
In connection with this lawsuit, the court held hearings on motions filed by plaintiffs and the co-defendant seeking various sanctions against the Company alleging certain improper discovery practices. Rulings on such hearings are pending. The Company is not able to assess or estimate a loss, or range of loss, if any, or the ultimate outcome of such hearings, but it does not believe these proceedings will have a material adverse affect on the Company's financial position.
There have been no material developments during the quarter ended NovemberMay 1, 20032004 in any other legal proceedings described in the Company's Annual Report on Form 10-K for the year ended February 1, 2003.
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Item 6 - ExhibitsITEM 2 CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
The following table provides information relating to the company's repurchase of common stock for the first quarter of 2004.
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) February 1, 2004 - February 28, 2004 February 29, 2004 - April 3, 2004 (2) (2) (2) April 4, 2004 - May 1, 2004 Total
| ITEM 3 | DEFAULTS UPON SENIOR SECURITIES |
None
At the Annual Meeting of Shareholders held on May 27, 2004, one proposal described in the Notice of Annual Meeting of Shareholders dated April 13, 2004, was voted upon.
| Directors | ||||
| Julie C. Esrey | 15,020,750 | 840,532 | ||
| Richard A. Liddy | 15,615,668 | 245,614 | ||
| W. Patrick McGinnis | 15,021,756 | 839,526 | ||
| Hal J. Upbin | 15,619,480 | 241,802 |
| ITEM 5 |
None
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| ITEM 6 | EXHIBITS AND REPORTS ON FORM 8-K |
| (a) | (3) | (i) | Certificate of Incorporation of the Company incorporated herein by reference |
| (ii) | Bylaws of the Company as amended through | ||
| Severance Agreement, dated May 24, 2004 between the Company and Diane M. Sullivan, filed herewith. | |||
| (10.2) | Severance Agreement, dated March 8, 2001 between the Company and Michael Oberlander, filed herewith. | ||
| (10.3) | Severance Agreement, dated October 5, 2000 between the Company and Richard C. Schumacher, filed herewith. | ||
| (10.4) | Form of Restricted Stock Unit Agreement, dated May 27, 2004 between the Company and each of Joseph L. Bower, Julie C. Esrey, Richard A. Liddy, Patricia G. McGinnis, W. Patrick McGinnis, and Jerry E. Ritter, filed herewith. | ||
| (10.5) | Form of Restricted Stock Unit Agreement, dated May 27, 2004 between the Company and each of Joseph L. Bower, Julie C. Esrey, Richard A. Liddy, Patricia G. McGinnis, W. Patrick McGinnis, Jerry E. Ritter, and Hal J. Upbin, filed herewith. | ||
| (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. |
| (b) | Reports on Form 8-K: | ||
| The Company filed a current report on Form 8-K dated | |||
| The Company filed a current report on Form 8-K dated | |||
| The Company filed a current report on Form 8-K dated | |||
| The Company filed a current report on Form 8-K dated | |||
| The Company filed a current report on Form 8-K dated | |||
21
| The Company filed a current report on Form 8-K dated | |||
| The Company filed a current report on Form 8-K dated | |||
| The Company filed a | |||
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| SIGNATURES |
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.
| Date: | ||
Chief Financial Officer and Treasurer On Behalf of the Corporation and as the Principal Financial Officer |
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