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 checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act Rule 12b-2)Act). Yes [X] No [ ]
As of May 29,August 28, 2004, 18,171,16618,189,166 common shares were outstanding.
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| PART I | FINANCIAL INFORMATION |
| ITEM 1 | FINANCIAL STATEMENTS |
| BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS | BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS | BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||||||||||||
| ($ thousands) | May 1, 2004 | May 3, 2003 | January 31, 2004 | July 31, 2004 | August 2, 2003 | January 31, 2004 | |||||||||||||
| Assets | |||||||||||||||||||
| Current Assets | |||||||||||||||||||
| Cash and cash equivalents | $ | 66,422 | $ | 40,025 | $ | 55,657 | $ | 71,478 | $ | 50,406 | $ | 55,657 | |||||||
| Receivables | 88,072 | 64,753 | 81,930 | 83,938 | 75,271 | 81,930 | |||||||||||||
| Inventories | 366,902 | 369,237 | 376,210 | 453,016 | 417,731 | 376,210 | |||||||||||||
| Prepaid expenses and other current assets | 19,275 | 24,450 | 15,888 | 21,718 | 26,405 | 15,888 | |||||||||||||
| Total current assets | 540,671 | 498,465 | 529,685 | 630,150 | 569,813 | 529,685 | |||||||||||||
| Other assets | 83,851 | 83,723 | 83,692 | 85,274 | 83,883 | 83,692 | |||||||||||||
| Goodwill and intangible assets, net | 20,222 | 18,931 | 20,405 | 20,382 | 18,999 | 20,405 | |||||||||||||
| Property and equipment | 277,667 | 261,402 | 272,151 | 283,399 | 268,754 | 272,151 | |||||||||||||
| Allowances for depreciation and amortization | (191,854 | ) | (176,030 | ) | (186,603 | ) | (196,426 | ) | (181,155 | ) | (186,603 | ) | |||||||
| Total property and equipment | 85,813 | 85,372 | 85,548 | 86,973 | 87,599 | 85,548 | |||||||||||||
| Total assets | $ | 730,557 | $ | 686,491 | $ | 719,330 | $ | 822,779 | $ | 760,294 | $ | 719,330 | |||||||
| Liabilities and Shareholders' Equity | Liabilities and Shareholders' Equity | Liabilities and Shareholders' Equity | |||||||||||||||||
| Current Liabilities | |||||||||||||||||||
| Notes payable | $ | 43,000 | $ | 24,500 | $ | 19,500 | $ | 27,500 | $ | 19,000 | $ | 19,500 | |||||||
| Trade accounts payable | 100,902 | 108,974 | 116,677 | 192,243 | 174,541 | 116,677 | |||||||||||||
| Accrued expenses | 90,489 | 82,484 | 96,707 | 96,420 | 90,653 | 96,707 | |||||||||||||
| Income taxes | 5,189 | 8,450 | 2,960 | 7,377 | 12,422 | 2,960 | |||||||||||||
| Current maturities of long-term debt | - | 20,000 | - | - | 10,000 | - | |||||||||||||
| Total current liabilities | 239,580 | 244,408 | 235,844 | 323,540 | 306,616 | 235,844 | |||||||||||||
| Other Liabilities | |||||||||||||||||||
| Long-term debt and capitalized lease obligations | 100,000 | 103,493 | 100,000 | 100,000 | 103,494 | 100,000 | |||||||||||||
| Other liabilities | 27,756 | 31,109 | 28,358 | 27,373 | 29,411 | 28,358 | |||||||||||||
| Total other liabilities | 127,756 | 134,602 | 128,358 | 127,373 | 132,905 | 128,358 | |||||||||||||
| Shareholders' Equity | |||||||||||||||||||
| Common stock | 68,002 | 66,745 | 67,787 | 68,209 | 67,308 | 67,787 | |||||||||||||
| Additional capital | 64,851 | 52,051 | 62,772 | 65,155 | 53,902 | 62,772 | |||||||||||||
| Unamortized value of restricted stock | (3,648 | ) | (2,853 | ) | (3,408 | ) | (3,188 | ) | (2,896 | ) | (3,408 | ) | |||||||
| Accumulated other comprehensive loss | (5,651 | ) | (8,872 | ) | (4,934 | ) | (3,974 | ) | (7,726 | ) | (4,934 | ) | |||||||
| Retained earnings | 239,667 | 200,410 | 232,911 | 245,664 | 210,185 | 232,911 | |||||||||||||
| Total shareholders' equity | 363,221 | 307,481 | 355,128 | 371,866 | 320,773 | 355,128 | |||||||||||||
| Total liabilities and shareholders' equity | $ | 730,557 | $ | 686,491 | $ | 719,330 | $ | 822,779 | $ | 760,294 | $ | 719,330 | |||||||
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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 | ||||||||
See notes to condensed consolidated financial statements.BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS ($ thousands, except per share amounts) Net sales $ $ Cost of goods sold Gross profit Selling and administrative expenses Operating earnings Interest expense Interest income ) ) ) ) Earnings before income taxes Income tax provision Net earnings $ $ Basic net earnings per common share $ $ Diluted net earnings per common share $ $ Dividends per common share $ $
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| BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||||
| ($ thousands) | May 1, 2004 | May 3, 2003 | July 31, 2004 | August 2, 2003 | ||||||||||
| Operating Activities: | ||||||||||||||
| Net earnings | $ | 8,567 | $ | 9,003 | $ | 16,381 | $ | 20,559 | ||||||
| Adjustments to reconcile net earnings to net cash provided (used) by operating activities: | ||||||||||||||
| Depreciation | 5,767 | 6,121 | ||||||||||||
| Amortization | 4 | 4 | ||||||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization | 11,787 | 12,470 | ||||||||||||
| Share-based compensation expense | 1,405 | 1,039 | 711 | 1,867 | ||||||||||
| Tax benefit related to share-based plans | 709 | - | ||||||||||||
| Loss on disposal of facilities and equipment | 315 | 348 | 403 | 567 | ||||||||||
| Impairment charges for facilities and equipment | 409 | 350 | 600 | 966 | ||||||||||
| Provision for (recoveries from) doubtful accounts | (167 | ) | 161 | (344 | ) | 150 | ||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| Receivables | (5,975 | ) | 17,572 | (1,664 | ) | 7,065 | ||||||||
| Inventories | 9,308 | 23,347 | (76,806 | ) | (25,147 | ) | ||||||||
| Prepaid expenses and other current assets | (3,387 | ) | (3,472 | ) | (5,830 | ) | (5,427 | ) | ||||||
| Trade accounts payable and accrued expenses | (21,993 | ) | (39,400 | ) | 75,279 | 33,716 | ||||||||
| Income taxes | 2,229 | 3,098 | 4,417 | 7,070 | ||||||||||
| Other, net | (1,121 | ) | 1,565 | (645 | ) | 542 | ||||||||
| Net cash provided (used) by operating activities | (4,639 | ) | 19,736 | |||||||||||
| Net cash provided by operating activities | 24,998 | 54,398 | ||||||||||||
| Investing Activities: | ||||||||||||||
| Capital expenditures | (7,049 | ) | (6,856 | ) | (14,235 | ) | (16,146 | ) | ||||||
| Other | 115 | 125 | 153 | 248 | ||||||||||
| Net cash used by investing activities | (6,934 | ) | (6,731 | ) | ||||||||||
| Net cash used for investing activities | (14,082 | ) | (15,898 | ) | ||||||||||
| Financing Activities: | ||||||||||||||
| Increase (decrease) in short-term notes payable | 23,500 | (4,500 | ) | 8,000 | (10,000 | ) | ||||||||
| Principal repayments of long-term debt | - | (10,000 | ) | |||||||||||
| Debt issuance costs | (1,071 | ) | - | |||||||||||
| Proceeds from stock options exercised | 649 | 1,174 | 1,605 | 3,342 | ||||||||||
| Dividends paid | (1,811 | ) | (1,775 | ) | (3,629 | ) | (3,557 | ) | ||||||
| Net cash provided (used) by financing activities | 22,338 | (5,101 | ) | |||||||||||
| Net cash provided by (used for) financing activities | 4,905 | (20,215 | ) | |||||||||||
| Increase in cash and cash equivalents | 10,765 | 7,904 | 15,821 | 18,285 | ||||||||||
| Cash and cash equivalents at beginning of period | 55,657 | 32,121 | 55,657 | 32,121 | ||||||||||
| Cash and cash equivalents at end of period | $ | 66,422 | $ | 40,025 | $ | 71,478 | $ | 50,406 | ||||||
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| BROWN SHOE COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL |
| 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 cash flows have been reclassified to conform to the current period presentation. These reclassifications did not affect net earnings.
The Company's business is subject to seasonal influences, particularly the back-to-school selling season at Famous Footwear which falls in the Company's third quarter. Interim results may not necessarily be indicative of results which may be expected for any other interim period or for the year as a whole.
For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended January 31, 2004.
| Note 2. | Earnings Per Share |
The following table sets forth the computation of basic and diluted earnings per common share for the periods ended May 1,July 31, 2004 and May 3,August 2, 2003:
| ($ thousands, except per share data) | May 1, 2004 | May 3, 2003 | July 31, 2004 | August 2, 2003 | July 31, 2004 | August 2, 2003 | ||||||||||||||
| NUMERATOR | $ | |||||||||||||||||||
| Net earnings | $ | 8,567 | $ | 9,003 | $ | 7,814 | 11,556 | $ | 16,381 | $ | 20,559 | |||||||||
| DENOMINATOR (thousand shares) | ||||||||||||||||||||
| Denominator for basic earnings per common share | 17,841 | 17,510 | 17,921 | 17,631 | 17,881 | 17,570 | ||||||||||||||
| Dilutive effect of unvested restricted stock and stock options | 1,078 | 883 | 1,066 | 901 | 1,072 | 893 | ||||||||||||||
| Denominator for diluted earnings per common share | 18,919 | 18,393 | 18,987 | 18,532 | 18,953 | 18,463 | ||||||||||||||
| Basic earnings per common share | $ | 0.48 | $ | 0.51 | $ | 0.44 | $ | 0.66 | $ | 0.92 | $ | 1.17 | ||||||||
| Diluted earnings per common share | $ | 0.45 | $ | 0.49 | $ | 0.41 | $ | 0.62 | $ | 0.86 | $ | 1.11 | ||||||||
Options to purchase 236,167231,167 and 38,74515,000 shares of common stock at May 1,for the thirteen week periods and 233,667 and 15,167 for the twenty-six week periods ended July 31, 2004 and May 3,August 2, 2003, respectively, were not included in the denominator for diluted earnings per common share because their effect would be antidilutive.
| Note 3. | Comprehensive Income |
Comprehensive Incomeincome includes changes in shareholders' equity related to foreign currency translation adjustments and unrealized gains/gains or losses from derivatives used for hedging activities.
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The following table sets forth the reconciliation from Net Earningsnet earnings to Comprehensive Incomecomprehensive income for the periods ended May 1,July 31, 2004 and May 3,August 2, 2003:
| ($ Thousands) | May 1, 2004 | May 3, 2003 | July 31, 2004 | August 2, 2003 | July 31, 2004 | August 2, 2003 | ||||||||||||||
| Net earnings | $ | 7,814 | $ | 11,556 | $ | 16,381 | $ | 20,559 | ||||||||||||
| Net Earnings | $ | 8,567 | $ | 9,003 | ||||||||||||||||
| Other Comprehensive Income (Loss), net of tax: | ||||||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||
| Foreign currency translation adjustment | (1,310 | ) | 2,697 | 1,218 | 562 | (92 | ) | 3,259 | ||||||||||||
| Unrealized gains (losses) on derivative instruments | 102 | (767 | ) | (214 | ) | 212 | (112 | ) | (555 | ) | ||||||||||
| Net loss reclassified into earnings | 491 | 345 | 673 | 372 | 1,164 | 717 | ||||||||||||||
(717 | ) | 2,275 | 1,677 | 1,146 | 960 | 3,421 | ||||||||||||||
| Comprehensive Income | $ | 7,850 | $ | 11,278 | ||||||||||||||||
| Comprehensive income | $ | 9,491 | $ | 12,702 | $ | 17,341 | $ | 23,980 | ||||||||||||
| Note 4. | Business Segment Information |
Applicable business segment information is as follows for the periods ended May 1,July 31, 2004 and May 3,August 2, 2003:
($ thousands)
Footwear
Operations
RetailThirteen Weeks Ended May 1, 2004 External Sales $ $ $ $ $ Intersegment Sales Operating earnings (loss) ) ) Operating segment assets Thirteen Weeks Ended May 3, 2003 External Sales $ $ $ $ $ Intersegment Sales Operating earnings (loss) ) ) Operating segment assets ($ thousands)
Footwear
Operations
Retail Thirteen Weeks Ended July 31, 2004 External sales $ $ $ $ $ Intersegment sales Operating earnings (loss) ) ) Operating segment assets Thirteen Weeks Ended August 2, 2003 External sales $ $ $ $ $ Intersegment sales Operating earnings (loss) ) ) Operating segment assets Twenty-six Weeks Ended July 31, 2004 External sales $ $ $ $ $ Intersegment sales Operating earnings (loss) ) ) Twenty-six Weeks Ended August 2, 2003 External sales $ $ $ $ $ Intersegment sales Operating earnings (loss) ) )
The "Other"Other segment includes Corporatecorporate administrative and other expenses, which are not allocated to the operating units, and the Company's investment in its majority-owned subsidiary, Shoes.com, Inc., a footwear e-commerce company.
Effective February 1, 2004, the Company began accounting for its Irish financing subsidiary, Brown Group Dublin Limited, which holds cash earned offshore other than in Canada, within the Other segment. Brown Group Dublin Limited had previously been accounted for within the Wholesale Operations segment. Prior year amounts have been reclassified to
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conform to the current year presentation. This reclassification had no effect on operating earnings, but resulted in a transfer of assets of $57.9$62.4 million and $34.3$41.3 million inat July 31, 2004 and August 2, 2003, respectively, to the "Other"Other segment.
| Note 5. | Restructuring Reserves |
Closure of Canadian Manufacturing Facility
In the fourth quarter of fiscal year 2003, the Company announced the closing of its last Canadian footwear manufacturing facility, located in Perth, Ontario, and recorded a pretaxpre-tax charge of $4.5 million, the components of which were as follows:
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| ($ millions) | Employee Severance | Inventory Markdowns | Lease Buyouts | Total | Employee Severance | Inventory Markdowns | Lease Buyouts | Total | ||||||||||||||||
| Original charge and reserve balance | $ | 2.3 | $ | 1.6 | $ | 0.6 | $ | 4.5 | $ | 2.3 | $ | 1.6 | $ | 0.6 | $ | 4.5 | ||||||||
| Adjustments | (0.3 | ) | 0.4 | (0.1 | ) | - | (0.3 | ) | 0.4 | (0.1 | ) | - | ||||||||||||
| Expenditures in quarter ending May 1, 2004 | (1.8 | ) | (2.0 | ) | (0.1 | ) | (3.9 | ) | (1.8 | ) | (2.0 | ) | (0.1 | ) | (3.9 | ) | ||||||||
| Reserve balance May 1, 2004 | $ | 0.2 | $ | - | $ | 0.4 | $ | 0.6 | ||||||||||||||||
| Expenditures in quarter ending July 31, 2004 | (0.1 | ) | - | (0.2 | ) | (0.3 | ) | |||||||||||||||||
| Reserve balance July 31, 2004 | $ | 0.1 | $ | - | $ | 0.2 | $ | 0.3 | ||||||||||||||||
The Company anticipates that the restructuring activities associated with the closure of the Canadian manufacturing facility will be substantially completed duringby the secondend of fiscal quarter of 2004.
| Note 6. | Goodwill and Other Intangible Assets |
Goodwill and intangible assets were attributable to the Company's operating segments as follows:
| ($ thousands) | May 1, 2004 | May 3, 2003 | January 31, 2004 | July 31, 2004 | August 2, 2003 | January 31, 2004 | ||||||||||||
| Famous Footwear | $ | 3,529 | $ | 3,529 | $ | 3,529 | $ | 3,529 | $ | 3,529 | $ | 3,529 | ||||||
| Wholesale Operations | 10,241 | 10,255 | 10,245 | 10,237 | 10,252 | 10,245 | ||||||||||||
| Naturalizer Retail | 5,117 | 4,947 | 5,296 | 5,281 | 5,018 | 5,296 | ||||||||||||
| Other | 1,335 | 200 | 1,335 | 1,335 | 200 | 1,335 | ||||||||||||
$ | 20,222 | $ | 18,931 | $ | 20,405 | $ | 20,382 | $ | 18,999 | $ | 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 May 3,August 2, 2003 to May 1,July 31, 2004 of $1.1 million reflects the acquisition of additional shares of Shoes.com Inc. by the Company.
| Note 7. | Share-Based Compensation |
As of May 1,July 31, 2004, the Company had four share-based compensation plans, which are described more fully in Note 16 ofto the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended January 31, 2004. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Compensation expense is recognized in net earnings for stock appreciation units, stock performance plans and restricted stock grants. No share-based employee compensation cost is reflected in net earnings for stock options, as all option grants had an exercise price equal to the market value of the
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underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock options outstanding:
7
| ($ thousands, except per share amounts) | May 1, 2004 | May 3, 2003 | July 31, 2004 | August 2, 2003 | July 31, 2004 | August 2, 2003 | ||||||||||||||
| Net earnings, as reported | $ | 8,567 | $ | 9,003 | $ | 7,814 | $ | 11,556 | $ | 16,381 | $ | 20,559 | ||||||||
| Add: Total share-based employee compensation expense included in reported net earnings, net of related tax effect | 913 | 675 | ||||||||||||||||||
| Add: Total share-based employee compensation (income) expense included in reported net earnings, net of related tax effect | (451 | ) | 538 | 462 | 1,213 | |||||||||||||||
| 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 | ) | (359 | ) | (1,125 | ) | (2,013 | ) | (2,397 | ) | ||||||||
| Pro forma net earnings | $ | 7,826 | $ | 8,406 | $ | 7,004 | $ | 10,969 | $ | 14,830 | $ | 19,375 | ||||||||
| Earnings per share: | ||||||||||||||||||||
| Basic - as reported | $ | 0.48 | $ | 0.51 | $ | 0.44 | $ | 0.66 | $ | 0.92 | $ | 1.17 | ||||||||
| Basic - pro forma | 0.44 | 0.48 | 0.39 | 0.62 | 0.83 | 1.10 | ||||||||||||||
| Diluted - as reported | 0.45 | 0.49 | 0.41 | 0.62 | 0.86 | 1.11 | ||||||||||||||
| Diluted - pro forma | 0.41 | 0.46 | 0.37 | 0.59 | 0.78 | 1.05 | ||||||||||||||
The Company issued 57,19055,387 and 115,806150,347 shares of common stock respectively, for the thirteen week periods, and 112,577 and 266,153 shares of common stock for the twenty-six week periods, ended May 1,July 31, 2004 and May 3,August 2, 2003, respectively, for stock options exercised and restricted stock grants. The Company recognized $0.5 million of share-based compensation income during the thirteen weeks ended July 31, 2004 as a result of the decline in the Company's net earnings and stock price during that period.
| Note 8. | Retirement and Other Benefit Plans |
The following table sets forth the components of net periodic benefit cost (income)or income for the Company, including all domestic and Canadian plans:
| ($ thousands) | May 1, 2004 | May 3, 2003 | May 1, 2004 | May 3, 2003 | July 31, 2004 | August 2, 2003 | July 31,2004 | August 2, 2003 | ||||||||||||||||
| Service cost | $ | 1,383 | $ | 1,283 | $ | - | $ | - | $ | 1,699 | $ | 1,349 | $ | - | $ | - | ||||||||
| Interest cost | 2,103 | 1,978 | 63 | 75 | 2,228 | 2,016 | 67 | 61 | ||||||||||||||||
| Expected return on assets | (3,608 | ) | (3,601 | ) | - | - | (4,042 | ) | (3,798 | ) | - | - | ||||||||||||
| Amortization of: | ||||||||||||||||||||||||
| Actuarial (gain) loss | 78 | 78 | (50 | ) | (50 | ) | 81 | 109 | (20 | ) | (48 | ) | ||||||||||||
| Prior service costs | 75 | 75 | - | (25 | ) | 81 | 81 | (27 | ) | |||||||||||||||
| Net transition assets | (43 | ) | (39 | ) | - | - | (42 | ) | (42 | ) | - | - | ||||||||||||
| Settlement cost | - | - | - | - | ||||||||||||||||||||
| Total net periodic benefit cost (income) | $ | (12 | ) | $ | (226 | ) | $ | 13 | $ | - | $ | 5 | $ | (285 | ) | $ | 47 | $ | (14 | ) | ||||
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| ($ thousands) | July 31, 2004 | August 2, 2003 | July 31,2004 | August 2, 2003 | ||||||||
| Service cost | $ | 3,082 | $ | 2,632 | $ | - | $ | - | ||||
| Interest cost | 4,331 | 3,994 | 130 | 136 | ||||||||
| Expected return on assets | (7,650 | ) | (7,399 | ) | - | - | ||||||
| Amortization of: | ||||||||||||
| Actuarial (gain) loss | 159 | 187 | (70 | ) | (98 | ) | ||||||
| Prior service costs | 156 | 156 | - | (52 | ) | |||||||
| Net transition assets | (85 | ) | (81 | ) | - | - | ||||||
| Total net periodic benefit cost (income) | $ | (7 | ) | $ | (511 | ) | $ | 60 | $ | (14 | ) | |
| Note 9. | Amended and Restated Credit Agreement |
The Company entered into an Amended and Restated Credit Agreement (the "Agreement") effective July 21, 2004, which amended and restated its existing $350 million revolving bank credit agreement. The Agreement provides for a maximum line of credit of $350 million, subject to the calculated borrowing base restrictions. In addition to extending the credit term, the Agreement also provides other benefits to the Company, including expanding the definition of eligible inventory in certain circumstances and reducing the interest rate spread paid on outstanding borrowings. Borrowing availability under the Agreement is based upon the sum of eligible accounts receivable and inventory, less outstanding borrowings, letters of credit and applicable reserves. The Agreement matures on July 21, 2009 and the Company's obligations are secured by the Company's accounts receivable and inventory. Borrowings under the Agreement bear interest at a variable rate determined based upon the level of availability under the Agreement. If availability falls below specified levels, the Company would then be subject to certain financial covenants. In addition, if availability falls below $25 million and the fixed charge coverage ratio is less than 1.0 to 1, the Company would be in default. The Agreement also contains certain other covenants and restrictions.
In connection with the Agreement, the Company incurred $1.1 million of issuance costs in the second quarter, which, together with remaining unamortized debt issuance costs of approximately $2.7 million associated with the existing bank credit agreement, will be amortized over the five-year term of the Agreement.
| Note 10. | Commitments and Contingencies |
Environmental Remediation
The Company is involved in environmental remediation and ongoing compliance activities at several sites. The Company is remediating, under the oversight of Colorado authorities, the groundwater and indoor air at its owned facility in Colorado (also known as the Redfield site) and residential neighborhoods adjacent to and near the property that have been affected by solvents previously used at the facility. The total anticipated future cost of remediation activities at May 1,July 31, 2004 is $7.7$7.1 million and is accrued within other accrued expenses and other liabilities on the condensed consolidated balance sheet, but the ultimate cost may vary. The cumulative costs incurred through May 1,July 31, 2004 are $12.9$13.8 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,July 31, 2004, recorded recoveries totaled $4.8$3.8 million and are recorded in other noncurrent assets on the condensed consolidated balance sheet. $4.5$3.6 million of the recorded recoveries are expected from certain insurance companies as indemnification for amounts spent for remediation associated with the Redfield site. The insurance companies are contesting their indemnity obligations, and the Company has sued its insurers seeking recovery of defense costs, indemnity and other damages related to the former operations and the remediation at the site. The Company believes insurance coverage in place entitles it to reimbursement for more than the recovery recorded. The Company believes the recorded recovery is supported by the fact the limits of the insurance policies at issue exceed the amount of the recorded recovery, and certain insurers have offered to settle these claims. The Company is unable to estimate the ultimate recovery from the insurance carriers, but is pursuing resolution of its claims.
Page 9
The Company has completed its remediation efforts at its closed New York tannery and two associated landfills. In 1995, state environmental authorities reclassified the status of these sites as being properly closed and requiring only continued maintenance and monitoring over the next 20 years. In addition, various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other landfills.
Based on information currently available, the Company had an accrued liability of $9.8$9.1 million as of May 1,July 31, 2004 to complete the cleanup, maintenance and monitoring at all sites. Of the $9.8$9.1 million liability, $6.8 million is included in accrued expenses and $2.3 million is included in other accrued expenses and $7.5 million is included in other liabilities inon the condensed consolidated balance sheet. The ultimate costs may vary, and it is possible costs may exceed the recorded amounts.
While the Company currently does not operate manufacturing facilities, prior operations included numerous manufacturing and other facilities for which the Company may have responsibility under various environmental laws for the remediation of conditions that may be identified in the future.
Litigation
In March 2000, a class action lawsuit was filed in Colorado State Court (District Court for the City and County of Denver) related to the Redfield site described above. Plaintiffs alleged claims for trespass, nuisance, strict liability, unjust enrichment, negligence and exemplary damages arising from the alleged release of solvents contaminating the groundwater and indoor air in the areas adjacent to and near the site. In December 2003, the jury hearing the claims returned a verdict finding one of the Company's subsidiarysubsidiaries negligent and awarded the class plaintiffs $1.0 million in damages. The Company has recorded this award along with estimated pretrialpre-trial interest on the award and estimated costs related to sanctions imposed by the court related to a pretrialpre-trial discovery dispute between the parties. The total pretaxpre-tax charge recorded for these matters in the fourth quarter of fiscal 2003 was $3.1 million ($2.0 million after tax). The Company recorded an additional $0.6 million in expense in the first quarter of 2004, related to pretrialpre-trial interest, to reflect the trial court's ruling extending the time period for which pre-judgment interest applied. In April 2004, the plaintiffs filed a motion for a new trial; the court has not yet ruled ondenied that motion. Several other post-trial motions are still pending before the trial courtcourt. The plaintiffs have appealed the judgment to the Colorado Court of Appeals and have asked for a retrial. The Company has cross-appealed the trial court's ruling as to the amount of pre-judgment interest, and has conditionally appealed a number of the trial court's rulings in the event of a retrial. The ultimate outcome and cost to the Company may vary.
As described above in "Environmental Remediation," the Company has filed suit against its insurance carriers and is seeking recovery of certain defense costs, indemnity for the costs incurred for remediation related to the Redfield site and for the damages awarded in the class action, and other related damages.
The Company also is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending will not have a material adverse effect on the Company's results of operations or financial position.
Other
The Company is a guarantor of an Industrial Development Bond financing of $3.5 million for a manufacturing and warehouse facility in Bedford County, Pennsylvania. These facilities and the business that operated them were sold to another party in 1985, which assumed this obligation. This financing is scheduled to be paid annually beginning in 2004 through 2009.
The Company is contingently liable for lease commitments of approximately $11$10 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 these guarantees and lease commitments, the current owners would have to default. At this time, the Company does not believe this is reasonably likely to occur.
Page 10
| ITEM 2 | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
| OVERVIEW |
Overall, we are pleased with our firstthe second quarter results, even thoughwas a difficult one for the Company as net earnings declined slightly from the second quarter last year, as we increased sales, assimilated the Bass licensed footwear business and achieved improved results at Famous Footwear.
despite a slight increase in net sales. Consolidated net sales rose 10.2%0.1% to $491.8$458.7 million for the firstsecond quarter of fiscal 2004, as compared to $446.4$458.4 million for the firstsecond quarter of the prior year. Net earnings were $8.6$7.8 million, for the quarter, or $0.45 per diluted share compared to $0.49$0.41 per diluted share, for the firstsecond quarter of the prior year. Net earnings for the first quarter of 2004 include $3.3 million, pretax, or $0.11compared to $0.62 per diluted share for the second quarter of transition and assimilation costs related to the Bass license. On February 2, 2004, the Company entered into a long-term license agreement to sell Bass footwear.last year. Each of our operating segments reported lower operating earnings than in last year's second quarter.
Following is a summary of the more significant factors affecting our results in the firstsecond quarter of fiscal 2004:
10Page 11
| CONSOLIDATED RESULTS |
| ($ millions) | % of Net Sales | % of Net Sales | % of Net Sales | % of Net Sales | % of Net Sales | % of Net Sales | |||||||||||||||||||||||
| Net sales | $ | 491.8 | 100.0% | $ | 446.4 | 100.0% | $ | 458.7 | 100.0% | $ | 458.4 | 100.0% | $ | 950.5 | 100.0% | $ | 904.8 | 100.0% | |||||||||||
| Cost of goods sold | 292.5 | 59.5% | 261.3 | 58.5% | 269.4 | 58.7% | 270.5 | 59.0% | 561.9 | 59.1% | 531.8 | 58.8% | |||||||||||||||||
| Gross profit | 199.3 | 40.5% | 185.1 | 41.5% | 189.3 | 41.3% | 187.9 | 41.0% | 388.6 | 40.9% | 373.0 | 41.2% | |||||||||||||||||
| Selling & administrative expenses | 184.4 | 37.5% | 169.8 | 38.0% | |||||||||||||||||||||||||
| Selling and administrative expenses | 176.0 | 38.4% | 169.3 | 36.9% | 360.4 | 37.9% | 339.0 | 37.5% | |||||||||||||||||||||
| Operating earnings | 14.9 | 3.0% | 15.3 | 3.5% | 13.3 | 2.9% | 18.6 | 4.1% | 28.2 | 3.0% | 34.0 | 3.7% | |||||||||||||||||
| Interest expense | 2.4 | 0.5% | 2.9 | 0.7% | 2.2 | 0.4% | 2.5 | 0.6% | 4.6 | 0.5% | 5.5 | 0.5% | |||||||||||||||||
| Interest income | (0.1 | ) | 0.0% | (0.1 | ) | 0.0% | (0.2 | ) | 0.0% | (0.1 | ) | 0.0% | (0.3 | ) | 0.0% | (0.2 | ) | 0.0% | |||||||||||
| Earnings before income taxes | 12.6 | 2.5% | 12.5 | 2.8% | 11.3 | 2.5% | 16.2 | 3.5% | 23.9 | 2.5% | 28.7 | 3.2% | |||||||||||||||||
| Income tax provision | (4.0 | ) | (0.8)% | (3.5 | ) | (0.8)% | (3.5 | ) | (0.8)% | (4.6 | ) | (1.0)% | (7.5 | ) | (0.8)% | (8.1 | ) | (0.9)% | |||||||||||
| Net earnings | $ | 8.6 | 1.7% | $ | 9.0 | 2.0% | $ | 7.8 | 1.7% | $ | 11.6 | 2.5% | $ | 16.4 | 1.7% | $ | 20.6 | 2.3% | |||||||||||
Net Sales
Net sales increased $45.4$0.3 million, or 10.2%0.1%, to $491.8$458.7 million in the firstsecond quarter of 2004 as compared to $446.4$458.4 million in the firstsecond quarter of the prior year. This increase is primarily attributable to the following factors. First, the acquisition of the Bass footwear license at the beginning of fiscal 2004, which contributed $15.3$9.1 million of net sales during the second quarter. Offsetting the impact of the Bass sales increase was weakness in both the children's and women's private label wholesale divisions as well as a decline in sales at the Naturalizer Retail stores.
Net sales increased $45.7 million, or 5.0%, to $950.5 million in the first half of 2004 as compared to $904.8 million in the first half of the prior year. The increase is primarily attributable to the acquisition of the Bass footwear license at the beginning of 2004, which contributed $24.4 million in net sales during the first quarter. Second, inhalf of 2004. In addition, to the incremental Bass business, the Wholesale segment achieved $15.0 million ofnet sales improvement was driven by first quarter sales gains within our private label, Dr. Scholl's and LifeStride lines, including some sandal shipments that typically ship in the second quarter. Third,and from new 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$1.4 million, or 7.7%0.7%, to $199.3$189.3 million for the firstsecond quarter of 2004 as compared to $185.1$187.9 million in the firstsecond quarter of the prior year. ThisAs a percent of net sales, our gross margin percentage increased to 41.3% in the second quarter from 41.0% in the second quarter of the prior year as a result of higher gross profit rates at Famous Footwear due to the fresher product mix and lower markdowns.
Gross profit increased $15.6 million, or 4.2%, to $388.6 million in the first half of 2004 as compared to $373.0 million in the first half of the prior year. The overall increase in gross profit is primarily driven by the 10.2%$45.7 million increase in net sales. However, asAs a percent of net sales, our gross margin percentage declined from 41.5%profit rate decreased to 40.9% in the first quarterhalf of 2004 as compared to 41.2% in the first half of the prior year to 40.5%year. The decline in the first quarter of 2004 as a result ofgross profit rate reflects a greater mix of wholesale sales, which carry a lower gross margin rate than our overall retail sales.sales, and a lower gross profit rate in our Wholesale Operations segment.
Selling and Administrative Expenses
Selling and administrative expenses increased $14.6$6.7 million, or 8.6%4.0%, to $184.4$176.0 million for the firstsecond quarter of 2004 as compared to $169.8$169.3 million in the firstsecond quarter of the prior year. This increase is attributable to both transition and assimilation costs related to the Bass footwear line of approximately $3.3$1.5 million and to our ongoing investments in talent, systems, and infrastructure intended to position the Company for future growth. Although sellingOffsetting these factors were benefits from reduced compensation costs associated with stock-based and incentive compensation plans of $2.4 million compared to last year.
Selling and administrative costs haveexpenses increased $21.4 million, or 6.3%, to $360.4 million in absolute dollars, they have declinedthe first half of 2004 as a percentcompared to $339.0 million in the first half of salesthe prior year. This increase is due to both transition and assimilation costs related to the effective leveragingBass footwear line of approximately $4.8 million and our increaseongoing investments in net sales.talent, systems and infrastructure intended to position the Company for future growth.
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Interest Expense
Interest expense decreased $0.5$0.3 million, or 14.7%14.9%, to $2.4$2.2 million in the second quarter as compared to $2.5 million in the second quarter of the prior year. The decrease in interest expense is due to a decline in the average daily borrowings. In addition, on July 21, 2004, the Company amended and restated its credit agreement, which resulted in more favorable interest rates near the end of the second quarter.
Interest expense decreased $0.9 million, or 14.8%, to $4.6 million in the first quarterhalf of 2004 as compared to $2.9$5.5 million in the first quarter of the prior year. While average daily borrowings are relatively consistent with the first quarterhalf of the prior year ourdue to a decline in the average interest rate declined.daily borrowings.
Income Tax Provision
Our consolidated effective tax rate was 31.8%30.9% in the firstsecond quarter of 2004 as compared to 28.1%28.7% in the firstsecond quarter of the prior year, reflecting a greater projected annual mix of domestic income. We do not provide deferred taxes on unremitted foreign earnings, as it is our intention to reinvest those earnings indefinitely or to repatriate the earnings only when it is tax-advantageous to do so.
For the first half of 2004, our consolidated effective income tax rate was 31.4% as compared to 28.4% for the first half of the prior year, reflecting a greater projected annual mix of domestic income.
11
| FAMOUS FOOTWEAR |
| ($ millions, except sales per square foot) | % of Net Sales | % of Net Sales | |||||||||||||||||||||||||||
| ($ millions) | % of Net Sales | % of Net Sales | % of Net Sales | % of Net Sales | |||||||||||||||||||||||||
| Operating Results | |||||||||||||||||||||||||||||
| Net sales | $ | 272.1 | 100.0% | $ | 261.1 | 100.0% | $ | 269.8 | 100.0% | $ | 268.9 | 100.0% | $ | 541.9 | 100.0% | $ | 530.0 | 100.0% | |||||||||||
| Cost of goods sold | 151.1 | 55.5% | 145.1 | 55.6% | 148.0 | 54.9% | 149.9 | 55.7% | 299.1 | 55.2% | 295.0 | 55.7% | |||||||||||||||||
| Gross profit | 121.0 | 44.5% | 116.0 | 44.4% | 121.8 | 45.1% | 119.0 | 44.3% | 242.8 | 44.8% | 235.0 | 44.3% | |||||||||||||||||
| Selling & administrative expenses | 108.6 | 39.9% | 105.4 | 40.4% | |||||||||||||||||||||||||
| Selling and administrative expenses | 109.2 | 40.4% | 106.1 | 39.5% | 217.8 | 40.2% | 211.5 | 39.9% | |||||||||||||||||||||
| Operating earnings | $ | 12.4 | 4.6% | $ | 10.6 | 4.0% | $ | 12.6 | 4.7% | $ | 12.9 | 4.8% | $ | 25.0 | 4.6% | $ | 23.5 | 4.4% | |||||||||||
| Key Metrics | |||||||||||||||||||||||||||||
| Same-store sales % change | 2.6% | (5.4)% | (2.5)% | (2.9)% | 0.0% | (4.1)% | |||||||||||||||||||||||
| Same-store sales $ change | $ | 6.4 | $ | (13.6) | $(6.5) | $(7.4) | $ - | $(21.0) | |||||||||||||||||||||
| Sales change from new and closed stores, net | $ | 4.6 | $ | 7.1 | $7.4 | $5.6 | $11.9 | $12.7 | |||||||||||||||||||||
| Sales per square foot | $ | 44 | $ | 42 | $43 | $43 | $86 | $85 | |||||||||||||||||||||
| Square footage (thousands sq. ft.) | 6,249 | 6,218 | |||||||||||||||||||||||||||
| Square footage (thousand sq. ft.) | 6,384 | 6,224 | 6,384 | 6,224 | |||||||||||||||||||||||||
| Stores opened | 12 | 20 | 26 | 12 | 38 | 32 | |||||||||||||||||||||||
| Stores closed | 8 | 25 | 8 | 16 | 16 | 41 | |||||||||||||||||||||||
| Ending stores | 897 | 913 | 915 | 909 | 915 | 909 | |||||||||||||||||||||||
Net Sales
Net sales increased $11.0$0.9 million, or 4.2%0.3%, to $272.1$269.8 million in the firstsecond quarter of 2004 as compared to $261.1$268.9 million in the firstsecond quarter of the prior year. This increase is primarily attributable to an increase in same-store sales of 2.6% and sales growth from net new stores. During the firstsecond quarter of 2004, we opened 1226 new stores and closed 8, resulting in 897915 stores at the end of the firstsecond quarter of 2004 as compared to 913909 at the end of the firstsecond quarter of the prior year. Sales per square foot improved to $44 from $42 inwere $43, even with the year ago period. Same-store sales were down 2.5% during the second quarter due to lower traffic counts, a later start to the back-to-school season and a shift in tax-free days between the second and third quarters. In addition, we experienced some weakness in our women's casual business, sandals and our junior category.
Page 13
Net sales increased $11.9 million, or 2.2%, to $541.9 million in the first half of 2004 as compared to $530.0 million in the first half of the prior year. While same-store sales for the first half of 2004 were flat compared to the first half of the prior year, sales from net new stores totaled $11.9 million. We opened 38 new stores and closed 16 during the first quarter, we experienced increased traffic into our stores.half of 2004, resulting in 915 stores at the end of the second quarter.
Same-store sales changes are calculated by comparing the sales in stores that have been open at least 13 months. This method avoids the distorting effect that grand opening sales have in the first month of operation. Relocated stores are treated as new stores. Closed stores are excluded from the calculation. Sales change from new and closed stores, net reflects the change in net sales due to stores that have been opened or closed during the period and are thereby excluded from the same-store sales calculation.
Gross Profit
Gross profit increased $5.0$2.8 million, or 4.3%2.3%, to $121.0$121.8 million in the firstsecond quarter of 2004 as compared to $116.0$119.0 million in the firstsecond quarter of the prior year. This increase is 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%profit to 45.1% in the firstsecond quarter of 2004 from 44.3% in the second quarter of the prior yearyear. This improvement was driven by our fresher product mix and lower markdowns.
Gross profit increased $7.8 million, or 3.3%, to 44.5%$242.8 million in the first quarterhalf of 2004. This improvement2004 as compared to $235.0 million in the first half of the prior year. The gross profit increase of 3.3% is driven byprimarily attributed to the 2.2% increase in net sales. As a percent of net sales, our gross profit rate increased to 44.8% in the first half of 2004 as compared to 44.3% in the first half of the prior year, reflecting reduced shrinkage costs.costs and a fresher product mix.
Selling and Administrative Expenses
Selling and administrative expenses increased $3.2$3.1 million, or 3.0%2.8%, to $108.6$109.2 million for the firstsecond quarter of 2004 as compared to $105.4$106.1 million in the firstsecond quarter of the prior year. This increase is primarily attributable to increased marketing costs and higher selling salaries.salaries, due in part to the large number of store openings during the second quarter. As a percentage of net sales, these costs declinedincreased to 39.9%40.4% from 40.4%39.5% last year reflectingyear.
Selling and administrative expenses increased $6.3 million, or 2.9%, to $217.8 million in the leveraging effectfirst half of 2004 as compared to $211.5 million in the first half of the sales increaseprior year due to increased marketing costs and higher productivityselling salaries, due in our stores.part to store openings during the first half of 2004.
Operating Earnings
Operating earnings increased $1.8decreased $0.3 million, or 17.0%2.1%, to $12.4$12.6 million for the firstsecond quarter of 2004 as compared to $10.6$12.9 million in the second quarter of the prior year. This decrease was driven by increases in selling and administrative expenses, partially offset by the improvement in the gross profit rate.
Operating earnings increased $1.5 million, or 6.5%, to $25.0 million in the first quarterhalf of 2004 as compared to $23.5 million in the first half of the prior year. This increase was driven by both the increase in net sales increase, coupled withand the improvement in the gross profit as a percentage of sales,rate, partially offset by modest increasesthe increase in operatingselling and administrative expenses.
12Page 14
| NATURALIZER RETAIL |
| ($ millions, except sales per square foot) | % of Net Sales | % of Net Sales | |||||||||||||||||||||||||||
| ($ millions) | % of Net Sales | % of Net Sales | % of Net Sales | % of Net Sales | |||||||||||||||||||||||||
| Operating Results | |||||||||||||||||||||||||||||
| Net sales | $ | 45.3 | 100.0% | $ | 42.8 | 100.0% | $ | 48.3 | 100.0% | $ | 49.7 | 100.0% | $ | 93.6 | 100.0% | $ | 92.5 | 100.0% | |||||||||||
| Cost of goods sold | 22.9 | 50.6% | 21.4 | 50.0% | 27.0 | 55.9% | 27.5 | 55.2% | 49.9 | 53.3% | 48.8 | 52.8% | |||||||||||||||||
| Gross profit | 22.4 | 49.4% | 21.4 | 50.0% | 21.3 | 44.1% | 22.2 | 44.8% | 43.7 | 46.7% | 43.7 | 47.2% | |||||||||||||||||
| Selling & administrative expenses | 24.6 | 54.3% | 22.8 | 53.2% | |||||||||||||||||||||||||
| Operating loss | $ | (2.2 | ) | (4.9)% | $ | (1.4 | ) | (3.2)% | |||||||||||||||||||||
| Selling and administrative expenses | 23.9 | 49.4% | 23.2 | 46.8% | 48.5 | 51.8% | 46.1 | 49.8% | |||||||||||||||||||||
| Operating earnings | $ | (2.6 | ) | (5.3)% | $ | (1.0 | ) | (2.0)% | $ | (4.8 | ) | (5.1)% | $ | (2.4 | ) | (2.6)% | |||||||||||||
| Key Metrics | |||||||||||||||||||||||||||||
| Same-store sales % change - domestic | 4.1% | (2.5)% | |||||||||||||||||||||||||||
| Same-store sales % change - Canadian | (1.0)% | (8.1)% | |||||||||||||||||||||||||||
| Same-store sales % change | (3.9)% | 2.3% | (1.0)% | (0.9)% | |||||||||||||||||||||||||
| Same-store sales $ change | $ | 1.0 | $ | (1.8) | $(1.8) | $1.1 | $(0.8) | $(0.7) | |||||||||||||||||||||
| Sales change from new and closed stores, net | $ | 0.1 | $ | (5.5) | $0.2 | $(3.7) | $0.3 | $(9.3) | |||||||||||||||||||||
| Impact of changes in Canadian exchange rate on sales | $ | 1.4 | $ | 0.9 | $0.2 | $2.1 | $1.6 | $3.1 | |||||||||||||||||||||
| Sales per square foot | $ | 75 | $ | 70 | $80 | $83 | $154 | $153 | |||||||||||||||||||||
| Square footage (thousands sq. ft.) | 578 | 580 | |||||||||||||||||||||||||||
| Square footage (thousand sq. ft.) | 588 | 580 | 588 | 580 | |||||||||||||||||||||||||
| Stores opened | 9 | - | 4 | 2 | 9 | 3 | |||||||||||||||||||||||
| Stores transferred, net | - | - | 4 | - | |||||||||||||||||||||||||
| Stores closed | 8 | 3 | 3 | 3 | 11 | 6 | |||||||||||||||||||||||
| Ending stores | 379 | 387 | 380 | 386 | 380 | 386 | |||||||||||||||||||||||
Net Sales
Net sales increased $2.5decreased $1.4 million, or 5.8%2.8%, to $45.3$48.3 million in the firstsecond quarter of 2004 as compared to $42.8$49.7 million in the firstsecond quarter of the prior year. This increasedecrease is attributable in part, to an increasea decrease in same-store sales of 4.1% in the domestic market. In Canada, same-store sales declined 1.0%3.9%. However, the favorable impact of the Canadian exchange rate improved net sales by $1.4$0.2 million. During the firstsecond quarter of 2004, we opened 94 new stores and closed 8,3, resulting in 379380 stores at the end of the firstsecond quarter of 2004 as compared to 387386 at the end of the firstsecond quarter of the prior year. Sales per square foot improveddeclined to $75$80 from $70$83 in the year ago period. Our net sales decline is partly attributable to our emphasis on sandals and casual footwear, while the market was favoring dressy looks, leading to a poor performance in Canada and in our U.S. outlet stores. We are focused on strengthening our Naturalizer Retail platform and have 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 toproviding better-fashion, higher-grade imported product in our Canadian stores and providing trend-right merchandise in our U.S. outlet stores, both priced to deliver better margins.
Net sales increased $1.1 million, or 1.2%, to $93.6 million in the first half of 2004 as compared to $92.5 million in the first half of the prior year. However, same-store sales for the first half of 2004 declined 0.8%, led by weakness in our Canadian stores. The increase in net sales is attributable to the impact of changes in the Canadian market sourced throughexchange rate, which improved net sales by $1.6 million during the Company's worldwide sourcing network.first half of 2004. Sales per square foot increased slightly to $154 for the first half of 2004 from $153 for the first half of the prior year.
Gross Profit
Gross profit increased $1.0decreased $0.9 million, or 4.7%4.3%, to $22.4$21.3 million in the firstsecond quarter of 2004 as compared to $21.4$22.2 million in the firstsecond quarter of the prior year. As a percentage of net sales, gross profit declined to 44.1% in the second quarter from 50.0% to 49.4%.44.8% in the year ago quarter. This decline iswas driven by higher markdowns in our Canadian stores to clear domestically- produced footwear as we transition to higher-grade imported product.
Page 15
Gross profit remained flat at $43.7 million in the first half of 2004 as compared to the first half of the prior year. As a percent of sales, our gross profit rate decreased to 46.7% in the first half of 2004 as compared to 47.2% in the first half of the prior year, due primarily to the transition in the Canadian chainstores from domestically produced footwear to higher-grade imported product.
Selling and Administrative Expenses
Selling and administrative expenses increased $1.8$0.7 million, or 7.9%2.5%, to $24.6$23.9 million for the firstsecond quarter of 2004 as compared to $22.8$23.2 million in the firstsecond quarter of the prior year. Approximately $0.8$0.1 million of the increase is due to changes in the Canadian exchange rate. The remaining $1.0$0.6 million relates to a combination of increased retail facilities expensesconsulting fees and increased store selling salaries. Retail facilitiesemployee benefit costs.
Selling and administrative expenses have increased $2.4 million, or 5.3%, to $48.5 million in the first half of 2004 as a resultcompared to $46.1 million in the first half of normal rent escalations. Store selling salaries have increasedthe prior year. Approximately $0.6 million of the increase is due to changes in the Canadian exchange rate. The remaining increase is due to a recently implemented compensation structure in the domestic stores that ties store manager compensation more directly to the levelcombination of individual store sales.increased retail facilities costs, increased consulting fees, and increased employee benefit costs.
13
Operating Earnings
Naturalizer Retail's operating loss increased to $2.2$2.6 million in the firstsecond quarter of 2004 as compared to a loss of $1.4$1.0 million in the firstsecond quarter of the prior year. The current period loss was due primarily to the same-store sales decline, lower gross profit rates and higher markdowns in Canada.
The operating loss of $4.8 million in the Canadian storesfirst half of 2004 increased from an operating loss of $2.4 million in the first half of the prior year, due principally to the increase in selling and slightly lower margins during the quarter.administrative expenses.
| WHOLESALE OPERATIONS |
| ($ millions) | % of Net Sales | % of Net Sales | % of Net Sales | % of Net Sales | % of Net Sales | % of Net Sales | |||||||||||||||||||||||
| Operating Results | |||||||||||||||||||||||||||||
| Net sales | $ | 171.5 | 100.0% | $ | 141.0 | 100.0% | $ | 136.9 | 100.0% | $ | 137.9 | 100.0% | $ | 308.4 | 100.0% | $ | 278.9 | 100.0% | |||||||||||
| Cost of goods sold | 117.2 | 68.3% | 94.2 | 66.8% | 92.3 | 67.4% | 92.3 | 66.9% | 209.5 | 67.9% | 186.5 | 66.9% | |||||||||||||||||
| Gross profit | 54.3 | 31.7% | 46.8 | 33.2% | 44.6 | 32.6% | 45.6 | 33.1% | 98.9 | 32.1% | 92.4 | 33.1% | |||||||||||||||||
| Selling & administrative expenses | 41.5 | 24.2% | 33.8 | 24.0% | |||||||||||||||||||||||||
| Selling and administrative expenses | 35.6 | 26.1% | 33.0 | 23.9% | 77.1 | 25.0% | 66.8 | 23.9% | |||||||||||||||||||||
| Operating earnings | $ | 12.8 | 7.5% | $ | 13.0 | 9.2% | $ | 9.0 | 6.5% | $ | 12.6 | 9.2% | $ | 21.8 | 7.1% | $ | 25.6 | 9.2% | |||||||||||
| Key Metrics | |||||||||||||||||||||||||||||
| Unfilled order position at end of period | $ | 184.8 | $ | 161.5 | |||||||||||||||||||||||||
| Unfilled order position at End of period | Unfilled order position at End of period | $175.6 | $155.2 | ||||||||||||||||||||||||||
Net Sales
Net sales increased $30.5decreased $1.0 million, or 21.7%0.7%, to $171.5$136.9 million in the firstsecond quarter of 2004 as compared to $141.0$137.9 million in the second quarter of the prior year. Although net sales for the Bass footwear line contributed $9.1 million in the quarter, weakness in children's and women's private label markets more than offset the increase from net sales of Bass footwear. A shortage of trucks in the Midwest and delays at the West Coast ports at the end of the second quarter also negatively impacted net sales for that period.
Net sales increased $29.5 million, or 10.6%, to $308.4 million in the first quarterhalf of 2004 as compared to $278.9 million in the first half of the prior year. This increase was due to approximately $15.3$24.4 million of sales for the Bass footwear line. We also achieved sales gains withinIn addition, although 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 aSantana businesses have posted 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%.gains, weakness in our children's division has partially offset those gains.
Page 16
Gross Profit
Gross profit increased $7.5decreased $1.0 million, or 16.0%2.1%, to $54.3$44.6 million in the firstsecond quarter of 2004 as compared to $46.8$45.6 million in the firstsecond quarter of the prior year. As a percentage of net sales, gross profit declined to 32.6% in the second quarter from 33.2% to 31.7%.33.1% in the second quarter of the prior year. This decline is primarily due to higher allowances granted to our department store customers within our Bass and Dr. Scholl's wholesale divisions.
Gross profit increased $6.5 million, or 7.0%, to $98.9 million in part,the first half of 2004 as compared to $92.4 million in the first half of the prior year. As a percent of net sales, our gross profit decreased to 32.1% in the first half of 2004 as compared to 33.1% in the first half of the prior year. The decline in our gross profit rate is principally due to higher allowances related to the disposal of Bass closeout footwear acquired under an asset purchase agreement.
Selling and Administrative Expenses
Selling and administrative expenses increased $7.7$2.6 million, or 22.8%8.2%, to $41.5$35.6 million for the firstsecond quarter of 2004 as compared to $33.8$33.0 million in the firstsecond quarter of the prior year. Selling and administrative costs include $3.3$1.5 million in expenses to transition the Bass linebusiness to our headquarters and distribution centers. In addition, the acquisition of the Bass footwear license resulted in an additional $2.5$2.8 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.Offsetting these factors were benefits from reduced compensation costs associated with stock-based and incentive compensation plans.
Selling and administrative expenses increased $10.3 million, or 15.5%, to $77.1 million in the first half of 2004 as compared to $66.8 million in the first half of the prior year. This increase is due to transition and assimilation costs related to the Bass footwear line of approximately $4.8 million and an additional $5.8 million of typical selling and administrative costs associated with Bass footwear, including selling costs, warehousing and distribution, marketing, sourcing, etc.
Operating Earnings
Operating earnings decreased $0.2$3.6 million, or 1.6%29.1%, to $12.8$9.0 million for the firstsecond quarter of 2004 as compared to $13.0$12.6 million in the firstsecond quarter of the prior year. This decrease is due to the $3.3weakness in our children's and women's private label markets, lower gross profit rates and $1.5 million in expenses related to transition and assimilation of the Bass business that were recognizedincurred during the firstsecond quarter of 2004.
Operating earnings decreased $3.8 million, or 15.1%, to $21.8 million in the first half of 2004 as compared to $25.6 million in the first half of the prior year. This decrease is due to weakness in our children's business as well as Bass transition and assimilation costs of $4.8 million.
14
| 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$1.8 million, or 87.5%96.9%, to $2.8$3.7 million in the firstsecond quarter of 2004 as compared to $1.5$1.9 million in the second quarter of the prior year. Net sales increased $3.1 million, or 92.7%, to $6.5 million in the first quarterhalf of 2004 as compared to $3.4 million in the first half of the prior year. This increase reflects continuing strong sales growth due to increased Web site traffic and improved conversion rates.
Operating Earnings
The Shoes.com business generated an operating lossearnings of $0.3$0.1 million in the firstsecond quarter of 2004 as compared to an operating loss of $0.2 million in the firstsecond quarter of the prior year. The declineearnings improvement is due to higher selling and administrativea favorable settlement of $0.5 million received in the second quarter of 2004 to discontinue operation of a former affiliate's Web site.
For the first half of 2004, the Shoes.com business generated an operating loss of $0.1 million compared to an operating loss of $0.3 million for the prior year. The earnings improvement is due to the $0.5 million settlement received in the second quarter, offset by increased warehouse expenses asto move facilities to accommodate the division continues to invest for further growth.Bass acquisition.
Page 17
Other Corporate Expenses
Unallocated corporate administrative and other costs were $7.8$5.9 million in the firstsecond quarter of 2004 as compared to $6.7$5.7 million in the firstsecond quarter of the prior year. DuringCorporate expenses increased due to higher consulting costs related to Project ExCEL - our supply chain management improvement initiative, partially offset by lower compensation costs of $1.3 million associated with stock-based and incentive compensation plans.
For the first half of 2004, unallocated corporate administrative and other costs were $13.7 million as compared to $12.4 million in the first half of the prior year. The increase is attributable to both increased consulting costs associated with Project ExCEL and a charge of $0.6 million recorded in the first quarter of 2004, we recorded an additional $0.6 million in expense related to pretrialpre-trial interest for ourawarded in connection with the Redfield litigation. For further information on the Redfield litigation, see Part II - Item 1 - Legal Proceedings. In addition, corporate expenses increased due to higher employee compensation, incentive plans and consulting costs related to Project ExCEL - our supply chain management improvement initiative.
| LIQUIDITY AND CAPITAL RESOURCES |
Borrowings
| ($ millions) | May 1, 2004 | May 3, 2003 | Increase/ (Decrease) | July 31, 2004 | August 2, 2003 | Increase/ (Decrease) | ||||||||||||
| Notes payable | $ | 43.0 | $ | 24.5 | $ | 18.5 | $ | 27.5 | $ | 19.0 | $ | 8.5 | ||||||
| Long-term debt, including current maturities | 100.0 | 123.5 | (23.5 | ) | 100.0 | 113.5 | (13.5 | ) | ||||||||||
| Total short- and long-term debt | $ | 143.0 | $ | 148.0 | $ | (5.0 | ) | $ | 127.5 | $ | 132.5 | $ | (5.0 | ) | ||||
Total debt obligations have declined by $5.0 million, or 3.3%3.8%, to $143.0$127.5 million at May 1,July 31, 2004 as compared to $148.0$132.5 million at May 3,August 2, 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$0.3 million, or 14.7%14.9%, to $2.4$2.2 million in the firstsecond quarter of 2004 as compared to $2.9$2.5 million in the firstsecond quarter of the prior year. The reduction in interest expense was due to lower average daily borrowings compared with the second quarter of the prior year.
The Company entered into an Amended and Restated Credit Agreement (the "Agreement") effective July 21, 2004, which amended and restated its existing $350 million revolving bank credit agreement. The Agreement provides for a maximum line of credit of $350 million, subject to the calculated borrowing base restrictions. In addition to extending the credit term, the Agreement also provides other benefits to the Company, including expanding the definition of eligible inventory in certain circumstances and reducing the interest rate spread paid on outstanding borrowings. Borrowing availability under the Agreement is based upon the sum of eligible accounts receivable and inventory, less outstanding borrowings, letters of credit and applicable reserves. The Agreement matures on July 21, 2009 and the Company's obligations are secured by the Company's accounts receivable and inventory. Borrowings under the Agreement bear interest at a variable rate determined based upon the level of availability under the Agreement. If availability falls below specified levels, the Company would then be subject to certain financial covenants. In addition, if availability falls below $25 million and the fixed charge coverage ratio is less than 1.0 to 1, the Company would be in default. The Agreement also contains certain other covenants and restrictions.
At July 31, 2004, the Company had $127.5 million of borrowings outstanding and $21.0 million in letters of credit outstanding under the Amended and Restated Credit Agreement. Total additional availability was approximately $194.5 million at July 31, 2004.
Working Capital and Cash Flow
| ($ 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 | |||
| ($ millions) | July 31, 2004 | August 2, 2003 | Increase/ (Decrease) | ||||||
| Net cash provided by (used for) operating activities | $ | 25.0 | $ | 54.4 | $ | (29.4 | ) | ||
| Net cash provided by (used for) investing activities | (14.1 | ) | (15.9 | ) | 1.8 | ||||
| Net cash provided by (used for) financing activities | 4.9 | (20.2 | ) | 25.1 | |||||
| Increase in cash and cash equivalents | $ | 15.8 | $ | 18.3 | $ | (2.5 | ) | ||
15Page 18
A summary of key financial data and ratios at the dates indicated is as follows:
May 1, 2004 | May 3, 2003 | January 31, 2004 | July 31, 2004 | August 2, 2003 | January 31, 2004 | |||||
| Working capital ($ millions) | $301.1 | $254.1 | $293.8 | $306.6 | $263.2 | $293.8 | ||||
| Current ratio | 2.3:1 | 2.0:1 | 2.2:1 | 1.9:1 | 1.9:1 | 2.2:1 | ||||
| Total debt as a percentage of total capitalization | 28.2% | 32.5% | 25.2% | 25.5% | 29.2% | 25.2% |
Working capital at May 1,July 31, 2004 was $301.1$306.6 million, which was $7.3$12.8 million higher than at January 31, 2004 and $47.0$43.4 million higher than at May 3, 2003. Our current ratio, the relationship of current 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,August 2, 2003. The improvement in both our working capital and current ratio is attributedattributable to continued growth in cash and cash equivalents as a result of our strongpositive financial results over the past twelve months as well as effective management of our outstanding debt obligations and other current liabilities. Our current ratio, the relationship of current assets to current liabilities, decreased to 1.9 to 1 at July 31, 2004 from 2.2 to 1 at January 31, 2004 and remained flat compared to August 2, 2003. The current ratio is generally lower at the end of the second quarter as compared to the year-end ratio due to the seasonality of inventory purchases in preparation for the back-to-school selling season that occurs during the third quarter.
At May 1,July 31, 2004, the Company had $66.4$71.5 million of cash and cash equivalents. Of this total, approximately $64.6 millionequivalents, substantially all of which represents cash and cash equivalents of our Canadian and other foreign subsidiaries. Our intention is to maintain this cash within our foreign operations indefinitely or to repatriate it only when it is tax-effective to do so.
Cash usedprovided by operating activities was $4.6$25.0 million in the first quarterhalf of 2004 as compared to cash provided by operating activities of $19.7$54.4 million last year, a difference of $24.3$29.4 million. This difference primarily reflects the investment of approximately $14$13.4 million in Bass inventory and the buildup of approximately $13$5.9 million of accounts receivable from sales of Bass product. Traditionally, inventories and accounts payable both decline in our first quarter compared to the prior 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, our inventories were 6% lower per square foot than at the same time last year.footwear.
Cash used byfor investing activities was $6.9$14.1 million in the first quarterhalf of 2004 as compared to $6.7$15.9 million in the first quarter of the priorlast 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 firstsecond quarter were used to both retrofit existing stores and open new stores in our retail divisions.
Cash provided by financing activities was $22.3$4.9 million in the first quarterhalf of 2004 as compared to cash used byfor financing activities of $5.1$20.2 million last year, a difference of $27.4$25.1 million. This difference represents an increase in our short-term notes payable of $23.5$8.0 million since the beginning of the first quarter of 2004year as compared to a reduction in our short-term notes payable of $4.5debt reductions totaling $20.0 million in the first quarterhalf of the priorlast year. The increase in short-term notes payable was used to fund operations, including the Bass inventory and accounts receivable as well as the related transition and assimilation costs. In connection with its Amended and Restated Credit Agreement, the Company incurred $1.1 million in debt issuance costs in the second quarter, which are being deferred and amortized to expense over the five-year term of the agreement.
In May 2000, we announced a stock repurchase program authorizing the repurchase of up to 2 million shares of our outstanding common stock. Since the inception of this program, we have purchased a total of 928,900 shares for $11.3 million. No shares were purchased under the plan in either the first quarterhalf of 2004 or the first quarterduring any of the prior year.fiscal 2003.
The Company paid dividends of $0.10 per share in the firstsecond quarter of 2004 and the firstsecond 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.
16
| FORWARD-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
Page 19
and purchasing patterns, which may be influenced by consumers' disposable income; (ii) the uncertainties of currently pending litigation; (iii) intense competition within the footwear industry; and (iv) political and economic conditions or other threats to continued and uninterrupted flow of inventory from Brazil and China, where the Company relies heavily on third-party manufacturing facilities for a significant amount of its inventory. In Item 1 of the Company's Annual Report on Form 10-K for the year ended January 31, 2004, detailed risk factors that could cause variations in results to occur are listed and further described. Such description is incorporated herein by reference.
| ITEM 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
No material changes have taken place in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further information, see Item 7A of the Company's Annual Report on Form 10-K for the year ended January 31, 2004.
| 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 May 1,July 31, 2004, management of the Company, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures with respect to the information generated for use in this Quarterly Report. Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded the Company's disclosure controls were effective to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. There have been no changes in the Company's internal control over financial reporting during the quarter ended May 1,July 31, 2004, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
It should be noted that while the Company's management, including the Chief Executive Officer and Chief Financial Officer, believes the Company's disclosure controls and procedures provide a reasonable level of assurance, they do not expect that the Company's disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met. Further, the design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or fraud may occur and not be detected.
17Page 20
| 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 in residential neighborhoods adjacent to and near the property, which have been affected by solvents previously used at the site and surrounding facilities.
In March 2000, a class action lawsuit was filed in Colorado State Court (District Court for the City and County of Denver) related to the Redfield site described above against one of our subsidiaries, a prior operator at the site and two individuals (the Antolovich class action). Plaintiffs, certain current and former residents living in an area adjacent to the Redfield site, alleged claims for trespass, nuisance, strict liability, unjust enrichment, negligence and exemplary damages arising from the alleged release of solvents that are contaminating the groundwater and indoor air in certain areas adjacent to the site. In December 2003, a jury returned a verdict finding usone of our subsidiaries negligent and awarding the class plaintiffs $1.0 million in damages. We have recorded this award along with the estimated cost of associated pretrialpre-trial interest and the estimated costs of sanctions imposed on us by the court resulting from pretrialpre-trial discovery disputes between the parties. We have recorded total pretaxpre-tax charges of $3.7 million for these matters. In April 2004, the plaintiffs filed a motion for a new trial; the court has not yet ruled ondenied that motion. The plaintiffs have appealed the judgment to the Colorado Court of Appeals and have asked for a retrial. The Company has cross-appealed the trial court's ruling as to the amount of pre-judgment interest, and has conditionally appealed a number of the trial court's rulings in the event of a retrial. Several other post-trial motions are still pending before the trial court, and the ultimate outcome and cost to us may vary.
We have also filed suit in Federal District Court in Denver against a number of former owner/owners/operators of the Redfield site as well as surrounding businesses seeking recovery of amounts spent responding to the contamination at and around the Redfield site. We have reached settlement agreementsconsummated settlements with several of these defendants and have reached agreements in this actionprinciple to settle with the remaining defendants and currently do not anticipate the case will be tried against the remaining defendants in late 2004.tried. We have also filed a contribution action in Colorado State Court against the Colorado Department of Transportation, which owns and operates a facility adjacent to the Redfield site. That case is not yet set for trial.
We have also filed suit against our insurance carriers seeking recovery of the costs incurred for investigation and remediation of the Redfield site, the damages awarded in the Antolovich class action and other relief. In prior years, we recorded an anticipated recovery of $4.5 million for remediation costs.costs, of which approximately $3.6 million is outstanding at July 31, 2004. We believe insurance coverage in place entitles us to reimbursement for more than the recorded recovery. While the insurance companies are contesting their indemnity obligations, we believe the recorded recovery is supported by the fact that the limits of the insurance policies at issue exceed the amount of the recorded recovery, and certain insurance companies have made offers to settle the claim. We are unable to estimate the ultimate recovery from our insurers, but are pursuing resolution of our claims.
We have completed our remediation efforts at our closed New York tannery and two associated landfills. In 1995, state environmental authorities reclassified the status of these sites as being properly closed and requiring only continued maintenance and monitoring over the next 20 years. In addition, various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other landfills.
While we currently do not operate manufacturing facilities, prior operations included numerous manufacturing and other facilities for which we may have responsibility under various environmental laws to address conditions that may be identified in the future.
There have been no material developments during the quarter ended May 1,July 31, 2004 in any other legal proceedings described in the Company's Annual Report on Form 10-K for the year ended January 31, 2004.
18Page 21
| ITEM 2 |
The following table provides information relating to the company'sCompany's repurchase of common stock forduring the firstsecond 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 Fiscal Period
of Shares
Purchased
Price Paid
per Share
of Shares Purchased
as Part of Publicly
Announced Program
of Shares that
May Yet Be
Purchased Under
the Program
(1) (2) (2) (2) (2)
| ITEM 3 | DEFAULTS UPON SENIOR SECURITIES |
None
| ITEM 4 | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
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.None
| 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 | OTHER INFORMATION |
None
19Page 22
| ITEM 6 | EXHIBITS |
| (3) | (i) | Certificate of Incorporation of the Company incorporated herein by reference from Exhibit 3 (a) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 4, 2002. | |
| (ii) | Bylaws of the Company as amended through February 5, 2004, incorporated herein by reference from Exhibit 3 (b) to the Company's Annual Report on Form 10-K for the year ended January 31, 2004. | ||
| (10.1) | |||
| (10.2) | |||
| (10.3) | |||
| (10.4) | Form of | ||
| (10.5) | Form of Restricted Stock | ||
| (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. | ||
20
| 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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