ITEM 1 - BUSINESS - -----------------
The Corporation, founded in 1878 and incorporated in 1913, operates in the Footwear industry. Current activities include the operation of retail shoe stores and importing, foreign sourcing, and marketing of women's, men's and children's footwear. During 1995, footwear sales were approximately 61% women's, 24% men's and 15% children's. This composition has remained relatively constant over the past few years. Approximately 62% of 1995 footwear sales were made at retail compared to 54% in 1994 and 52% in 1993. The trend of increasing retail sales as a percentage of total sales will flatten in 1996 as the Corporation slows the growth of Famous Footwear, a retail chain of branded discount shoe stores. During 1995, the Corporation closed its remaining five shoe factories in the United States and now is operating two shoe factories, both located in Canada. In prior years, the Corporation conducted business in the Footwear and Specialty Retailing industry segments. The Specialty Retailing segment, which comprised a chain of retail fabric stores, was sold in the third quarter of fiscal 1994. See Note 6 of Notes to Consolidated Financial Statements on page 28 of the Annual Report to Shareholders for the year ended February 3, 1996, which is incorporated herein by reference, for additional information regarding the Corporation's business segment and operations by geographic area.
Retail Operations - -----------------
The Corporation's retail footwear operations comprise a large number of retail footwear stores in the United States and Canada. The stores operate under various names including: Famous Footwear, Naturalizer and F.X. LaSalle. Fiscal year 1994 and 1993 operations also included Connie and Regal retail stores, which were closed during fiscal 1994 as part of the restructuring initiatives announced in January 1994. A portion of the retail sales carries Corporate owned and licensed brand names with the footwear manufactured under contract to its specifications primarily by foreign suppliers.
In retail sales of footwear, the Corporation competes in a highly fragmented market with many organizations of various sizes operating retail shoe stores and departments. Competitors include local, regional and national shoe store chains, department stores, discount stores and numerous independent retail operators of various sizes. Customer service, store location, product display, merchandise selection and pricing are important components of retail competition.
A summary of retail footwear stores operated by the Corporation at the prior five fiscal year-ends is as follows:
ITEM 1 - BUSINESS (Continued) -----------------
Wholesale Operations - --------------------
Footwear is distributed by the Corporation's marketing, importing and foreign sourcing operations to approximately 8,400 retailers, including department stores, mass merchandisers, and independent retailers in the United States, Canada, Europe, South America, and the Far East; athletic footwear distributors and retailers in Europe and South America; and to affiliates. Most of these customers also sell shoes bought from competing footwear suppliers. Wholesale footwear sales carry Corporate brand names, brand names licensed by the Corporation, and private label footwear produced under contract to its specifications primarily by foreign suppliers. Products sold under license agreements, such as with Schering-Plough HealthCare Products, Inc. and The Walt Disney Company, were responsible for approximately 13%, 17%, and 13% in 1995, 1994, and 1993, respectively, of total sales. The Corporation competes with both domestic manufacturers and importers of foreign-produced footwear.
Foreign sourced footwear accounts for the vast majority of all footwear sold in the United States. Through the sourcing activities of its Pagoda organization, the Corporation is a leading supplier of imported footwear. This organization sources a wide variety of footwear, primarily from China and to a lesser extent other Far Eastern countries, Brazil and Italy, for other Brown Group divisions and for outside customers, which primarily consist of large discount store operations. During 1995, this operation was responsible for sourcing approximately 70 million pairs of shoes. These sourcing activities include coordination of the styling, production and shipment of footwear produced for the Corporation by independent footwear manufacturers in foreign countries. Pagoda's sourcing capabilities are diverse and include a number of
ITEM 1 - BUSINESS (Continued) -----------------
countries of origin and manufacturing facilities. Production can be shifted from country to country.
The Corporation's Brown Shoe Company closed its five remaining United States manufacturing plants and related facilities during 1995. The loss of footwear production caused by the domestic plant closings will be made up by an increase in sourcing from the Corporation's Pagoda organization.
During 1995, the Corporation purchased the Larry Stuart Collection branded footwear business and the Le Coq Sportif athletic shoe brand. The total cost of these acquisitions was approximately $10 million.
The nature of the Corporation's wholesale shoe business is such that it does not have a significant backlog of non-cancelable orders. Orders for shoes are solicited by the Corporation's sales force primarily during two selling seasons in each year, spring and fall. Orders placed as a result of these sales efforts are taken before the shoes are sourced with delivery generally within three to four months thereafter. Footwear is sold to wholesale customers on both a first-cost and landed basis. First-cost sales are those sales in which the Corporation obtains title to footwear from its overseas suppliers and typically relinquishes title to customers at a designated overseas port. Landed sales are those sales in which the Corporation obtains title to footwear from its overseas suppliers, imports the footwear and relinquishes title to customers after customs formalities have been satisfied. The Corporation maintains a stock of the higher volume styles which are available for prompt shipment on reorder.
The Corporation's marketing and promotional efforts are carried out through a number of avenues. The footwear wholesaling group maintains a sales force that visits customers periodically, presents its footwear at trade shows, and advertises in trade magazines and publications. In addition, direct advertising to consumers is carried out through use of print and electronic media, sponsoring of certain sporting events and in-store presentations and demonstrations. The footwear retailing organization advertises its products in the print and electronic media, as well as with in-store displays and promotions.
Due to the seasonal nature of retail sales of shoes, the Corporation experiences fluctuations in the components of working capital. Retail footwear sales are seasonal with significant increases in sales experienced in the spring, back-to-school and Christmas periods.
The major brand names of the Corporation's footwear include the following:
Women's: Air Step Brittania (under license from Brittania Sportswear, Ltd.) Connie DeLiso Dr. Scholl's (under license from Schering-Plough HealthCare Products, Inc. and Scholl Latin America Ltd.) Fanfares
ITEM 1 - BUSINESS (Continued) -----------------
Women's: Jordache (under license from Jordache Enterprises, Inc.) Larry Stuart Collection Le Coq Sportif LS Studio Life Stride Maserati Melange Mickey Unlimited (under license from The Walt Disney Company) Naturalizer NaturalSport Nature Sole Night Life Penalo Penn (under license from Penn Racquet Sports) Revelations
Men's: Brittania (under license from Brittania Sportswear, Ltd.) Cedar Trail Dr. Scholl's (under license from Schering-Plough HealthCare Products, Inc. and Scholl Latin America Ltd.) Le Coq Sportif Penn (under license from Penn Racquet Sports) Regal Remington (under license from Remington Arms Company, Inc.) U.S. 101 UnionBay (under license from Seattle Pacific Industries, Inc.)
Children's: Barbie for Girls (under license from Mattel, Inc.) Buster Brown Candie's (under license from Candie's, Inc.) Casper (under license from MCA/Universal Merchandising, Inc.) 101 Dalmatians (under license from The Walt Disney Company) Disney Babies (under license from The Walt Disney Company) Fanfares The Flintstones (under license from MCA/Universal Merchandising, Inc. and Turner Home Entertainment) G. I. Joe (under license from Hasbro, Inc.) Hello Kitty (under license from Sanrio, Inc.) The Hunchback of Notre Dame (under license from The Walt Disney Company) Jordache (under license from Jordache Enterprises, Inc.) Kazaam (under license from Interscope Communications, Inc.) The Lion King (under license from The Walt Disney Company) Mickey & Co. (Under license from The Walt Disney Company) Mickey's Stuff for Kids (under license from The Walt Disney Company) Nerf (under license from Hasbro, Inc.) Playskool (under license from Hasbro, Inc.) Pocahontas (under license from The Walt Disney Company) Remington (under license from Remington Arms Company, Inc.) Sailor Moon (under license from DIC Entertainment, L.P.) That's Donald (under license from The Walt Disney Company) Tonka (under license from Hasbro, Inc.) UnionBay (under license from Seattle Pacific Industries, Inc.) Wildcats YDS (under license from Schering-Plough HealthCare Products, Inc.)
ITEM 1 - BUSINESS (Continued) -----------------
Discontinued Operations - -----------------------
On October 2, 1994, the Corporation sold its Cloth World chain of fabric stores to Fabri-Centers of America, Inc. This business involved the operation of approximately 340 retail stores selling fabrics and sewing accessories. It was acquired by the Corporation in 1970. In addition to the Cloth World sale, the Corporation announced a formal plan to close the Maryland Square catalog operation. The closure of this business was substantially completed in the fourth quarter of fiscal 1994.
In 1994, the Corporation completed its withdrawal from the Wohl Leased Shoe Department business, which was announced in the fourth quarter of fiscal 1993. This business involved the management of more than 500 shoe departments in department stores primarily on the West Coast and in the Midwest.
See pages 17 and 25 of the Annual Report to Shareholders for the year ended February 3, 1996, which is incorporated herein by reference, for a discussion of the financial impact of the Discontinued Operations on the Corporation.
Restructuring - -------------
The restructuring initiatives announced in January 1994 resulted in five plants and more than 150 Naturalizer, Connie and Regal retail stores being closed. In addition, Brown Shoe Company's men's shoe business was sold, and substantial consolidation of Pagoda and Brown Shoe Company administrative operations was achieved. See pages 16 and 25 of the Annual Report to Shareholders for the year ended February 3, 1996, which is incorporated herein by reference, for a discussion of the financial impact of the restructuring on the Corporation.
Corporate-wide Business Influence - ---------------------------------
The Corporation is involved in environmental remediation and ongoing compliance at several sites. The Corporation has completed remediation efforts at its closed New York tannery and two associated landfills and is now only required to monitor and maintain these properties. At an owned factory that is currently leased to another party, the Corporation is involved in remediation at the property. In addition, the Corporation has been identified by various governmental authorities as a potentially responsible party at certain other landfills. See pages 18 and 32 of the Annual Report to Shareholders for the year ended February 3, 1996, which is incorporated herein by reference, for a discussion of the financial statement impact of environmental issues on the Corporation. Federal, State, and local provisions for environmental protection have not had, nor are they anticipated to have, a material effect on the Corporation's capital expenditures or competitive position.
The Corporation sources and sells certain patented items but does not consider its business to be dependent on patents.
ITEM 1 BUSINESS (continued) ---------------
From time to time the Corporation investigates and negotiates for the possible acquisition of other businesses and operations; but at this time, there are no agreements or understandings for acquisition of any significant subsidiaries.
The Corporation has approximately 11,000 full and part-time employees. Approximately 130 employees engaged in the warehousing of footwear are employed under a union contract, which is due to expire in August 1996.
ITEM 2

ITEM 2 - PROPERTIES - -------------------
The principal executive, sales and administrative offices of the Corporation are located in Clayton (St. Louis), Missouri, and consist of an owned complex of two adjoining office buildings.
The Corporation's wholesale footwear operations are carried out at two warehouses located in Missouri and two manufacturing and one warehouse facility located in Ontario, Canada. All of the facilities are owned or subject to long-term capital leases. Five manufacturing plants and related facilities were closed in fiscal 1995 and five manufacturing plants were closed in fiscal 1994.
The Corporation's retail footwear operations are conducted throughout the United States and Canada and involve the operation of 1,241 shoe stores, including 114 in Canada. All store locations are leased with more than half having renewal options. In addition, Famous Footwear has leased office space, a leased 750,000 square foot distribution center, including a mezzanine level, in Madison, Wisconsin, and a leased 800,000 square foot distribution center, including mezzanine levels, in Lebanon, Tennessee, which began operations in November 1995. The new distribution center will initially service stores in the Southeast United States.
ITEM 3

ITEM 3 - LEGAL PROCEEDINGS - --------------------------
The Corporation is a party to several uninsured lawsuits arising in the ordinary course of business. While the Corporation is unable to predict the ultimate outcome of these actions, it believes that their final resolution will not result in any materially adverse effect on the Corporation's financial position.
In January 1995, the U.S. Tax Court issued a judgment in favor of the Internal Revenue Service related to an assessment on a portion of the Corporation's unremitted foreign earnings. This judgment was reversed by an Appeals Court ruling in fiscal 1995. The Internal Revenue Service has appealed the most recent ruling but the Corporation believes it will prevail. The potential financial impact on the Corporation is discussed on pages 15 and 28 of the Annual Report to Shareholders for the year ended February 3, 1996, which is incorporated herein by reference.
The Corporation is working with Federal and various State Environmental Protection Agencies to resolve clean-up issues at several sites. The potential financial impact on the Corporation is discussed on pages 18 and 32 of the Annual Report to Shareholders for the year ended February 3, 1996, which is incorporated herein by reference.
ITEM 4

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------------------------------------------------------------
No matter was submitted to a vote of shareholders during the fourth quarter of fiscal 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------
The following is a list of the names and ages of the executive officers of the registrant and of the offices held by each such person. There is no family relationship between any of the named persons. The terms of the following executive officers will expire May, 1996.
Name Age Current Position - ---- --- ----------------
B. A. Bridgewater, Jr. 62 Chairman of the Board, President, Chief Executive Officer and Chairman of the Executive Committee
Brian C. Cook 56 Vice President, Footwear Retailing and President, Famous Footwear
Ronald N. Durchfort 42 President, Pagoda International
Ronald A. Fromm 45 Executive Vice President, Famous Footwear
Robert D. Pickle 58 Vice President, General Counsel and Corporate Secretary
Gary M. Rich 45 President, Pagoda U.S.A.
Harry E. Rich 56 Director, Executive Vice President, Chief Financial Officer and Member of the Executive Committee
James M. Roe 50 Senior Vice President, Sales and Operations, Famous Footwear
Andrew M. Rosen 45 Vice President and Treasurer
Richard C. Schumacher 48 Vice President and Controller
David H. Schwartz 51 President, Pagoda Trading
Mary S. Siverts 36 Vice President, Public Affairs
Thomas A. Williams 47 Vice President, Footwear Wholesaling; President, Brown Shoe Company; and Chairman, Pagoda
E. Lee Wyatt, Jr. 43 Senior Vice President, Finance and Administration, Brown Shoe Company and Pagoda
George J. Zelinsky 47 Senior Vice President and General Merchandise Manager, Famous Footwear
The period of service of each officer in the positions listed and other business experience are set forth below.
EXECUTIVE OFFICERS OF THE REGISTRANT (Continued) ------------------------------------
B. A. Bridgewater, Jr., Chairman of the Board and Chief Executive Officer of the registrant since 1985. President of the registrant prior to 1987 and since 1990.
Brian C. Cook, Vice President, Footwear Retailing of the registrant since March 1992; President of Famous Footwear since 1981.
Ronald N. Durchfort, President of Pagoda International since March 1993. General Manager of Operations, France Office, from 1988 through March 1993.
Ronald A. Fromm, Executive Vice President, Famous Footwear since September 1992. Vice President and Chief Financial Officer of Famous Footwear from 1988 to 1992.
Robert D. Pickle, Vice President, General Counsel and Corporate Secretary of the registrant since 1985.
Gary M. Rich, President of Pagoda U.S.A. since March 1993. President, Pagoda Trading Company, Inc. from June 1989 through March 1993. Executive Vice President, Sidney Rich Associates, Inc. from December 1980 through June 1989.
Harry E. Rich, Executive Vice President and Chief Financial Officer of the registrant since 1988. Senior Vice President and Chief Financial Officer of the registrant from 1984 to 1988.
James M. Roe, Senior Vice President, Sales and Operations, Famous Footwear since December 1994. Vice President, Real Estate, Famous Footwear from January 1992 to 1994. Director, Strip Center Real Estate of the registrant from 1987 to 1992.
Andrew M. Rosen, Vice President and Treasurer of the registrant since January 1992. Treasurer of the registrant from 1983 to 1992.
Richard C. Schumacher, Vice President and Controller of the registrant since June 1994. Vice President and Chief Financial Officer of Wohl Shoe Company from November 1992 to June 1994. Assistant Controller of the registrant from 1985 to 1992.
David H. Schwartz, President, Pagoda Trading since February 1996. President, Men's, Athletic and Children's Divisions from March 1995 to February 1996. President, Marathon Division, Pagoda from March 1981 to March 1995.
Mary S. Siverts, Vice President, Public Affairs since September 1993. Director of Public Relations from 1988 to 1993.
Thomas A. Williams, Vice President, Footwear Wholesaling; President, Brown Shoe Company; and Chairman, Pagoda since January 1994. Chairman, Pagoda Trading Company, Inc., since January 1990. Vice President, International Operations of the registrant and Chairman, Brown Group International, Inc., from March 1993 to January 1994. Vice Chairman of Pagoda Trading Company from June 1989 to December 1989. Other management positions at Pagoda Trading Company from 1982 to 1990.
EXECUTIVE OFFICERS OF THE REGISTRANT (Continued) ------------------------------------
E. Lee Wyatt, Jr., Senior Vice President of Finance and Administration, Brown Shoe Company and Pagoda since May 1994. Vice President, Planning and Controller of the registrant from March 1994 to May 1994. Vice President, Planning and Taxes of the registrant from November 1992 to March 1994. Director, Corporate Planning and Taxes and Assistant Secretary from June 1990 to November 1992. Director, Corporate Planning and Tax from October 1989 to June 1990. Other management positions with the registrant from 1986 to 1989.
George J. Zelinsky, Senior Vice President and General Merchandise Manager, Famous Footwear since June 1989. Vice President, Women's Better Grade Division, Wohl Shoe Company from 1986 to 1989.
PART II -------
ITEM 5

ITEM 5 -MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS -----------------------------------------
Common Stock market prices and dividends on page 35 of the Annual Report to Shareholders and the number of shareholders of record on page 37 of the Annual Report to Shareholders for the year ended February 3, 1996, are incorporated herein by reference.
ITEM 6

ITEM 6 - SELECTED FINANCIAL DATA - --------------------------------
Selected Financial Data on page 19 of the Annual Report to Shareholders for the year ended February 3, 1996, is incorporated herein by reference.
ITEM 7

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------
Management's Discussion and Analysis of Operations and Financial Condition on pages 14 through 18 of the Annual Report to Shareholders for the year ended February 3, 1996, is incorporated herein by reference.
ITEM 8

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------
The consolidated financial statements of the Corporation and its subsidiaries on pages 20 through 34, and the supplementary financial information on page 35 of the Annual Report to Shareholders for the year ended February 3, 1996, are incorporated herein by reference.
ITEM 9

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------------------------------------------------------
None.
PART III --------
ITEM 10

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------
Information regarding Directors of the Corporation on pages 3 through 11 of the Proxy Statement for the Annual Meeting of Shareholders to be held May 23, 1996, is incorporated herein by reference. Information regarding Executive Officers of the Corporation is included in Part I of this Form 10-K following Item 4.
ITEM 11

ITEM 11 - EXECUTIVE COMPENSATION - --------------------------------
Information regarding Executive Compensation on pages 12 through 18 and 22 through 24 of the Proxy Statement for the Annual Meeting of Shareholders to be held May 23, 1996, is incorporated herein by reference.
ITEM 12

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------
Security Holdings of Directors and Management on pages 3 and 4 of the Proxy Statement for the Annual Meeting of Shareholders to be held May 23, 1996, is incorporated herein by reference.
ITEM 13

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - ------------------------------------------------------
(a) (1) and (2) The response to this portion of Item 14 is submitted as a separate section of this report.
(a) (3) Exhibits
Exhibit No.:
3.(i) (a) Certificate of Incorporation of the Corporation as amended through February 16, 1984, incorporated herein by reference to Exhibit 3 to the Corporation's Report on Form 10-K for the fiscal year ended November 1, 1986.
(i) (b) Amendment of Certificate of Incorporation of the Corporation filed February 20, 1987, incorporated herein by reference to Exhibit 3 to the Corporation's Report on Form 10-K for the fiscal year ended January 30, 1988.
(ii) Bylaws of the Corporation as amended through January 11, 1996, filed, herewith.
4.(a) Rights Agreement dated as of March 7, 1996 between the Corporation and Boatmen's Trust Company, which includes as Exhibit A the form of Rights Certificate evidencing the Corporation's Common Stock Purchase Rights, incorporated herein by reference to Form 8-K dated March 7, 1996.
(b) (i) Indenture dated as of April 2, 1986 between the Corporation and Citibank, N.A. as Trustee, incorporated herein by reference to Exhibit 4 to the Corporation's Registration Statement on Form S-3 (No. 33-4500).
(c) Certain instruments with respect to the long-term debt of the Corporation are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K since the amount of debt authorized under each such omitted instrument does not exceed 10 percent of the total assets of the Corporation and its subsidiaries on a consolidated basis. The Corporation hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
10.(a)* Stock Appreciation, Stock Option and Performance Bonus Plan of 1983, incorporated herein by reference to Exhibit 3 to the Corporation's definitive proxy statement dated January 20, 1984.
(b)* Stock Option and Restricted Stock Plan of 1987, as amended, incorporated herein by reference to Exhibit 3 to the Corporation's definitive proxy statement dated April 26, 1988.
(c)* Stock Option and Restricted Stock Plan of 1994, incorporated herein by reference to Exhibit 3 to the Corporation's definitive proxy statement dated April 20, 1994.
11. Computation of earnings per share.
13. Annual Report to Shareholders of Brown Group, Inc. for the fiscal year ended February 3, 1996. Such report, except for portions incorporated by reference herein, is furnished for the information of the SEC and is not "filed" as part of this report.
21. Subsidiaries of the registrant.
23. Consent of Independent Auditors.
24. Power of attorney (contained on signature page).
27. Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the quarter ended February 3, 1996. The Corporation filed a current report on Form 8-K dated March 7, 1996, in response to item 5, which announced a new Shareholders' Rights Plan.
(c) Exhibits:
Exhibits begin on page 20 of this Form 10-K.
(d) Financial Statement Schedule.
*Denotes management contract or compensatory plan arrangements.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DATE: April 19, 1996 BROWN GROUP, INC. - -------------------- ---------------------------- (Registrant)
By Harry E. Rich /s/ ---------------------------- Executive Vice President and Principal Financial Officer
Know all men by these presents, that each person whose signature appears below constitutes and appoints Harry E. Rich his true and lawful attorney in fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney in fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney in fact and agent or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on April 19, 1996, by the following persons on behalf of the Registrant and in the capacities indicated.
Signatures Title ---------- -----
B. A. Bridgewater, Jr. /s/ Chairman of the Board of Directors ---------------------------- President and Chief Executive Officer
Harry E. Rich /s/ Director, Executive Vice President ---------------------------- and Chief Financial Officer
Richard C. Schumacher /s/ Vice President and Controller ----------------------------
Signature Title --------- -----
Joseph L. Bower /s/ Director and Chairman of ---------------------------- Compensation Committee
Richard A. Liddy /s/ Director ----------------------------
William E. Maritz /s/ Director ----------------------------
Daniel R. Toll /s/ Director and Chairman of ---------------------------- Audit Committee
Julie Esrey /s/ Director ----------------------------
ANNUAL REPORT ON FORM 10-K
ITEM 14 (a) (1) and (2), and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
YEAR ENDED FEBRUARY 3, 1996
BROWN GROUP, INC.
ST. LOUIS, MISSOURI
FORM 10-K - ITEM 14 (a) (1) and (2), and (d) BROWN GROUP, INC. AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Brown Group, Inc. and subsidiaries included in the annual report of the registrant to shareholders for the year ended February 3, 1996, are incorporated by reference in Item 8:
Consolidated Balance Sheets - February 3, 1996, and January 28, 1995.
Consolidated Earnings - Years ended February 3, 1996, January 28, 1995, and January 29, 1994.
Consolidated Cash Flows - Years ended February 3, 1996, January 28, 1995, and January 29, 1994.
Consolidated Shareholders' Equity - Years ended February 3, 1996, January 28, 1995, and January 29, 1994.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
The following consolidated financial statement schedule of Brown Group, Inc. and subsidiaries is included in Item 14(d):
Schedule VIII - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
SCHEDULE VIII -------------
VALUATION AND QUALIFYING ACCOUNTS BROWN GROUP, INC.
BROWN GROUP, INC. ANNUAL REPORT TO SHAREHOLDERS ON FORM 10-K INDEX TO EXHIBITS
Exhibit -------
3.(ii) Bylaws as amended through January 11, 1996
11. Computation of earnings per share
13. 1995 Annual Report to Shareholders of Brown Group, Inc.
21. Subsidiaries of the registrant
23. Consent of Independent Auditors
24. Power of Attorney (see signature page)
27. Financial Data Schedule


ITEM 1. BUSINESS
OVERVIEW
Boise Cascade Office Products Corporation (with its subsidiaries, "the Company" or "we") is one of the world's premier distributors of products for the office. We sell a broad line of branded and private label office supplies, furniture, paper, computer-related items, and promotional products. We purchase most of our products directly from manufacturers and distribute them directly to end-user customers.
Throughout our 33-year history, our primary marketing focus has been and remains business customers. For much of that time, we have concentrated on serving the commodity office supply needs of large businesses in the United States. More recently, we have broadened our marketing focus to include small and medium-sized businesses and home offices, expanded our array of products and services, and entered the United Kingdom, Canada, Australia, and Germany.
Large and Small Business Customers. We market our products and services to large business customers, including our rapidly growing national account customers in the U.S., through our direct sales force, our annual full-line catalog (including a CD-ROM version), and a variety of specialized catalogs. This is traditionally referred to as the contract stationer channel.
We serve small business and home office customers through the direct marketing channel. Operating under the name Reliable in the U.S., Grand & Toy Connect in Canada, Neat Ideas in the United Kingdom, and Buro & Technik in Germany, we use targeted catalogs and sophisticated database marketing programs to sell our products. We market to medium-sized business customers using service elements of both channels, depending upon the specific customer needs. In 1996, approximately 86% of our total sales were derived from the contract stationer channel and approximately 14% from the direct marketing channel.
Geographic Expansion. Until the beginning of 1996, we operated only in the U.S., where we are one of the largest distributors of office products. We are now one of the largest distributors of office products in Australia, Canada (under the name "Grand & Toy"), and the United Kingdom (under the name "Neat Ideas"). We also operate office products retail stores in Canada to support Grand & Toy's service to its business customers.
In 1996, foreign operations accounted for approximately 15% of our total net sales and approximately 12% of our total operating income.
We expect our international operations to become increasingly important in 1997 and in future years. In December 1996, we purchased the Canadian customer list of Quill Corporation, which was the only sizable direct marketer of office products in Canada. In January 1997, we entered into a joint venture with Otto Versand, a German company which is one of the world's largest direct marketers of consumer products. Through this joint venture, in which we have a 50% interest, we will sell office products via direct marketing in continental Europe, initially in Germany. For further financial information about our foreign operations, see Note 1, "Organization and Basis of Presentation," of the Notes to Financial Statements in our 1996 Annual Report, which is incorporated herein by reference.
Our integrated network of 47 distribution centers in the U.S. enables us to provide consistent products, prices, and service to our national account customers. It also enables us to provide next-day delivery of virtually all orders to our large business customers and approximately 70% of orders to our small and medium-sized customers. We added 13 distribution centers to our U.S. network in 1996, 11 through acquisitions of existing businesses and two through start-ups. We intend to open at least one new distribution center in 1997 and may acquire a few others to supplement our extensive U.S. distribution network. In Canada we have a national network of nine distribution centers. In Australia we have a national network of eight distribution centers.
THE OFFICE PRODUCTS DISTRIBUTION INDUSTRY
United States. The office products distribution industry in the U.S. is consolidating rapidly and undergoing other significant changes. The industry consists of companies that operate in one or more of three broad channels for the marketing and distribution of office products to end-users. Business customers have the opportunity to purchase office products through any of the channels.
The contract stationer channel. Contract stationers typically serve large and medium-sized business customers through product catalogs and sales forces, stocking products in distribution centers, and delivering them to customers the next business day against orders received electronically, by telephone or fax, or taken by a salesperson on the customer's premises. Contract stationers typically enter into contracts with their customers that specify prices for items the customers may order, services to be provided, and other terms. Major contract stationers purchase directly from manufacturers, rely upon wholesaler intermediaries only to a limited extent for inventory backup and increased product breadth, and offer significant volume-related discounts and a high level of service to their customers. Historically, contract stationers operated in only one or a very few major metropolitan areas. The Company has been a significant exception for many years. In recent years, principally as a result of consolidation by acquisition, several other major contract stationers have emerged, each of which operates in a number of major metropolitan areas and, in some cases, nationally.
The direct marketing channel. Direct marketers of office products typically target small and medium-sized business customers and home offices. While their procurement and order fulfillment functions are similar to contract stationers, direct marketers rely exclusively on catalogs and other database marketing programs, rather than direct sales forces, to sell their product offerings. Their marketing is based upon large, proprietary
customer databases and sophisticated circulation strategies designed to increase sales from catalog mailings to customers and prospects. In addition to a few large direct marketing companies which primarily distribute office products, several of the major contract stationers and office products retailers now employ direct marketing techniques to expand their customer bases. The Company first entered this channel with its 1994 acquisition of the direct marketing office products distribution operations of The Reliable Corporation ("Reliable"), which at the time was the third largest direct marketing distributor of office products in the United States.
The retail channel. Office products retailers typically serve small and medium-sized businesses, home offices, and individuals. For many years, the retail channel consisted principally of a large number of independent dealers, operating only one or a few relatively small stores in a single local area and purchasing a limited inventory of office supplies from wholesalers for resale at or near manufacturers' list prices. Over the last decade, the retail channel has undergone significant change, primarily as a result of the emergence and rapid growth of the office products superstores. The superstore concept typically involves a large suburban strip mall or stand-alone store which employs a warehouse format, is open for business seven days a week, stocks a large number and broad range of items in inventory, purchases in volume and takes delivery at the store direct from manufacturers, and offers many products at discounts from manufacturers' list prices. Every major metropolitan area in the U.S. is now served by at least one, and most by several, office products superstores.
The changes described above have blurred the lines between these three marketing and distribution channels and between the companies operating in these channels. Several major industry participants operate across these channels and/or serve all or a large part of the office products customer spectrum.
Significant changes are also taking place in the way business customers purchase office products. Large multi-site businesses increasingly recognize the efficiency and cost-effectiveness of uniform system-wide purchasing of their office products requirements under a national contract with a single distributor. We believe this move on the part of customers to reduce suppliers and consolidate purchasing power is gaining momentum. In addition, some major businesses are beginning to use integrated procurement systems as they seek to satisfy not only their office product needs but also their requirements for a variety of other office-related services and supplies from a single source. Small and medium-sized businesses are also focusing on ways to increase efficiency and reduce costs in meeting their requirements for office products, which has resulted in the development of sophisticated direct marketing techniques tailored to their needs.
International. The office products markets in Canada, Australia, and the United Kingdom are similar to the U.S. market. Some industry consolidation has occurred, to a greater or lesser extent, in each country and the channels have blurred.
STRATEGY FOR GROWTH
Since we began implementing our strategy for accelerated growth in 1993, the Company has grown rapidly. Our year-over-year increases in net sales, sales on a same-location basis, and operating income have been as follows:
We believe that the distribution of products to the office customer continues to present significant growth opportunities. We intend to continue exploiting such opportunities through our growth strategy, which includes the following elements:
Expand Our Geographic Scope
We intend to enter the office products distribution business in other foreign countries, as well as to expand our operations in those countries where we currently operate. We expect to do this through a combination of acquisitions, joint ventures, alliances, and start-ups. We also expect to establish a presence in selected additional cities in the U.S., through start-ups as well as through acquisitions of contract stationers to enhance our domestic distribution system.
Broaden Our Customer Base
- Increase national accounts. We define a "national account" as a multi-site customer served by two or more of our distribution centers under a single contract. Large businesses with many office sites across the U.S. are increasingly seeking to reduce product and process costs by purchasing all of their office products needs from a single company with national distribution capability under one centrally negotiated national contract.
We believe that we currently have a competitive advantage with respect to such businesses in the U.S. because of the nationwide coverage of our integrated distribution centers. This coverage enables us to provide consistent delivery of products, prices, and service across all customer locations. A key element of our strategy is to exploit this advantage to expand our business with national account customers.
In 1992 we established a specialized national account marketing staff, which is dedicated to building and maintaining our business with national accounts. The amount of our sales to such customers has grown significantly, as the following table indicates:
U.S. National Account Sales
We are pursuing a similar national account strategy in our operations outside the United States, which may serve multi-national accounts as well.
- Increase our business with small and medium-sized businesses and home offices. The office products distribution market for small and medium-sized businesses and home offices is growing more rapidly than the large business customer segment. These smaller customers usually cannot be cost-effectively served through a direct sales force. An important element in our growth strategy is to expand our business with this segment of the market. We believe that the direct marketing channel provides the most convenient and cost-effective way for customers in this market segment to purchase office products.
Starting with our April 1994 acquisition of the office products distribution business of Reliable, we have expanded our direct marketing business, both in the U.S. and abroad. In December 1995, we acquired Neat Ideas, the United Kingdom's second largest office products direct marketer. In December 1996, we purchased Quill Corporation's Canadian customer list and began direct marketing in Canada through Grand & Toy. With the formation of our joint venture with Otto Versand in January 1997, we have begun direct marketing operations in continental Europe, initially in Germany.
As the following table indicates, our worldwide direct marketing business has grown significantly during the last three years:
_________
(1) An "active customer" is one which has made at least one purchase during the preceding 12 months
(2) Reflects the results of Reliable during the eight months after our acquisition in April 1994
Increase Sales of Core Products and Add New Products and Services
We plan to increase sales of certain existing product categories, such as office papers and office furniture, as well as the sales of our newest product categories, such as computer-related items and promotional products. As part of this element of our growth strategy, we are offering customized procurement and product-related support services to our customers, particularly in electronic commerce. By broadening our product lines and services, we are better able to meet the needs of those customers interested in reducing their supplier base and taking advantage of "one-stop shopping." This also leverages our distribution and systems infrastructure.
- As a result of our efforts to broaden the product mix purchased by current customers, our sales of office papers, measured by volume, increased year-over-year by more than 40% in 1996 and more than 60% in 1995. Our growth strategy also targets office furniture, with the goal of increasing its sales across the system, especially at those locations where sales have been modest. To do this, we are using furniture sales specialists, showrooms, and targeted catalogs.
- In response to rapid increases in our customers' needs for computer supplies, hardware, software, and peripherals, we acquired Word Technology Systems, Inc., ("WTS") in September 1995. WTS, which had 1994 sales of approximately $65 million, distributed computer-related products to businesses throughout the United States. These products often require a specialized selling effort. Since the acquisition, we have nearly doubled (to approximately 90) the total number of sales managers, technically-trained sales associates, and certified network engineers dedicated to the marketing of such products. They are located at 13 of our major U.S. distribution centers, from which we now market computer-related products under the name Boise Technology. In 1996 we also formed an alliance with XL Connect Solutions, Inc., a technology-related service company, which enables us to provide businesses with a wide range of services that complement our computer-related products.
- Promotional products, such as jackets, T-shirts, coffee mugs, and pen and pencil sets with corporate logos or unique designs, are used by our customers for employee recognition and incentive programs and for marketing and advertising. To bolster the range of such products and related services which we offer in this large and growing category, we acquired Oregon Wholesale Novelty Company, Inc., ("OWNCO") in November 1996. OWNCO, which had sales of approximately $30 million at the time of acquisition, is a premier U.S. promotional products company.
Each of the foregoing elements of our growth strategy has both an acquisition component and an internal growth component, the mix of which, for any given element in any given year, can be expected to be different because of that year's priorities, opportunities, capital availability, and other factors.
Acquisitions have been and are expected to continue to be an important means by which we execute our strategy. The near-term focus of our acquisition program is to increase our presence abroad in the contract stationer channel and to broaden our product offerings in the United States. Direct marketing in Europe through the joint venture with Otto Versand is also expected to grow via acquisitions and internal
growth initiatives. We may also acquire additional contract stationers in the United States. We typically seek to retain management of each acquired business and to draw upon its specialized knowledge. In addition, we intend to integrate the acquired business into our nationwide distribution network to the extent it is appropriate and cost-effective.
In the U.S., we have opened new distribution centers in selected metropolitan areas where we wished to establish or expand our presence but where we could not find an appropriate acquisition candidate. In 1996, we started new distribution centers in Las Vegas, Nevada, and Miami, Florida. During the second half of 1997, we expect to open at least one new distribution center in the Southeast (in Charlotte, North Carolina) to further build our presence in that rapidly growing part of the country. While a start-up typically requires a smaller initial capital investment than an acquisition, it may take two to four years to achieve profitability. We have transferred a base of business from existing distribution centers to our recent start-ups in order to speed up this process.
We may not be able to complete targeted acquisitions because of competition, availability of suitable candidates, or capital availability. In addition, we encounter various risks associated with each acquisition which we do complete, including the possible inability to integrate the acquired business into our distribution network, increased goodwill amortization, diversion of management's attention, and unanticipated problems, costs, or liabilities, some or all of which could have a material adverse effect on our operations and financial performance. With our expansion through acquisition into foreign markets, the management and integration risks associated with our acquisitions will be larger. Additional risks arising out of our operations in foreign countries include those associated with currency exchange rates, new and different legal and regulatory requirements, and language and cultural differences.
BUSINESS MODEL
United States. Our objective is to be the preferred supplier of office products to business customers of all sizes by outperforming our competitors at all levels -- to "out-national" our national competitors and "out-local" our local competitors. To achieve this, our business model is designed to take maximum advantage of both our centralized national capabilities and our local presence in major markets across the country. We manage centrally where it is efficient and cost effective to do so or where there is value to our customers in nationwide consistency, and we manage locally where it is responsive to local market needs and opportunities or local customer requirements.
The large majority of our U.S. distribution centers are linked through a common computer system with our headquarters and with our other distribution centers. This integrated distribution network enables us to provide next-day consistent delivery of virtually the entire range of products offered in our full-line catalog, at agreed-upon prices and levels of service, to all of our large business customers and approximately 70% of orders to our small and medium-sized business customers throughout the country. It also facilitates the delivery of consistent products, pricing, service, and reporting to our many national account customers. In addition, it enables us to centralize certain administrative, logistical, and other management functions, thereby reducing operating costs. For example, we are able to centrally monitor inventory levels and forecast future demand for items stocked at our distribution centers. As a result, the responsibility for rebuying our most frequently ordered items is now a centralized function. This has reduced our inventory restocking costs and improved our annual inventory turn rate. Since the product overlap between our contract stationer and direct marketing businesses is high, centralized rebuying for
both channels has resulted in economies of scale. We plan to continue converting recently and newly acquired distribution centers to this common system.
Our merchandising activities are centralized, including product selection; catalog preparation; and vendor selection, management, and evaluation. Sales training, marketing programs, activity-based cost management programs, accounting, logistics, and human resources management are other functions that are primarily or totally managed centrally and can benefit from economies of scale as we grow. The provision of customer service which is both responsive and cost effective is another important element of our business model, requiring an appropriate balance between centralization and local autonomy. We provide customer service at each distribution center to handle location-specific matters, and we operate centralized call centers which enter customer orders and respond to customer inquiries about product alternatives, order status, billing, and other matters. We have centralized call centers at Peru and Ottawa, Illinois, to handle inbound orders and inquiries for our contract stationer and direct marketing customers. During 1997, we plan to open another call center at Bristol, Virginia. Our integrated computer system enables us to organize certain customer support functions in a centralized, cost-effective manner without compromising customer focus.
A substantial part of our internal capital spending is intended to make our operations more efficient and cost effective. In addition to seeking to improve the efficiency of our individual distribution centers, our logistics experts focus on the efficiency of our distribution network as a whole in each of the countries where we operate. Stocking strategies, distribution center configurations, and delivery methods are all being designed to serve customers better while minimizing our investment and controlling our operating costs. We began a major initiative in the U.S. to consolidate the order fulfillment operations of our direct marketing business with those of our contract stationer business. We closed two (of four) stand-alone direct marketing distribution centers and moved their order fulfillment operations into five of our major contract stationer distribution centers across the country. Eventually, we expect to use approximately 15 of our distribution centers to fill orders for our direct marketing customers in the United States. Our steps to date have increased the next-day delivery coverage of our direct marketing operations and reduced our overall occupancy and delivery costs (as a percent of sales).
We believe that a local distribution center presence is important to many of our customers and can provide a competitive advantage within a specific metropolitan area. While national accounts are coordinated centrally, our sales force is distributed across our national network and supervised locally. Each distribution center is a profit center; its general manager is responsible for local account targeting, pricing, and servicing; distribution center productivity; sales management; and location-specific or customer-specific products and services, alliances, and promotions. In each local market, our business model draws on the local market knowledge of our management team and sales representatives to develop and offer customized services -- from stocking customer-unique products to special reporting and delivery services.
Our business model is data intensive. Through our activity-based cost management system ("ABCM"), we measure our costs by activity, and then by customer and by product. ABCM facilitates cost comparisons across all distribution centers so that "best practices" can be identified at one location and replicated at all locations where appropriate. The ABCM system enables us to directly attribute over 90% of our actual costs to specific customer-related activities. Other important measurements which we make on an ongoing basis include on-time delivery, order accuracy and completeness, supplier performance by location, customer satisfaction, associate satisfaction, and key process stability and capability. We believe that these measurement systems, including ABCM, provide us with a competitive advantage.
International. In each of the foreign countries where we have an extensive system of distribution centers, currently Australia and Canada, we plan to apply the major elements of our domestic business model: to link each of the facilities via computer, offer similar products across the entire system, serve the full range of customers from each facility, and centralize a variety of functions where it is efficient and cost effective to do so, while performing certain other functions locally. We completed upgrades to our distribution center and computer system in the United Kingdom to accommodate additional volume growth in that country. We have also purchased land and started designing a new and more efficient distribution facility for Toronto, Ontario, Canada.
PRODUCTS
Our net sales by product category through all distribution channels, expressed as a percentage of our total net sales, during each of the last three years were as follows:
__________ (1) Includes, among many other products, pens, staples, file folders, binders, office papers, envelopes, tablets, calculators, and computer-related products (2) Includes desks, chairs, file cabinets, computer stations, and furniture accessories (3) Includes lunchroom supplies, janitorial supplies, and special items, including promotional products
SALES AND MARKETING
Electronic Commerce. As part of our overall program of providing expanded opportunities for electronic data interchange with our large business customers, we developed and offer a CD-ROM version of our annual full-line catalog. Interactive features of the CD-ROM catalog provide customers, by computer, the same information on each item as the printed version of the catalog. The features also permit a customer to view complementary items, see prices specific to that customer, and order electronically.
We have also recently developed and offer Internet '97 ("I-97"), an Internet-based ordering system that allows customers to order our complete range of products "on-line." I-97 provides customers with unlimited levels of security and authorizations to ensure that each order has the proper approval. Features of I-97 include: unlimited, multi-tiered approvals; user-customized security; credit card capabilities; a variety of reporting options; and true EDI capabilities. To use I-97, customers only need access to the Internet and browser software such as Netscape Navigator or Microsoft Internet Explorer.
Electronic data interchange between our mainframe computer and our customers' systems, local-area-network-based electronic commerce systems, and the systems mentioned above accounted for approximately 20% of our inbound order volume in 1996.
OPERATIONS
Logistics and systems support. Advanced information technology is critical in a nationwide distribution business involving thousands of different items under tight time constraints. We were a pioneer in the use of computer systems to facilitate this process. We have developed and use customized software applications to carry out or assist in performing a great variety of business functions. These functions include, among many others: order entry; order processing; receiving, storing, and "picking" inventory; routing delivery vehicles; measuring productivity and transaction quality; generating customized reports; preparing accounting statements; and tracking product and customer data.
To provide additional domestic systems flexibility and capacity, we are converting part of our principal computer network in the U.S. from a mainframe to a distributed system. The system employs a new software applications package developed by and licensed from an outside contractor which specializes in distribution companies. The software is a combination of pre-existing modules and custom applications developed specifically for us and tailored to our needs.
Order entry. We offer a wide range of order entry options to our large business customers. Customers wishing to place an order with us in the U.S. may: (i) give the order in person to a sales associate; (ii) convey the order by telephone or facsimile transmission to a customer service representative at its local distribution center or, using a toll-free number, at a central customer service facility; or (iii) enter the order by using a personal computer or other computer interface, including on-line ordering using I-97.
Ease in ordering is also a key component of customer service in our direct marketing operations. To facilitate order placement and entry, we maintain 24-hour, seven-day-a-week, toll-free numbers for ordering by telephone or fax. These lines are linked to our central order reception and customer service centers in Illinois, where customer service associates receive orders and enter them into a computerized order processing system. A credit check is performed electronically and, if credit is approved, each order is transmitted to the appropriate distribution center based on a pre-programmed ordering system which uses customer zip codes and other factors to assure rapid fulfillment and delivery.
Stocking, order fulfillment, and delivery. Our distribution centers receive and store inventory and fill customer orders. Most of our distribution centers regularly stock all of the core items offered in our full-line catalog. Our stocking strategy at each distribution center is designed to ensure our ability to provide delivery of all catalog items at the lowest cost on a next-day basis to large business customers and on a next- or second-day basis to our other customers. Our stocking strategy reflects a rigorous economic tradeoff between carrying a particular item in inventory at a particular distribution center or sourcing it from a nearby distribution center or wholesaler.
Orders received during the day are picked, packed, and assembled using a variety of automated equipment. This is performed at the appropriate distribution center for delivery the following day to customers within the next-day service area for that center. Depending on population density and other logistical factors, the next-day service area of a given distribution center can cover an area of up to a 400-mile radius from the distribution center. Based on an optimized route structure allowing us to schedule specific vehicles and delivery times, our software can determine the optimal sequence in which orders are to be loaded onto delivery vehicles. The vehicles may be either owned or leased by us or operated by common or contract carriers, depending on the cost effectiveness of each alternative.
Procurement. Our computer system monitors inventory levels and forecasts demand for each item which we stock and recommends the timing and amount of future purchases. We have centralized the rebuying function for those items most frequently ordered by our customers, which we believe contributes to more efficient purchasing decisions and lower procurement costs. Our inventory turns increased to 10.0 in 1996, from 9.7 in 1995 and 8.7 in 1994.
To assist in making vendor selection decisions and in reducing inventory cost, we have developed and now use a detailed vendor management and evaluation program. This program enables our central purchasing staff to measure the performance of each of our vendors in a number of areas and then evaluate them based upon such measurements.
Foreign operations. Our operations outside the U.S. are structured similarly to our domestic operations. Within each country, distribution facilities are integrated on the same computer systems. This allows us to take advantage of efficiencies and centralize many common administrative processes. It also positions our foreign operations to serve large corporate customers on a coordinated national basis.
EMPLOYEES
At December 31, 1996, we had a worldwide total of approximately 8,500 full- and part-time employees ("associates"). Of these, approximately 3,200 were employed primarily in marketing and sales, order processing, and customer service; approximately 2,800 were located at our distribution centers in inventory receipt and storage, order filling, and as drivers of delivery vehicles; and approximately 2,500 were employed in other operations, management, and administration. Part-time employees supplement our associates in customer service and order filling during those periods each day when there are surges in incoming calls or outgoing orders.
COMPETITION
We face a highly competitive environment in each of the office products distribution channels in which we operate. Competition is based principally on price, service, and customer relationships. We are one of the premier distributors of office products through the contract stationer channel in the United States, Canada, and Australia. We are the third largest distributor of office products through the direct marketing channel in the U.S., the second largest in the United Kingdom, and currently the only major distributor in Canada.
United States. In the contract stationer channel, the consolidation of the industry into a relatively small number of major publicly held participants, each seeking to establish a national distribution network similar to our own, is largely complete. A number of these participants, which include some of the major superstore companies, have grown at rapid rates, principally through the acquisition of local or regional contract stationers. Some of our competitors have greater financial resources and purchasing power than we do. The contract stationer operations of the major superstore companies also benefit from their national advertising and franchising programs. We also compete with the smaller local and regional contract stationers, many of which have long-standing customer relationships.
Our superior ability, to date, to link together our network of domestic distribution centers, including those which we have recently acquired, into an integrated national system enables us to deliver consistent
products, prices, and service across all locations of multi-site customers. We believe that this gives us a competitive advantage with this important segment of business customers.
In the direct marketing channel, we compete for the small and medium-sized business customer and the home office customer primarily against two larger direct marketers of office products as well as the office products superstores and small retail dealers. We believe the synergies between our direct marketing business and our contract stationer business are beginning to give us a competitive advantage, in terms of service and cost, over the other direct marketing companies. We also believe that we have a competitive advantage over the superstores and small retail dealers in that our customers are able to avoid the time and cost associated with store visits and the need to transport purchased merchandise from the store to their offices. As part of the blurring of the lines between distribution channels which has occurred in recent years, several of the major contract stationers and office products superstores now employ direct marketing techniques to expand their customer bases.
As we indicated earlier, some large companies are starting to use integrated procurement systems to purchase office products and office-related services and supplies. Other companies that provide office-related services and supplies, including document management; printing services; industrial supplies; and information technology and computer supplies, are providing some competition today and will likely provide increased competition in the future.
International. In Canada, we are one of the largest contract stationers and we have a strong position in retail. Through its long operating history in Canada, Grand & Toy has developed excellent name recognition. In the contract stationer channel in Canada, we compete with several major companies who have made acquisitions in Canada similar to the consolidation process in the U.S., in addition to numerous local competitors. Two of the U.S.-based superstores have retail operations in Canada. We are the only sizable direct marketer of office products in Canada.
In Australia, we compete with two of the large U.S.-based office products distribution companies in the contract stationer channel and with many local distributors. We do not currently have direct marketing operations in Australia.
In the United Kingdom, we currently do business in the direct marketing channel, where we compete with a larger direct marketing company, with companies in the retail channel, and with contract stationers.
ENVIRONMENTAL MATTERS
We are subject to federal and state and local laws, regulations, and ordinances which govern activities which might have adverse environmental effects, such as discharges to air and water, as well as the handling and storage of hazardous wastes. None of our facilities typically engage in activities or generate discharges of the types generally covered by these laws and regulations. We believe we are in substantial compliance with all such applicable laws and regulations.
We are also subject to federal laws and regulations which impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals, or other forms of environmental damage, including those which might have occurred prior to our ownership of particular sites. We are currently not aware of any environmental conditions at any of the sites which we operate which, individually or in the aggregate, would be likely to have a material adverse effect on our financial condition or results of operations. Nevertheless, there can be no assurance that any such environmental conditions in the future will not have a material adverse effect on our financial condition or results of operations.
ITEM 2.

ITEM 2. PROPERTIES
Our corporate headquarters, together with our Chicago metropolitan area distribution center, is located in a combined facility that we own at 800 W. Bryn Mawr Avenue in Itasca, Illinois, a suburb northwest of Chicago. As of February 28, 1997, we operated 65 distribution centers, including the suburban Chicago distribution center, at the following locations:
AUSTRALIA CANADA (4) --------- ------ Adelaide, South Australia Calgary, Alberta Brisbane, Queensland Fredericton, New Brunswick Canberra, New South Wales Montreal, Quebec Kalgoorlie, Western Australia North Bay, Ontario Melbourne, Victoria (1) Ottawa, Ontario Perth, Western Australia Toronto, Ontario (1) Sydney, New South Wales (Don Mills and Bermondsey) Vancouver, British Columbia UNITED KINGDOM Winnipeg, Manitoba -------------- Doncaster, England (2)
UNITED STATES -------------
Albuquerque, New Mexico Milwaukee (New Berlin), Wisconsin Atlanta (Smyrna), Georgia Minneapolis/St. Paul Boise, Idaho (Golden Valley), Minnesota Boston (Billerica), Massachusetts Nashville, Tennessee Burlington, Vermont New Castle, Delaware Butte, Montana New York (Carlstadt, New Jersey), Chicago (Itasca), Illinois New York Cleveland (Independence), Ohio Norfolk (Chesapeake), Virginia Columbus, Ohio Oklahoma City, Oklahoma Dallas (Garland), Texas Orlando, Florida Denver, Colorado Philadelphia (Bristol), Pennsylvania Detroit (Warren), Michigan Phoenix, Arizona Grand Rapids, Michigan Pittsburgh, Pennsylvania Greenville, South Carolina Portland, Maine Hartford (Naugatuck), Connecticut Portland, Oregon (1) Honolulu, Hawaii (3) Reno, Nevada Houston, Texas Rochester, New York Jacksonville, Florida St. Louis, Missouri Kalamazoo, Michigan Salt Lake City, Utah Kansas City, Missouri San Francisco (Menlo Park), Las Vegas, Nevada California Los Angeles (Garden Grove), California Seattle (Kent), Washington (1) Louisville, Kentucky Spokane, Washington Miami, Florida Washington (Elkridge, Maryland), DC
(1) Consists of two facilities.
(2) Land subject to a long leasehold, with a lease term in excess of 50 years.
(3) Consists of three owned facilities located on the islands of Oahu, Maui, and Hawaii and two leased facilities on the islands of Oahu and Kauai. We also lease and operate four retail stores on the island of Oahu.
(4) With the acquisition of Grand & Toy, we also operate approximately 70 retail stores throughout Canada.
The majority of our distribution centers are leased with lease terms expiring between 1997 and 2006. We own facilities in Arizona, California, Georgia, Hawaii, Illinois, Kansas, Massachusetts, Michigan, Pennsylvania, and Washington and in Canada and the United Kingdom.
In addition to the distribution centers listed above, we lease office space in Ottawa, Illinois, and own a facility in Peru, Illinois, where we operate central telephone calling centers for incoming orders and customer service.
We own substantially all equipment used in our facilities.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any legal or administrative proceedings that it believes could have, either individually or in the aggregate, a material adverse effect on its business or financial condition.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth quarter of 1996.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the New York Stock Exchange. The high and low sales prices for our common stock are presented in Note 11, "Quarterly Results of Operations (unaudited)," of the Notes to Financial Statements in our 1996 Annual Report and is incorporated herein by reference. At February 28, 1997, the approximate number of common shareholders of record was 426.
We intend to retain our earnings to finance our growth and for general corporate purposes and, therefore, do not anticipate paying cash dividends in the foreseeable future.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data for the Company for each of the five years 1996 through 1992. The selected historical income statement data and balance sheet data as of December 31, 1996, 1995, 1994, and 1993, have been derived from our audited financial statements. The selected historical balance sheet data as of December 31, 1992, have been derived from our unaudited financial statements which, in the opinion of management, includes all adjustments (consisting solely of normal recurring adjustments, except as noted on the following page) necessary to present fairly the financial information as of that date. The data set forth below should be read in conjunction with, and are qualified in their entirety by reference to, the disclosures in Items 7 and 8 of this Form 10-K.
(1) During 1996, we acquired 19 businesses. The acquisitions were accounted for as purchases. Data for the year ended December 31, 1996, include the results of operations of the acquired businesses for the periods subsequent to their acquisitions.
(2) During 1995, we acquired 10 businesses. The acquisitions were accounted for as purchases. Data for the year ended December 31, 1995, include the results of operations of the acquired businesses for the periods subsequent to their acquisitions.
(3) Effective April 30, 1994, we acquired the direct marketing office products distribution business of Reliable. Also during 1994 we acquired two other businesses. The acquisitions were accounted for as purchases. Data for the year ended December 31, 1994, include the results of operations of the acquired businesses subsequent to their acquisitions.
(4) Excludes our wholesale office products distribution operations that were sold in early 1992.
(5) Effective January 1, 1992, we adopted Financial Accounting Standards Board requirements to accrue postretirement benefit costs.
(6) Information concerning pro forma earnings per share is included in Note 2, "Summary of Significant Accounting Policies" of the Notes to Financial Statements in our 1996 Annual Report and is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of operations are presented under the caption "Financial Review" in our 1996 Annual Report and are incorporated herein by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and related notes, together with the report of independent public accountants, are presented in our 1996 Annual Report and are incorporated herein by reference.
The unaudited income statement for the three months ended December 31, 1996, is presented in our Fact Book for the fourth quarter of 1996 and is incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The directors and nominees for directors of the Company are presented under the caption "Election of Directors" in the Company's proxy statement. This information is incorporated herein by reference.
(1) Executive Vice President and General Manager, Office Products Distribution, Boise Cascade Corporation.
(2) Vice President, Operations, Office Products Distribution, Boise Cascade Corporation.
(3) Vice President, Finance, Office Products Distribution, Boise Cascade Corporation.
(4) Vice President, Corporate Planning and Development, and Corporate Secretary, Boise Cascade Corporation.
Prior to being elected an officer of the Company, Peter G. Danis Jr. served as Executive Vice President and General Manager, Office Products Distribution Division of Boise Cascade Corporation since 1993. Prior thereto, Mr. Danis served in various capacities at Boise Cascade Corporation including as Executive Vice President, Office Products and Building Products from 1989 to 1993; Senior Vice President from 1981 to 1989; and Vice President, Office Products from 1977 to 1981.
Prior to being elected an officer of the Company, Christopher C. Milliken served as a Region Manager of Boise Cascade Office Products Distribution Division since 1991. He has served in various positions with the Division since 1977.
Prior to being elected an officer of the Company, Carol B. Moerdyk served as Vice President and Assistant to the General Manager of Office Products of Boise Cascade Corporation since 1992. Previously, Ms. Moerdyk served in various capacities at Boise Cascade Corporation including Vice President, Corporate Planning and Development from 1990 to 1992 and Corporate Planning and Development Director from 1986 to 1990.
Richard L. Black became President of The Reliable Corporation, a wholly-owned subsidiary of the Company, in 1994. Mr. Black served as Vice President, Marketing of Rivertown Trading Company from 1992 to 1994 and, prior thereto, as Vice President, New Business Development of Fingerhut Corporation, both direct marketing companies.
Lawrence E. Beeson served as Vice President, Marketing of Hallmark Cards, Inc. from 1990 to March 1995 and as Senior Vice President, Marketing for KFC Corp., a subsidiary of Pepsico Inc., prior thereto.
Prior to being elected an officer of the Company, Darrell R. Elfeldt served as Finance and Distribution Director of Boise Cascade Office Products Distribution Division since 1993. He has served in various positions with the division since 1980.
Prior to being elected an officer of the Company, John A. Love served as the Human Resources Director of Boise Cascade Office Products Distribution Division since 1978.
Prior to being elected an officer of the Company, Stephen M. Thompson served as a Region Manager of Boise Cascade Office Products Distribution Division since 1976, where he has served with the Division since 1970.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Information concerning compensation of our executive officers for the year ended December 31, 1996, is presented under the caption "Compensation Tables" in the Company's proxy statement. This information is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Information concerning the security ownership of certain beneficial owners as of December 31, 1996, is set forth under the caption "Beneficial Ownership" in the Company's proxy statement and is incorporated herein by reference.
(b) Information concerning security ownership of management as of December 31, 1996, is set forth under the caption "Security Ownership of Directors and Executive Officers" in the Company's proxy statement and is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions during 1996 is set forth under the caption "Related Party Transactions" in the Company's proxy statement and in Note 5, "Transactions With Boise Cascade Corporation," of the Notes to Financial Statements in our 1996 Annual Report and are incorporated herein by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form 10-K for Boise Cascade Office Products Corporation:
(1) Financial Statements
(i) The Income Statement for the three months ended December 31, 1996, is incorporated herein by reference from our Fact Book for the fourth quarter of 1996.
(ii) The Financial Statements, the Notes to Financial Statements, and the Report of Independent Public Accountants listed below are incorporated herein by reference from our 1996 Annual Report.
- Balance Sheets as of December 31, 1996 and 1995. - Statements of Income for the years ended December 31, 1996, 1995, and 1994. - Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994. - Statements of Shareholders' Equity for the years ended December 31, 1996, 1995, and 1994. - Notes to Financial Statements - Report of Independent Public Accountants
(2) Financial Statement Schedules.
None required.
(3) Exhibits.
A list of the exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
No Form 8-K's were filed during the last quarter covered by this report.
(c) Exhibits.
See Index to Exhibits.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BOISE CASCADE OFFICE PRODUCTS CORPORATION
By /s/Peter G. Danis Jr. --------------------------- Peter G. Danis Jr. President and Chief Executive Officer Dated: March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 24, 1997.
SIGNATURE CAPACITY
(i) Principal Executive Officer:
/s/ Peter G. Danis Jr. President and ------------------------- Chief Executive Officer PETER G. DANIS JR.
(ii) Principal Financial Officer:
/s/ Carol B. Moerdyk Senior Vice President and ------------------------- Chief Financial Officer CAROL B. MOERDYK
(iii) Principal Accounting Officer:
/s/ Darrell R. Elfeldt Vice President and Controller ------------------------- DARRELL R. ELFELDT
(iv) Directors:
/s/ Peter G. Danis Jr. ------------------------- PETER G. DANIS JR.
/s/ George J. Harad ------------------------- GEORGE J. HARAD
/s/ John B. Carley ------------------------- JOHN B. CARLEY
/s/ James G. Connelly III ------------------------- JAMES G. CONNELLY III
/s/ Theodore Crumley ------------------------- THEODORE CRUMLEY
/s/ A. William Reynolds ------------------------- A. WILLIAM REYNOLDS
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our report dated January 28, 1997, included or incorporated by reference in this Form 10-K for the year ended December 31, 1996, into Boise Cascade Office Products Corporation's registration statement on Form S-8 (File No. 33-96348); registration statement on Form S-8 (File No. 33-96512); registration statement on Form S-8 (file No. 333-1132); registration statement on Form S-8 (File No. 333-1134); registration statement on Form S-8 (File No. 333-1152); and post-effective amendment No. 1 to registration statement on Form S-1 (File No. 333-3660).
Arthur Andersen LLP
Boise, Idaho March 24, 1997
BOISE CASCADE OFFICE PRODUCTS CORPORATION INDEX TO EXHIBITS Filed With the Annual Report on Form 10-K for the Year Ended December 31, 1996
(1) Exhibits 2.1 and 4.1 were filed under the same exhibit numbers in the Company's Amendment No. 1 to the Registration Statement on Form S-1 filed on March 28, 1995, and are incorporated herein by reference.
(2) Exhibits 3.1, 10.2, 10.4, 10.5, 10.6, 10.9, 10.10, 10.11, 10.12, 10.13, 10.16, 10.17, and 10.19 were filed under the same exhibit numbers in the Company's Registration Statement on Form S-1 filed on February 22, 1995, and are incorporated herein by reference.
(3) Exhibits 3.2, 10.1, 10.14, 10.20, and 10.21 were filed under the same exhibit numbers in the Company's 1995 Annual Report on Form 10-K and are incorporated herein by reference.
(4) The Credit Agreement dated March 30, 1995, was filed as Exhibit 10.1 in the Company's Amendment No. 1 to the Registration Statement on Form S-1 filed on March 28, 1995. The Form of Amendment No. 1 to Credit Agreement dated January 12, 1996, was filed as Exhibit 4.2 in the Company's 1995 Annual Report on Form 10-K. The Amended and Restated Credit Agreement dated June 5, 1996, was filed as Exhibit 4 in the Company's Current Report on Form 8-K filed on June 10, 1996. Each of the documents referenced in this footnote is incorporated herein by reference.
(5) Exhibit 10.3 was filed under the same exhibit number in the Company's Amendment No. 1 to the Registration Statement on Form S-1 filed on March 28, 1995, and is incorporated herein by reference. The Company has been granted an order of confidential treatment with respect to a portion of Exhibit 10.3.
(6) The Key Executive Stock Option Plan, as amended through April 23, 1996, was filed as Exhibit 10.1 in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and is incorporated herein by reference.
(7) The Form of Deferred Compensation and Benefits Trust dated January 30, 1996, was filed as Exhibit 10 in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, and is incorporated herein by reference.