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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 1-6024
WOLVERINE WORLD WIDE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-1185150
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
9341 COURTLAND DRIVE, ROCKFORD, MICHIGAN 49351
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (616) 866-5500
Securities registered pursuant to Section 12(b)
of the Securities Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $1 Par Value New York Stock Exchange/Pacific Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Number of shares outstanding of the registrant's Common Stock, $1 par value
(excluding shares of treasury stock) as of March 1, 1999: 41,002,243.
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant based on the closing price on the New York
Stock Exchange on March 1, 1999: $408,751,360.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the registrant's annual
stockholders' meeting to be held April 23, 1999, are incorporated by
reference into Part III of this report.
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PART I
ITEM 1. BUSINESS.
GENERAL.
Wolverine World Wide, Inc. (the "Company") is a leading designer,
manufacturer and marketer of a broad line of quality comfortable casual
shoes, rugged outdoor and work footwear, and constructed slippers and
moccasins. The Company, a Delaware corporation, is the successor of a 1969
reorganization of a Michigan corporation of the same name, originally
organized in 1906, which in turn was the successor of a footwear business
established in Grand Rapids, Michigan in 1883.
Consumers around the world purchased more than 38 million pairs of
Company branded footwear during fiscal 1998, making the Company a global
leader among U.S. shoe companies in the marketing of branded casual, work
and outdoor footwear. The Company's products generally feature
contemporary styling with patented technologies designed to provide maximum
comfort. The products are marketed throughout the world under widely
recognized brand names, including HUSH PUPPIES[REGISTERED],
WOLVERINE[REGISTERED], BATES[REGISTERED], CATERPILLAR[REGISTERED],
COLEMAN[REGISTERED], HY-TEST[REGISTERED], MERRELL[REGISTERED] and HARLEY-
DAVIDSON[REGISTERED]. The Company believes that its primary competitive
strengths are its well recognized brand names, broad range of comfortable
footwear, patented comfort technologies, numerous distribution channels and
diversified manufacturing and sourcing base.
The Company's footwear is sold under a variety of brand names designed
to appeal to most consumers of casual, work and outdoor footwear at
numerous price points. The Company's footwear products are organized under
three operating divisions: (i) the Wolverine Footwear Group, focusing on
work, outdoor and lifestyle boots and shoes, (ii) the
CATERPILLAR[REGISTERED] Footwear Group, focusing on the
CATERPILLAR[REGISTERED] product line of work and lifestyle footwear and
(iii) the Casual Footwear Group, focusing on HUSH PUPPIES[REGISTERED] brand
comfortable casual shoes, slippers and moccasins under the HUSH
PUPPIES[REGISTERED] brand and other private labels for third party
retailers and children's footwear under various Wolverine brands. The
Company's Global Operations Group is responsible for manufacturing and
sourcing in support of the various Wolverine brands. The Company's
footwear is distributed domestically to over 65,000 department store,
footwear chain, catalog, specialty retailer and mass merchant accounts, as
well as 56 Company-owned retail stores. The Company's products are
distributed worldwide in 134 markets through licensees and distributors.
The Company, through its Wolverine Leathers Division, operates a
Company-owned tannery and is one of the premier tanners of quality pigskin
leather for the shoe and leather goods industries. The pigskin leather
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tanned by the Company is used in a significant portion of the footwear
manufactured and sold by the Company, and is also sold to Company licensees
and other domestic and foreign manufacturers of shoes. In addition,
Wolverine Procurement, Inc. both performs skinning operations and
purchases raw pigskins which it then cures and sells to the Wolverine
Leathers Division and to outside customers for processing into pigskin
leather products.
In October 1997, the Company acquired certain assets of the
MERRELL[REGISTERED] outdoor footwear business from the Outdoor Division of
Sports Holdings Corp. The acquisition included substantially all the
assets of the MERRELL[REGISTERED] hiking and rugged outdoor footwear
business and global rights to the MERRELL[REGISTERED] trademark. In
addition, on March 12, 1998, the Company was granted the rights to
manufacture and market footwear, including motorcycle, casual, fashion,
work and western footwear under the HARLEY-DAVIDSON[REGISTERED] brand. The
MERRELL[REGISTERED] and HARLEY-DAVIDSON[REGISTERED] footwear businesses are
operated as part of the Wolverine Footwear Group.
For financial information regarding the Company, see the consolidated
financial statements of the Company, which are attached as Appendix A to
this Form 10-K. Effective January 4, 1998, the Company adopted Statement
of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. The Company has one reportable
operating segment, Branded Footwear. The "Branded Footwear" segment is
engaged in the manufacture and marketing of branded footwear, including
casual shoes, slippers, moccasins, dress shoes, boots, uniform shoes and
work shoes. The Company's "Other Businesses" category consists of the
Company's retail stores, tannery and pigskin procurement operations.
Financial information regarding the Company's operating segments can be
found in Note J to the consolidated financial statements of the Company,
which are attached as Appendix A to this Form 10-K.
BRANDED FOOTWEAR.
The Company manufacturers and markets a broad range of footwear styles
including shoes, boots and sandals, under many recognizable brand names
including HUSH PUPPIES[REGISTERED], WOLVERINE[REGISTERED],
BATES[REGISTERED], CATERPILLAR[REGISTERED], COLEMAN[REGISTERED], HY-
TEST[REGISTERED], MERRELL[REGISTERED] and HARLEY-DAVIDSON[REGISTERED]. The
Company through its wholly owned subsidiary, Wolverine Slipper Group, Inc.,
also manufactures constructed slippers and moccasins and markets them under
the HUSH PUPPIES[REGISTERED] trademark and on a private label basis. The
Company combines quality materials and skilled workmanship from around the
world to produce footwear according to its specifications at both
Company-owned and independent manufacturing facilities.
The Company's three branded footwear operating divisions are described
below.
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1. THE WOLVERINE FOOTWEAR GROUP. The Wolverine Footwear
Group is one of the world's largest work and outdoor footwear
companies, encompassing multiple brands designed with performance
and comfort features to serve a variety of work, outdoor and
lifestyle functions. The WOLVERINE[REGISTERED] brand, which has
been in existence for 116 years, is identified with performance
and quality and markets work and outdoor footwear in two
categories: (i) work and industrial footwear; and (ii) rugged
outdoor and sport footwear. The Wolverine Footwear Group also
includes the BATES[REGISTERED] and HY-TEST[REGISTERED] product
lines. These products feature patented technologies and designs,
such as the DURASHOCKS[REGISTERED] and DURASHOCKS SR
systems, innovative technologies with patent applications pending
such as WOLVERINE FUSION and the use of quality
materials and components. The Wolverine Footwear Group also
includes the HARLEY-DAVIDSON[REGISTERED] Footwear Division, which
markets motorcycle, casual, fashion, work and western footwear
through the HARLEY-DAVIDSON[REGISTERED] product line. In
addition, the Wolverine Footwear Group markets hiking and outdoor
shoes, boots and sandals through the MERRELL[REGISTERED] and
COLEMAN[REGISTERED] product lines.
WOLVERINE[REGISTERED] WORK AND INDUSTRIAL FOOTWEAR.
The Company believes the WOLVERINE[REGISTERED] brand has
built its reputation by making quality, durable and
comfortable work boots and shoes. The development of
DURASHOCKS[REGISTERED] technology allowed the
WOLVERINE[REGISTERED] brand to introduce a broad line
of work footwear with a focus on comfort and the new
WOLVERINE FUSION technology is expected to
continue the Company's tradition of comfortable work
and industrial footwear. The WOLVERINE[REGISTERED]
Work product line features work boots and shoes,
including steel toe boots and shoes, targeting male
and female industrial and farm workers.
WOLVERINE[REGISTERED] RUGGED OUTDOOR AND SPORT
FOOTWEAR. The WOLVERINE[REGISTERED] rugged outdoor and
sport product lines incorporate DURASHOCKS[REGISTERED],
DURASHOCKS SR and WOLVERINE
FUSION technology and other comfort features
into products designed for rugged outdoor use. This
broad product line targets active lifestyles and
includes all-terrain sport boots, walking shoes, trail
hikers, rugged casuals and outdoor sandals. The
Company also produces boots that target hunters,
fishermen and other active outdoor users. Warmth,
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waterproofing and comfort are achieved through the use
of GORE-TEX[REGISTERED], THINSULATE[REGISTERED] and the
Company's performance leathers and patented
DURASHOCKS[REGISTERED] technologies. In addition, the
Company produces WOLVERINE[REGISTERED] brand rubber
footwear, boots and waders for hunters, fishermen and
farm workers.
BATES UNIFORM FOOTWEAR. The Company's Bates Uniform
Footwear Division is an industry leader in supplying footwear
to military and civilian uniform users. The Bates Uniform
Footwear Division utilizes DURASHOCKS[REGISTERED], DURASHOCKS
SR, COOL TECH and other proprietary
comfort technologies in the design of its military-style boots
and oxfords including the BATES[REGISTERED] ENFORCER
SERIES footwear line. The Bates Uniform Footwear
Division currently contracts with the U.S. Department of
Defense and other governmental organizations to supply
military footwear. Civilian uniform uses include police,
security, postal, restaurant and other industrial occupations.
Bates Uniform Footwear Division products are also distributed
through specialty retailers and catalogs.
HY-TEST. The HY-TEST[REGISTERED] product line
consists primarily of high quality work boots and shoes
designed to protect male and female industrial workers
from foot injuries. HY-TEST[REGISTERED] footwear
incorporates various safety features into its product
lines, including steel toe footwear and electrical
hazard, static dissipating and conductive footwear to
protect against hazards of the workplace. In addition,
HY-TEST[REGISTERED] brand footwear incorporates
features such as FOOTRESTS[REGISTERED] comfort
technology to provide comfort together with safety for
working men and women. HY-TEST[REGISTERED] footwear is
distributed primarily through a network of mobile truck
"Shoemobiles" providing direct sales to workers at
industrial facilities.
HARLEY-DAVIDSON FOOTWEAR DIVISION. On March 12,
1998 the Company entered into a License Agreement with
the Harley-Davidson Motor Company granting the Company
the right to manufacture, market, distribute and sell
footwear under the HARLEY-DAVIDSON[REGISTERED] brand in
most countries of the world. The Company's rights to
the HARLEY-DAVIDSON[REGISTERED] brand became effective
in North America, South America and Central America in
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1998, and become effective in the remaining areas of
the world at various times in the future, such that by
January 1, 2000, the Company will have the exclusive
right to produce and distribute HARLEY-
DAVIDSON[REGISTERED] footwear in most countries of the
world. HARLEY-DAVIDSON[REGISTERED] brand footwear
products include motorcycle, casual, fashion, work and
western footwear for men, women and children. HARLEY-
DAVIDSON[REGISTERED] footwear is sold primarily through
a network of 600 independent HARLEY-
DAVIDSON[REGISTERED] dealerships and through department
stores and specialty retailers.
WOLVERINE OUTDOOR DIVISION. The Wolverine Outdoor
Division consists of the MERRELL[REGISTERED] and
COLEMAN[REGISTERED] footwear brands.
- MERRELL. The MERRELL[REGISTERED] product line,
acquired by the Company in October 1997, consists
primarily of technical hiking and rugged outdoor
footwear designed for backpacking, day hiking and
rugged every day use. MERRELL[REGISTERED] products are
sold primarily through department stores, specialty retailers
and catalogs.
- COLEMAN. The Company has been granted the
exclusive worldwide rights to manufacture, market,
distribute and sell outdoor footwear under the
COLEMAN[REGISTERED] brand. COLEMAN[REGISTERED] brand
footwear products include lightweight hiking boots,
rubber footgear and outdoor sandals, which are sold
primarily at value-oriented prices through specialty
retailers and mass merchants.
2. THE CATERPILLAR[REGISTERED] FOOTWEAR GROUP. The
CATERPILLAR[REGISTERED] Footwear Group began operating as a
separate division of the Company in 1997. Previously, the
CATERPILLAR[REGISTERED] Footwear Group operated as part of the
Wolverine Footwear Group. The Company has been granted the
exclusive worldwide rights to manufacture, market and distribute
footwear under the CATERPILLAR[REGISTERED], CAT &
DESIGN[REGISTERED], WALKING MACHINES[REGISTERED] and other
trademarks. The Company believes the association with
CATERPILLAR[REGISTERED] equipment enhances the reputation of its
boots for quality, ruggedness and durability.
CATERPILLAR[REGISTERED] brand footwear products include work
boots and shoes, sport boots, rugged casuals and lifestyle
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footwear. In addition, in 1997 the Company introduced
CAT[REGISTERED] Marine Power footwear, designed for industrial
and recreational marine uses. CATERPILLAR[REGISTERED] brand
products target work and industrial users and active lifestyle
users.
3. THE CASUAL FOOTWEAR GROUP. The Casual Footwear Group
consists of the Hush Puppies Company, Wolverine Slipper Group,
Inc., and the Children's Footwear Group. Each of these groups
are described below.
THE HUSH PUPPIES COMPANY. The Company believes that the 40-
year heritage of the HUSH PUPPIES[REGISTERED] brand as a pioneer
of comfortable casual shoes positions the brand to capitalize on
the global trend toward more casual workplace and leisure attire.
The diverse product line includes numerous styles for both work
and casual wear and utilizes comfort features, such as the
COMFORT CURVE[REGISTERED] sole and patented BOUNCE[REGISTERED]
technology. HUSH PUPPIES[REGISTERED] shoes are sold to men, women
and children in over 80 countries.
WOLVERINE SLIPPER GROUP, INC. Through its wholly owned
subsidiary, Wolverine Slipper Group, Inc., the Company is one of
the leading suppliers of constructed slippers in the United
States. Prior to 1999 these activities were operated as a
division of the Company. The styling of Wolverine Slipper
Group's footwear reflects consumer demand for the "rugged indoor"
look by using natural leathers such as moosehide, shearling and
suede in constructed slipper and indoor and outdoor moccasin
designs. Wolverine Slipper Group, Inc., designs and manufactures
constructed slippers and moccasins on a private label basis
according to customer specifications. Such products are
manufactured for leading United States retailers and catalogs,
such as Nordstrom, J.C. Penney, L.L. Bean, Eddie Bauer and Lands'
End. In addition to its traditional line of private label
slippers, the Wolverine Slipper Group also manufactures HUSH
PUPPIES[REGISTERED] brand slippers.
THE CHILDREN'S FOOTWEAR GROUP. The Children's Footwear
Group was formed in 1998 to consolidate the Company's rapidly
growing HUSH PUPPIES[REGISTERED] and CATERPILLAR[REGISTERED]
children's footwear business with the recently started children's
footwear programs for slippers and the COLEMAN[REGISTERED] and
Harley-Davidison[REGISTERED] brands. The Company believes the
consolidation will make possible the dedicated marketing,
sourcing and sales programs that are necessary to extend the
Company's high-profile, global brands into the children's
footwear market segment.
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OTHER BUSINESSES.
In addition to the manufacture and marketing of the Company's
footwear products that are reported in the Branded Footwear segment, the
Company also (i) operates a Company-owned pigskin tannery through its
Wolverine Leathers Division, (ii) purchases and cures raw pigskins for sale
to various customers through its wholly owned subsidiary Wolverine
Procurement, Inc. and (iii) operates 56 domestic retail footwear stores.
1. THE WOLVERINE LEATHERS DIVISION. The Wolverine
Leathers Division produces pigskin leathers primarily for use in
the footwear industry. The Wolverine Leathers Division is the
largest domestic tanner of pigskin. WOLVERINE
LEATHERS[REGISTERED] brand products are manufactured in the
Company's pigskin tannery located in Rockford, Michigan. The
Company believes these leathers offer superior performance and
cost advantages over cowhide leathers. The Company's waterproof,
stain resistant and washable leathers are featured in many of the
Company's domestic footwear lines and many products offered by
the Company's international licensees and distributors.
2. WOLVERINE PROCUREMENT, INC. Wolverine Procurement,
Inc. both performs skinning operations and purchases raw
pigskins from third parties, which it then cures and sells to
the Wolverine Leathers Division and to outside customers for
processing into pigskin leather products.
3. RETAIL STORES. The Company operated 56 domestic retail
shoe stores as of March 1, 1999, under two formats, consisting of
factory outlet stores and one mall-based speciality store. The
Company expects the scope of its retail operations to remain
relatively consistent in the foreseeable future. Most of the
Company's 55 factory outlet stores carry a large selection of
first quality Company branded footwear at a discount to
conventional retail prices. The regional mall-based full
service, full price HUSH PUPPIES[REGISTERED] Specialty Store
features a broad selection of men's and women's HUSH
PUPPIES[REGISTERED] brand footwear and other Company brands and
is used by the Company to test new styles and merchandising
strategies.
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MARKETING.
The Company's overall marketing strategy is to develop brand-specific
plans and related promotional materials for the United States market to
foster a differentiated and globally consistent image for each of the
Company's core footwear brands. Each footwear brand group within the
Company has its own marketing personnel who develop the marketing strategy
for products within that group. Domestic marketing campaigns target both
the Company's retail accounts and consumers, and strive to increase overall
brand awareness for the Company's branded products. The Company's
advertisements typically emphasize fashion, comfort, quality, durability,
functionality and other performance and lifestyle aspects of the Company's
footwear. Components of the brand-specific plans include print, radio and
television advertising, in-store point of purchase displays, promotional
materials, and sales and technical assistance.
The Company's footwear brand groups provide its international
licensees and distributors with creative direction and materials to convey
consistent messages and brand images. Examples of marketing assistance
provided by the Company to its licensees and distributors are (i) direction
concerning the categories of footwear to be promoted, (ii) photography and
layouts, (iii) broadcast advertising, including commercials and film
footage, (iv) point of purchase presentation specifications, blueprints and
packaging, (v) sales materials, and (vi) consulting concerning retail store
layout and design. The Company believes its footwear brand names provide
a competitive advantage. In support of this belief, the Company has
increased its expenditures on marketing and promotion to support the
position of its products and enhance brand awareness.
DOMESTIC SALES AND DISTRIBUTION.
The Company uses a wide variety of distribution channels to distribute
its branded footwear products. To meet the diverse needs of its broad
customer base, the Company uses four primary distribution strategies.
- Traditional wholesale distribution is used to service department
stores (such as J.C. Penney, Sears and Nordstrom), large footwear
chains (such as Famous Footwear), specialty retailers, catalog and
independent retailers, and military outlets. A dedicated sales
force and customer service team, advertising and point of purchase
support, and in-stock inventories are used to service these
accounts.
- Volume direct programs provide branded and private label footwear
at competitive prices with limited marketing support. These
programs service major retail, mail order, mass merchants and
government customers.
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- First cost agreements are primarily utilized to furnish brands
licensed by the Company to mass merchants on a royalty basis.
- A network of independent SHOEMOBILE distributors is
primarily used to distribute and sell HY-TEST[REGISTERED] brand
products. The Company also distributes additional products
through this independent distributor network.
In addition to its wholesale activities, the Company also operates
domestic retail shoe stores as described above.
A broad distribution base insulates the Company from dependence on any
one customer. No customer of the Company accounted for more than 10% of
the Company's net sales and other operating income in fiscal 1998.
Footwear sales are seasonal with significant increases in sales
experienced during the Christmas, Easter and back-to-school periods. Due
to this seasonal nature of footwear sales, the Company experiences some
fluctuation in the levels of working capital. The Company provides working
capital for such fluctuations through internal financing and through a
revolving credit agreement that the Company has in place. The Company
expects the seasonal sales pattern to continue in future years.
INTERNATIONAL OPERATIONS AND GLOBAL LICENSING.
The Company records revenue from foreign sources through a combination
of sales of branded footwear products generated from the Company's wholly
owned operations in Canada, the United Kingdom and Russia, and from royalty
income through a network of independent licensees and distributors. The
Company's owned operations include Hush Puppies UK, Ltd., Merrell Europe
Ltd., Hush Puppies Canada and Wolverine CIS, Ltd. In addition, the
Company's owned operations include Wolverine Russia, Inc., which provides
operational support, marketing assistance and consulting services to promote
the sale of both HUSH PUPPIES[REGISTERED] and CATERPILLAR[REGISTERED] brand
footwear in Russia. The Company's owned operations are located in markets
where the Company believes it can gain a strategic advantage.
The Company derives royalty income from sales of Company footwear
bearing the HUSH PUPPIES[REGISTERED], WOLVERINE[REGISTERED],
BATES[REGISTERED], HY-TEST[REGISTERED], MERRELL[REGISTERED] and other
trademarks by independent distributors and licensees. The Company also
derives royalty income from sales of footwear bearing the
CATERPILLAR[REGISTERED], COLEMAN[REGISTERED] and HARLEY-
DAVIDSON[REGISTERED] trademarks through foreign distributors. License and
distribution arrangements enable the Company to develop international
markets without the capital commitment required to maintain inventories or
fund localized marketing programs. In fiscal 1998, the Company's wholly
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owned foreign operations, together with the Company's foreign licensees and
distributors sold an estimated 17 million pairs of footwear, a slight
decrease from approximately 18 million pairs sold in fiscal 1997.
The Company continues to develop a global network of licensees and
distributors to market its footwear brands. The Company assists in
designing products that are appropriate to each foreign market but are
consistent with the global brand position. The licensees and distributors
then purchase goods from either the Company or authorized third-party manu-
facturers pursuant to a distribution agreement or manufacture branded
products consistent with Company standards pursuant to a license agreement.
Distributors and licensees are responsible for independently marketing and
distributing Company branded products in their respective territories, with
general oversight provided by the Company.
MANUFACTURING AND SOURCING.
Although approximately eighty percent of the Company's global branded
footwear product line is purchased or sourced from third parties, the
remainder is produced at Company-owned facilities. The Company's footwear
is manufactured at Company-owned facilities in several domestic and certain
affiliated foreign facilities located in Michigan, Arkansas, Missouri, New
York, the Caribbean Basin, Costa Rica, Mexico and Canada. The Company has
implemented a "twin plant" concept whereby a majority of the labor
intensive cutting and fitting construction of the "upper" portion of shoes
and boots is performed at the Company's facilities in the Caribbean Basin,
Costa Rica and Mexico and the technology intensive construction, or
"bottoming," is performed at the Company's domestic and Canadian
facilities.
The Company's factories each have the flexibility to produce a variety
of footwear, and depart from the industry's historic practice of dedicating
a given facility to production of specific footwear products. This
flexibility allows the Company to quickly respond to changes in market
preference and demand. The Company produces various products for both men
and women in most of its domestic and international facilities, allowing
the Company to respond to both market and customer-specific demand.
The Company sources certain footwear from a variety of foreign
manufacturing facilities in the Asia-Pacific region, Central and South
America, India and Europe. The Company maintains technical offices in the
Asia-Pacific region and in Europe to facilitate the sourcing and
importation of quality footwear. The Company has established guidelines
for each of its third-party manufacturers in order to monitor product
quality, labor practices and financial viability. In addition, the Company
has developed its "Engagement Criteria for Partners & Sources" to require
that its domestic and foreign manufacturers, licensees and distributors use
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ethical business standards, comply with all applicable health and safety
laws and regulations, are committed to environmentally safe practices,
treat employees fairly with respect to wages, benefits and working
conditions, and do not use child or prison labor.
The Company's domestic manufacturing operations allow the Company to
(i) reduce its lead time, enabling it to quickly respond to market demand
and reduce inventory risk, (ii) lower freight and shipping costs, and (iii)
closely monitor product quality. The Company's foreign manufacturing
strategy allows the Company to (i) benefit from lower labor costs,
(ii) source the highest quality raw materials from around the world, and
(iii) avoid additional capital expenditures necessary for factories and
equipment. The Company believes that its overall global manufacturing
strategy gives the Company maximum flexibility to properly balance the need
for timely shipments, high quality products and competitive pricing.
The Company owns and operates through its Wolverine Leathers Division,
a pigskin tannery, which is one of the premier tanners of quality leather
for the footwear industry. The Company and its licensees receive virtually
all of their pigskin requirements from the tannery. The Company believes
the tannery provides a strategic advantage for the Company by producing
leather using proprietary technology at prices below those available from
other sources. The continued operation of this tannery is important to the
Company's competitive position in the footwear industry.
The Company's principal required raw material is quality leather,
which it purchases primarily from a select group of domestic suppliers,
including the Company's tannery. The global availability of shearling and
cowhide leather eliminates any reliance by the Company upon a sole
supplier. The Company currently purchases the vast majority of the raw
pigskins used in a significant portion of its tannery operations from two
domestic sources. One of these sources has been a reliable and consistent
supplier for over 30 years. The Company purchases all of its other raw
materials and component parts from a variety of sources, none of which is
believed by the Company to be a dominant supplier.
The Company is subject to the normal risks of doing business abroad
due to its international operations, including the risk of expropriation,
acts of war, political disturbances and similar events, the imposition of
trade barriers, quotas and tariffs and loss of most favored nation trading
status. With respect to international sourcing activities, management
believes that over a period of time, it could arrange adequate alternative
sources of supply for the products currently obtained from its foreign
suppliers. A sustained disruption of such sources of supply could,
particularly on a short-term basis, have an adverse impact on the Company's
operations.
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TRADEMARKS, LICENSES AND PATENTS.
The Company holds a number of registered and common law trademarks
that identify its branded footwear products. The trademarks that are most
widely used by the Company include HUSH PUPPIES[REGISTERED],
WOLVERINE[REGISTERED], BATES[REGISTERED], WOLVERINE FUSION,
DURASHOCKS[REGISTERED], HIDDEN TRACKS[REGISTERED], BOUNCE AND
DESIGN[REGISTERED], COMFORT CURVE[REGISTERED], TRU-STITCH[REGISTERED],
SIOUX MOX[REGISTERED], HY-TEST[REGISTERED], MERRELL[REGISTERED] and
FOOTRESTS[REGISTERED]. The Company has obtained the right to manufacture,
market and distribute footwear throughout most countries of the world under
the CATERPILLAR[REGISTERED] HARLEY-DAVIDSON[REGISTERED] and
COLEMAN[REGISTERED] trademarks pursuant to license agreements with the
respective trademark owners. All of the Company's licenses are long term
and extend for four or more years with renewal options. The licenses are
subject to customary approval, performance and default provisions. Pigskin
leather produced by the Company's Wolverine Leather Division is sold under
the trademarks WOLVERINE LEATHERS [REGISTERED], WEATHER TIGHT[REGISTERED]
and ALL SEASON WEATHER LEATHERS.
The Company believes that its products are identified by consumers by
its trademarks and that its trademarks are valuable assets. The Company is
not aware of any infringing uses or any prior claims of ownership of its
trademarks that could materially affect its current business. It is the
policy of the Company to pursue registration of its primary marks whenever
possible and to vigorously defend its trademarks against infringement or
other threats to the greatest extent practicable under the laws of the
United States and other countries. The Company also holds several patents,
copyrights and various other proprietary rights. The Company protects all
of its proprietary rights to the greatest extent practicable under
applicable law.
ORDER BACKLOG.
At March 27, 1999, the Company had a backlog of orders of
approximately $181 million compared with a backlog of approximately
$189 million at March 28, 1998. While orders in backlog are subject to
cancellation by customers, the Company has not experienced significant
cancellation of orders in the past and the Company expects that
substantially all of the orders will be shipped in fiscal 1999. The
backlog at a particular time is affected by a number of factors, including
seasonality and the scheduling of the manufacture and shipment of products.
-13-
Accordingly, a comparison of backlog from period to period is not
necessarily meaningful and may not be indicative of eventual actual
shipments.
COMPETITION.
The Company's footwear lines are manufactured and marketed in a highly
competitive environment. The Company competes with numerous manufacturers
(domestic and foreign) and importers of footwear, some of which are larger
and have greater resources than the Company. The Company's major
competitors for its brands of footwear are located in the United States.
The Company has at least ten major competitors in connection with the sale
of its work shoes and boots, at least eight major competitors in connection
with the sale of its sport boots, and at least fifteen major competitors in
connection with the sale of its casual and dress shoes. Product
performance and quality, including technological improvements, product
identity, competitive pricing, and the ability to adapt to style changes
are all important elements of competition in the footwear markets served by
the Company. The footwear industry in general is subject to changes in
consumer preferences. The Company strives to meet competition and maintain
its competitive position through promotion of brand awareness,
manufacturing efficiencies, its tannery operations, and the style, comfort
and value of its products. Future sales by the Company will be affected by
its continued ability to sell its products at competitive prices and to
meet shifts in consumer preferences.
Because of the lack of reliable published statistics, the Company is
unable to state with certainty its position in the footwear industry.
Market shares in the footwear industry are highly fragmented and no one
company has a dominant market position; however, the Company believes it is
among the largest domestic manufacturers of footwear.
RESEARCH AND DEVELOPMENT.
In addition to normal and recurring product development, design and
styling activities, the Company engages in research and development related
to new and improved materials for use in its branded footwear and other
products and in the development and adaptation of new production
techniques. The Company's continuing relationship with the Biomechanics
Evaluation Laboratory at Michigan State University has led to specific
biomechanical design concepts, such as BOUNCE[REGISTERED],
DURASHOCKS[REGISTERED] and HIDDEN TRACKS[REGISTERED] comfort technologies,
that have been incorporated in the Company's footwear. While the Company
continues to be a leading developer of footwear innovations, research and
development costs do not represent a material portion of operating
expenses.
-14-
ENVIRONMENTAL MATTERS.
Compliance with federal, state and local provisions which have been
enacted or adopted regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment
have not had, nor are they expected to have, any material effect on the
capital expenditures, earnings or competitive position of the Company. The
Company uses and generates, and in the past has used and generated, certain
substances and wastes that are regulated or may be deemed hazardous under
certain federal, state and local regulations with respect to the
environment. The Company from time to time works with federal, state and
local agencies to resolve cleanup issues at various waste sites or other
regulatory issues.
EMPLOYEES.
As of January 2, 1999, the Company had approximately 6,600 domestic
and foreign production, office and sales employees. Approximately 1,731
employees were covered by eight union contracts expiring at various dates
through February 11, 2002. The Company has experienced no work stoppages
since 1990. The Company presently considers its employee relations to be
good.
-15-
ITEM 2. PROPERTIES.
The Company owned or leased the following offices and manufacturing
facilities as of January 2, 1999:
OWNED SQUARE
LOCATION TYPE OF FACILITY LEASED FOOTAGE
Rockford, MI Administration/Sales Owned 193,300
Jonesboro, AR Administration/Sales Leased 5,680
Malone, NY Administration/Sales Owned 11,718
New York, NY Administration/Sales Leased 3,811
Montecatine Terme, Italy Administration/Sales Leased 2,800
St. Laurent, Quebec, Canada Administration/Sales Leased 2,800
Saint-Sauveur-des-Monts, Quebec, Canada Administration/Sales Leased 1,500
Taipei, Taiwan Administration/Sales Leased 2,800
Chungli, Taiwan Administration/Sales Leased 2,800
Tai Chung, Taiwan Administration/Sales Leased 3,000
Leicester, England, United Kingdom Administration/Sales Leased 13,250
Bristol, England, United Kingdom Administration/Sales Leased 2,200
Moscow, Russia Administration/Sales Leased 3,800
TOTAL ADMINISTRATION/SALES 249,459
Rockford, MI Tannery Owned 160,000
Des Moines, IA Procurement Owned 6,200
Dyersburg, TN Procurement Leased 12,000
Durant, OK Procurement Leased 12,900
Dennison, KS Procurement Leased 1,855
TOTAL TANNERY AND PROCUREMENT 192,955
Jonesboro, AR Manufacturing Leased 79,197
Jonesboro, AR Manufacturing Owned 11,680
Monette, AR Manufacturing Owned 18,030
Rockford, MI Manufacturing Owned 20,833
Rockford, MI Manufacturing Owned 19,624
Rockford, MI Manufacturing Owned 7,790
Big Rapids, MI Manufacturing Owned 77,626
Kirksville, MO Manufacturing Owned 104,000
Malone, NY Manufacturing Owned 90,664
Malone, NY Manufacturing Owned 37,596
Malone, NY Manufacturing Owned 8,100
Malone, NY Manufacturing Owned 27,125
-16-
Bombay, NY Manufacturing Owned 58,980
Monterrey, MX Manufacturing Leased 60,000
Aquadilla, Puerto Rico Manufacturing Leased 62,100
San Pedro, Dominican Republic Manufacturing Leased 65,111
Santo Domingo, Dominican Republic Manufacturing Leased 54,332
Alexandria, Ontario, Canada Manufacturing Owned 28,000
Cartago, Costa Rica Manufacturing Leased 88,308
TOTAL MANUFACTURING 919,096
Jonesboro, AR Warehouse Leased 2,000
Jonesboro, AR Warehouse Leased 19,500
Jonesboro, AR Warehouse Owned 13,500
Jonesboro, AR Warehouse Owned 15,478
Walnut Ridge, AR Warehouse Leased 2,000
Rockford, MI Warehouse Owned 304,278
Rockford, MI Warehouse Owned 93,140
Rockford, MI Warehouse Owned 75,000
Grand Rapids, MI Warehouse Leased 20,000
Cedar Springs, MI Warehouse Leased 32,900
Cedar Springs, MI Warehouse Leased 230,000
Big Rapids, MI Warehouse Owned 39,800
Howard City, MI Warehouse Leased 350,000
Malone, NY Warehouse Owned 115,211
Bombay, NY Warehouse Owned 26,000
St. Laurent, Quebec, Canada Warehouse Leased 33,000
Moscow, Russia Warehouse Leased 2,500
TOTAL WAREHOUSE 1,374,307
In addition, the Company operates its retail stores through leases
with various third-party landlords. The Company believes that its current
facilities are suitable and adequate to meet its anticipated needs for the
next twelve months.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in litigation and various legal matters
arising in the normal course of business, including certain environmental
compliance activities. The Company has considered facts that have been
ascertained and opinions of counsel handling these matters, and does not
believe the ultimate resolution of such proceedings will have a material
adverse effect on the Company's financial condition or results of
operations.
-17-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the
fiscal year covered by this report.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table lists the names and ages of the Executive Officers
of the Company as of the date of this Annual Report on Form 10-K, and the
positions presently held with the Company. The information provided below
the table lists the business experience of each such Executive Officer
during the past five years. All Executive Officers serve at the pleasure
of the Board of Directors of the Company, or if not appointed by the Board
of Directors, they serve at the pleasure of management.
NAME AGE POSITIONS HELD WITH THE COMPANY
---- --- -------------------------------
Geoffrey B. Bloom 57 Chief Executive Officer and Chairman
of the Board
John Deem 43 Executive Vice President, and President,
Casual Footwear Group
Steven M. Duffy 46 Executive Vice President and President,
Global Operations Group
V. Dean Estes 49 Vice President and President,
Wolverine Footwear Group
Stephen L. Gulis, Jr. 41 Executive Vice President, Chief Financial
Officer and Treasurer
Blake W. Krueger 45 Executive Vice President, General Counsel
and Secretary
Thomas P. Mundt 49 Vice President of Strategic Planning and
Corporate Communications
Timothy J. O'Donovan 53 Chief Operating Officer and President
Nicholas P. Ottenwess 36 Corporate Controller
Robert J. Sedrowski 49 Vice President of Human Resources
James D. Zwiers 31 Associate General Counsel and Assistant
Secretary
Geoffrey B. Bloom has served the Company as Chief Executive Officer
and Chairman of the Board since April 1996. From 1993 to 1996 he served
the Company as President and Chief Executive Officer. From 1987 to 1993 he
served the Company as President and Chief Operating Officer.
-18-
John Deem has served the Company as Executive Vice President and
President, Casual Footwear Group since July 1998. From 1996 to July 1998,
he served as Vice President of Global Product Development. From 1992 to
1996 he served as Executive Vice President of Product Development and
Marketing at Dexter Shoe Company.
Steven M. Duffy has served the Company as an Executive Vice President
since April 1996 and is President of the Company's Global Operations Group.
From 1993 to 1996 he served the Company as a Vice President. From 1989 to
April 1993 he served the Company in various senior manufacturing positions.
V. Dean Estes has served the Company as a Vice President since 1995.
Mr. Estes is also President of the Wolverine Footwear Group. Since he
joined the Company in 1975, Mr. Estes has served in various positions
relating to the sales, marketing and product development functions of the
Company's work boot and shoe and related businesses.
Stephen L. Gulis, Jr., has served the Company as Executive Vice
President, Chief Financial Officer and Treasurer since April 1996. From
1994 to April 1996 he served the Company as Vice President and Chief
Financial Officer. From 1993 to 1994 he served the Company as Vice
President of Finance and Corporate Controller, and from 1986 to 1993 he was
the Vice President of Administration and Controller for The Hush Puppies
Company.
Blake W. Krueger has served the Company as Executive Vice President,
General Counsel and Secretary since April 1996. From 1993 to April 1996 he
served the Company as General Counsel and Secretary. From 1985 to 1996 he
was a partner of the law firm of Warner Norcross & Judd LLP.
Thomas P. Mundt has served the Company as Vice President of Strategic
Planning and Corporate Communications since April 1996. From December 1993
to April 1996, he served the Company as Vice President of Strategic
Planning and Treasurer. From 1988 to 1993 he served in various financial
and planning positions at Sears Roebuck & Co., including Vice President
Planning, Coldwell Banker's Real Estate Group and Director of Corporate
Planning for Sears Roebuck & Co.
Timothy J. O'Donovan has served the Company as Chief Operating Officer
and President since April 1996. From 1982 to April 1996 he served the
Company as Executive Vice President.
Nicholas P. Ottenwess has served as Corporate Controller of the
Company since September 1997. From 1993 to September 1997 he served as
Vice President of Finance & Administration for The Hush Puppies Company.
-19-
Robert J. Sedrowski has served the Company as Vice President of Human
Resources since October 1993. From 1990 to 1993 he served as Director of
Human Resources for the Company.
James D. Zwiers has served the Company as Associate General Counsel
and Assistant Secretary since January 1998. From 1995 to 1998 he was an
attorney with the law firm of Warner Norcross & Judd LLP. From 1992 to
1995 he attended the University of Michigan Law School. From 1990 to 1992
he was a Certified Public Accountant at BDO Siedman LLP.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Wolverine World Wide, Inc. common stock is traded on the New York
Stock Exchange and the Pacific Exchange, Inc. under the symbol "WWW." The
following table shows the high and low sales prices by calendar quarter for
1998 and 1997 as reported on the New York Stock Exchange. The prices shown
below have been retroactively adjusted to reflect the three-for-two stock
split announced in April 1997. The number of stockholders of record of
common stock on March 1, 1999, was 2,230.
1998 1997
---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
1st quarter 30 15/16 20 7/8 26 1/4 18 9/16
2nd quarter 29 1/4 19 7/8 27 5/8 22 11/16
3rd quarter 22 7/8 8 1/16 31 1/8 21 5/8
4th quarter 15 8 5/8 26 3/8 19 7/16
CASH DIVIDENDS DECLARED PER SHARE:
1998 1997
---- ----
1st quarter $.0275 $.0217
2nd quarter .0275 .0217
3rd quarter .0275 .0217
4th quarter .0275 .0217
-20-
Cash dividends declared per share for 1997 have been retroactively ad-
justed to reflect the three-for-two stock split announced in April 1997.
Dividends of $.03 were declared for the first quarter of fiscal 1999.
On December 8, 1998, the Company issued 6.50% Senior Notes of the
Company due on December 8, 2008, in the aggregate principal amount of
$75,000,000 (the "Notes"). The Notes were sold to a limited number of
institutional investors for cash pursuant to a private placement
exemption from registration.
ITEM 6. SELECTED FINANCIAL DATA.
FIVE-YEAR OPERATING AND FINANCIAL SUMMARY
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
SUMMARY OF OPERATIONS
Net sales and other
operating income $669,329 $665,125 $511,029 $413,957 $387,534
Net earnings 41,651 41,539 32,856 24,067 16,598
Per share of common stock:
Net earnings:
Basic $ 1.00 $ 1.00 $ .81 $ .66 $ .48
Diluted .97 .96 .76 .62 .45
Cash dividends .11 .09 .07 .06 .05
FINANCIAL POSITION AT YEAR END
Total assets $527,478 $449,663 $361,598 $283,554 $231,582
Long-term debt 161,650 94,264 41,309 30,678 43,786
NOTES TO FIVE-YEAR OPERATING AND FINANCIAL SUMMARY
1. This summary should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto, which are
attached as Appendix A to this Form 10-K.
2. Basic earnings per share are based on the weighted average number of
shares of common stock outstanding during the year after adjustment
for nonvested common stock. Diluted earnings per share assume the
exercise of dilutive stock options and the vesting of all common
stock.
-21-
3. On April 17, 1997, July 11, 1996, April 19, 1995, and March 10, 1994,
the Company announced three-for-two stock splits on shares of common
stock outstanding at May 2, 1997, July 26, 1996, May 1, 1995, and
March 21, 1994, respectively. All share and per share data have been
retroactively adjusted for the increased shares resulting from these
stock splits.
4. Cash dividends per share represent the rates paid by the Company on
the shares outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OPERATIONS
RESULTS OF OPERATIONS 1998 COMPARED TO 1997
Net sales and other operating income increased 0.6% to $669.3 million
in 1998 as compared to $665.1 million in 1997. The Company's branded footwear
businesses consist primarily of The Hush Puppies Company, the Wolverine
Footwear Group (comprised of WOLVERINE[REGISTERED], HY-TEST[REGISTERED],
MERRELL[REGISTERED], COLEMAN[REGISTERED], BATES[REGISTERED] and HARLEY-
DAVIDSON[REGISTERED] brands), the CATERPILLAR[REGISTERED] Footwear Group, and
the Wolverine Slipper Group and contributed a $10.1 million (1.7%) increase
in 1998 net sales and other operating income, while the Company's other
business units (Hush Puppies Retail Division and Wolverine Leathers Division)
reported a $5.9 million (7.7%) decline in net sales and other operating
income in 1998 compared to 1997.
The Hush Puppies Company reported a $29.8 million (13.0%) decline in
1998 net sales and other operating income, while the Wolverine Footwear
Group contributed $33.6 million (13.8%) of additional net sales and other
operating income in 1998 as compared to 1997. The Caterpillar Footwear
Group recorded a $1.8 million (2.8%) decrease in 1998 net sales and other
operating income compared to 1997. Net sales and other operating income of
the Wolverine Slipper Group decreased $1.9 million (4.5%) for 1998 compared
to the prior year. The Company acquired Sivan-Co. Limited in the fourth
quarter of 1998 and established a wholesale footwear operation in Russia
that contributed $5.0 million to net sales and other operating income in
1998.
The Hush Puppies U.S. wholesale operations' net sales and other
operating income decreased $12.7 million (9.3%) from the 1997 level
primarily as the result of decreased demand for the HUSH
PUPPIES[REGISTERED] Classics line. Net sales and other operating income
related to Hush Puppies international licensing increased $0.6 million
(5.3%) in 1998 over 1997 levels, highlighted by gains from licensees in
Japan, Mexico, Central America, India and Australia. The Hush Puppies U.K.
-22-
wholesale operation's 1998 net sales and other operating income decreased
$18.7 million (29.7%) from 1997 as a result of the planned reduction in the
specialty store segment of its distribution channel. Net sales and other
operating income in the Hush Puppies Canadian wholesale operation increased
$1.0 million (5.8%) in 1998 compared to 1997.
The Wolverine Footwear Group reported record net sales and other
operating income in 1998 despite unseasonably warm weather during the key
boot selling season. The Wolverine Boots and Shoes Division reported a $1.5
million (1.1%) increase in net sales and other operating income over 1997
as the fourth quarter introduction of the new WOLVERINE FUSION
durable comfort technology received favorable acceptance in the market
place. Net sales and other operating income related to international
licensing decreased $0.3 million (16.2%) in 1998 compared to the prior
year. Hy-Test Boots and Shoes experienced a $3.8 million (10.3%) decrease
in net sales and other operating income from 1997 primarily related to the
sale of five Company-owned distribution units over the last eighteen
months. The MERRELL[REGISTERED] outdoor footwear business, which was
acquired in the fourth quarter of 1997, contributed $23.9 million to the
increase in net sales and other operating income in 1998 over 1997, while
HARLEY-DAVIDSON[REGISTERED] brand footwear, manufactured under a license
acquired in 1998, began shipping in the third quarter of 1998 and
contributed $6.0 million to net sales and other operating income.
COLEMAN[REGISTERED] brand footgear contributed an additional $6.0 million
in net sales and other operating income to 1998 results as compared to
1997. Net sales and other operating income for BATES[REGISTERED] brand
footwear, including shipments to the United States Department of Defense,
remained flat in 1998 compared to 1997.
The CATERPILLAR[REGISTERED] Footwear Group recognized a $1.8 million
(2.8%) decrease in 1998 net sales and other operating income from the 1997
level. The U.S. wholesale operation reported a $3.7 million (8.3%) drop in
net sales and other operating income which was related primarily to
unfavorably warm weather in the fourth quarter of 1998 and difficult retail
market conditions. International royalty revenue continued to grow,
reflecting a $1.9 million (10.2%) increase over 1997 in net sales and other
operating income for 1998.
The Wolverine Slipper Group's net sales and other operating income
decreased $1.9 million (4.5%) compared to the level recorded in 1997. The
Wolverine Slipper Group, which historically ships the majority of its
products in the fourth quarter, was particularly hard hit by the second
unseasonably warm winter in a row.
The Hush Puppies Retail Division's net sales and other operating
income increased $1.2 million (3.4%) in 1998 compared to 1997; however,
same-store net sales declined 3.7%.
-23-
The Wolverine Leathers Division recorded a net sales and other
operating income decrease of $7.1 million (17.5%) in 1998 as compared to
1997. The decrease relates primarily to reduced demand for the HUSH
PUPPIES[REGISTERED] Classics suede product line. In addition, during 1998
the price of cowhide leather decreased making it a cost-effective alternative
to pigskin supplied by this business unit.
Gross margin as a percentage of net sales and other operating income
increased to 31.8% in 1998 from 30.7% in 1997. Gross margin dollars
increased $8.5 million (4.2%) in 1998 to $212.6 million as compared to
$204.1 million in 1997. The gross margin percentage of the branded
footwear businesses increased to 31.0% in 1998 from 30.4% in 1997. The Hush
Puppies Company reported a gross margin percentage in 1998 that was
comparable with 1997 as improved margins in the Hush Puppies U.K. wholesale
operation were offset by increased seasonal markdowns experienced by the
U.S. wholesale operation. The Wolverine Footwear Group experienced a 0.5
percentage point increase in gross margins in 1998 compared to 1997 due
primarily to the higher initial gross margins on MERRELL[REGISTERED] brand
products. The CATERPILLAR[REGISTERED] Footwear Group reported an improved
gross margin percentage in 1998 compared to 1997 as a result of higher
international royalties, which positively impacts the gross margin
percentage. Additionally, the Wolverine Slipper Group experienced a 3.3%
margin improvement primarily reflecting efficiencies resulting from the
1997 factory restructuring that was fully implemented in 1998 and the
elimination of unprofitable product lines. Gross margins for the other
business units increased from 33.0% in 1997 to 37.9% in 1998 primarily as
a result of improved labor efficiencies and lower raw material costs
experienced in the Wolverine Leathers Division.
Selling and administrative expenses as a percentage of net sales and
other operating income increased to 21.4% in 1998 from 20.6% in 1997 as
these costs increased $6.2 million (4.6%) to $143.4 million in 1998 from
$137.2 million in 1997. The increase in selling and administrative expenses
as a percentage of net sales and other operating income resulted primarily
from costs associated with the start up of the new 350,000 square foot
Howard City distribution center, increased media advertising spending on
the Company's core brands and increased investments in branded marketing
and operations related to various new business initiatives, including the
HARLEY-DAVIDSON[REGISTERED], MERRELL[REGISTERED] and COLEMAN[REGISTERED]
footwear brands and the Russian footwear distribution operations.
Net interest expense of $7.3 million was $2.7 million (58.7%) greater
in 1998 than the 1997 level of $4.6 million. The increase in net interest
expense for 1998 reflects additional borrowings on the Company's revolving
credit facility to support the repurchase of 2.3 million shares of the
Company's common stock during 1998, the 1997 fourth quarter acquisition of
the MERRELL[REGISTERED] outdoor footwear business and increased working
capital requirements in 1998 as compared to 1997.
-24-
The 1998 effective tax rate of 32.6% increased from 32.0% in 1997 as a
result of earnings from certain foreign subsidiaries, which are taxed
generally at lower rates, becoming a smaller percentage of total
consolidated earnings.
Net earnings of $41.7 million for 1998 reflect a 0.3% increase over
net earnings of $41.5 million reported for 1997. Diluted earnings per
share for 1998 were $0.97 compared to $0.96 in 1997. Basic earnings per
share of $1.00 were reported for both 1998 and 1997. Increased net earnings
are primarily a result of the items noted above.
RESULTS OF OPERATIONS 1997 COMPARED TO 1996
Net sales and other operating income increased 30.2% to $665.1 million
during 1997 from $511.0 million in 1996. The Company's branded footwear
businesses contributed a $133.5 million (29.3%) increase in 1997 net sales
and other operating income, while the Company's other business units
reported a $20.6 million (36.8%) increase in net sales and other operating
income in 1997 compared to 1996.
The Hush Puppies Company had a $59.4 million (35.0%) increase in 1997
net sales and other operating income, while the Wolverine Footwear Group
contributed $42.9 million (24.4%) of additional net sales and other
operating income in 1997 as compared to 1996. The CATERPILLAR[REGISTERED]
Footwear Group continued its strong growth rate showing a $24.9 million
(63.7%) increase in 1997 net sales and other operating income over 1996.
Net sales and other operating income of the Wolverine Slipper Group were
flat for 1997 as compared to the prior year.
The Hush Puppies U.S. wholesale operations' net sales and other
operating income increased $16.6 million (13.7%) over the 1996 level as a
result of the continued popularity of the HUSH PUPPIES[REGISTERED] Classics
product line. Net sales and other operating income related to Hush Puppies
international licensing increased $1.3 million (12.1%) in 1997 over 1996
levels, reflecting solid growth rates throughout the world. The Hush
Puppies U.K. wholesale operation, which was acquired at the end of the
third quarter of 1996, had a $36.4 million increase over its four months of
1996 operations.
The Wolverine Footwear Group continued its strong performance in 1997
as the Wolverine Boots and Shoes Division reported a $22.8 million (19.0%)
increase in net sales and other operating income over 1996. Hy-Test Boots
and Shoes, which was acquired near the end of the first quarter of 1996,
had a $12.1 million (49.4%) increase over its nine months of 1996
operations. BATES[REGISTERED] footwear net sales and other operating income
improved $4.3 million (14.8%) in 1997 over 1996 reflecting increased
penetration into military, uniform and export markets. The
-25-
MERRELL[REGISTERED] outdoor footwear business was acquired in the fourth
quarter of 1997 and contributed marginally to net sales and other operating
income.
The CATERPILLAR[REGISTERED] Footwear Group recognized a $24.9 million
(63.7%) increase in 1997 net sales and other operating income over 1996.
Domestically, the CAT[REGISTERED] footwear brand continued to gain momentum
as approximately 800 new specialty and department store customers were
added in 1997. Internationally, the brand continued to show solid growth
gains in the United Kingdom and Europe and accelerated its growth in the
Pacific Rim and Latin American regions.
The Wolverine Slipper Group's net sales and other operating income was
1.0% above the level recorded in 1996. Higher sales of HUSH
PUPPIES[REGISTERED] branded slippers offset lower sales of private branded
products in 1997.
The Hush Puppies Retail Division's net sales and other operating
income increased $6.1 million (20.2%) in 1997 with same-store net sales and
other operating income improving 7.9%.
The Wolverine Leathers Division recorded a significant net sales and
other operating income improvement of $14.5 million (56.1%) in 1997 with
both licensee and domestic accounts contributing to the increase. The 1997
performance represented the fourth consecutive year of net sales and other
operating income increases for the division. Strong demand for performance
leather and sueded products continued to drive volume increases.
Gross margin as a percentage of net sales and other operating income
increased to 30.7% in 1997 from 30.5% in 1996. The gross margin percentage
of the branded footwear businesses increased to 30.4% in 1997 from 29.9% in
1996. Gross margin dollars increased $48.3 million (31.0%) in 1997 to
$204.1 million as compared to $155.8 million in 1996. The gross margin
improvement was primarily generated by The Hush Puppies Company where the
Hush Puppies U.S. wholesale operation reported a gross margin improvement
of 4.3 percentage points in 1997 related primarily to initial pricing
improvements and manufacturing and sourcing efficiencies. The 1997
improvement in gross margin percentage by The Hush Puppies Company was
tempered to some degree by the increased net sales and other operating
income of the Hush Puppies U.K. wholesale operation, which operates at
lower gross margin levels than comparable U.S. operations. The Wolverine
and CATERPILLAR[REGISTERED] Footwear Groups experienced slightly lower
gross margin percentages in 1997 as compared to 1996 as a result of initial
investments required to position recent acquisitions and new products in
both domestic and international markets. The Wolverine Slipper Group
experienced lower gross margins as a percentage of net sales and other
operating income due to a decline in factory efficiencies. Gross margins
-26-
for the Company's other businesses declined slightly as a percentage of net
sales and other operating income as a result of strong growth of the
Wolverine Leathers Division which operates at lower gross margins than the
Hush Puppies' Retail Division.
Selling and administrative expenses as a percentage of net sales and
other operating income decreased to 20.6% in 1997 from 21.0% in 1996 as
these costs increased $29.7 million (27.6%) to $137.2 million in 1997 from
$107.5 million in 1996. Excluding the 1997 acquisition of the
MERRELL[REGISTERED] outdoor footwear business and the 1996 acquisitions of
Hy-Test and Hush Puppies (U.K.) Ltd., selling, advertising and distribution
costs increased $15.4 million or 21.4% during 1997. The reduction in
selling and administrative expenses as a percentage of net sales and other
operating income occurred despite increased investments in branded
marketing initiatives, significant information system up-grades, higher
profit sharing provisions and costs associated with employee performance
incentive plans.
Net interest expense of $4.6 million was $3.0 million greater in 1997
than the 1996 level of $1.6 million. The increase in net interest expense
for 1997 reflects additional borrowings on the revolving credit facility
over the 1996 level resulting from the 1997 acquisition of the
MERRELL[REGISTERED] outdoor footwear business and increased working capital
requirements associated with higher sales volume. Additionally, proceeds
from the November 1995 equity offering provided cash, which resulted in
lower average borrowings for the first quarter of 1996.
On September 24, 1997, the Company moved to strengthen its domestic
footwear businesses by closing three Arkansas women's shoe factories and
converting a New York slipper factory into a warehouse. These actions
resulted in a restructuring charge of $3.5 million in 1997. The
restructuring balanced the sourcing mix for HUSH PUPPIES[REGISTERED]
women's shoes and the Wolverine Slipper Group as more products will be
sourced internationally in future years.
The 1997 effective tax rate of 32.0% increased from 31.1% in 1996 as a
result of earnings from certain foreign subsidiaries, which are taxed
generally at lower rates, becoming a smaller percentage of total
consolidated earnings.
Net earnings of $41.5 million for 1997 reflect a 26.4% increase over
net earnings of $32.9 million reported for 1996. Diluted earnings per
share for 1997 were $0.96 compared to $0.76 in 1996. Basic earnings per
share of $1.00 and $0.81 were reported for 1997 and 1996, respectively.
Increased net earnings are primarily a result of the items noted above.
-27-
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $4.5 million in 1998
compared to $0.2 million in 1997. Cash of $54.7 in 1998 and $52.6 million
in 1997 was used to fund working capital requirements. Accounts receivable
of $152.1 million at January 2, 1999 reflect a $14.0 million (10.2%)
increase over the $138.1 million balance at January 3, 1998. Inventories
of $167.0 million at January 2, 1999 increased by $23.2 million (16.1%)
over the $143.8 million balance at January 3, 1998. More than half of the
increase in inventories is attributable to new business initiatives,
including the HARLEY-DAVIDSON[REGISTERED], MERRELL[REGISTERED] and
COLEMAN[REGISTERED] brand initiatives and the acquisition of a wholesale
footwear operation in Russia. As of year-end 1998, the Company's backlog
was 13.0% below the prior year's levels, and plans are in place to reduce
inventory levels to meet the Company's expected future customer demand.
Accounts payable of $14.9 million at January 2, 1999 reflects a $9.4 million
(38.6%) decrease from the $24.3 million balance at January 3, 1998. The
decrease in accounts payable is primarily attributable to the timing of 1998
year-end payments compared to 1997.
Additions to property, plant and equipment of $32.4 million in 1998
compare to $35.4 million reported in 1997. The replacement of legacy
information systems accounted for $15.1 million of the 1998 additions.
Other expenditures were related to the completion of the new corporate
business center, modernization of existing office buildings, expansion of
warehouse facilities and purchases of manufacturing equipment necessary to
upgrade the Company's footwear and leather manufacturing operations.
Depreciation and amortization expense of $13.0 million in 1998 compares to
$9.2 million in 1997. This increase resulted from the capital investments
noted above and the amortization of goodwill related to the 1998 and 1997
acquisitions discussed below.
The Company maintains short-term borrowing and commercial letter-of-
credit facilities of $68.4 million, of which $30.1 million and $37.0
million were outstanding at the end of 1998 and 1997, respectively. Long-
term debt, including current maturities of $161.7 million at the end of
1998 increased $67.4 million from the $94.2 million balance at the end of
1997. The increase in debt primarily resulted from seasonal working
capital requirements and the repurchase of 2.3 million shares of the
Company's common stock as discussed below.
Effective August 20, 1998, the Company's Board of Directors approved
and the Company executed a common stock repurchase program totalling 2.2
million shares of common stock. The primary purpose of this stock
repurchase program was to take advantage of the low market price relative
to management's assessment of the future prospects of the business and its
corresponding favorable effect on stockholder value. The total cost of
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shares repurchased under this program totaled $23.0 million, averaging
$10.25 per share. In addition, the Company repurchased in the ordinary
course of business 0.1 million shares of common stock at a total cost of
$1.9 million.
It is expected that continued Company growth will require increases in
capital funding over the next several years. In the first quarter of 1998,
the Company renegotiated its long-term revolving debt agreement and
increased the amount available under its domestic credit facilities from
$100 million to $150 million. The Company's subsidiary in the United
Kingdom has a $17.2 million, three-year variable rate revolving credit
agreement expiring in January 2000 to support its working capital
requirements. In addition, the Company issued $75 million of senior debt
during the fourth quarter of 1998 and used the proceeds to reduce
outstanding borrowings under its revolving credit facility. The combination
of credit facilities and cash flows from operations is expected to be
sufficient to meet future capital needs.
The Company declared dividends of $4.6 million in 1998, or $0.11 per
share, which reflects a 25.3% increase over the $3.7 million, or $0.09 per
share declared in 1997. Additionally, shares issued under stock incentive
plans provided cash of $4.1 million in 1998 compared to $8.9 million during
1997.
On September 29, 1998, the Company acquired certain assets and assumed
bank debt in the amount of $4.1 million of Sivan-Co Limited, a Russian
wholesale distributor of Hush Puppies and Caterpillar branded footwear, in
exchange for the forgiveness of $7.3 million in trade accounts receivable
that were due to the Company.
On October 17, 1997, the Company completed the purchase of
substantially all of the assets of the MERRELL[REGISTERED] outdoor footwear
business from the Outdoor Division of Sports Holdings Corp for $15.8
million and a $0.5 million note payable.
The current ratio at year-end was 6.7 to 1.0 in 1998 compared to 4.7
to 1.0 at year-end 1997. The Company's total debt to total capital ratio
increased to .36 to 1.0 in 1998 from .26 to 1.0 in 1997.
MARKET RISK DISCLOSURE
The Company has assets, liabilities and inventory purchase commitments
outside the United States that are subject to fluctuations in foreign
currency exchange rates. A substantial portion of inventory sourced from
foreign countries is purchased in U.S. dollars and is accordingly not
subject to exchange rate fluctuations. Similarly, revenues from products
sold in foreign countries under licensing and distribution arrangements are
-29-
denominated in U.S. dollars. As a result, the Company does not engage in
forward foreign exchange or other similar contracts to reduce its economic
exposure to changes in exchange rates as the associated risk is not
considered significant.
Assets and liabilities outside the United States are primarily located
in Canada, the United Kingdom and Russia. The Company's investment in
foreign subsidiaries with a functional currency other than the U.S. dollar
are generally considered long-term. Accordingly, the Company does not hedge
these net investments. Foreign currency risk related to the Company's
operations in Russia, whose economy is presently considered to be
hyperinflationary, is limited as substantially all transactions are
denominated in the U.S. dollar. As a result of current uncertainty
regarding the stability of the Russian economy, the Company is presently
limiting additional capital investment in Russia. At January 2, 1999, the
Company's net investment in Russia was approximately $14.0 million.
Because the Company markets, sells and licenses its products
throughout the world, it could be significantly affected by weak economic
conditions in foreign markets that could reduce demand for its products.
The Company is exposed to changes in interest rates primarily as a
result of its long-term debt requirements. The Company's interest rate risk
management objectives are to limit the effect of interest rate changes on
earnings and cash flows and to lower overall borrowing costs. To achieve
its objectives, the Company maintains a significant percentage of fixed-
rate debt (62% at January 2, 1999) to take advantage of lower relative
interest rates currently available and finances seasonal working capital
needs with variable-rate debt. The Company has not historically utilized
interest swap or similar hedging arrangements to fix interest rates, but in
1998 entered into an interest rate lock agreement to fix the interest rate
prior to the issuance of 6.5% senior notes in the amount of $75 million.
The contract was settled in 1998 and resulted in a prepayment of $2.2
million that is being amortized over the term of the senior notes. The
amortization of the prepayment creates an effective interest rate of 6.78%
on the senior debt.
The table that follows provides principal cash flows and related
interest rates of the Company's short and long-term debt by fiscal year of
maturity. For foreign currency-denominated debt, the information is
presented in U.S. dollar equivalents. Variable interest rates are based on
the weighted average rates of the portfolio at January 2, 1999.
-30-
- ----------------------------------------------------------------------------------------------------------
THERE- FAIR
(MILLIONS OF DOLLARS) 1999 2000 2001 2002 2003 AFTER TOTAL VALUE
- ----------------------------------------------------------------------------------------------------------
DENOMINATED IN U.S. DOLLARS:
Fixed Rate $4.8 $4.2 $4.3 $15.0 $15.0 $57.9 $101.2 $99.6
Average Interest Rate 7.8% 7.8% 7.8% 6.9% 6.9% 6.6%
Variable Rate $59.0 $59.0 $59.0
Average Interest Rate 6.7%
DENOMINATED IN CANADIAN DOLLARS:
Variable Rate $4.5 $4.5 $4.5
Average Interest Rate 7.1%
DENOMINATED IN BRITISH STERLING:
Variable Rate $1.8 $1.7 $3.5 $3.5
Average Interest Rate 7.0% 7.0%
The Company does not enter into contracts for speculative or trading
purposes, nor is it a party to any leveraged derivative instruments.
YEAR 2000 READINESS DISCLOSURE
The "Year 2000 Issue" is the result of computer programs that use two
digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This
situation could result in system failures or miscalculations causing
disruptions to operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar
normal business activities.
The Company has and continues to modify or replace portions of its
software so that its computer systems and equipment will function properly
with respect to dates in the year 2000 and thereafter. This modification
and replacement process is being implemented by the Company's Information
Systems Team under a general remediation strategy developed by an Executive
Oversight Committee, consisting of internal executive management, a member
of the Board of Directors and various other third parties. The Company
presently believes that with planned modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose significant
operational problems for its computer systems. However, if the Company
-31-
fails to complete modifications required to obtain Year 2000 compliance in
a timely manner or if significant suppliers or customers experience Year
2000 problems, the Year 2000 Issue could have a material adverse impact on
the operations and financial condition of the Company.
The Company has completed a thorough assessment of all its existing
information systems. A significant portion of the Company's Year 2000
Issues will be resolved by the installation of Year 2000 compliant
information systems. The new systems are designed to manage order
processing, warehousing and finance on a fully integrated enterprise-wide
basis (the "Base System"). Implementation of the Base System began in 1997
primarily in response to business demand and growth, although implementation
of the Base System will replace software that is not Year 2000 compliant as
an ancillary benefit. Year 2000 compliance for information systems not
replaced by the Base System, including manufacturing and raw material
inventory systems, will be addressed through a combination of reprogramming
and replacement. The Company is utilizing both internal and external
resources to replace, reprogram and test its information systems for Year
2000 modifications. The Company anticipates implementation of the Base
System to be substantially complete by mid-1999 and anticipates reprogramming
and replacement efforts for Year 2000 compliance in its information systems
to be substantially complete by the end of third quarter 1999, which is prior
to any anticipated impact on its operating systems, with the balance of
modifications to be completed on less critical systems during the fourth
quarter of 1999.
The Company has also completed a thorough assessment of all operating
systems and equipment containing computer microchips that may be Year 2000
sensitive (commonly referred to as "embedded chips"). With priority given
to critical items, the Company intends to test operating systems and
equipment containing embedded chips for Year 2000 compliance and to
reprogram or replace such equipment as appropriate. Company-owned
manufacturing systems are generally Year 2000 compliant and will not
require significant reprogramming or replacement. It is intended that Year
2000 modifications for critical operating systems and equipment will be
completed by mid-1999, with the modification or elimination of lower
priority systems and equipment to be completed during the third and fourth
quarters of 1999.
The Company has initiated formal communications with significant
suppliers and vendors to determine the extent to which the Company may be
vulnerable to a failure by any of these third parties to remediate their
own Year 2000 Issues. The Company has also received Year 2000
communications from substantially all its significant customers indicating
formal attention to Year 2000 Issues. Although the Company has not
received any specific indications that any significant suppliers, vendors
or customers will not be Year 2000 compliant, other companies are widely
-32-
resistant to providing any written or binding assurances that they will be
Year 2000 compliant given the scope and uncertainties relating to Year 2000
Issues. For this reason, the Company can provide no assurance that the
systems of suppliers, vendors or significant customers will be Year 2000
compliant or that the lack of Year 2000 compliance among suppliers, vendors
or significant customers could not have an adverse effect on the Company's
operations or financial condition.
To date, the Company has spent approximately $14.0 million for
implementation of the new Base System and estimates that total costs for
implementing the new Base System will approximate $20.0 million. The
Company has also spent approximately $0.7 million to date for additional
assessment, reprogramming, replacement and other Year 2000 compliance
issues not covered by implementation of the Base System and estimates that
total costs for such items will approximate $2.5 million. To the extent
these costs represent investment in new or upgraded technology with
definable value lasting beyond 2000 and Year 2000 compliance is merely an
ancillary benefit, the Company capitalizes and depreciates such assets over
their estimated useful lives. To the extent that Year 2000 costs do not
qualify as capital investments, the Company will expense such costs as
incurred.
The Company has given consideration to the most reasonably likely
worst-case Year 2000 scenarios and contingency planning to address such
scenarios. Year 2000 problems may involve temporary delays in the delivery
to the Company of footwear or raw materials used in manufacturing
operations. The Company sources footwear from numerous vendors located in
22 countries and sources raw materials, principally leather and footwear
soles, from a select group of domestic and international suppliers. The
possibility that Year 2000 problems could cause the temporary failure in
basic utilities, delays in transportation, interruption of electronic com-
munications or the interruption of banking and commercial payment systems
in various parts of the world is beyond the reasonable ability of the
Company to assess or control. Any such events could disrupt suppliers'
ability to make timely deliveries to the Company and could disrupt the
Company's own operations. Although there is also the risk that suppliers
may fail to completely remediate their own internal Year 2000 problems, the
Company believes this risk is mitigated by the fact that the bulk of its
supplied goods, such as pigskins for tanning or leather footwear uppers
stitched offshore, involve relatively lower levels of technology that are
less susceptible to Year 2000 problems. To the extent Year 2000 problems
affect vendors and suppliers, the Company could experience delays which in
turn could adversely affect its ability to fill customer orders in a timely
manner resulting in a reduction or delay in Company sales and earnings.
The Company believes that any supply delays will generally be
temporary in nature and that the Company can address any material delays in
-33-
supply through the diversity of its supplier base and owned manufacturing
facilities. Because the Company sources finished footwear and stitched uppers
from numerous vendors throughout the world, and because this work is to a
large degree interchangeable, management believes it can address any serious
supplier problems by shifting orders to suppliers not experiencing significant
Year 2000 Issues or shifting production to Company-owned facilities as may
be required. To the extent any important suppliers are unable to provide
reasonable assurances of continued performance during the Year 2000, the
Company may elect to accumulate reasonable advance inventories or, because
the Company is not dependent upon any single supplier for footwear or raw
materials, may identify alternative suppliers for the goods in question.
The Company's customers consist primarily of mass merchants and
footwear retailers. Although the Company's customers are subject to the
general risks associated with the Year 2000, these risks may be mitigated
because the Company's footwear products are not vulnerable to Year 2000
Issues and because the Company's customers sell footwear in retail stores
and have a relatively low degree of direct dependence upon technology that
is vulnerable to Year 2000 Issues. Year 2000 problems among customers
could adversely affect the Company's sales and earnings. Customers are not
under an obligation to purchase Company products and an inability of
customers to purchase Company products arising from Year 2000 problems is
beyond the ability of the Company to correct or control.
Internally, an unforseen delay in implementation of the Company's new
Base System could adversely affect the Company's operations and sales and
would have to be addressed by the parallel remediation of legacy
information systems to support continuing operations until completion of
the Base System. Additionally, any delay in the reprogramming and
replacement of manufacturing or raw material inventory related systems
could also adversely affect the Company's operations and sales. The
Company does not currently believe these risks are likely because
implementation of the Base System and the reprogramming and replacement
efforts are scheduled for completion prior to the Year 2000.
The costs and anticipated completion dates for Year 2000 modifications
and the estimated impact of Year 2000 issues are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, the level of Year 2000
disruptions experienced by the Company's suppliers and customers and the
success of any required contingency actions, and similar uncertainties.
-34-
This Year 2000 Readiness Disclosure is in part based upon and repeats
information provided to the Company by outside sources, including certain
customers, suppliers, outside consultants and other business partners and
certain manufacturers, vendors and licensors of the Company's software,
hardware and other systems and equipment. Although the Company believes
this outside information is accurate, the Company is not the original
source of this outside information and has not independently verified the
information.
INFLATION
Inflation has not had a significant effect on the Company over the
past three years nor is it expected to have a significant effect in the
foreseeable future. The Company continuously attempts to minimize the
effect of inflation through cost reductions and improved productivity.
FORWARD-LOOKING STATEMENTS
This discussion and analysis of financial condition and results of
operations, and other sections of this report, contain forward-looking
statements that are based on management's beliefs, assumptions, current
expectations, estimates and projections about the footwear industry, the
economy and about the Company itself. Words such as "anticipates,"
"believes," "estimates," "expects," "forecasts," "intends," "is likely,"
"plans," "predicts," "projects," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions ("Future Factors") that are difficult
to predict with regard to timing, extent, likelihood and degree of
occurrence. Therefore, actual results and outcomes may materially differ
from what may be expressed or forecasted in such forward-looking
statements.
Future Factors include, but are not limited to, uncertainties relating
to changes in demand for the Company's products; changes in consumer
preferences or spending patterns; the cost and availability of inventories,
services, labor and equipment furnished to the Company; the degree of
competition by the Company's competitors; changes in government and
regulatory policies; changes in trading policies or import and export
regulations; changes in interest rates, tax laws, duties or applicable
assessments; technological developments; disruptions due to Year 2000
problems experienced by the Company and/or its suppliers or customers; and
changes in domestic or international economic conditions. These matters are
representative of the Future Factors that could cause a difference between
an ultimate actual outcome and a forward-looking statement. Historical
operating results are not necessarily indicative of the results that may be
expected in the future. Furthermore, the Company undertakes no obligation
-35-
to update, amend or clarify forward-looking statements, whether as a result
of new information, future events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The response to this item is set forth under the caption "MARKET RISK
DISCLOSURE" in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and is here incorporated by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item is set forth in Appendix A of this Annual
Report on Form 10-K and is here incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information regarding directors of the Company contained under the
captions "Board of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the definitive Proxy Statement of the Company
dated March 22, 1999, is incorporated herein by reference. The information
regarding Executive Officers is provided in the Supplemental Item following
Item 4 of Part I above.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the captions "Compensation of
Directors," "Executive Compensation," "Employment Agreements and
Termination of Employment and Change in Control Arrangements," and
"Compensation Committee Report on Executive Compensation" in the definitive
Proxy Statement of the Company dated March 22, 1999, is incorporated herein
by reference.
-36-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the captions "Ownership of Common
Stock" and "Securities Ownership of Management" contained in the definitive
Proxy Statement of the Company dated March 22, 1999, is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information regarding certain employee loans following the caption
"Executive Compensation," under the subheading "Stock Options," and the
information contained under the captions "Compensation of Directors" and
"Certain Relationships and Related Transactions" contained in the
definitive Proxy Statement of the Company dated March 22, 1999, are
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM
8-K.
ITEM 14(a)(1). FINANCIAL STATEMENTS. Attached as Appendix A.
The following consolidated financial statements of Wolverine World
Wide, Inc. and subsidiaries are filed as a part of this report:
- Consolidated Balance Sheets as of January 2, 1999, and January 3,
1998.
- Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Fiscal Years Ended January 2, 1999, January 3, 1998,
and December 28, 1996.
- Consolidated Statements of Operations for the Fiscal Years Ended
January 2, 1999, January 3, 1998, and December 28, 1996.
- Consolidated Statements of Cash Flows for the Fiscal Years Ended
January 2, 1999, January 3, 1998, and December 28, 1996.
- Notes to Consolidated Financial Statements as of January 2, 1999.
- Report of Independent Auditors.
-37-
ITEM 14(a)(2). FINANCIAL STATEMENT SCHEDULES. Attached as Appendix B.
The following consolidated financial statement schedule of
Wolverine World Wide, Inc. and subsidiaries is filed as a part of this
report:
- Schedule II--Valuation and qualifying accounts.
All other schedules (I, III, IV, and V) for which provision is made in
the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
ITEM 14(a)(3). EXHIBITS.
The following exhibits are filed as part of this report:
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EXHIBIT
NUMBER DOCUMENT
- ------ --------
3.1 Certificate of Incorporation, as amended. Previously filed as
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for
the period ended June 14, 1997. Here incorporated by reference.
3.2 Amended and Restated By-laws.
4.1 Certificate of Incorporation, as amended. See Exhibit 3.1 above.
4.2 Rights Agreement dated as of April 17, 1997. Previously filed
with the Company's Form 8-A filed April 12, 1997. Here
incorporated by reference.
4.3 Credit Agreement dated as of October 11, 1996, with NBD Bank as
Agent. Previously filed as Exhibit 4.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 28, 1996.
Here incorporated by reference.
4.4 Note Purchase Agreement dated as of August 1, 1994, relating to
7.81% Senior Notes. Previously filed as Exhibit 4(d) to the
Company's Quarterly Report on Form 10-Q for the period ended
September 10, 1994. Here incorporated by reference.
4.5 Note Purchase Agreement dated as of December 8, 1998, relating to
6.50% Senior Notes due on December 8, 2008.
4.6 Amendment No. 1 dated as of January 8, 1998, to the Credit
Agreement dated as of October 11, 1996, with NBD Bank as Agent.
4.7 The Registrant has several classes of long-term debt instruments
outstanding in addition to that described in Exhibits 4.4 and 4.5
above. The amount of none of these classes of debt outstanding on
March 2, 1998, exceeds 10% of the Company's total consolidated
assets. The Company agrees to furnish copies of any agreement
defining the rights of holders of any such long-term indebtedness
to the Securities and Exchange Commission upon request.
10.1 Stock Option Plan of 1979, and amendment. Previously filed
as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended January 2, 1988. Here incorporated by
reference.
10.2 1993 Stock Incentive Plan. Previously filed as Exhibit 10(b)
to the Company's Annual Report on Form 10-K for the fiscal year
ended January 1, 1994. Here incorporated by reference.
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EXHIBIT
NUMBER DOCUMENT
- ------ --------
10.3 1988 Stock Option Plan. Previously filed as an exhibit to
the Company's registration statement on Form S-8, filed July 21,
1988, Registration No. 33-23196. Here incorporated by reference.
10.4 Amended and Restated Directors Stock Option Plan. Previously
filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended January 1, 1994. Here incorporated by
reference.
10.5 Employees Pension Plan. Previously filed as Exhibit 10.5 to
the Company's annual Report on Form 10-K for the fiscal year
ended January 3, 1998. Here incorporated by reference.
10.6 Employment Agreement dated April 27, 1998, between the Company
and Geoffrey B. Bloom.
10.7 Executive Long-Term Incentive (Three Year) Plan 1996-1998
Period. Previously filed as Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 28,
1996. Here incorporated by reference.
10.8 1994 Directors' Stock Option Plan. Previously filed as
Exhibit 10(aa) to the Company's Quarterly Report on Form 10-Q for
the period ended June 18, 1994. Here incorporated by reference.
10.9 Stock Option Loan Program. Previously filed as Exhibit 10(h)
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 28, 1991. Here incorporated by reference.
10.10 Executive Severance Agreement. Previously filed as Exhibit
10.10 to the Company's Annual Report on Form 10-K for the fiscal
year ended January 3, 1998. Here incorporated by reference.
10.11 Supplemental Executive Retirement Plan, as amended.
Previously filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the period ended June 15, 1996. Here
incorporated by reference. An updated participant schedule is
attached as Exhibit 10.11.
10.12 1995 Stock Incentive Plan. Previously filed as an Appendix
to the Company's Definitive Proxy Statement with respect to the
Company's Annual Meeting of Stockholders held on April 19, 1995.
Here incorporated by reference.
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EXHIBIT
NUMBER DOCUMENT
- ------ --------
10.13 Executive Long-Term Incentive (Three Year) Plan for the three
year period 1994-1996. Previously filed as Exhibit 10.13 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 30, 1995. Here incorporated by reference.
10.14 Executive Long-Term Incentive (Three Year) Plan for the three
year period 1995-1997. Previously filed as Exhibit 10.14 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 30, 1995. Here incorporated by reference.
10.15 Indemnification Agreements. The form of agreement was
previously filed as Exhibit 10(n) to the Company's Annual Report
on Form 10-K for the fiscal year ended January 2, 1993. Here
incorporated by reference. The Company has entered into an
Indemnification Agreement with each director and executive
officer.
10.16 Supplemental Retirement Benefits. Previously filed as
Exhibit 10(l) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988. Here incorporated by
reference.
10.17 Benefit Trust Agreement dated May 19, 1987, and Amendments Number
1, 2 and 3 thereto. Previously filed as Exhibit 10(p) to the
Company's Annual Report on Form 10-K for the fiscal year ended
January 2, 1993. Here incorporated by reference.
10.18 1996 Executive Short-Term Incentive Plan (Annual Bonus Plan).
Previously filed as Exhibit 10.19 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 30, 1995. Here
incorporated by reference.
10.19 Outside Directors' Deferred Compensation Plan. Previously
filed as Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the period ended June 15, 1996. Here incorporated by
reference.
10.20 1984 Executive Incentive Stock Purchase Plan, and amendment.
Previously filed as Exhibit 10(b) to the Company's Annual Report
on Form 10-K for the fiscal year ended January 2, 1988. Here
incorporated by reference.
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EXHIBIT
NUMBER DOCUMENT
- ------ --------
10.21 Supplemental Director's Fee Agreement dated as of March 27, 1995,
between the Company and Phillip D. Matthews. Previously
filed as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the period ended March 25, 1995. Here incorporated by
reference.
10.22 Restricted Stock Agreement dated as of March 27, 1995, between
the Company and Phillip D. Matthews. Previously filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the period ended March 25, 1995. Here incorporated by reference.
10.23 1997 Stock Incentive Plan. Previously filed as Appendix A to
the Company's Definitive Proxy Statement with respect to the
Company's Annual Meeting of Stockholders held on April 16, 1997.
Here incorporated by reference.
10.24 Executive Short-Term Incentive Plan (Annual Bonus Plan).
Previously filed as Appendix B to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of
Stockholders held on April 16, 1997. Here incorporated by
reference.
10.25 Executive Long-Term Incentive Plan (3-Year Bonus Plan).
Previously filed as Appendix C to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of
Stockholders held on April 16, 1997. Here incorporated by
reference.
21 Subsidiaries of Registrant.
23 Consent of Independent Auditors.
24 Powers of Attorney.
27 Financial Data Schedule.
____________________________
Management contract or compensatory plan or arrangement.
-42-
The Company will furnish a copy of any exhibit listed above to any
stockholder without charge upon written request to Mr. Blake W. Krueger,
Executive Vice President, General Counsel and Secretary, 9341 Courtland
Drive, Rockford, Michigan 49351.
ITEM 14(b). REPORTS ON FORM 8-K.
No reports on Form 8-K were filed in the fourth quarter of the fiscal
year ended January 2, 1999.
-43-
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.
WOLVERINE WORLD WIDE, INC.
Dated: April 2, 1999 By:/S/STEPHEN L. GULIS, JR.
Stephen L. Gulis, Jr.
Executive Vice President,
Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
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 and on the dates indicated.
SIGNATURE TITLE DATE
*/S/GEOFFREY B. BLOOM Chief Executive Officer April 2, 1999
Geoffrey B. Bloom and Chairman of the Board
of Directors
*/S/TIMOTHY J. O'DONOVAN President and Director April 2, 1999
Timothy J. O'Donovan
/S/STEPHEN L. GULIS, JR. Executive Vice President, April 2, 1999
Stephen L. Gulis, Jr. Chief Financial Officer and
Treasurer (Principal
Financial and Accounting
Officer)
*/S/DANIEL T. CARROLL Director April 2, 1999
Daniel T. Carroll
*/S/DONALD V. FITES Director April 2, 1999
Donald V. Fites
-44-
*/S/ALBERTO L. GRIMOLDI Director April 2, 1999
Alberto L. Grimoldi
*/S/DAVID T. KOLLAT Director April 2, 1999
David T. Kollat
*/S/PHILLIP D. MATTHEWS Director April 2, 1999
Phillip D. Matthews
*/S/DAVID P. MEHNEY Director April 2, 1999
David P. Mehney
*/S/JOSEPH A. PARINI Director April 2, 1999
Joseph A. Parini
*/S/JOAN PARKER Director April 2, 1999
Joan Parker
*/S/ELIZABETH A. SANDERS Director April 2, 1999
Elizabeth A. Sanders
*/S/PAUL D. SCHRAGE Director April 2, 1999
Paul D. Schrage
*BY/S/STEPHEN L. GULIS, JR.
Stephen L. Gulis, Jr.
Attorney-in-Fact
-45-
APPENDIX A
WOLVERINE WORLD WIDE, INC.
CONSOLIDATED BALANCE SHEETS
AS OF FISCAL YEAR END
(THOUSANDS OF DOLLARS) 1998 1997
- ----------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,203 $ 5,768
Accounts receivable, less allowances
(1998-$5,896; 1997-$7,292) 152,110 138,066
Inventories:
Finished products 113,923 100,272
Raw materials and work-in-process 53,116 43,562
- ----------------------------------------------------------------------------------------------------
167,039 143,834
Refundable income taxes 4,822 7,174
Deferred income taxes 5,938 4,880
Other current assets 4,866 4,139
- ----------------------------------------------------------------------------------------------------
Total current assets 340,978 303,861
Property, plant and equipment:
Land 1,177 1,178
Buildings and improvements 63,006 58,483
Machinery and equipment 108,094 96,710
Software 22,097 7,010
- ----------------------------------------------------------------------------------------------------
194,374 163,381
Less accumulated depreciation 83,239 73,050
- ----------------------------------------------------------------------------------------------------
111,135 90,331
Other assets:
Goodwill and other intangibles, less accumulated
amortization (1998-$2,447; 1997-$1,017) 19,931 18,789
Cash value of life insurance 14,725 13,166
Prepaid pension costs 15,242 9,963
Assets held for exchange 7,942 6,033
Notes receivable 4,921 4,388
Other 6,604 3,132
- ----------------------------------------------------------------------------------------------------
69,365 55,471
- ----------------------------------------------------------------------------------------------------
Total assets $521,478 $449,663
====================================================================================================
-1-
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 6,546 $ 3,251
Accounts payable 14,934 24,318
Salaries, wages and other compensation 7,776 13,512
Taxes, other than income taxes 1,927 3,463
Other accrued expenses 15,524 15,934
Current maturities of long-term debt 4,561 4,417
- ----------------------------------------------------------------------------------------------------
Total current liabilities 51,268 64,895
Long-term debt, less current maturities $157,089 89,847
Supplemental employee retirement benefits 6,993 7,741
Deferred income taxes 5,808 4,203
Other noncurrent liabilities 547
Stockholders' equity:
Common stock, $1 par value:
Authorized: 80,000,000 shares
issued, including treasury shares:
1998-43,832,070 shares; 1997-43,310,718 shares 43,832 43,311
Additional paid-in capital 72,825 64,912
Retained earnings 227,829 190,799
Accumulated other comprehensive income (1,014) (68)
Unearned compensation (5,999) (4,285)
Cost of shares in treasury:
1998-3,067,177 shares; 1997-758,113 shares (37,153) (12,239)
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity 300,320 282,430
- ----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $521,478 $449,663
====================================================================================================
( ) Denotes deduction.
See accompanying notes to consolidated financial statements.
-2-
WOLVERINE WORLD WIDE, INC.
FISCAL YEAR
(THOUSANDS OF DOLLARS) 1998 1997 1996
- --------------------------------------------------------------------------------------------------
COMMON STOCK
Balance at beginning of the year $ 43,311 $ 42,244 $ 41,551
Common stock issued under stock incentive
plans (1998-521,352 shares;
1997-1,067,109 SHARES; 1996-693,027 SHARES) 521 1,067 693
- --------------------------------------------------------------------------------------------------
Balance at end of the year 43,832 43,311 42,244
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of the year 64,912 53,943 48,475
Proceeds over par value and income tax benefits
associated with common stock issued under
stock incentive plans 7,913 10,969 5,468
- --------------------------------------------------------------------------------------------------
Balance at end of the year 72,825 64,912 53,943
RETAINED EARNINGS
Balance at beginning of the year 190,799 152,948 123,066
Net earnings 41,651 41,539 32,856
Cash dividends (1998-$.11 per share;
1997-$.09 per share; 1996-$.07 per share) (4,621) (3,688) (2,974)
- --------------------------------------------------------------------------------------------------
Balance at end of the year 227,829 190,799 152,948
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of the year (68) 79 (324)
Foreign currency translation adjustment (946) (147) 403
- --------------------------------------------------------------------------------------------------
Balance at end of the year (1,014) (68) 79
UNEARNED COMPENSATION
Balance at beginning of the year (4,285) (2,908) (1,827)
Awards under stock incentive plans (4,383) (3,117) (2,469)
Compensation expense 2,669 1,740 1,388
- --------------------------------------------------------------------------------------------------
Balance at end of the year (5,999) (4,285) (2,908)
-3-
COST OF SHARES IN TREASURY
Balance at beginning of the year (12,239) (7,014) (6,727)
Common stock purchased for treasury
(1998-2,309,064 shares; 1997-200,790 shares;
1996-9,410 shares) (24,914) (5,225) (287)
- --------------------------------------------------------------------------------------------------
Balance at end of the year (37,153) (12,239) (7,014)
- --------------------------------------------------------------------------------------------------
Total stockholders' equity at end of the year $300,320 $282,430 $239,292
==================================================================================================
COMPREHENSIVE INCOME
Net earnings $ 41,651 $ 41,539 $ 32,856
Foreign currency translation adjustments (946) (147) 403
- --------------------------------------------------------------------------------------------------
Total comprehensive income $ 40,705 $ 41,392 $ 33,259
==================================================================================================
( ) Denotes deduction.
See accompanying notes to consolidated financial statements.
-4-
WOLVERINE WORLD WIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1998 1997 1996
- -----------------------------------------------------------------------------------------
Net sales and other operating income $669,329 $665,125 $511,029
Costs and expenses:
Cost of products sold 456,726 460,999 355,224
Selling and administrative expenses 143,403 137,157 107,492
Interest expense 8,449 5,455 3,127
Interest income (1,170) (845) (1,532)
Restructuring charge 3,450
Other income - net 113 (2,172) (949)
- -----------------------------------------------------------------------------------------
607,521 604,044 463,362
- -----------------------------------------------------------------------------------------
Earnings before income taxes 61,808 61,081 47,667
Income taxes 20,157 19,542 14,811
- -----------------------------------------------------------------------------------------
Net earnings $ 41,651 $ 41,539 $ 32,856
=========================================================================================
Net earnings per share:
Basic $ 1.00 $ 1.00 $ .81
Diluted .97 .96 .76
See accompanying notes to consolidated financial statements.
-5-
WOLVERINE WORLD WIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR
(THOUSANDS OF DOLLARS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 41,651 $ 41,539 $ 32,856
Adjustments necessary to reconcile net earnings
to net cash provided by (used in) operating activities:
Depreciation and amortization 13,036 9,151 7,147
Deferred income taxes (credit) 547 4,642 (214)
Other (5,025) (2,980) (398)
Changes in operating assets and liabilities:
Accounts receivable (21,322) (6,092) (32,752)
Inventories (17,043) (27,744) (19,526)
Other operating assets 1,657 (5,794) 154
Accounts payable (9,384) (17,162) 26,085
Other operating liabilities (8,588) 4,214 4,056
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (4,471) (226) 17,408
INVESTING ACTIVITIES
Business acquisitions (15,753) (29,158)
Additions to property, plant and equipment (32,376) (35,419) (20,639)
Other (1,348) (5,950) 4,086
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (33,724) (57,122) (45,711)
FINANCING ACTIVITIES
Proceeds from short-term borrowings 12,739 4,711
Payments of short-term debt (9,444) (3,090) (1,313)
Proceeds from long-term borrowings 180,089 112,090 58,000
Payments of long-term debt (116,814) (59,135) (47,369)
Deferred financing and interest costs (2,456)
Cash dividends (4,621) (3,688) (2,974)
Purchase of common stock for treasury (24,914) (5,225) (287)
Proceeds from shares issued under stock incentive plans 4,051 8,919 3,692
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 38,630 54,582 9,749
- ----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 435 (2,766) (18,554)
-6-
Cash and cash equivalents at beginning of the year 5,768 8,534 27,088
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the year $ 6,203 5,768 $ 8,534
==========================================================================================================
OTHER CASH FLOW INFORMATION
Interest paid $ 9,596 6,361 $ 3,595
Income taxes paid 10,751 11,174 8,426
( ) Denotes reduction in cash and cash equivalents.
See accompanying notes to consolidated financial statements.
-7-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Wolverine
World Wide, Inc. and its wholly owned subsidiaries (collectively, the
Company). Upon consolidation, all intercompany accounts, transactions and
profits have been eliminated.
FISCAL YEAR
The Company's fiscal year is the 52- or 53-week period that ends on the
Saturday nearest the end of December. Fiscal years presented herein
include the 52-week periods ended January 2, 1999 and December 28, 1996,
and the 53-week period ended January 3, 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
REVENUE RECOGNITION
Revenue is recognized on the sale of products when the related goods have
been shipped and legal title has passed to the customer.
CASH EQUIVALENTS
All short-term investments with a maturity of three months or less when
purchased are considered cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
by the last-in, first-out (LIFO) method for substantially all inventories
(see Note C). Foreign and retail inventories are valued using methods
approximating cost under the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost and include
expenditures for new facilities, major renewals, betterments and software.
Normal repairs and maintenance are expensed as incurred.
Depreciation of plant, equipment and software is computed using the
straight-line method. The depreciable lives for buildings and improvements
-8-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
range from five to forty years; from three to ten years for machinery and
equipment; and from three to ten years for software.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED AND OBTAINED FOR INTERNAL USE. The SOP provides guidelines
for determining whether costs should be expensed or capitalized for computer
software developed or purchased for internal use. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. The Company believes that its
current accounting policies for such items are substantially in compliance
with SOP 98-1 and, therefore, adoption will not have a material effect on its
consolidated financial position or results of operations.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $29,673,000 in 1998,
$26,976,000 in 1997 and $21,186,000 in 1996.
INCOME TAXES
The provision for income taxes is based on the earnings reported in the
consolidated financial statements. A deferred income tax asset or liability
is determined by applying currently enacted tax laws and rates to the
cumulative temporary differences between the carrying value of assets and
liabilities for financial statement and income tax purposes. Deferred income
tax expense (credit) is measured by the net change in deferred income tax
assets and liabilities during the year.
EARNINGS PER SHARE
Basic earnings per share is computed based on weighted average shares of
common stock outstanding during each year after adjustment for nonvested
common stock issued under stock incentive plans. Diluted earnings per share
assumes the exercise of dilutive stock options and the vesting of all common
stock.
The following table sets forth the reconciliation of weighted average shares
used in the computation of basic and diluted earnings per share:
-9-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1998 1997 1996
- -----------------------------------------------------------------------------------------
Outstanding during the year 42,218,378 42,214,620 41,541,944
Adjustment for nonvested common stock (697,962) (699,107) (900,898)
- -----------------------------------------------------------------------------------------
Denominator for basic earnings per share 41,520,416 41,515,513 40,641,046
Effect of dilutive stock options 733,195 1,249,070 1,412,691
Adjustment for nonvested common stock 697,962 699,107 900,898
- -----------------------------------------------------------------------------------------
Denominator for diluted earnings per share 42,951,573 43,463,690 42,954,635
=========================================================================================
Options to purchase 989,662 shares of common stock in 1998 and 116,275 shares
in 1997 have not been included in the denominator for computation of diluted
earnings per share because related exercise prices were greater than the
average market price for the period and, therefore, were antidilutive.
Antidilutive options in 1996 were not significant.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company's financial instruments consist of cash and cash equivalents,
accounts and notes receivable, accounts and notes payable and long-term debt.
The Company's estimate of the fair value of these financial instruments
approximates their carrying amounts at January 2, 1999, January 3, 1998 and
December 28, 1996. Fair value was determined using discounted cash flow
analyses and current interest rates for similar instruments. The Company
does not hold or issue financial instruments for trading purposes.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 requires companies to record
derivative instruments on the balance sheet at fair value and establishes
accounting rules for changes in fair value that result from hedging
activities. The Company does not currently engage in significant hedging
activities that require use of derivative instruments and does not believe
the adoption of SFAS No. 133 will have a material effect on its consolidated
financial position or results of operations.
The Company does not require collateral or other security on trade accounts
receivable.
-10-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPREHENSIVE INCOME
As of the beginning of 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 defines comprehensive income as including
net earnings and any revenues, expenses, gains and losses that, under
generally accepted accounting principles, are excluded from net earnings and
recognized directly as a component of stockholders' equity. The Company
elected to disclose comprehensive income within the consolidated statements
of stockholders' equity and comprehensive income.
RECLASSIFICATIONS
Certain amounts previously reported in 1997 and 1996 have been reclassified
to conform with the presentation used in 1998.
- ---------------------------------------------------------------------------
NOTE B - BUSINESS ACQUISITIONS
- ---------------------------------------------------------------------------
On September 29, 1998, the Company acquired certain assets and assumed bank
debt in the amount of $4,111,000 of Sivan-Co Limited, a Russian wholesale
distributor of Hush Puppies and Caterpillar branded footwear, in exchange for
the forgiveness of $7,278,000 in trade accounts receivable that were due to
the Company.
On October 17, 1997, the Company acquired the assets of the Merrell outdoor
footwear business from the Outdoor Division of Sports Holding Corp. for cash
of $15,753,000, including related transaction expenses, and a $500,000 note
payable in 1998.
On March 22, 1996, the Company acquired the assets and assumed certain
liabilities of the work, safety and occupational footwear business of Hy-
Test, Inc. from The Florsheim Shoe Company for a cash purchase price of
$24,468,000, including related transaction expenses.
On August 24, 1996, the Company acquired the rights to and certain assets of
the Hush Puppies[REGISTERED] wholesale shoe business in the United Kingdom
and Ireland from British Shoe Corporation, a subsidiary of Sears Plc, for a
purchase price of $7,045,000, of which $2,355,000 is payable over a three-
year period ending in 1999.
The acquisitions were accounted for using the purchase method and,
accordingly, the operating results of these acquired businesses are included
in the consolidated statements of operations since the dates of acquisition.
-11-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The purchase prices were allocated to the net assets acquired based on their
fair market value at the dates of acquisition. Goodwill and other intangibles
recognized in connection with these transactions totaled $2,446,000 in 1998,
$5,914,000 in 1997 and $11,480,000 in 1996, and are being amortized over
periods ranging from five to seventeen years.
Consolidated net sales would not have differed materially from reported
amounts in 1998 and would have approximated $685,000,000 in 1997 and
$602,000,000 in 1996 on a pro forma basis if the acquisitions had occurred at
the beginning of 1996. Consolidated pro forma net earnings for all three
years would not have been materially different from reported amounts.
- ---------------------------------------------------------------------------
NOTE C - INVENTORIES
- ---------------------------------------------------------------------------
Inventories of $136,198,000 at January 2, 1999 and $122,607,000 at January 3,
1998 have been valued using the LIFO method. If the FIFO method had been
used, inventories would have been $14,455,000 and $18,204,000 higher than
reported at January 2, 1999 and January 3, 1998, respectively.
- ---------------------------------------------------------------------------
NOTE D - DEBT
- ---------------------------------------------------------------------------
Notes payable consist primarily of unsecured short-term debt of the Company's
Canadian and United Kingdom subsidiaries. The notes bear interest of up to 1%
over the respective foreign bank base rate (7.1% and 6.6% weighted average
base rate at January 2, 1999 and January 3, 1998, respectively).
The Company has short-term debt and commercial letter-of-credit facilities
that allow for total borrowings up to $68,399,000. In addition to the notes
payable discussed above, amounts outstanding under these facilities consist
of letters-of-credit that totaled $30,075,000 and $37,047,000 at January 2,
1999 and January 3, 1998, respectively.
-12-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consists of the following obligations:
(THOUSANDS OF DOLLARS) 1998 1997
- -----------------------------------------------------------------------------------
6.5% senior notes payable $ 75,000
7.81% senior notes payable to insurance companies 25,714 $30,000
Revolving credit obligations 60,660 63,922
Other 276 342
- -----------------------------------------------------------------------------------
161,650 94,264
Less current maturities 4,561 4,417
- -----------------------------------------------------------------------------------
$157,089 $89,847
===================================================================================
The 6.5% senior notes payable require payments of interest only through
December 2002 at which time annual principal payments of $10,714,000 become
due through the maturity date of December 8, 2008. In connection with the
issuance of these senior notes, the Company entered into an interest rate
lock agreement with a bank that was settled on November 4, 1998 and resulted
in a prepayment of $2,200,000. This prepayment is being amortized over the
term of the notes using the effective interest method.
The 7.81% senior notes payable to insurance companies require equal annual
principal payments of $4,285,000 through 2003, with the balance due on August
15, 2004.
The Company has domestic and foreign revolving credit agreements that allow
for borrowings of up to $167,470,000 ($167,227,000 in 1997), of which
$17,470,000 pertains to the Company's United Kingdom subsidiary. The
agreements require that interest be paid at variable rates based on both
LIBOR and the domestic prime rate. The weighted average interest rate of
outstanding borrowings under these facilities was 6.7% at January 2, 1999 and
6.4% at January 3, 1998. The foreign commitment expires on January 9, 2000
and the domestic facility expires on October 11, 2001. Maximum borrowings
under the agreements were $149,000,000 in 1998 and $99,600,000 in 1997.
The long-term loan agreements contain restrictive covenants which, among
other things, require the Company to maintain certain financial ratios and
-13-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
minimum levels of tangible net worth. At January 2, 1999, unrestricted
retained earnings are $53,099,000. The agreements also impose restrictions on
securing additional debt, sale and merger transactions and the disposition of
significant assets.
Principal maturities of long-term debt during the four years subsequent to
1999 are as follows: 2000 $5,946,000; 2001 $63,286,000; 2002 $15,000,000;
2003 $15,000,000.
Interest costs of $1,145,000 in 1998, $768,000 in 1997 and $610,000 in 1996
were capitalized in connection with various capital improvement and computer
hardware and software installation projects.
- ---------------------------------------------------------------------------
NOTE E - LEASES
- ---------------------------------------------------------------------------
The Company leases machinery, transportation equipment and certain warehouse
and retail store space under operating lease agreements which expire at
various dates through 2012. At January 2, 1999, minimum rental payments due
under all noncancelable leases are as follows: 1999 $6,721,000;
2000 $5,862,000; 2001 $4,948,000; 2002 $3,350,000; 2003 $2,423,000;
thereafter $14,068,000.
Rental expense under all operating leases consisted primarily of minimum
rentals and totaled $9,085,000 in 1998, $9,013,000 in 1997 and $7,468,000 in
1996.
- ---------------------------------------------------------------------------
NOTE F - CAPITAL STOCK
- ---------------------------------------------------------------------------
The Company has 2,000,000 authorized shares of $1 par value preferred stock,
of which none is issued and outstanding.
On April 17, 1997 and July 11, 1996, the Company announced three-for-two
stock splits on shares of common stock outstanding at May 2, 1997 and July
26, 1996, respectively. All share and per share data included in the
consolidated financial statements has been retroactively adjusted for the
increased shares resulting from these stock splits.
-14-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has a preferred stock rights plan that is designed to protect
stockholder interests in the event the Company is confronted with coercive or
unfair takeover tactics. One right is associated with each share of common
stock currently outstanding. The rights trade with the common stock and
become exercisable only upon the occurrence of certain triggering events.
Each right, when exercisable, will entitle the holder to purchase one one-
hundredth of a share of Series B junior participating preferred stock for
$120. The Company has designated 500,000 shares of preferred stock as Series
B junior participating preferred stock for possible future issuance under the
Company's stock rights plan. Upon issuance for reasons other than
liquidation, each share of Series B junior participating preferred stock will
have 100 votes and a preferential quarterly dividend equal to the greater of
$21 per share or 100 times the dividend declared on common stock.
In the event the Company is a party to a merger or other business
combination, regardless of whether the Company is the surviving corporation,
rights holders other than the party to the merger will be entitled to receive
common stock of the surviving corporation worth twice the exercise price of
the rights. The plan also provides for protection against self-dealing
transactions by a 15% stockholder or the activities of an adverse person (as
defined). The Company may redeem the rights for $.01 each at any time prior
to a person being designated as an adverse person or fifteen days after a
triggering event. Unless redeemed earlier, all rights expire on May 7, 2007.
The Company has stock incentive plans under which options to purchase shares
of common stock may be granted to officers, other key employees and
nonemployee directors. Options granted are exerciseable over ten years and
vest over various periods ranging up to three years. All unexercised options
are available for future grants upon their cancellation.
-15-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the transactions under the stock option plans is as follows:
SHARES UNDER WEIGHTED-AVERAGE
OPTIONS OPTION PRICE
- ----------------------------------------------------------------------------------------
Outstanding at December 31, 1995 2,248,437 $ 5.43
Granted in 1996 624,666 13.05
Exercised (515,227) 13.85
Cancelled (16,098) 11.02
- ----------------------------------------------------------------------------------------
Outstanding at December 28, 1996 2,341,778 7.71
Granted in 1997 798,015 24.12
Exercised (922,491) 20.48
Cancelled (35,861) 17.09
- ----------------------------------------------------------------------------------------
Outstanding at January 3, 1998 2,181,441 13.65
Granted in 1998 1,171,967 18.88
Exercised (328,899) 20.65
Cancelled (626,058) 25.48
- ----------------------------------------------------------------------------------------
Outstanding at January 2, 1999 2,398,451 $14.82
========================================================================================
Shares available for grant under the stock option plans were 1,131,544 at
January 2, 1999 and 1,879,818 at January 3, 1998.
The weighted-average grant-date fair value was $7.37 in 1998, $7.91 in 1997
and $4.27 in 1996 for stock options granted.
During 1998, the Board of Directors approved the cancellation and reissuance
of stock options representing 594,478 shares of common stock. The cancelled
options had original exercise prices ranging from $21.00 to $27.97. The
reissued options have an exercise price of $15.00, which was 38% above the
closing market price on the date of reissuance.
The exercise price of options outstanding at January 2, 1999 ranges from
$1.73 to $30.56. A summary of stock options outstanding at January 2, 1999
by range of option price is as follows:
-16-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WEIGHTED-AVERAGE
----------------------------------------
NUMBER OF OPTIONS OPTION PRICE
---------------------------------------------------- REMAINING
OUTSTANDING EXERCISABLE OUTSTANDING EXERCISABLE CONTRACTUAL LIFE
- ------------------------------------------------------------------------------------------------
Less than $10 689,092 689,092 $ 6.51 $ 6.51 5.3 years
$10 to $20 1,089,039 497,800 13.88 13.29 8.6 years
Greater than $20 620,320 427,946 25.72 25.59 7.9 years
- ------------------------------------------------------------------------------------------------
2,398,451 1,614,838 $14.82 $13.66 7.5 years
================================================================================================
The Company has elected to follow Accounting Principles Board (APB) Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations
in accounting for its stock incentive plans because the alternative fair
value accounting provided for under SFAS No.123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, requires the use of option valuation models that were not
specifically developed for valuing the types of stock incentive plans
maintained by the Company. Under APB Opinion No. 25, compensation expense is
recognized when the market price of the underlying stock award on the date of
grant exceeds any related exercise price.
Pro forma information regarding net earnings and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its stock awards using the fair value method. The fair value of
these awards was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions: risk free
interest rate of 5% (6% in 1997 and 1996); dividend yield of 0.5%; expected
market price volatility factor of 0.46 (0.32 in 1997 and 1996); and an
expected option life of four years.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options which have no vesting provisions and are
fully transferable. In addition, the model requires input of highly
subjective assumptions. Because the Company's stock options have
characteristics significantly different from traded options and the input
assumptions can materially affect the estimate of fair value, in management's
opinion, the Black-Scholes option model does not necessarily provide a
reliable measure of the fair value of its stock options.
-17-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For purposes of pro forma disclosures, the estimated fair value of stock
options are amortized to expense over the related vesting period. The
Company's pro forma information under SFAS No. 123 is as follows:
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1998 1997 1996
- -----------------------------------------------------------------------------------------
Pro forma net earnings $39,130 $38,945 $31,613
Pro forma net earnings per share:
Basic $ .94 $ .94 $ .78
Diluted .91 .90 .74
The Company also has nonvested stock award plans for officers and other key
employees. Common stock issued under these plans is subject to certain
restrictions, including prohibition against any sale, transfer or other
disposition by the officer or employee, and a requirement to forfeit the
award upon termination of employment. These restrictions lapse over a three-
to five-year period from the date of the award. Shares aggregating 195,625 in
1998, 154,862 in 1997 and 200,418 in 1996 were awarded under these plans. The
weighted-average award-date fair value was $27.67 in 1998, $23.75 in 1997 and
$13.09 in 1996 for the shares awarded. There were no cancellations of rights
to shares in 1998, while rights to 8,250 shares in 1997 and 21,869 shares in
1996 were cancelled. Any future shares awarded reduce the number of shares
identified as available for future grants in the stock option table. The
market value of the shares awarded is recognized as unearned compensation in
the consolidated statements of stockholders' equity and is amortized to
operations over the vesting period.
- ---------------------------------------------------------------------------
NOTE G - RETIREMENT PLANS
- ---------------------------------------------------------------------------
The Company has noncontributory, defined benefit pension plans covering a
majority of its domestic employees. The Company's principal defined benefit
pension plan provides benefits based on the employee's years of service and
final average earnings (as defined), while the other plans provide benefits
at a fixed rate per year of service. The Company intends to annually
contribute amounts deemed necessary to maintain the plans on a sound
actuarial basis.
-18-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also has individual deferred compensation agreements with certain
current and former employees that entitle them to receive payments from the
Company for a period of fifteen to eighteen years following retirement. Under
the terms of the individual contracts, the employees are eligible for reduced
benefits upon early retirement. The Company maintains life insurance
policies which are intended to fund these deferred benefits.
The Company has a defined contribution money accumulation plan covering
substantially all employees that provides for Company contributions based on
earnings. This plan is combined with the principal defined benefit pension
plan for funding purposes. Contributions to the money accumulation plan were
$1,500,000 in 1998, $1,495,000 in 1997 and $1,200,000 in 1996.
The following summarizes the Company's pension assets and related obligations
for its defined benefit pension plans:
SEPTEMBER 30,
(THOUSANDS OF DOLLARS) 1998 1997
- --------------------------------------------------------------------------------------------------
Pension assets at fair value, including underfunded plan
amounts of $5,370 in 1998 and $8,184 in 1997 $ 107,582 $ 131,406
Projected benefit obligation on services rendered to date,
including underfunded plan amounts of $18,414 in 1998
and $11,371 in 1997 (100,322) (81,221)
- --------------------------------------------------------------------------------------------------
Net pension assets $ 7,260 $ 50,185
==================================================================================================
Components of net pension assets:
Prepaid pension costs in other assets $ 15,242 $ 9,963
Unrecognized amounts, net of amortization:
Transition assets 968 1,902
Prior service costs (8,934) (7,140)
Net experience gains (16) 45,460
- --------------------------------------------------------------------------------------------------
Net pension assets $ 7,260 $ 50,185
==================================================================================================
-19-
Change in fair value of pension assets:
Fair value of pension assets at beginning of the year $ 131,406 $ 104,673
Actual net investment income (loss) (20,285) 30,015
Company contributions 414 278
Benefits paid to plan participants (3,953) (3,560)
- --------------------------------------------------------------------------------------------------
Fair value of pension assets at end of the year $ 107,582 $ 131,406
==================================================================================================
Components of prepaid pension costs (liability):
For overfunded plans $ 19,982 $ 13,566
For underfunded plans (4,740) (3,603)
- --------------------------------------------------------------------------------------------------
Prepaid pension costs $ 15,242 $ 9,963
==================================================================================================
Change in projected benefit obligation:
Projected benefit obligation at beginning of the year $ 81,221 $ 73,277
Service cost pertaining to benefits earned during the year 4,249 3,698
Interest cost on projected benefit obligation 6,221 5,597
Effect of changes in actuarial assumptions and plan amendments 2,544 2,954
Actuarial losses (gains) 10,040 (745)
Benefits paid (3,953) (3,560)
- --------------------------------------------------------------------------------------------------
Projected benefit obligation at end of the year $ 100,322 $ 81,221
==================================================================================================
-20-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of net pension income recognized by the Company:
(THOUSANDS OF DOLLARS) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
Service cost pertaining to benefits earned during
the year $(4,249) $ (3,698) $(3,626)
Interest cost on projected benefit obligation (6,221) (5,116) (4,704)
Expected return on pension assets 11,409 29,924 8,066
Net amortization 3,926 (18,481) 1,865
- ------------------------------------------------------------------------------------------------
Net pension income $ 4,865 $ 2,629 $ 1,601
================================================================================================
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation
were 7% and 4.5%, respectively, in 1998 and 7.5% and 5%, respectively, in
1997. The expected long-term return on plan assets was 10% in each year.
Plan assets were invested in listed equity securities (71%), fixed income
funds (20%) and short-term and other investments (9%). Equity securities
include 788,912 shares of the Company's common stock with a fair value of
$8,575,000 at September 30, 1998. Dividends paid on these shares of the
Company's common stock were not significant.
- ---------------------------------------------------------------------------
NOTE H - INCOME TAXES
- ---------------------------------------------------------------------------
The provisions for income taxes consist of the following:
(THOUSANDS OF DOLLARS) 1998 1997 1996
- ---------------------------------------------------------------------------
Currently payable:
Federal $16,248 $12,505 $13,247
State and foreign 3,362 2,395 1,778
Deferred (credit) 547 4,642 (214)
- ---------------------------------------------------------------------------
$20,157 $19,542 $14,811
===========================================================================
-21-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the Company's total income tax expense and the amount
computed by applying the statutory federal income tax rate of 35% to earnings
before income taxes is as follows:
(THOUSANDS OF DOLLARS) 1998 1997 1996
- -----------------------------------------------------------------------------------------
Income taxes at statutory rate $21,633 $21,378 $16,683
State income taxes, net of federal
income tax reduction 899 777 746
Nontaxable earnings of Puerto Rican
subsidiary and foreign affiliates (2,211) (2,233) (1,854)
Other (164) (380) (764)
- -----------------------------------------------------------------------------------------
$20,157 $19,542 $14,811
=========================================================================================
Significant components of the Company's deferred income tax assets and
liabilities as of the end of 1998 and 1997 are as follows:
(THOUSANDS OF DOLLARS) 1998 1997
- --------------------------------------------------------------------------------------
Deferred income tax assets:
Accounts receivable and inventory valuation allowances $ 2,987 $ 1,256
Deferred compensation accruals 2,018 2,207
Other amounts not deductible until paid 5,470 6,281
- --------------------------------------------------------------------------------------
Total deferred income tax assets 10,475 9,744
Deferred income tax liabilities:
Tax over book depreciation (3,479) (3,032)
Prepaid pension costs (5,877) (4,239)
Unremitted earnings of Puerto Rican subsidiary (802) (1,543)
Other (187) (253)
- --------------------------------------------------------------------------------------
Total deferred income tax liabilities (10,345) (9,067)
- --------------------------------------------------------------------------------------
Net deferred income tax assets $ 130 $ 677
======================================================================================
-22-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has provided for all taxes that would be payable if accumulated
earnings of its Puerto Rican subsidiary were distributed. Similar taxes on
the unremitted earnings of the Company's foreign affiliates have not been
provided because such earnings are considered permanently invested. The
additional taxes that would be payable if unremitted earnings of its foreign
affiliates were distributed approximate $7,910,000 at January 2, 1999 and
$6,042,000 at January 3, 1998.
- ---------------------------------------------------------------------------
NOTE I - LITIGATION AND CONTINGENCIES
- ---------------------------------------------------------------------------
The Company is involved in various environmental claims and other legal
actions arising in the normal course of business. The environmental claims
include sites where the Environmental Protection Agency has notified the
Company that it is a potentially responsible party with respect to
environmental remediation. These remediation claims are subject to ongoing
environmental impact studies, assessment of remediation alternatives,
allocation of cost between responsible parties and concurrence by regulatory
authorities and have not yet advanced to a stage where the Company's
liability is fixed. However, after taking into consideration legal counsel's
evaluation of all actions and claims against the Company, management is
currently of the opinion that their outcome will not have a significant
effect on the Company's consolidated financial position or future results of
operations.
- ---------------------------------------------------------------------------
NOTE J - BUSINESS SEGMENTS
- ---------------------------------------------------------------------------
Effective January 4, 1998, the Company adopted SFAS No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131
establishes new standards for the way public business enterprises report
information about operating segments, and also requires certain disclosures
about products and services, geographic areas of business and major
customers. The adoption of SFAS No. 131 did not affect the Company's
consolidated financial position or results of operations, but did change
business segment information previously reported.
The Company has one reportable segment that is engaged in the manufacture and
marketing of branded footwear, including casual shoes, slippers, moccasins,
-23-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
dress shoes, boots, uniform shoes and work shoes, to the retail sector.
Revenues of this segment are derived from the sale of branded footwear
products to external customers and the Company's retail division as well as
royalty income from the licensing of the Company's trademarks and brand names
to licensees. The business units comprising the branded footwear segment
manufacture or source, market and distribute products in a similar manner.
Branded footwear is distributed through wholesale channels and under
licensing and distributor arrangements.
The other business units in the following tables consists of the Company's
retail, tannery and pigskin procurement operations. The Company operates 56
domestic retail stores at January 2, 1999 that sell Company-manufactured or
sourced products and footwear manufactured by unaffiliated companies. The
other business units distribute products through retail and wholesale
channels.
The Company measures segment profits as earnings before income taxes. The
accounting policies used to determine profitability and total assets of the
branded footwear segment are the same as disclosed in the summary of
significant accounting policies (see Note A).
Business segment information is as follows:
1998
- ----------------------------------------------------------------------------------------------------------
BRANDED OTHER
(THOUSANDS OF DOLLARS) FOOTWEAR BUSINESSES CORPORATE CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------
Net sales and other operating income
from external customers $598,741 $70,588 $669,329
Intersegment sales 31,120 8,323 39,443
Interest expense (net) 12,728 1,558 $ (7,007) 7,279
Depreciation expense 6,787 2,083 2,736 11,606
Earnings before income taxes 53,336 7,095 1,377 61,808
Assets 385,262 33,178 103,038 521,478
Additions to property, plant and equipment 17,160 2,179 13,037 32,376
-24-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997
- ----------------------------------------------------------------------------------------------------------
Net sales and other operating income
from external customers $588,666 $76,459 $665,125
Intersegment sales 78,158 12,382 90,540
Interest expense (net) 9,104 1,521 $(6,015) 4,610
Depreciation expense 4,598 1,919 1,810 8,327
Restructuring charge 3,450 3,450
Earnings before income taxes 61,374 8,019 (8,312) 61,081
Assets 329,224 31,851 88,588 449,663
Additions to property, plant and equipment 10,189 2,450 22,780 35,419
1996
- ----------------------------------------------------------------------------------------------------------
Net sales and other operating income
from external customers $455,153 $55,876 $511,029
Intersegment sales 82,320 12,825 95,145
Interest expense (net) 5,854 1,226 $(5,485) 1,595
Depreciation expense 4,151 1,787 1,016 6,954
Earnings before income taxes 46,238 4,573 (3,144) 47,667
Assets 276,279 31,543 53,776 361,598
Additions to property, plant and equipment 12,681 2,466 5,492 20,639
Geographic information related to net sales and other operating income
included in the consolidated statements of operations is as follows:
-25-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS) 1998 1997 1996
- -----------------------------------------------------------------------------
United States $568,730 $552,874 $448,314
Canada 19,384 18,400 12,794
Europe 60,571 79,750 40,010
Central and South America 8,211 7,155 4,681
Middle East and Russia 8,162 2,690 687
Asia 4,271 4,256 4,543
- -----------------------------------------------------------------------------
$669,329 $665,125 $511,029
=============================================================================
The Company's long-lived assets (primarily intangible assets and property,
plant and equipment) summarized between domestic and foreign locations are as
follows:
(THOUSANDS OF DOLLARS) 1998 1997 1996
- -----------------------------------------------------------------------------
United States $157,152 $128,175 $84,459
Foreign countries 23,348 17,627 12,511
The Company does not believe that it is dependent upon any single customer,
since none account for more than 10% of consolidated net sales and other
operating income.
No product groups, other than footwear, account for more than 10% of
consolidated net sales and other operating income. Revenues derived from the
sale and licensing of footwear account for approximately 95% of net sales and
other operating income in 1998, 1997, and 1996.
Approximately 26% of the Company's employees are subject to bargaining unit
contracts extending through various dates to 2002.
-26-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE K - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- ---------------------------------------------------------------------------
The Company generally reports its quarterly results of operations on the
basis of 12-week periods for each of the first three quarters and a 16-week
period for the fourth quarter. The fourth quarter of 1998 includes 16 weeks
of operating results, while the fourth quarter of 1997 includes 17 weeks,
because 1997 was a 53-week period.
The Company's unaudited quarterly results of operations are as follows:
1998
- --------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------------------------------
Net sales and other operating income $148,514 $142,002 $164,486 $214,327
Gross margin 45,897 47,732 51,720 67,254
Net earnings 6,388 9,155 10,831 15,277
Net earnings per share:
Basic $ .15 $ .22 $ .26 $ .37
Diluted .15 .21 .25 .36
1997
- --------------------------------------------------------------------------------------------------------
Net sales and other operating income $129,301 $127,789 $162,246 $245,789
Gross margin 38,389 40,817 47,910 77,010
Net earnings 4,693 7,368 9,199 20,279
Net earnings per share:
Basic $ .11 $ .18 $ .22 $ .49
Diluted .11 .17 .21 .47
-27-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE L - RESTRUCTURING CHARGE
- ---------------------------------------------------------------------------
On September 24, 1997, the Company announced a restructuring of its domestic
manufacturing and warehousing operations and closed three Hush
Puppies[REGISTERED] women's shoe factories and converted a slipper factory
into a warehouse. The total restructuring charge of $3,450,000 included
employee termination benefits ($2,472,000) and other closing costs ($978,000)
associated with the facilities, and is disclosed separately in the 1997
consolidated statement of operations. As of January 2, 1999 and January 3,
1998, $3,409,000 and $1,620,000, respectively, of the restructuring costs
have been incurred and charged against the related liability. The
restructuring is substantially complete as of January 2, 1999.
-28-
WOLVERINE WORLD WIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Wolverine World Wide, Inc.
We have audited the accompanying consolidated balance sheets of Wolverine
World Wide, Inc. and subsidiaries as of January 2, 1999 and January 3, 1998,
and the related consolidated statements of stockholders' equity and
comprehensive income, operations and cash flows for each of the three fiscal
years in the period ended January 2, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Wolverine World
Wide, Inc. and subsidiaries at January 2, 1999 and January 3, 1998, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended January 2, 1999 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Grand Rapids, Michigan
February 8, 1999
-29-
APPENDIX B
Schedule II - Valuation and Qualifying Accounts
Wolverine World Wide, Inc. and Subsidiaries
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------
Additions
-------------------------
(1) (2)
Balance at Charged to Charged to Balance at
Beginning of Costs and Other Accounts Deductions End of
Description Period Expenses (Describe) (Describe) Period
- -----------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 2, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $ 6,038,000 $ 1,035,000 $ 2,344,000 $ 4,729,000
Allowance for cash discounts 1,254,000 5,394,000 5,481,000 1,167,000
Inventory valuation allowances 4,552,000 12,629,000 13,939,000 3,242,000
-----------------------------------------------------------------------
$ 11,844,000 $19,058,000 $ 21,764,000 $ 9,138,000
=======================================================================
FISCAL YEAR ENDED JANUARY 3, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $ 4,228,000 $ 2,956,000 $ 1,146,000 $ 6,038,000
Allowance for cash discounts 1,406,000 7,690,000 7,842,000 1,254,000
Inventory valuation allowances 2,954,000 6,888,000 5,290,000 4,552,000
-----------------------------------------------------------------------
$ 8,588,000 $17,534,000 $14,278,000 $11,844,000
=======================================================================
FISCAL YEAR ENDED DECEMBER 28, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $ 2,657,000 $ 2,005,000 $ 434,000 $ 4,228,000
Allowance for cash discounts 750,000 4,896,000 4,240,000 1,406,000
Inventory valuation allowances 1,317,000 5,535,000 3,898,000 2,954,000
-----------------------------------------------------------------------
$ 4,724,000 $12,436,000 $8,572,000 $ 8,588,000
-----------------------------------------------------------------------
Accounts charged off, net of recoveries.
Discounts given to customers.
Adjustment upon disposal of related inventories
Commission File No. 1-6024
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM 10-K
For the Fiscal Year Ended
January 2, 1999
Wolverine World Wide, Inc.
9341 Courtland Drive
Rockford, Michigan 49351
EXHIBIT INDEX
EXHIBIT
NUMBER
3.1 Certificate of Incorporation, as amended. Previously filed as
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
period ended June 14, 1997. Here incorporated by reference.
3.2 Amended and Restated By-laws.
4.1 Certificate of Incorporation, as amended. See Exhibit 3.1 above.
4.2 Rights Agreement dated as of April 17, 1997. Previously filed with
the Company's Form 8-A filed April 12, 1997. Here incorporated by
reference.
4.3 Credit Agreement dated as of October 11, 1996, with NBD Bank as
Agent. Previously filed as Exhibit 4.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 28, 1996.
Here incorporated by reference.
4.4 Note Purchase Agreement dated as of August 1, 1994, relating to
7.81% Senior Notes. Previously filed as Exhibit 4(d) to the
Company's Quarterly Report on Form 10-Q for the period ended
September 10, 1994. Here incorporated by reference.
4.5 Note Purchase Agreement dated as of December 8, 1998, relating to
6.50% Senior Notes due on December 8, 2008.
4.6 Amendment No. 1 dated as of January 8, 1998, to the Credit
Agreement dated as of October 11, 1996, with NBD Bank as Agent.
4.7 The Registrant has several classes of long-term debt instruments
outstanding in addition to that described in Exhibits 4.4 and 4.5
above. The amount of none of these classes of debt outstanding on
March 2, 1998, exceeds 10% of the Company's total consolidated
assets. The Company agrees to furnish copies of any agreement
defining the rights of holders of any such long-term indebtedness
to the Securities and Exchange Commission upon request.
10.1 Stock Option Plan of 1979, and amendment. Previously filed as
an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended January 2, 1988. Here incorporated by reference.
10.2 1993 Stock Incentive Plan. Previously filed as Exhibit 10(b)
to the Company's Annual Report on Form 10-K for the fiscal year
ended January 1, 1994. Here incorporated by reference.
10.3 1988 Stock Option Plan. Previously filed as an exhibit to the
Company's registration statement on Form S-8, filed July 21, 1988,
Registration No. 33-23196. Here incorporated by reference.
10.4 Amended and Restated Directors Stock Option Plan. Previously
filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended January 1, 1994. Here incorporated by
reference.
10.5 Employees Pension Plan. Previously filed as Exhibit 10.5 to
the Company's Annual report on Form 10-K for the fiscal year ended
January 3, 1998. Here incorporated by reference.
10.6 Employment Agreement dated April 27, 1998, between the Company and
Geoffrey B. Bloom.
10.7 Executive Long-Term Incentive (Three Year) Plan 1996-1998
Period. Previously filed as Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 28,
1996. Here incorporated by reference.
10.8 1994 Directors' Stock Option Plan. Previously filed as Exhibit
10(aa) to the Company's Quarterly Report on Form 10-Q for the
period ended June 18, 1994. Here incorporated by reference.
10.9 Stock Option Loan Program. Previously filed as Exhibit 10(h)
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 28, 1991. Here incorporated by reference.
10.10 Executive Severance Agreement. Previously filed as Exhibit
10.10 to the Company's Annual Report on Form 10-K for the fiscal
year ended January 3, 1998. Here incorporated by reference.
10.11 Supplemental Executive Retirement Plan, as amended. Previously
filed as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the period ended June 15, 1996. Here incorporated by
reference. An updated participant schedule is attached as Exhibit
10.11.
10.12 1995 Stock Incentive Plan. Previously filed as an Appendix to
the Company's Definitive Proxy Statement with respect to the
Company's Annual Meeting of Stockholders held on April 19, 1995.
Here incorporated by reference.
10.13 Executive Long-Term Incentive (Three Year) Plan for the three year
period 1994-1996. Previously filed as Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 30, 1995. Here incorporated by reference.
-2-
10.14 Executive Long-Term Incentive (Three Year) Plan for the three year
period 1995-1997. Previously filed as Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 30, 1995. Here incorporated by reference.
10.15 Indemnification Agreements. The form of agreement was
previously filed as Exhibit 10(n) to the Company's Annual Report on
Form 10-K for the fiscal year ended January 2, 1993. Here
incorporated by reference. The Company has entered into an
Indemnification Agreement with each director and executive officer.
10.16 Supplemental Retirement Benefits. Previously filed as
Exhibit 10(l) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988. Here incorporated by
reference.
10.17 Benefit Trust Agreement dated May 19, 1987, and Amendments Number
1, 2 and 3 thereto. Previously filed as Exhibit 10(p) to the
Company's Annual Report on Form 10-K for the fiscal year ended
January 2, 1993. Here incorporated by reference.
10.18 1996 Executive Short-Term Incentive Plan (Annual Bonus Plan).
Previously filed as Exhibit 10.19 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 30, 1995. Here
incorporated by reference.
10.19 Outside Directors' Deferred Compensation Plan. Previously filed
as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the period ended June 15, 1996. Here incorporated by reference.
10.20 1984 Executive Incentive Stock Purchase Plan, and amendment.
Previously filed as Exhibit 10(b) to the Company's Annual Report on
Form 10-K for the fiscal year ended January 2, 1988. Here
incorporated by reference.
10.21 Supplemental Director's Fee Agreement dated as of March 27, 1995,
between the Company and Phillip D. Matthews. Previously filed
as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the period ended March 25, 1995. Here incorporated by reference.
10.22 Restricted Stock Agreement dated as of March 27, 1995, between the
Company and Phillip D. Matthews. Previously filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the period
ended March 25, 1995. Here incorporated by reference.
-3-
10.23 1997 Stock Incentive Plan. Previously filed as Appendix A to
the Company's Definitive Proxy Statement with respect to the
Company's Annual Meeting of Stockholders held on April 16, 1997.
Here incorporated by reference.
10.24 Executive Short-Term Incentive Plan (Annual Bonus Plan).
Previously filed as Appendix B to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of
Stockholders held on April 16, 1997. Here incorporated by
reference.
10.25 Executive Long-Term Incentive Plan (3-Year Bonus Plan).
Previously filed as Appendix C to the Company's Definitive Proxy
Statement with respect to the Company's Annul Meeting of
Stockholders held on April 16, 1997. Here incorporated by
reference.
21 Subsidiaries of Registrant.
23 Consent of Independent Auditors.
24 Powers of Attorney.
27 Financial Data Schedule.
___________________________
Management contract or compensatory plan or arrangement.
-4-