Caleres - 10-Q quarterly report FY

UNITED STATES

(Mark One)

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  R    No £

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer R            Accelerated filer £              Non-accelerated filer £            Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

Yes £  NoR

As of May 31, 2008, 42,324,573 common shares were outstanding.

 

 

The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the United States Securities and Exchange Commission (“SEC”) and reflect all adjustments which management believes are necessary (which include only normal recurring accruals) to present fairly the financial position, results of operations and cash flows of Brown Shoe Company, Inc. (the “Company”). These statements, however, do not include all information and footnotes necessary for a complete presentation of the Company's consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries, after the elimination of intercompany accounts and transactions.

The Company's business is subject to seasonal influences, particularly the back-to-school selling season at Famous Footwear, which primarily 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.

Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications did not affect net earnings.

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 2, 2008.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (SFAS No. 157). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (FSP No. 157-2), which amends SFAS No. 157 by delaying its effective date by one year for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The implementation of SFAS No. 157 for financial assets and liabilities, effective February 3, 2008, did not have a material impact on the Company’s consolidated financial statements.  The Company is currently assessing the impact of SFAS No. 157 for non-financial assets and non-financial liabilities, to be adopted in fiscal year 2009, on its consolidated financial statements. See Note 11 to the condensed consolidated financial statements for additional information related to our fair value measurements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). This statement permits entities to choose to measure certain financial instruments and other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities using different measurement techniques. SFAS No. 159 requires additional disclosures related to the fair value measurements included in the entity’s financial statements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company has elected not to apply the fair value option to any of its financial instruments.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires a company to recognize on its balance sheet an asset for a defined benefit postretirement plan’s over funded status or a liability for a plan’s under funded status. As required by SFAS No. 158, the Company adopted the balance sheet recognition provisions at the end of fiscal year 2006 as described in the Company’s 2006 Form 10-K. SFAS No. 158 also requires that a plan’s assets and obligations be measured as of the end of the employer’s fiscal year for determination of funded status for fiscal years ending after December 15, 2008. The Company’s plans currently have measurement dates that do not coincide with its fiscal year end and thus the Company will be required to change its measurement dates in 2008. As permitted by SFAS No. 158, the Company will use the measurements performed in fiscal year 2007 to estimate the effects of its changes to fiscal year end measurement dates. The impact of the transition to fiscal year end measurement dates is expected to result in approximately $0.1 million of net periodic benefit cost being recognized as an adjustment to retained earnings in the fourth quarter of 2008. Additionally, other changes in the fair value of plan assets and benefit obligations during the transition period will be recorded as a component of other comprehensive income during the fourth quarter of 2008.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, a replacement of FASB Statement No. 141 (SFAS No. 141(R)), which significantly changes the principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring goodwill acquired in a business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement is effective prospectively, except for certain retrospective adjustments to deferred tax balances, for fiscal years beginning after December 15, 2008. Accordingly, the Company will record and disclose business combinations under SFAS No. 141(R) beginning in fiscal year 2009.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS No. 160). This statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Minority interests will be recharacterized as noncontrolling interests and classified as a component of shareholders’ equity separate from the parent’s equity. In addition, SFAS No. 160 establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This statement is effective prospectively, except for certain retrospective disclosure requirements, for fiscal years beginning after December 15, 2008. Accordingly, the Company will adopt SFAS No. 160 in fiscal year 2009. The Company is currently evaluating the impact of adopting SFAS No. 160 on its consolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS No. 161). This statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby seeks to improve the transparency of financial reporting. Entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company plans to adopt SFAS No. 161 in fiscal 2009. The Company is currently evaluating the impact of adopting SFAS No. 161 on its consolidated financial statements.

 

The following table sets forth the computation of basic and diluted earnings per common share for the periods ended May 3, 2008 and May 5, 2007:

Options to purchase 941,002 and 179,243 shares of common stock for the thirteen-week periods ended May 3, 2008 and May 5, 2007, respectively, were not included in the denominator for diluted earnings per common share because their effect would be antidilutive.

Comprehensive income includes changes in shareholders’ equity related to foreign currency translation adjustments and unrealized gains or losses from derivatives used for hedging activities.

The following table sets forth the reconciliation from net earnings to comprehensive income for the periods ended May 3, 2008 and May 5, 2007:

 

 

During the first quarter of 2008, the Company announced plans to relocate its Famous Footwear division headquarters from Madison, Wisconsin to St. Louis, Missouri. The total costs to implement the transition are estimated to be approximately $25 to $30 million ($15 to $18 million on an after-tax basis, or $0.37 to $0.44 per diluted share). These costs include employee-related costs for relocation, severance, recruiting and retention, as well as asset write-offs and lease exit costs. The Company expects that these costs will be primarily incurred during 2008, with a majority recognized during the second and third quarters. These estimates are preliminary and differences may arise between these estimates and actual costs. The Company incurred charges of $1.8 million ($1.1 million on an after-tax basis, or $0.03 per diluted share) during the first quarter of 2008.

The following is a summary of the costs incurred and payments made by category of costs:

All of the costs recorded during the first quarter of 2008 were reflected within the Other segment as a component of selling and administrative expenses. A tax benefit of $0.7 million was associated with the costs recorded during the first quarter of 2008. The write-off of assets are noncash items.

In connection with the relocation, the Company intends to work with public and private partners over the next few years on the redevelopment of its 12-acre property in St. Louis, Missouri into a mixed-use project with office, retail and residential facilities, including a new, more efficient headquarters for the Brown Shoe of the future. Working with its development partners, the Company anticipates that it will sell existing real estate at its St. Louis, Missouri site and execute an operating lease for new office space on a portion of the existing St. Louis complex.

During 2006, the Company initiated an Earnings Enhancement Plan designed to increase earnings through cost reductions, efficiency initiatives and the reallocation of resources. Key elements of the plan include: (i) restructuring administrative and support areas; (ii) redesigning logistics and distribution platforms; (iii) reorganizing to eliminate operational redundancies; (iv) realigning strategic priorities; and (v) refining the supply chain process and enhancing inventory utilization. The Company incurred no charges during the first quarter of 2008, but incurred charges of $19.0 million ($12.4 million on an after-tax basis) and $6.3 million ($3.9 million on an after-tax basis) in 2007 and 2006, respectively.

The following is a summary of the activity in the reserve by category of costs:

 

The following is a summary of the charges by segment:

During the first quarter of 2007, the Company incurred charges of $5.1 million ($3.3 million on an after-tax basis) related to the plan: $3.1 million for employee severance, $1.7 million for facility and lease exits, $0.2 million for other items and $0.1 for consulting services. Of the $5.1 million in costs recorded, $2.7 million was recorded in the Other segment, $2.1 million was recorded in the Wholesale Operations segment and $0.3 million was recorded in the Specialty Retail segment. The entire $5.1 million charge was reflected as a component of selling and administrative expenses. A tax benefit of $1.8 million was associated with this charge.

Of the cumulative costs recorded to date of $25.3 million, $25.0 million was reflected as a component of selling and administrative expenses and $0.3 million were reflected as a component of cost of goods sold. A tax benefit of $9.0 million was associated with the cumulative costs recorded to date.

Inventory markdowns and the write-off of assets are noncash items.

After-tax implementation costs for the Earnings Enhancement Plan for the remainder of 2008 are currently estimated to be approximately $2 to $3 million. These estimates are preliminary and differences may arise between these estimates and actual costs to the Company.

Applicable business segment information is as follows for the periods ended May 3, 2008 and May 5, 2007:

The Other segment includes unallocated corporate administrative and other costs and recoveries.

During the thirteen weeks ended May 3, 2008, operating earnings of the Other segment included environmental insurance recoveries, net of associated fees and costs, of $10.2 million and charges related to the Famous Footwear relocation of $1.8 million.

Following is a reconciliation of operating earnings to earnings before income taxes and minority interests:

Goodwill and intangible assets were attributable to the Company's operating segments as follows:

The change in goodwill and intangible assets between periods for the Famous Footwear segment is due to the Company’s acquisition of a trademark during the second quarter of 2007 for $2.8 million, which facilitates the use of the Famous Footwear name on its stores located in the metropolitan St. Louis area. These stores (approximately 25) were formerly named Supermarket of Shoes.

The change in goodwill and intangible assets between periods for the Wholesale Operations segment is primarily due to the amortization of our licensed and owned trademarks. The change for the Specialty Retail segment reflects an additional investment in Shoes.com of $3.9 million as well as changes in the Canadian dollar exchange rate and amortization.

During the first quarter of 2008, the Company granted 50,500 stock options to certain employees with a weighted-average exercise price and grant date fair value of $15.22 and $5.72, respectively.  These options vest in four equal increments, with 25% vesting over each of the next four years. These options have a term of ten years.  Compensation expense is recognized on a straight-line basis separately for each vesting portion of the stock option award. 

The Company granted 286,500 performance share awards during the first quarter of 2008. Vesting of performance-based awards is dependent upon the financial performance of the Company and the attainment of certain financial goals over the next three years. The performance share awards may pay out at a maximum of 200% of the target number of shares.  Compensation expense is being recognized based on the fair value of the award on the date of grant and the anticipated number of shares to be awarded on a straight-line basis over the three-year service period.

The Company also granted 330,500 restricted shares with a weighted-average grant date fair value of $15.20 during the first quarter of 2008. The restricted shares vest in four years and compensation expense will be recognized on a straight-line basis over the four-year period.

The Company recognized share-based compensation (income) expense of ($0.1) million and $2.6 million during the first quarter of 2008 and 2007, respectively. Income was recognized during the first quarter of 2008 as a result of reductions in expected payout percentages in connection with our stock performance plans granted in 2006 and 2007.

The following table sets forth the components of net periodic benefit cost (income) for the Company, including all domestic and Canadian plans:

The Company has a secured $350.0 million Amended and Restated Credit Agreement (the “Agreement”), which became effective July 21, 2004 and expires on July 21, 2009. The Agreement provides for a maximum line of credit of $350.0 million, subject to calculated borrowing base restrictions. 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 Company’s obligations are secured by certain of its accounts receivable and inventory. Borrowings under the Agreement bear interest at a variable rate determined based upon the level of availability under the Agreement. The variable interest rate on borrowings is based on the LIBOR rate or the base rate, as defined. Furthermore, there is a fee payable on the unused amount of the facility. Certain covenants would be triggered if availability were to fall below specified levels, including fixed charge coverage requirements. In addition, if availability falls below $25.0 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, with which the Company was in compliance as of May 3, 2008.

At May 3, 2008, the Company had no borrowings outstanding and $­­­­10.1 million in letters of credit outstanding under the Agreement. Total additional borrowing availability was $312.8 million as of May 3, 2008.

In April 2005, the Company issued $150.0 million of 8.75% senior notes due in 2012 (“Senior Notes”). The Senior Notes are guaranteed on a senior unsecured basis by each of the subsidiaries of Brown Shoe Company, Inc. that is an obligor under the Agreement. Interest on the Senior Notes is payable on May 1 and November 1 of each year. The Senior Notes mature on May 1, 2012, but are callable any time on or after May 1, 2009, at specified redemption prices plus accrued and unpaid interest. The Senior Notes also contain certain other covenants and restrictions, with which the Company was in compliance as of May 3, 2008.

 

As discussed in Note 2, the FASB issued SFAS No. 157, Fair Value Measurement, in September 2006, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The Company adopted the provisions of SFAS No. 157, as amended, for financial assets and financial liabilities at the beginning of fiscal year 2008. Although the adoption of SFAS No. 157 did not impact the Company’s financial condition, results of operations or cash flows, additional disclosures related to fair value measurements are required. Pursuant to the provisions of FSP No. 157-2, Effective Date of FASB Statement No. 157, the Company will defer application of the provisions of SFAS No. 157 that relate to non-financial assets and liabilities until February 1, 2009.

SFAS No. 157 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s own assumptions of market participant valuation (unobservable inputs). In accordance with SFAS No. 157, the hierarchy is broken down into three levels based on the reliability of the inputs as follows:

In determining fair value in accordance with SFAS No. 157, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. Classification of the financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company measures fair value as an exit price, the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date, using the procedures described below for all financial assets and liabilities measured at fair value.

The Company has cash equivalents consisting of short-term money market funds backed by U.S. Treasury securities. The primary objective of our short-term investment activities is to preserve our capital for the purpose of funding operations and we do not enter into short-term investments for trading or speculative purposes. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).

The Company uses derivative financial instruments, primarily foreign exchange contracts, to reduce its exposure to market risks from changes in foreign exchange rates. These derivatives, designated as cash flow hedges, are used to hedge the procurement of footwear from foreign countries and the variability of cash flows paid for certain operating expenses. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to these financial instruments. Counterparties to these agreements are, however, major international financial institutions with an investment grade or better credit rating, and the risk of loss due to nonperformance is believed to be minimal. These foreign exchange contracts are measured at fair value using quoted forward foreign exchange prices from counterparties corroborated by market-based pricing (Level 2).

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at May 3, 2008 consistent with the fair value hierarchy provisions of SFAS No. 157.

Prior to fiscal year 2008, the Company used OgilvyOne LLC (“Ogilvy”) to provide certain marketing and consulting services. A member of the Company’s Board of Directors, Carla C. Hendra, is an officer of Ogilvy North America and OgilvyOne N.A., both of which are affiliates of Ogilvy. The Company incurred no charges and $0.3 million in charges with Ogilvy during the thirteen weeks ended May 3, 2008 and May 5, 2007, respectively.

The Company entered into a joint venture agreement with a subsidiary of Hongguo International Holdings Limited (“Hongguo”) to begin marketing Naturalizer footwear in China in fall 2007 and Via Spiga footwear over the next several years. The Company is a 51% owner of the joint venture (“B&H Footwear”), with Hongguo owning the other 49%. B&H Footwear began operations in 2007 and distributes the Naturalizer brand in department store shops and free-standing stores in several of China’s largest cities. In addition, B&H Footwear sells Naturalizer footwear to Hongguo on a wholesale basis. Hongguo then sells Naturalizer products through retail stores in China. During the thirteen weeks ended May 3, 2008, the Company, through its consolidated subsidiary, B&H Footwear, sold $0.9 million of Naturalizer footwear on a wholesale basis to Hongguo, with no corresponding sales during the first quarter of 2007.

During 2007, the Company obtained a 42.5% equity interest in Edelman Shoe, Inc. (“Edelman Shoe”), which is a privately held company operated by Sam and Libby Edelman. A consolidated subsidiary of the Company sells footwear to Edelman Shoe on a wholesale basis, which is then sold by Edelman Shoe to department stores and independent specialty stores across the country.  During the thirteen weeks ended May 3, 2008, this consolidated subsidiary of the Company sold $0.5 million of footwear on a wholesale basis to Edelman Shoe, with no corresponding sales during the first quarter of 2007.

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. 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 (the “Redfield site” or, when referring to remediation activities at or under the facility, the “on-site remediation”) and residential neighborhoods adjacent to and near the property (the “off-site remediation”) that have been affected by solvents previously used at the facility. Based on the results of ongoing testing and the study of remediation alternatives by the Company’s environmental consultants, the Company submitted, in 2006, to the Colorado authorities a supplement to its former remediation plan, setting forth a long-term remediation plan and extending the time period the Company expects to perform certain remediation activities. Accordingly, a charge of $5.6 million was recorded in 2006, the majority of which represented the estimated discounted costs to complete the on-site remediation. The liability for the on-site remediation, $5.3 million, was discounted at 4.8%. On an undiscounted basis, the on-site remediation liability would be $21.4 million. The Company expects to spend approximately $0.2 million in each of the next five succeeding years and $20.4 million thereafter related to the on-site remediation. During the thirteen weeks ended May 3, 2008, the Company recorded no expense related to this remediation, other than the accretion of interest expense.

The cumulative expenditures for both on-site and off-site remediations through May 3, 2008 are $19.9 million. As discussed further below, the Company has recovered a portion of these expenditures from insurers and other third parties. The reserve for the anticipated future remediation activities at May 3, 2008, is $8.3 million, of which $1.0 million is accrued within accrued expenses and $7.3 million is accrued within other liabilities. Of the total $8.3 million reserve, $5.3 million is for on-site remediation and $3.0 million is for off-site remediation.

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 16 years. The Company has an accrued liability of $2.0 million at May 3, 2008, related to these sites, which has been discounted at 6.4%. On an undiscounted basis, this liability would be $2.8 million. The Company expects to spend approximately $0.2 million in each of the next five successive years and $1.8 million thereafter related to these sites. In addition, various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other landfills. However, the Company does not currently believe that its liability for such sites, if any, would be material.

Based on information currently available, the Company had an accrued liability of $10.4 million as of May 3, 2008, to complete the cleanup, maintenance and monitoring at all sites. Of the $10.4 million liability, $1.0 million is included in accrued expenses and $9.4 million is included in other noncurrent liabilities. The Company continues to evaluate its estimated costs in conjunction with its environmental consultants and records its best estimate of such liabilities. However, future actions and the associated costs are subject to oversight and approval of various governmental authorities. Accordingly, the ultimate costs may vary, and it is possible costs may exceed the recorded amounts.

In March 2000, a class action lawsuit was filed in Colorado State Court (District Court for the City and County of Denver) related to the Redfield site described above. Plaintiffs alleged claims for trespass, nuisance, strict liability, unjust enrichment, negligence and exemplary damages arising from the alleged release of solvents contaminating the groundwater and indoor air in the areas adjacent to and near the site. In December 2003, the jury hearing the claims returned a verdict finding the Company’s subsidiary negligent and awarded the class plaintiffs $1.0 million in damages. The Company recorded this award along with estimated pretrial interest on the award and estimated costs related to sanctions imposed by the court related to a pretrial discovery dispute between the parties. The total pretax charge recorded for these matters in 2003 was $3.1 million. The Company recorded an additional $0.6 million in expense in 2004, related to pretrial interest, to reflect the trial court’s ruling extending the time period for which prejudgment interest applied. The plaintiffs filed an appeal of the December 2003 jury verdict, and in August 2007, the Colorado Court of Appeals rejected the plaintiffs’ attempt to obtain a new trial by affirming the trial court judgment. The Court also denied a cross-appeal by the Company seeking a reversal of a portion of the pretrial interest awarded to plaintiffs, and the Company paid an additional $0.8 million in April 2008 for the remainder of the pretrial interest owing on the judgment. The Court also reversed the trial court’s award of costs to the Company and remanded the case to the trial court for a determination of whether plaintiffs are entitled to recover their costs related to the trial. The plaintiffs subsequently filed a petition with the Supreme Court of Colorado seeking review of the Court of Appeal’s decision denying them a new trial, which the Supreme Court denied on May 19, 2008, effectively ending plaintiffs’ attempts to obtain a retrial. The cost of further proceedings in this matter may vary.

In connection with the Redfield environmental remediation and class action litigation discussed above, the Company sued a number of its insurers seeking recovery of defense costs, indemnity and other damages related to the former operations and the remediation at the site. During 2006, the Company reached agreements with certain of those insurers to resolve the coverage claims arising out of the Redfield site and recorded income related to these recoveries of $7.3 million, net of related legal fees, as a reduction of selling and administrative expenses. Prior to a trial of that action, during the first quarter of 2008, the Company reached settlements with all insurers remaining in the case for total insurance recoveries, net of associated fees and costs, of $10.2 million, as a reduction of selling and administrative expenses. As a result of these settlements, all claims among the parties will be dismissed. In addition, the Company has 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. On April 14, 2008, the Supreme Court of Colorado sustained the Department of Transportation's effort to have a significant portion of the Company's suit dismissed on legal grounds and remanded the case to the trial court for further proceedings on the remainder of the case.

The Company also is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending will not have a material adverse effect on the Company’s results of operations or financial position. All legal costs associated with litigation are expensed as incurred.

In 2004, the Company was notified of the insolvency of an insurance company that insured the Company for workers’ compensation and casualty losses from 1973 to 1989. That company is now in liquidation. Certain claims from that time period are still outstanding, for which the Company has an accrued liability of $2.7 million. While management has recorded its best estimate of loss, the ultimate outcome and cost to the Company may vary.

At May 3, 2008, the Company was contingently liable for remaining lease commitments of approximately $2.1 million in the aggregate, which relate to former retail chains that were sold in prior years. These obligations will continue to decline over the next several years as leases expire. In order for the Company to incur any liability related to these lease commitments, the current owners would have to default. The Company does not believe this is reasonably likely to occur.

In 2005, Brown Shoe Company, Inc. issued Senior Notes, which are fully and unconditionally and jointly and severally guaranteed by all of its existing and future subsidiaries that are guarantors under its existing Amended and Restated Credit Agreement. The following table presents the condensed consolidating financial information for each of Brown Shoe Company, Inc. (Parent), the Guarantors and subsidiaries of the Parent that are not Guarantors (the Non-Guarantors), together with consolidating eliminations, as of and for the periods indicated.

The condensed consolidating financial statements have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Management believes that the information, presented in lieu of complete financial statements for each of the Guarantors, provides meaningful information to allow investors to determine the nature of the assets held by, and operations and cash flows of, each of the consolidating groups.