WWW Form 10-K - Fiscal Year Ended January 1, 2005

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________

Form 10-K

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended January 1, 2005

 

 

[  ]

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
(State or other jurisdiction of
incorporation or organization)

38-1185150
(I.R.S. Employer Identification No.)

 

 

 

 

 

 

9341 Courtland Drive, Rockford, Michigan
(Address of principal executive offices)

49351
(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.  [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

 

Yes

X


 

No

 


 

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 June 19, 2004, the last business day of the registrant's most recently completed second fiscal quarter: $939,739,102.

Number of shares outstanding of the registrant's Common Stock, $1 par value (excluding shares of treasury stock) as of March 11, 2005: 57,903,836.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the registrant's annual stockholders' meeting to be held April 21, 2005, are incorporated by reference into Part III of this report.






FORWARD-LOOKING STATEMENTS

          This Report on Form 10-K contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the footwear business, worldwide economics and the Company itself. Statements, including without limitation, those related to: future revenue, earnings, margins, growth, cash flows, operating measurements, tax rates and tax benefits; expected economic returns; projected 2005 operating results and dividend rates; future share repurchase activity; future strength of the Company; future pension costs; future marketing investments; the introduction of new lines or categories of products; future growth or success in specific countries, categories or market sectors; liquidity; capital resources and market risk are forward-looking statements. In addition, words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," "should," "will," variati ons of such words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Risk 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.

          Risk 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; cancellation of future orders, changes in planned customer demand or at-once orders; the availability and pricing of foreign footwear factory capacity; reliance on foreign sourcing and concentration of production in China; the availability and price of power, labor and resources in key foreign sourcing countries, including China; the impact of competition and pricing; changes in government and regulatory policies; foreign currency fluctuations; changes in trading policies or import and export regulations; changes in interest rates, tax laws, duties, tariffs, quotas or applicable assessments; technological developments; changes in local, domestic or international economic and market conditions; the size and growth of footwear markets; service interruptions at shipping and receiving ports; changes in the price of oil and other raw materials; changes in the amount or severity of inclement weather; changes due to the growth of Internet commerce; popularity of particular designs and categories of footwear; the ability of the Company to manage and forecast its growth and inventories; the ability to secure and protect trademarks, patents and other intellectual property; integration of operations of newly acquired businesses; changes in business strategy or development plans; the ability to attract and retain qualified personnel; labor strikes or disruptions; the ability to retain rights to brands licensed by the Company; loss, bankruptcy and credit limitations of significant customers; relationships with international distributors and licensees; the Company's ability to meet at-once orders; the exercise of future purchase options by the U.S. Department of Defense on previously awarded contracts; the risk of doing business in developing countries and economically volatile areas; domestic and international terrori sm and war; retail buying patterns; consolidation in the retail sector; and the acceptability of U.S. brands in international markets. Additionally, concern regarding acts of terrorism, the war in Iraq and subsequent events have created significant global economic and political uncertainties that may have material and adverse effects on consumer demand, foreign sourcing of footwear, shipping and transportation, product imports and exports and the sale of products in foreign markets. These matters are representative of the Risk 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. The Risk Factors included here are not exhaustive. Other Risk Factors exist, and new Risk Factors emerge from time-to-time, that may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, inves tors should not place undue reliance on forward-looking statements as a prediction of actual results. Furthermore, the Company undertakes no obligation


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to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

PART 1

Item 1.  Business.

General.

          Wolverine World Wide, Inc. (the "Company") is a leading designer, manufacturer and marketer of a broad line of quality casual shoes, rugged outdoor and work footwear, and constructed slippers and moccasins. The Company, a Delaware corporation, is the successor 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 42.7 million pairs of Company branded footwear during fiscal 2004, making the Company a global leader among footwear companies in the marketing of branded casual, work and outdoor footwear. The Company's products generally feature contemporary styling with proprietary technologies designed to provide maximum comfort and performance. The products are marketed throughout the world under widely recognized brand names, including Bates®, CAT®, Harley-Davidson®, Hush Puppies®, HyTest®, Merrell®, Sebago®, Stanley® and Wolverine®. The Company believes that its primary competitive strengths are its well-recognized brand names, broad range of comfortable footwe ar, patented and proprietary designs and 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 currently organized under five operating units: (i) the Wolverine Footwear Group, focusing on the Bates®, HyTest®, Stanley® and Wolverine® product lines of work, outdoor, uniform and lifestyle boots and shoes, (ii) the Outdoor Group, focusing on the Sebago® and Merrell® product lines of performance and lifestyle footwear, (iii) the Heritage Brands Group, focusing on the CAT® product lines of work and lifestyle footwear and the Harley-Davidson® lines of lifestyle and performance footwear, (iv) The Hush Puppies Company, focusing on the Hush Puppies® brand of comfortable casual and dress footwear and slippers, and (v) Other Branded Footwear, focusing on the design and manufacture of private label footwear. The Company also licenses its brands for use on non-footwear products including apparel, eyewear, watches, socks, gloves, handbags and plush toys.

          The Company's Global Operations Group is responsible for manufacturing, sourcing, distribution and customer support for the various Company brands. The Company's footwear is distributed domestically through 70 Company-owned retail stores and to numerous accounts including department stores, footwear chains, catalogs, specialty retailers, mass merchants and Internet retailers. Many of the retailers to whom Wolverine distributes operate multiple storefront locations. The Company's products are distributed worldwide in over 140 markets through licensees and distributors.

          The Company, through its Wolverine Leathers Division, operates a tannery which is one of the premier tanners of quality pigskin leather for the shoe and leather goods industries. Pigskin leather tanned by the Company is used in a significant portion of the footwear marketed by the Company, and is also sold to Company licensees and other domestic and foreign manufacturers of footwear. In addition, Wolverine Procurement, Inc., a Company-owned subsidiary, performs skinning operations and purchases

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raw pigskins which it then cures and sells to outside customers for processing into pigskin leather products.

          For financial information regarding the Company, see the consolidated financial statements of the Company and the notes thereto, which are attached as Appendix A to this Form 10-K. The Company has one reportable segment, Branded Footwear and Licensing. The Branded Footwear and Licensing segment is engaged in manufacturing, sourcing, licensing, marketing and distributing branded footwear, including casual shoes, slippers, moccasins, dress shoes, boots, uniform shoes, work shoes and performance outdoor footwear. The Company's Other Business units consist of its retail stores, tannery and pigskin procurement operations. Financial information regarding the Company's business segments and financial information about geographic areas is found in Note 9 to the consolidated financial statements of the Company that are attached as Appendix A to this Form 10-K.

Branded Footwear and Licensing.

          The Company sources and markets a broad range of footwear styles including shoes, boots, slippers, moccasins and sandals under many recognizable brand names including Bates®, CAT®, Harley-Davidson®, Hush Puppies®, HyTest®, Merrell®, Sebago®, Stanley® and Wolverine®. 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 also licenses its brands for use on non-footwear products including apparel, eyewear, watches, socks, handbags and plush toys. Current significant licensing programs include Hush Puppies® apparel , eyewear, watches and plush toys, and Wolverine® brand apparel, gloves and eyewear.

          The Company's five branded footwear and licensing operating units are described below.

          1.          Wolverine Footwear Group. The Wolverine Footwear Group encompasses footwear primarily under the Wolverine®, Bates®, HyTest® and Stanley® brands and markets footwear designed with performance and comfort features to serve a variety of work, outdoor and lifestyle functions.

          Wolverine® Work and Industrial Footwear. The Wolverine® brand has built its reputation by offering high quality work boots and shoes that incorporate innovative technologies to deliver comfort and durability. The Wolverine® brand, which has been in existence for 122 years, markets work and outdoor footwear in three categories: (i) work and industrial; (ii) outdoor sport; and (iii) rugged casual. The development of DuraShocks® technology and, in 2004, Wolverine MultiShox™ technology, has allowed the Wolverine® brand to introduce a broad line of work footwear with a focus on comfort. The Wolverine Fusion®, DuraShocks SR™ and Wolverine Compressor™ technologies represent the Company's tradition of comfortable work and industrial footwear, a tradition that is continued and enhanced with the development of the Wolverine MultiShox™ Individual Comfort System. The Wolverine® work product line features work boots and shoes, including steel toe boots and shoes, targeting male and female industrial and farm workers. The Wolverine® rugged casual and outdoor sport product lines incorporate DuraShocks® technology and other comfort features into products designed for casual and outdoor sport use. The rugged casual line targets active lifestyles and includes walking shoes, rugged casuals and outdoor sandals. The outdoor sport line is designed to meet the demands of hunters, fishermen and other active outdoor sportsmen and women. Warmth, waterproofing and comfort are achieved through the use of Gore-Tex® and Thinsulate® brand fabrics, the Company's performance leathers


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and patented DuraShocks® technologies. In addition, the Wolverine® brand is licensed for use on apparel, eyewear, watches and gloves.

          Bates® Uniform Footwear. The Bates Uniform Footwear Division is an industry leader in supplying footwear to military and civilian uniform users. The Bates Uniform Footwear Division utilizes DuraShocks®, DuraShocks SR™, CoolTech® and other proprietary comfort technologies in the design of its military-style boots and oxfords including the Bates®, Enforcer Series® and Special Ops™ footwear lines. The Bates Uniform Footwear Division contracts with the U.S. Department of Defense and the militaries of several foreign countries to supply military footwear. Civilian uniform uses include police, security, postal, restaurant and other industrial occupations. Bates Uniform Footwear Division's products are also distributed through specialty retailers and catalogs.

          HyTest® Safety Footwear. The HyTest® product line consists primarily of high-quality work boots and shoes designed to protect male and female industrial workers from foot injuries. HyTest® footwear incorporates various specialty safety features into its product lines, including steel toe, composite toe, metatarsal guards, electrical hazard, static dissipating and conductive footwear to protect against hazards of the workplace. In addition, HyTest® brand footwear incorporates features such as FootRests® comfort technology to provide comfort together with safety for working men and women. HyTest® footwear is distributed primarily through a network of independently-owned Shoemobile® mobile truck retail outlets providing direct sales of the Company 's occupational and work footwear brands to workers at industrial facilities and also through direct sales arrangements with large industrial customers.

          Stanley® Footgear. Pursuant to a license arrangement with The Stanley Works, the Company has exclusive rights to manufacture, market, distribute and sell footwear under the Stanley® brand. The Stanley® Footgear line is designed primarily for and marketed in the value-priced work footwear market. Stanley® Footgear is currently sold in Payless ShoeSource, Inc. stores throughout the United States.

          2.          The Outdoor Group. The Outdoor Group consists of Merrell® and Sebago® footwear and includes performance outdoor, hiking and nautical footwear as well as casual and after-sport footwear.

          Merrell® Footwear. The Merrell® product line consists primarily of technical hiking, rugged outdoor and outdoor-inspired casual footwear designed for backpacking, day hiking and everyday use. The Merrell® product line also includes the "After-Sport" category, incorporating Merrell® footwear's technical hiking and outdoor expertise with Wolverine Performance Leathers™ and other technical materials to create footwear with unique styling, performance and comfort features. In spring of 2005, the Outdoor Group launched its tightly-focused Merrell® Continuum™ product offering, featuring four product categories that are organized by end use (Hiking, Active Speed, Multi-Sport, and Aqua Sport). In addition to footwear, the Outdoor Group markets a line of Merrell® packs, bags and luggage. Merrell® products are sold primarily through outdoor specialty retailers, department stores and catalogs. Merrell® footwear is marketed in over 120 countries worldwide.

          Sebago® Footwear. The Sebago® product line consists primarily of performance nautical and American-inspired casual footwear for men and women such as


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handsewn loafers and boat shoes that have been manufactured and distributed since 1946. Highly recognized Sebago® line extensions include Docksides, Drysides and Campsides. The Sebago® product line is distributed in over 85 countries worldwide. The Sebago® manufacturing and design tradition of quality componentry, durability, comfort and "Americana" heritage is further supported by targeted distribution to better-grade independent, marine and department store retailers throughout the world.

          3.          The Heritage Brands Group. The Heritage Brands Group was formed in 2004 and consists of Caterpillar® Footwear and Harley-Davidson® Footwear. Previously Caterpillar® Footwear was operated as a separate operating unit and Harley-Davidson® Footwear was part of the Wolverine Footwear Group.

          Caterpillar® Footwear. Pursuant to a license arrangement with Caterpillar Inc., the Company has exclusive worldwide rights to manufacture, market and distribute footwear under the Caterpillar®, CAT & Design®, Walking Machines® and other trademarks. The Company believes the association with CAT® equipment enhances the reputation of its footwear for quality, ruggedness and durability. CAT® brand footwear products include work boots and shoes, sport boots, rugged casuals and lifestyle footwear, including lines of work and casual footwear featuring CAT® iTechnology and Hidden Tracks® comfort features. In addition, the Company also manufactures and markets CAT® Marine Power® footwear, designed for industrial and recreational marine uses. CAT® footwear products target work and industrial users and active lifestyle users. CAT® footwear is marketed in over 130 countries worldwide.

          Harley-Davidson® Footwear. Pursuant to a license arrangement with the Harley-Davidson Motor Company, the Company has the exclusive right to manufacture, market, distribute and sell Harley-Davidson® brand footwear throughout the world. Harley-Davidson® brand footwear products include motorcycle, casual, fashion, work and western footwear for men, women and children. Harley-Davidson® footwear is sold globally through a network of independent Harley-Davidson® dealerships as well as through department stores and specialty retailers.

          4.          The Hush Puppies Company. Since 1958, the Hush Puppies® brand has been a leader in the casual footwear market. The brand offers shoes and boots for men, women and children, and is sold in over 110 countries. The modern styling is complemented by a variety of comfort features and proprietary technologies that have earned the brand its reputation for comfort. In addition, the Hush Puppies® brand is licensed for use on apparel, eyewear, handbags and plush toys.

          5.          Other Branded Footwear. The Company designs and manufactures constructed slippers, aftersport footwear, moccasins and children's footwear on a private label basis according to customer specifications. The styling of the Company'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. In addition to its traditional line of private label products, the Company has developed a College Clogs™ program for the sale of licensed collegiate slipper products.




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Other Businesses.

          In addition to manufacturing, sourcing, marketing and distributing the Company's footwear products as reported in the Branded Footwear and Licensing 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 70 domestic retail footwear stores.

          1.          The Wolverine Leathers Division. The Wolverine Leathers Division produces pigskin leathers primarily for use in the footwear industry. Wolverine Leathers® brand products are primarily manufactured in the Company's pigskin tannery located in Rockford, Michigan. The Company believes these leathers offer superior performance and advantages over cowhide leathers. The Company's waterproof and stain resistant leathers are featured in many of the Company's domestic footwear lines and many products offered by the Company's international licensees and distributors. Wolverine performance leathers are also featured in certain outside brands of athletic and outdoor footwear.

          2.          Wolverine Procurement, Inc. Wolverine Procurement, Inc. performs skinning operations and purchases raw pigskins from third parties, which it cures and sells to the Wolverine Leathers Division and to outside customers for processing into pigskin leather products.

          3.          Wolverine Retail. The Company operates 70 domestic retail shoe stores as of February 2005. These stores are under the Hush Puppies and FamilySM and Track'n Trail® names. The Company expects to open new stores under both formats in 2005. Both retail formats carry a large selection of Company branded footwear featuring such brands as Wolverine®, Merrell®, Hush Puppies®, CAT®, Sebago® and Harley-Davidson®. The Company also operates direct-to-customer retail websites, including www.upfootgear.com, www.trackandtrail.com, www.catfootwear.com and www.hushpuppies.com.

Marketing.

          The Company's overall marketing strategy is to develop brand-specific plans and related promotional materials for the United States and international markets to foster a differentiated and consistent image for each of the Company's core footwear brands. Each footwear brand group has its own marketing personnel who develop the marketing strategy for products within that group. Marketing campaigns and strategies vary by brand and may target accounts and/or end users as they 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 vary and may include print, radio and television advertising, event sponsorships, 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 that may be provided by the Company to its licensees and distributors are (i) direction on 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 on retail store layout and design. The Company believes its footwear brand names provide a competitive advantage and the Company makes significant


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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 the following distribution strategies.

 

Traditional wholesale distribution is used to service department stores, large footwear chains, specialty retailers, catalogs, independent retailers and uniform 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 merchant and government customers.

 

 

 

 

A network of independent Shoemobile® distribution outlets is used to distribute the Company's work and occupational footwear at industrial facilities.

 

 

 

 

The Company solicits all branches of the United States military and enters bids for contracts to supply specific footwear products.

          In addition to its wholesale activities, the Company also operates a domestic retail operation as described above. The Company continues to develop various programs, both independently and with its retail customers, for the distribution of its products.

          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 revenue in fiscal 2004.

          The Company experiences moderate fluctuations in sales volume during the year as reflected in quarterly revenue (and taking into consideration the 16 weeks or 17 weeks included in the fourth accounting period versus the 12 weeks included in the first three accounting periods). The Company also experiences some fluctuation in its levels of working capital, typically including an increase in working capital requirements near the end of the third quarter. 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 current seasonal sales patterns 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 owned operations in Canada, the United Kingdom, Austria, Finland, France, Germany, The Netherlands, Spain, Sweden and Switzerland and from royalty income through a network of independent licensees and distributors. The Company's owned operations include Hush Puppies (UK) Ltd., Merrell Europe B.V., Merrell (Europe) Limited, Wolverine Europe Limited and Wolverine World Wide Corporation, Inc. (formerly known as Hush Puppies Canada Footwear, Ltd.). In addition, in January 2005, the Company's Canadian subsidiary, Wolverine World Wide Corporation, Inc., purchased selected assets of the Canadian CAT and Wolverine footwear businesses from the Company's former independent distributor, Wolverine Canada, Inc.; and also


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acquired the assets of the Company's Merrell Canada division to centralize its Canadian operations. The Company also acquired selected assets of its Merrell distributors in Sweden and Finland and began direct distribution of Sebago® brand products to retailers in the U.K. and Germany. 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 products (primarily Company footwear) bearing the Hush Puppies®, Wolverine®, Bates®, HyTest®, Merrell®, Sebago® and other trademarks by independent distributors and licensees. The Company also derives royalty income from sales of footwear bearing the CAT®, and Harley-Davidson® trademarks through foreign distributors. License and distribution arrangements enable the Company to develop sales in international markets without the capital commitment required to maintain related foreign operations, employees, inventories or localized marketing programs.

          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. Independent licensees and distributors purchase goods from either the Company or authorized third-party manufacturers pursuant to distribution agreements or manufacture branded products consistent with Company standards pursuant to license agreements. Distributors and licensees are responsible for independently marketing and distributing Company branded products in their respective territories, with product and market support provided by the Company.

Manufacturing and Sourcing.

          The Company controls the sourcing and manufacture of approximately 76% of the pairs of footwear marketed under the Company's brand names globally. The balance is controlled directly by the Company's licensees. Of the pairs controlled by the Company, approximately 88% are purchased or sourced from third parties, with the remainder produced at Company-operated facilities. Footwear produced by the Company is manufactured at Company-operated facilities in several domestic and certain affiliated foreign facilities located in Michigan, Arkansas, and the Dominican Republic. For some of the Company-produced footwear, a "twin plant" concept is utilized 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 Dominican Republic and Arkansas, and the technology intensive construction, or "bottoming," is performed primarily at the Company's Michigan facilities.

          The Company's factories each have the flexibility to produce a variety of footwear, which departs from the industry's historical 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 currently produces slippers, military footwear and work, casual and dress casual footwear in its domestic and/or Dominican Republic facilities.

          The Company sources a majority of its 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 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 adopted "Engagement Criteria for Partners & Sources" to require that its domestic and foreign manufacturers, licensees and distributors use 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.



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          The Company's domestic manufacturing operations allow the Company to (i) reduce its production 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 manufacturing costs and state-of-the-art manufacturing facilities, (ii) source the highest quality raw materials from around the world, and (iii) avoid additional capital expenditures necessary for owned 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 a pigskin tannery through its Wolverine Leathers Division, 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 pigskin leather using proprietary technology at prices below those available from other sources.

          The Company's principal required raw material is quality leather, which it purchases from a select group of domestic and offshore suppliers, including the Company's tannery. The global availability of common upper materials and specialty leathers 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 one domestic source. This source has been a reliable and consistent supplier for over 30 years. Alternative sources of pigskin are available; however the price, processing and/or product characteristics are less advantageous to the Company. 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 or terrorism, political disturbances and similar events, the imposition of trade barriers, quotas and tariffs, loss of most favored nation trading status and currency and exchange rate fluctuations. 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 have an adverse impact on the Company's operations and financial condition.

Trademarks, Licenses and Patents.

          The Company holds a significant portfolio of registered and common law trademarks that identify its branded footwear products. The owned trademarks that are most widely used by the Company include Hush Puppies®, Wolverine®, Bates®, Wolverine Fusion®, DuraShocks®, Wolverine MultiShox, Wolverine Compressor™, Hidden Tracks®, iTechnology, Bounce®, Comfort Curve®, HyTest®, Merrell®, Continuum™, Sebago®, and Track'n Trail®. The Company has obtained license rights to manufacture, market and distribute footwear throughout the world under the CAT&re g; and Harley-Davidson® trademarks, and the right to manufacture, market and distribute footwear in the United States and other countries under the Stanley® trademark, all pursuant to license arrangements with the respective trademark owners. The CAT®, Harley-Davidson®, and Stanley® licenses are long-term and extend for five or more years with conditional renewal options and are subject to early termination for breach. Pigskin leather produced by the Company's Wolverine Leathers Division is sold under the trademarks Wolverine Leathers®, Weather Tight® 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


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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 many design and utility patents, copyrights and various other proprietary rights. The Company protects all of its proprietary rights to the greatest extent practicable under applicable laws.

Order Backlog.

          At March 14, 2005, the Company had an order backlog of approximately $326 million compared with an order backlog of approximately $274 million at March 13, 2004. Substantially all of the backlog relates to demand for products expected to be shipped in 2005. Orders in backlog are subject to cancellation by customers and to changes in planned customer demand or at-once orders. The backlog at a particular time is affected by a number of factors, including seasonality, retail conditions, expected customer demand, product availability and the schedule for the manufacture and shipment of products. 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 domestic and foreign marketers, manufacturers 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 and Europe. The Company has at least ten major competitors in connection with the sale of its work shoes and boots, at least ten major competitors in connection with the sale of its sport boots, and at least thirty major competitors in connection with the sale of its casual, work and outdoor 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 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 non-athletic footwear industry are highly fragmented and no one company has a dominant market position.

Research and Development.

          In addition to normal and recurring product development, design and styling activities, the Company engages in research and development related to the development of new production techniques and to improving the function, performance, reliability and quality of its branded footwear and other products. The Company's continuing relationship with the Biomechanics Evaluation Laboratory at Michigan State University, for example, has led to specific biomechanical design concepts, such as Bounce®, DuraShocks® and Hidden Tracks® 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.



11


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 and its subsidiaries. The Company uses and generates 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 and other regulatory issues.

Employees.

          As of January 1, 2005, the Company had approximately 5,134 domestic and foreign production, office and sales employees. Approximately 640 employees were covered by three union contracts expiring at various dates through May 1, 2006. The Company presently considers its employee relations to be good.

Available Information.

          Information about the Company, including the Company's Code of Conduct & Compliance, Corporate Governance Guidelines, Director Independence Standards, Accounting and Finance Code of Ethics, Audit Committee Charter, Compensation Committee Charter, Executive Committee Charter and Governance Committee Charter, is available at its website, http://www.wolverineworldwide.com. Printed copies of the documents listed above are available by writing to the Company at 9341 Courtland Drive, N.E., Rockford, MI 49351, Attention: Director of Investor Relations.

          The Company also makes available on or through its website, free of charge, the Company's annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports (along with certain other Company filings with the Securities and Exchange Commission ("SEC")) as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC. These materials are also accessible on the SEC's website at www.sec.gov.

Item 2.  Properties.

          The Company operates its domestic administration, sales and marketing operations primarily from an owned facility of approximately 225,000 square feet in Rockford, Michigan. The Company's manufacturing and tanning operations are primarily conducted at a combination of leased and owned facilities in Arkansas, Michigan and the Dominican Republic. The Company operates its warehousing operations primarily through owned warehouses in Rockford, Michigan, totaling approximately 475,000 square feet, a leased warehouse in Cedar Springs, Michigan, of approximately 362,000 square feet and a leased warehouse in Howard City, Michigan, of approximately 350,000 square feet, which the Company currently expects to expand by approximately 100,000 square feet.

          The Company also leases and owns various other offices and warehouses in the United States to meet its operational requirements. In addition, the Company's subsidiary, Hush Puppies Retail, Inc., operates retail stores through leases with various third-party landlords. International operations are conducted in Canada, the United Kingdom, and Europe through leased warehouses, offices and


12


showrooms. The Company believes that its current facilities are suitable and adequate for its current needs.

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 related to legal and regulatory matters 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 future results of operations.

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 January 1, 2005, 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

 

 

 

 

 

Steven M. Duffy

52

Executive Vice President and President,
   Global Operations Group

 

V. Dean Estes

55

Vice President and President,
   Wolverine Footwear Group

 

Stephen L. Gulis, Jr.

47

Executive Vice President, Chief Financial
   Officer and Treasurer

 

Blake W. Krueger

51

Executive Vice President, Secretary, and
   President, Heritage Brands Group

 

Timothy J. O'Donovan

59

Chief Executive Officer and President

 

Nicholas P. Ottenwess

42

Vice President of Finance and Corporate
   Controller

 

Robert J. Sedrowski

55

Vice President of Human Resources

 

James D. Zwiers

37

General Counsel and Assistant
   Secretary

          Steven M. Duffy has served the Company as Executive Vice President since April 1996 and is President of the Company's Global Operations Group. From 1993 to 1996 he served as Vice President. From 1989 to 1993 he served in various senior manufacturing positions.

          V. Dean Estes has served the Company as 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 related businesses.



13


          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 as Vice President and Chief Financial Officer. From 1993 to 1994 he served 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, Secretary and President of the Heritage Brands Group since August 2004. From November 2003 to August 2004 he served the Company as Executive Vice President, Secretary, and President of Caterpillar Footwear. From April 1996 to November 2003 he served the Company as Executive Vice President, General Counsel and Secretary. From 1993 to April 1996 he served as General Counsel and Secretary. From 1985 to 1996 he was a partner with the law firm of Warner Norcross & Judd LLP.

          Timothy J. O'Donovan has served the Company as Chief Executive Officer and President since April 2000. From 1996 to April 2000 he served as Chief Operating Officer and President. From 1982 to April 1996 he served as Executive Vice President.

          Nicholas P. Ottenwess has served the Company as Vice President of Finance and Corporate Controller since June 2001. From September 1997 to June 2001 he served as Corporate Controller. From 1993 to September 1997 he served as Vice President of Finance and Administration for The Hush Puppies Company.

          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.

          James D. Zwiers has served the Company as General Counsel and Assistant Secretary since December 2003. From January 1998 to December 2003 he served the Company as Associate General Counsel and Assistant Secretary. From 1995 to 1998 he was an attorney with the law firm of Warner Norcross & Judd LLP.


PART II

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

          The Company's common stock is traded on the New York Stock Exchange and the Pacific Exchange under the symbol "WWW." The following table shows the high and low stock prices on the New York Stock Exchange and dividends declared by calendar quarter for 2004 and 2003. The prices and dividends shown below have been retroactively adjusted to reflect the three-for-two stock split distributed on February 1, 2005. The number of stockholders of record on March 1, 2005 was 1,518.

 


 


 


 


 


 


 


 


      2004


 


    2003


 


 


Stock Price


High


 


Low


 


High


 


Low


 


 

First quarter

$

16.10

 

$

13.40

 

$

11.72

 

$

9.53

 

 

Second quarter

 

18.81

 

 

15.38

 

 

12.87

 

 

10.70

 

 

Third quarter

 

17.92

 

 

14.27

 

 

14.00

 

 

12.35

 

 

Fourth quarter

 

21.66

 

 

16.18

 

 

14.39

 

 

13.00

 



14


 


 


 


 


 


 


 


Cash Dividends Declared Per Share:


2004


 


2003


 


 

     First quarter

$

.043

 

$

.037

 

 

     Second quarter

 

.043

 

 

.037

 

 

     Third quarter

 

.043

 

 

.037

 

 

     Fourth quarter

 

.065

 

 

.037

 


 

A quarterly dividend of $.065 per share was declared during the first quarter of fiscal 2005.

 

 

 

See Item 12 for information with respect to the Company's equity compensation plans.

The following table relates information regarding the Company's purchases of its own common stock during the fourth quarter:

Issuer Purchases of Equity Securities (1)









Period







Total
Number of
Shares
Purchased








Average
Price Paid
per Share


Total Number
of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs




Maximum
Number
of Shares that
May
Yet Be Purchased
Under the Plans or
Programs


 

Period 1 (September 12, 2004 to October 9, 2004)

 

 

 

 

 

 

 

 

   Common Stock Repurchase Program(2)

     

$

     

 

     

 

3,326,832

 

   Employee Transactions(3)

24,111

 

18.30

 

N/A

 

N/A

 

Period 2 (October 10, 2004 to November 6, 2004)

 

 

 

 

 

 

 

 

   Common Stock Repurchase Program(2)

     

 

     

 

     

 

3,326,832

 

   Employee Transactions(3)

256,466

 

19.87

 

N/A

 

N/A

 

Period 3 (November 7, 2004 to December 4, 2004)

 

 

 

 

 

 

 

 

   Common Stock Repurchase Program(2)

365,550

 

19.55

 

365,550

 

2,961,282

 

   Employee Transactions(3)

     

 

     

 

N/A

 

N/A

 

Period 4 (December 5, 2004 to January 1, 2005)

 

 

 

 

 

 

 

 

   Common Stock Repurchase Program(2)

     

 

     

 

     

 

2,961,282

 

   Employee Transactions(3)

592,545

 

20.80

 

N/A

 

N/A

 

Total for Fourth Quarter ended January 1, 2005

 

 

 

 

 

 

 

 

   Common Stock Repurchase Program(2)

365,550

$

19.55

 

365,550

 

2,961,282

 

   Employee Transactions(3)

873,122

 

20.46

 

N/A

 

N/A

 


 

1.

The information in this table and in these notes has been adjusted to reflect the three-for-two stock split distributed on February 1, 2005.

 

2.

The Company's Board of Directors approved two common stock repurchase programs, one on October 5, 2004, and one on December 9, 2003. Each program authorizes the repurchase of 3.0 million shares of common stock over a 24-month period commencing on the effective date of the program. All shares repurchased during the period covered by this report were purchased under publicly announced programs.

 

3.

Employee transactions include: (1) shares delivered or attested in satisfaction of the exercise price and/or tax withholding obligations by holders of employee stock options who exercised



15


 

 

options and (2) restricted shares withheld to offset tax withholding that occurs upon vesting of restricted shares. The Company's employee stock compensation plans provides that the value of the shares delivered or attested to, or withheld, shall be the average of the high and low price of the Company's common stock on the date the relevant transaction occurs.



Item 6.  Selected Financial Data.

Five-Year Operating and Financial Summary(1)

 


 


 


 


 


 


 


 


 


 


 


 


2004


 


2003


 


2002


 


2001


 


2000


 


(Thousands of Dollars, Except Per Share Data) 

 

Summary of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Revenue

$

991,909

 

$

888,926

 

$

827,106

 

$

720,066

 

$

701,291

 

   Net earnings

 

65,938

 

 

51,716

 

 

47,912

 

 

45,240

 

 

10,690

 

   Per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Basic net earnings(2)(3)

$

1.15

 

$

.88

 

$

.79

 

$

.74

 

$

.17

 

     Diluted net earnings(2)(3)

 

1.09

 

 

.85

 

 

.77

 

 

.71

 

 

.17

 

     Cash dividends declared(2)

 

.19

 

 

.15

 

 

.12

 

 

.11

 

 

.09

 

Financial Position at Year End

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Total assets

$

639,571

 

$

593,762

 

$

531,994

 

$

543,678

 

$

494,568

 

   Long-term debt

 

43,904

 

 

59,923

 

 

72,915

 

 

90,848

 

 

92,194

 

Notes to Five-Year Operating and Financial Summary

1.

This summary should be read in conjunction with the consolidated financial statements and the notes thereto, which are attached as Appendix A to this Form 10-K. In particular, see the discussions of the fiscal 2000 $45.0 million realignment charge as discussed in the Company's 2000 Form 10-K filed with the Securities and Exchange Commission ("SEC") and Note 11 - Business Acquisitions.

 

 

2.

On December 15, 2004, the Company announced a three-for-two stock split in the form of a stock dividend on shares of common stock outstanding at January 3, 2005 distributed to stockholders on February 1, 2005. All per share data has been retroactively adjusted for the increased shares resulting from this stock split. Treasury shares were excluded from the stock split.

 

 

3.

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 outstanding restricted stock.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview
During 2004, Wolverine World Wide, Inc. (the "Company") achieved record revenue and earnings. Revenue increased 11.6% to $991.9 million, marking a fifth consecutive annual revenue increase. Earnings per share growth extended for a fourth consecutive year, improving 28.2% to $1.09 per share. The Company ended 2004 with $72.2 million in cash on hand and a debt balance at an eight-year low. For the sixth year in a row, the Company recorded positive cash generation from operating activities with 2004 cash generation reaching a record $106.4 million. Continued focus on asset management programs contributed to significant reductions in accounts receivable days sales outstanding as well as improved inventory turnover ratios.



16


The Company's 2004 performance is a direct result of the execution of the Company's strategic growth plan unveiled several years ago. The key growth strategies of this plan include:

Expanding our global reach - Consumers in more than 140 countries purchased over 42.7 million pairs of footwear bearing our brand names during 2004. The Company's European-based wholesale operations represented over 17% of the Company's 2004 revenue and achieved year-over-year revenue growth exceeding 20%.

Pursuing and delivering product excellence - Our product development process continues to strengthen as the Company strives to deliver innovative, high quality, market-right products. This strategy has resulted in an increased global market share. A benefit of the evolving product development process is the creation of tightly-focused product collections and improved inventory turns for the Company.

Strengthening our brand/business portfolio - The Company successfully integrated the Sebago® brand, acquired in November 2003, into its business portfolio. The first full year's revenue was on plan while earnings exceeded expectations. The Company continued to reach consumers directly through global concept stores and shop-in-shops for the Merrell® and Hush Puppies® brands and expanded its Track'n Trail® retail concept stores.

Providing service excellence to our customers - In an effort to better serve its customers, and to deliver product to market faster, the Company added several enhancements to its strong suite of business systems. SAP® upgrades included the launch of the business warehouse and strategic enterprise management modules to more effectively meet today's rigorous financial reporting requirements. The Company's Online Account Service capabilities were made available in Canada and Europe. Customers in those markets now have the same 24/7 access to online ordering and account review capabilities that have proven beneficial to U.S. retailers.

Building a strong team and Company culture - The Company continues to attract and retain excellent leadership throughout the business. We continue to improve our management strength through training and career development, and our success is a result of the dedication, skills and experience of our global team.

During 2005, the Company expects to achieve a significant milestone - crossing the $1.0 billion revenue mark. Our strategic plan is focused on creating shareholder value through the delivery of consistent revenue and earnings growth, improved operating leverage, effective asset utilization and strong cash generation. The three-year growth goals include:

Producing annual revenue growth averaging mid- to upper-single digits - The Company expects this growth to be generated through global expansion and market share gains from its operations.

Generating earnings growth at approximately 1.5 times the rate of revenue growth - The Company expects its operating model to generate earnings at a rate significantly greater than revenue growth.

Driving the global growth of the Company's brands through investments in marketing and product development - The Company plans to increase its investment in marketing and product development at rates faster than revenue growth by reinvesting a portion of expected margin gains into brand building activities.




17


The following is a discussion of the Company's results of operations and liquidity and capital resources. This section should be read in conjunction with the consolidated financial statements and notes. All share and per share amounts in management's discussion and analysis of financial condition and results of operations have been adjusted for all periods to reflect the three-for-two stock split distributed on February 1, 2005.

RESULTS OF OPERATIONS - FISCAL 2004 COMPARED TO FISCAL 2003

Financial Summary - 2004 versus 2003

 


2004


 


2003


 


Change


 


 


$


 


%


 


$


 


%


 


$


 


%


 


(Millions of Dollars, Except Per Share Data)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Branded footwear and licensing

$

903.6

 

91.1%

 

$

812.6

 

91.4%

 

$

91.0

 

11.2%

 

   Other business units


 


88.3


 


8.9%


 


 


76.3


 


8.6%


 


 


12.0


 


15.7%


 


      Total revenue


$


991.9


 


100.0%


 


$


888.9


 


100.0%


 


$


103.0


 


11.6%


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Branded footwear and licensing

$

343.1

 

38.0%

 

$

300.1

 

36.9%

 

$

43.0

 

14.3%

 

   Other business units


 


31.0


 


35.1%


 


 


26.5


 


34.7%


 


 


4.5


 


17.0%


 


      Total gross margin


$


374.1


 


37.7%


 


$


326.6


 


36.7%


 


$


47.5


 


14.5%


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

$

274.1

 

27.6%

 

$

246.7

 

27.7%

 

$

27.4

 

11.1%

 

Interest expense-net

 

3.2

 

0.3%

 

 

5.5

 

0.6%

 

 

(2.3

)

(41.8%

)

Other income-net

 

(0.3

)

0.0%

 

 

(0.7

)

(0.1%

)

 

(0.4

)

(57.1%

)

Earnings before income taxes and minority
   interest

 


97.1

 


9.8%

 

 


75.1

 


8.5%

 

 


22.0

 


29.3%

 

Net earnings

 

65.9

 

6.6%

 

 

51.7

 

5.8%

 

 

14.2

 

27.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

$

1.09

 

-

 

$

0.85

 

-

 

$

0.24

 

28.2%

 

The Company has one reportable segment that is engaged in manufacturing, sourcing, marketing and distributing branded footwear, licensed apparel and accessories. Within the Branded Footwear and Licensing segment, the Company has identified five operating units, consisting of the Wolverine Footwear Group (comprised of the Bates®, HyTest®, Stanley® and Wolverine® brands), the Outdoor Group (comprised of the Merrell® and Sebago® brands), the Heritage Group (comprised of Harley-Davidson® Footwear and CAT® Footwear), The Hush Puppies Company, and Other Branded Footwear. The Company's other business units consist of Hush Puppies® Retail and Wolverine® Leathers (comprised of the Tannery and Procurement operations). The following is supplemental information on total revenue:

Total Revenue

 


2004


 


2003


 


Change


 


 


$


 


%


 


$


 


%


 


$


 


%


 


(Millions of Dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wolverine Footwear Group

$

269.3

 

27.1%

 

$

255.4

 

28.7%

 

$

13.9

 

5.4%

 

Outdoor Group

 

286.6

 

28.9%

 

 

223.2

 

25.1%

 

 

63.4

 

28.4%

 

Heritage Group

 

159.4

 

16.1%

 

 

152.2

 

17.1%

 

 

7.2

 

4.7%

 

The Hush Puppies Company

 

157.8

 

15.9%

 

 

151.1

 

17.0%

 

 

6.7

 

4.4%

 

Other Branded Footwear


 


30.5


 


3.1%


 


 


30.7


 


3.5%


 


 


(0.2


)


(0.7%


)


   Total branded footwear and licensing revenue

$

903.6

 

91.1%

 

$

812.6

 

91.4%

 

$

91.0

 

11.2%

 

   Other business units


 


88.3


 


8.9%


 


 


76.3


 


8.6%


 


 


12.0


 


15.7%


 


      Total revenue


$


991.9


 


100.0%


 


$


888.9


 


100.0%


 


$


103.0


 


11.6%


 




18


REVENUE
Revenue for 2004 increased $103.0 million over 2003. A full year of revenue from Sebago® represented $26.3 million of the increase. Increases in unit volume, changes in product mix and changes in selling price for the Branded Footwear and Licensing segment operations, as discussed below, contributed $58.5 million of the revenue increase. The impact of translating foreign denominated revenue to U.S. dollars improved revenue by $18.2 million. Both domestic and international revenue increased with international revenue accounting for 27.6% of total revenue in 2004 compared to 24.5% in 2003.

The Wolverine Footwear Group's revenue increase was due to the success of the Bates® division. The Bates® brand improvements were driven by increased shipments of technical boot products to the U.S. military and the civilian uniform markets. A significant portion of the sales gain resulted from accelerated demand under a combat boot contract for the Department of Defense. Wolverine® Boots and Shoes recorded a decline in revenue principally as a result of lower average selling prices as the business responded to consumer demand for more boot product in the $80 - $120 retail price point category.

The Outdoor Group reported its seventh year of double-digit revenue growth. The Merrell® business accounted for over half of the increase. Merrell® experienced double-digit growth in the four wholesale markets that it services - U.S., Canada, U.K. and Europe. The Merrell® brand's presence continues to grow with 134 U.S. shop-in-shops in operation at year end. The Sebago® brand, in its first full year of operations, met its planned revenue goal. Approximately 60% of the Sebago® revenue was generated outside of the United States.

The Heritage Group recorded a mid-single-digit revenue increase for 2004. The Harley-Davidson® Footwear business recorded a slight increase for the year, with growth coming from new distribution channels. The CAT® Footwear business recorded revenue growth in the U.S., U.K. and, Europe and with the brand's international distributors. New product technologies introduced during the year as well as the impact of translating foreign denominated revenue to U.S. dollars contributed to the increase.

The Hush Puppies Company's revenue increase was generated from the U.K., Canada and the international licensing businesses. Within The Hush Puppies Company's foreign wholesale operations, Hush Puppies® U.K. reported a strong increase as a result of expanded distribution with fashion accounts. The Hush Puppies® Canada business recorded an increase in a challenging retail environment. Hush Puppies® U.S. experienced a revenue decrease as the business continued its transition plan from mature, lower-priced product to a younger, more contemporary-styled footwear assortment.

Revenue for Other Branded Footwear decreased as the Company executed a strategy to revamp its private label footwear offerings.

Within the Company's other business units, Hush Puppies® Retail reported a mid-single-digit same-store sales increase. Wolverine® Leathers recorded a revenue increase driven primarily by market demand for sueded leather footwear.

The Company ended 2004 with an order backlog approximately 13% above 2003 year-end levels. This backlog principally reflects demand for the first half of 2005.

GROSS MARGIN
The total gross margin level for 2004 of 37.7% was a 100 basis point improvement over the prior year. Benefits from favorable exchange rates comprise 60 basis points of the improvement. Inventory management programs as well as a higher margin product mix also contributed to the improvement.



19


SELLING AND ADMINISTRATIVE EXPENSES
The increase in selling and administrative expenses includes an additional $7.0 million investment in product development and marketing for the Company's branded products. The Company also recognized increases in profit sharing expense of $6.0 million. The impact of translating foreign denominated operating expense to U.S. dollars increased total expense by $4.9 million in 2004. The Company recorded a $1.2 million decrease in pension expense. The remaining increase relates primarily to selling costs that are directly variable to the increase in revenue.

INTEREST, OTHER & TAXES
The net decrease in interest expense reflects lower average outstanding amounts on senior notes and lower working capital borrowings during the year as well as interest income from invested cash.

The change in other income primarily relates to the change in realized gains or losses on foreign currency transactions.

The Company's 2004 effective income tax rate was 31.8% compared to 31.0% for 2003 and was in line with the Company's estimated annualized rate. The 2003 income tax rate included the cumulative impact of research and development tax credits, while 2004 reflected only one year of credit taken. The estimated annualized effective tax rate for fiscal 2005 is 32.0%.

NET EARNINGS
As a result of the revenue, gross margin and expense changes discussed above, the Company achieved 2004 net earnings of $65.9 million, an increase of $14.2 million over 2003.

RESULTS OF OPERATIONS - FISCAL 2003 COMPARED TO FISCAL 2002

Financial Summary - 2003 versus 2002

 


2003


 


2002


 


Change


 


 


$


 


%


 


$


 


%


 


$


 


%


 


(Millions of Dollars, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Branded footwear and licensing

$

812.6

 

91.4%

 

$

748.8

 

90.5%

 

$

63.8

 

8.5%

 

   Other business units


 


76.3


 


8.6%


 


 


78.3


 


9.5%


 


 


(2.0


)


(2.6%


)


      Total revenue


$


888.9


 


100.0%


 


$


827.1


 


100.0%


 


$


61.8


 


7.5%


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Branded footwear and licensing

$

300.1

 

36.9%

 

$

265.1

 

35.2%

 

$

35.0

 

13.2%

 

   Other business units


 


26.5


 


34.7%


 


 


29.1


 


39.2%


 


 


(2.6


)


(8.9%


)


      Total gross margin


$


326.6


 


36.7%


 


$


294.2


 


35.6%


 


$


32.4


 


11.0%


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

$

246.7

 

27.7%

 

$

217.2

 

26.3%

 

$

29.5

 

13.6%

 

Interest expense

 

5.5

 

0.6%

 

 

6.5

 

0.8%

 

 

(1.0

)

(15.3%

)

Other income-net

 

(0.7

)

0.1%

 

 

(1.0

)

0.1%

 

 

0.3

 

(34.4%

)

Earnings before income taxes and
   minority interest

 


75.1

 


8.5%

 

 


71.7

 


8.7%

 

 


3.4

 


4.9%

 

Net earnings

 

51.7

 

5.8%

 

 

47.9

 

5.8%

 

 

3.8

 

7.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

$

0.85

 

-

 

$

0.77

 

-

 

$

0.08

 

10.4%

 



20


The following is supplemental information on total revenue:

Total Revenue

 


2003


 


2002


 


Change


 


 


$


 


%


 


$


 


%


 


$


 


%


 


(Millions of Dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wolverine Footwear Group

$

255.4

 

28.7%

 

$

243.9

 

29.6%

 

$

11.5

 

4.7%

 

Outdoor Group

 

223.2

 

25.1%

 

 

180.0

 

21.7%

 

 

43.2

 

24.0%

 

Heritage Group

 

152.2

 

17.1%

 

 

149.8

 

18.1%

 

 

2.4

 

1.6%

 

The Hush Puppies Company

 

151.1

 

17.0%

 

 

143.9

 

17.4%

 

 

7.2

 

5.0%

 

Other Branded Footwear


 


30.7


 


3.5%


 


 


31.2


 


3.7%


 


 


(0.5


)


(1.6%


)


   Total branded footwear and
      licensing revenue


$


812.6

 


91.4%

 


$


748.8

 


90.5%

 


$


63.8

 


8.5%

 

   Other business units


 


76.3


 


8.6%


 


 


78.3


 


9.5%


 


 


(2.0


)


(2.6%


)


      Total revenue


$


888.9


 


100.0%


 


$


827.1


 


100.0%


 


$


61.8


 


7.5%


 


REVENUE
Revenue for 2003 increased $61.8 million over 2002. Increases in unit volume, changes in product mix and changes in selling prices for the branded footwear operations as discussed below contributed $45.1 million of the revenue increase. The impact of translating foreign denominated revenue to U.S. dollars improved revenue by $15.6 million. The acquisition of Sebago® added $3.1 million to revenue. These increases were offset by a $2.0 million decrease in the other business units. Both domestic and international revenue increased, with international revenue accounting for 24.1% of total revenue.

The Wolverine Footwear Group's revenue increase was largely due to the success of the Bates® division. The Bates® brand improvements were driven by increased shipments of technical boot products to the U.S. military and tactical ultra-light uniform footwear for the civilian uniform market. Wolverine® Boots and Shoes (including HyTest® and Stanley®) recognized an increase in units sold, but experienced a slight decline in revenue dollars per unit sold reflecting a continued shift in the marketplace to more moderately priced footwear.

The Outdoor Group reported its sixth consecutive year of double-digit revenue growth. The Merrell® U.S. footwear business accounted for approximately half of the increase, with growth coming from the outdoor/sporting goods and department store distribution channels. The Merrell® European and Canadian wholesale businesses also contributed to the increase, due to the expansion of multi-sport and casual footwear product sales. Revenue from the Merrell® international business increased with Italy, Japan, Argentina and Sweden/Finland each recognizing over a 100,000 pair increase from the prior year. Sebago®, which was purchased in November 2003, also contributed to the revenue increase for the Outdoor Group.

The Heritage Group had a slight sales increase for the year. Revenue from Harley-Davidson® Footwear improved due to expanded product offerings in the existing Harley-Davidson® dealerships, as well as in new distribution channels. CAT® Footwear realized a revenue decrease due to lower sales in the CAT® U.S. wholesale business, primarily caused by a reduction in shipments of work and industrial product resulting from cautious inventory reorders by large national chain retailers. The CAT® international distribution business reported improved revenues, reflecting an increase in pairs sold in Canada, South Africa, Saudi Arabia, Mexico and the Pacific Rim. The CAT® European business recognized an increase in revenue reflecting the impact of translating foreign denominated revenue to U.S. dollars.



21


The Hush Puppies Company's increase was generated primarily from the international divisions as a result of expanded retail distribution and higher royalty income from international licensees in the Pacific Rim and Europe. Within The Hush Puppies Company's foreign wholesale operations, Hush Puppies® U.K. reported strong increases in revenue as a result of expanded distribution of its better grade products while Hush Puppies® Canada revenue was up slightly for the year. Hush Puppies® U.S. experienced a slight decrease in revenue as it continued to transition from lower-priced, more mature products in favor of higher-priced, better-grade footwear aimed at a younger, more contemporary consumer.

Revenue for Other Branded Footwear decreased slightly due to lower shipments of private label product.

Within the Company's other business units, Hush Puppies® Retail reported an increase in the low-single-digit range as a result of same-store revenue increases and new store openings. Wolverine® Leathers recorded decreases in revenue due to reduced market demand for sueded leather used for footwear.

The Company ended 2003 with an order backlog of approximately 19% above 2002 year-end levels. The purchase of Sebago® contributed 4% of the increase.

GROSS MARGIN
The gross margin dollar and percentage increases for the branded footwear segment relate to the increased sales mix of the Company's lifestyle product offerings (80 basis points), fewer required markdowns on slow moving inventories (50 basis points) and favorable foreign exchange rate changes (20 basis points). The gross margin percentage for the other business units decreased as a result of inefficiencies and overhead absorption losses experienced in the Wolverine® Leathers operation due to reduced production levels. Hush Puppies® Retail's gross margin level remained flat.

SELLING AND ADMINISTRATIVE EXPENSES
The increase in selling and administrative expenses includes planned increases of $7.3 million in pension expense, due to reductions in the market value of assets and interest rates used in the actuarial valuation, and $2.3 million in employee benefit costs. The impact of translating foreign denominated operating expense to U.S. dollars increased total expenses by $6.6 million in 2003. The remaining increase relates primarily to selling and distribution costs that are directly variable to the increase in revenue.

INTEREST, OTHER & TAXES
The decrease in interest expense reflects lower average outstanding amounts on senior notes and minimal borrowing under the revolving credit facility.

The change in other income primarily relates to the change in realized gains or losses on foreign currency transactions.

The Company's 2003 effective income tax rate was 31.0% compared to 32.9% for 2002. This reduced effective tax rate reflects the overall profit mix from the Company's foreign entities and the cumulative impact of research and development tax credits recorded in 2003. The Company expects the research and development tax credit will have an ongoing positive benefit.

NET EARNINGS
As a result of the revenue, gross margin and expense changes discussed above, the Company achieved 2003 net earnings of $51.7 million, an increase of $3.8 million over 2002.



22


LIQUIDITY AND CAPITAL RESOURCES


 


 


 


 


 

January 1,

January 3,

Change


 

 


2005


2004


$


 


%


 


(Millions of Dollars)

 

 

 

 

 

 

Cash

$    72.2   

$    55.4   

$   16.8

 

30.4%

 

Accounts receivable

151.2   

146.9   

4.3

 

2.9%

 

Inventories

182.9   

164.9   

18.0

 

10.9%

 

Accounts payable

50.5   

26.3   

24.2

 

91.9%

 

Accrued salaries and wages

19.4   

16.7   

2.7

 

16.4%

 

Other accrued liabilities

28.6   

26.7   

1.9

 

6.9%

 

Debt

43.9   

59.9   

(16.0

)

(26.7%

)

 

 

 

 

 

 

 

Cash provided by operating activities

106.4   

102.2   

4.2

 

4.1%

 

Additions to property, plant and equipment

18.1   

16.0   

2.1

 

12.9%

 

Depreciation and amortization

19.1   

17.9   

1.2

 

6.3%

 

The Company continued to strengthen its balance sheet in 2004. Accounts receivable increased 2.9% on an 11.6% revenue gain. Cash of $106.4 million was generated from operating activities in 2004, with cash of $12.2 million generated from working capital improvements. Inventory levels were up 10.9%, which was slightly less than the revenue gain. The inventory increase reflects receipt of the Merrell® Continuum™ product line for spring 2005, which was accelerated as retail demand was high. The accounts receivable days sales outstanding was reduced by 10.2% and inventory SKU (stock keeping unit) levels were reduced by 5.1%.

The increase in accounts payable was attributed to the timing of inventory purchases from contract suppliers, specifically the acceleration of the Merrell® Continuum™ product noted above. The increase in accrued salaries and wages was due to profit sharing accruals. The increase in other accrued liabilities was a result of a 50% increase in the level of cash dividends declared in the fourth quarter and distributed on February 1, 2005.

The majority of capital expenditures were for information system enhancements, distribution equipment and building improvements and consumer-direct initiatives. The Company leases machinery, equipment and certain warehouse, office and retail store space under operating lease agreements that expire at various dates through 2018.

The Company has a long-term revolving credit agreement that expires in May 2006 and allows for borrowings up to $150.0 million, of which $10.0 million is allocated to the Company's Canadian subsidiary. Of the remaining $140.0 million facility, $35.0 million can be utilized by the Company's European subsidiaries. The revolving credit facility is used to support working capital requirements. No amounts were outstanding under revolving credit facilities at January 1, 2005 or January 3, 2004. The Company was in compliance with all debt covenant requirements at January 1, 2005. Proceeds from existing credit facilities and anticipated renewals, along with cash flows from operations, are expected to be sufficient to meet capital needs in the foreseeable future. Any excess cash flows from operating activities are expected to be used to purchase property, plant and equipment, pay down existing debt, fund internal and external growth initiatives, pay dividends or repurchase the Company's common stock.

The decrease in debt was the result of annual principal payments on the Company's senior notes. The Company had commercial letter-of-credit facilities outstanding of $3.2 million and $2.4 million at the end


23


of 2004 and 2003, respectively. The total debt to total capital ratio for the Company was 8.7% in 2004 and 12.2% in 2003.

The Company's pension benefit results are based upon actuarial valuations. Inherent in these valuations are key assumptions, including discount rates and expected returns on plan assets. The Company is required to consider market conditions, including changes in interest rates, in selecting these assumptions. Pre-tax expense resulting from the Company's qualified defined benefit pension plans decreased $1.2 million ($0.01 per share) for 2004 when compared to 2003 as a result of market conditions that positively affected asset values of the plan investments. The Company also recorded a net change of $1.0 million within the accumulated other comprehensive income component of stockholders' equity in 2004 which reduced a portion of the previously recorded minimum pension liability. This adjustment had no impact on the net earnings or cash flows of the Company. The Company estimates that pre-tax expense related to qualified defined benefit pension plans will increase by an additional $3.1 million (approximatel y $0.04 per share) in 2005 as compared to 2004 as a result of the amortization of prior losses incurred as a result of market value declines and discount rate deductions.

Applying the provisions of Statement of Financial Accounting Standards (SFAS) No. 87 and SFAS No. 132, the Company's qualified pension plans (the "Plans") were overfunded by $3.5 million in 2004 and underfunded by $2.4 million in 2003. Under the Employee Retirement Income Security Act of 1974, the Plans had no minimum funding requirements for 2004 and a requirement of $0.6 million for 2003. Discretionary cash contributions were made to the Plans totaling $5.0 million in 2004 and $8.9 million in 2003 to provide long-term stability to the Plans.

No provision has been made for U.S. federal and state income taxes or foreign taxes that may result from future remittances of the undistributed earnings ($96.1 million at January 1, 2005 and $69.6 million at January 3, 2004) of foreign subsidiaries as the Company expects such earnings will be reinvested overseas indefinitely. However, the Company is analyzing the potential impact of the repatriation provision of the American Jobs Creation Act of 2004 (the "Act"), which would allow the Company to bring these foreign earnings back to the United States at reduced tax rates effective until December 31, 2005. If elected, the amount of repatriation is not expected to exceed $70.0 million because a dividend of earnings from certain jurisdictions would not result in a tax benefit where foreign statutory rates exceed the U.S. rate. Technical corrections to the Act are pending issuance and therefore it is not currently practicable to estimate the potential range of impact on income taxes.

The Company's Board of Directors has approved three common stock repurchase programs each authorizing the repurchase of 3.0 million shares of common stock over a 24-month period commencing on the effective dates listed below. The primary purpose of these stock repurchase programs is to increase shareholder value. The Company intends to continue to repurchase shares of its common stock in open market or privately negotiated transactions, from time to time, depending upon market conditions and other factors.





24


 


 


 


 


 


 


 





Effective date



Shares
repurchased
in 2004


Market
price of
shares
repurchased



Shares
repurchased
in 2003


Market
price of
shares
repurchased



Cumulative
shares
repurchased


Market
price of
cumulative
shares


October 5, 2004

38,718

$   773,000

-

-

38,718

$    773,000

December 9, 2003

3,000,000

49,020,000

-

-

3,000,000

49,020,000

August 19, 2002

211,500

3,219,000

1,933,800

$24,296,000

3,000,000

36,529,000

The Company declared dividends of $11.2 million in 2004, or $0.19 per share, which was a 26.7% increase over the $8.6 million, or $0.15 per share, declared in 2003. On February 10, 2005, the Company declared a quarterly cash dividend of $0.065 per share of common stock, an increase of 50.0% as compared to the same period of 2004. The quarterly dividend is payable on May 2, 2005, to shareholders of record on April 1, 2005. On December 15, 2004 the Company announced a three-for-two stock split in the form of a stock dividend on shares of common stock outstanding at January 3, 2005 distributed on February 1, 2005.

On January 3, 2005, the Company expanded its owned Wolverine® and CAT® operations in Canada. Based on a preliminary purchase price allocation, assets consisting primarily of inventory and fixed assets totaling approximately $1.7 million were acquired from the Company's former Wolverine® and CAT® Footwear distributor for cash of $2.2 million, subject to certain post-closing adjustments, and resulted in goodwill and intangible assets of approximately $0.5 million.

On January 3, 2005, the Company expanded its owned Merrell® operations in Sweden and Finland and its Sebago® operations in the United Kingdom and Germany. Based on a preliminary purchase price allocation, assets consisting primarily of inventory totaling approximately $0.5 million were acquired from former distributors for cash.

On November 3, 2003, the Company acquired significant operating assets of Sebago, Inc., a global distributor of performance nautical and American-inspired footwear, consisting of accounts receivable, inventory, fixed assets, trademarks and other amortizable intangible assets totaling approximately $18.6 million and assumed liabilities of approximately $2.0 million. Subject to certain post-closing adjustments, the total purchase price of Sebago, Inc., was $16.9 million, which consisted of $14.9 million paid in cash and a note payable for $2.0 million ($1.0 million paid in 2004 and $1.0 million payable in 2005), resulting in goodwill of $0.2 million.

These acquisitions are discussed further in Note 11 to the consolidated financial statements.

NEW ACCOUNTING STANDARDS
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), Share-Based Payment, which would require all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated statements of operations based on their fair values, effective for public companies for interim periods beginning after June 15, 2005. The Company intends to adopt SFAS No. 123(R) effective June 19, 2005. SFAS No. 123(R) permits public companies to adopt its requirements using either the modified prospective or retrospective method. The Company is currently evaluating the alternative methods of adoption.

The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the pro forma impact of


25


SFAS No. 123 as disclosed in Note 1 to the consolidated financial statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature.

CRITICAL ACCOUNTING POLICIES
The preparation of the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Historically, actual results have not been materially different from the Company's estimates. However, actual results may differ from these estimates under different assumptions or conditions.

The Company has identified the following critical accounting policies used in determining estimates and assumptions in the amounts reported. Management believes that an understanding of these policies is important to an overall understanding of the consolidated financial statements.

REVENUE RECOGNITION
The Company's revenue consists of sales to customers, license fees and royalties. Revenue is recognized on the sale of products manufactured or sourced by the Company when the related goods have been shipped and legal title has passed to the customer. Revenue generated through programs with licensees and distributors involving products bearing the Company's trademarks is recognized as earned according to stated contractual terms upon either the purchase or shipment of branded products by distributors and licensees.

The Company records provisions against gross revenue for estimated stock returns and cash discounts in the period when the related revenue is recorded. These estimates are based on factors that include, but are not limited to, historical stock returns, historical discounts taken and analysis of credit memorandum activity. The actual amount of customer returns or allowances, which is uncertain, may differ from the Company's estimates. The Company would record either an increase or decrease to net sales in the period in which it determined an adjustment to be appropriate.

ACCOUNTS RECEIVABLE
The Company maintains an allowance for uncollectible accounts receivable for estimated losses resulting from its customers' inability to make required payments. Company management evaluates the allowance for uncollectible accounts receivable based on a review of current customer status and historical collection experience. Historically, losses have been within the Company's expectations. Adjustments to these estimates may be required if the financial condition of the Company's customers were to change. If the Company were to determine that increases or decreases to the allowance for uncollectible accounts were appropriate, the Company would record either an increase or decrease to general and administrative expenses in the period the Company made such a determination. At January 1, 2005 and January 3, 2004, management believes that it has provided sufficient reserves to address future collection uncertainties.

INVENTORY
The Company values its inventory at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for all domestic raw materials and work-in-process inventories, and most domestic finished goods inventories. Cost is determined using methods approximating cost under the first-in, first-out (FIFO) method for all raw materials, work-in-process and finished goods inventories in foreign


26


countries where LIFO is not permitted. The FIFO method is also used for all finished goods inventories of the Company's retail business, due to the unique nature of that operation, and for certain domestic finished goods inventories that were acquired as part of asset purchase transactions. Once elected, the Company has applied these inventory cost valuation methods consistently from year to year. The Company reduces the value of its inventories to the lower of cost or market for excess or obsolete inventories based upon assumptions about future demand and market conditions. If the Company were to determine that the estimated market value of its inventory is less than the carrying value of such inventory, the Company would provide a reserve for such difference as a charge to cost of sales. If actual market conditions are different from those projected, adjustments to those inventory reserves may be required. The adjustments would increase or decrease the Company's cost of sales and net income in the period i n which they were realized or recorded. Inventory quantities are verified at various times throughout the year by performing annual physical inventory observations and perpetual inventory cycle count procedures. If the Company determines that adjustments to the inventory quantities are appropriate, an increase or decrease to the Company's cost of sales and inventory would be recorded in the period in which such determination was made.

GOODWILL AND OTHER NON-AMORTIZABLE INTANGIBLES
Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to impairment tests at least annually. The first step of the goodwill impairment test requires that the fair value of the applicable reporting unit be compared with its recorded value. The Company establishes fair value by calculating the present value of the future cash flows of the reporting unit. The Company uses assumptions about expected future operating performance in determining estimates of those cash flows, which may differ from actual cash flows. If the recorded values of these assets are not recoverable, based on this discounted cash flow analysis, management performs the next step which compares the fair value of the reporting unit calculated in step one to the fair value of the tangible and intangible assets of the reporting unit, which results in an implied fair value of goodwill. Goodwill is reduced by any shortfall of implied goodwill to its carrying value. Impairment tests for other non-amortiza ble intangibles require the determination of the fair value of the intangible asset. The carrying value is reduced by any excess over fair value. The Company reviewed the carrying amounts of goodwill and other non-amortizable intangible assets and there was no impairment indicated for 2004 or 2003.

INCOME TAXES
The Company operates in multiple tax jurisdictions both inside and outside the United States. Accordingly, management must determine the appropriate allocation of income in accordance with local law for each of these jurisdictions. The Company believes its tax accruals are adequate to cover exposures related to changes in income allocation between tax jurisdictions. The carrying value of the Company's deferred tax assets assumes that the Company will be able to generate sufficient taxable income in future years to utilize these deferred tax assets. If these assumptions change, the Company may be required to record valuation allowances against its gross deferred tax assets in future years, which would result in additional income tax expense in the Company's consolidated statements of operations. Management evaluates the potential for realizing gross deferred tax assets and assesses the need for valuation allowances on a quarterly basis. The Company did not record a valuation allowance in 2004 or 2003.

On a periodic basis, the Company estimates what the effective tax rate will be for the full fiscal year and records a quarterly income tax provision in accordance with the anticipated annual rate. As the fiscal year progresses, that estimate is refined based upon actual events and earnings by tax jurisdictions during the year. This continual estimation process periodically results in a change to the expected effective tax rate for the fiscal year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate.


27


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company faces market risk to the extent that changes in foreign currency exchange rates affect the Company's foreign assets, liabilities and inventory purchase commitments and to the extent that its long-term debt requirements are affected by changes in interest rates. The Company manages these risks by attempting to denominate contractual and other foreign arrangements in U.S. dollars and by maintaining a significant percentage of its debt on a fixed-rate basis. The Company does not believe that there has been a material change in the nature of the Company's primary market risk exposures, including the categories of market risk to which the Company is exposed and the particular markets that present the primary risk of loss to the Company. As of the date of this Annual Report, the Company does not know of or expect there to be any material change in the general nature of its primary market risk exposure in the near term.

Under the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS Nos. 137 and 138, the Company is required to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive gain (loss) until the hedged item is recognized in earnings.

The Company conducts wholesale operations outside of the United States in Europe and Canada where the functional currencies are primarily the British pound, euro, and Canadian dollar. The Company utilizes foreign currency forward exchange contracts to manage the volatility associated with inventory purchases made by non-U.S. wholesale operations in foreign currencies in the normal course of business. At January 1, 2005 and January 3, 2004, the Company had outstanding forward currency exchange contracts to purchase $47.0 million and $37.9 million, respectively, of various currencies (principally U.S. dollars) with maturities ranging up to 280 days.

The Company also has production facilities in the Dominican Republic where financial statements reflect U.S. dollars as the functional currency; however, operating costs are paid in the local currency. Royalty revenue generated by the Company from third party foreign licensees is calculated in the licensees' local currencies, but paid in U.S. dollars. Accordingly, the Company could be subject to related foreign currency remeasurement gains and losses in 2005 and beyond.

Assets and liabilities outside the United States are primarily located in the United Kingdom, Canada and The Netherlands. The Company's investments 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. For the years ended January 1, 2005 and January 3, 2004, the strengthening of foreign currencies increased the value of these investments in net assets by $9.7 million and $10.9 million, respectively. This gain resulted in cumulative foreign currency translation adjustments at January 1, 2005 and January 3, 2004 of $23.8 million and $14.1 million, respectively, that are deferred and recorded as a component of accumulated other comprehensive income (loss) in stockholders' equity.

Because the Company markets, sells and licenses its products throughout the world, it could be 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 effectively manage overall borrowing costs. To achieve its objectives, the Company maintains substantially all fixed-rate debt to take advantage of lower relative


28


interest rates currently available and finances seasonal working capital needs with variable-rate debt. The Company has not historically utilized interest rate swaps or similar hedging arrangements to fix interest rates; however, in 1998 the Company 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 interest 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 notes.

The Company does not enter into contracts for speculative or trading purposes, nor is it a party to any leveraged derivative instruments.

The following table lists required principal payments and related interest rates for the Company's short- and long-term debt by fiscal year of maturity.

 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


2004


 


2003



 



2005



 



2006



 



2007



 



2008



 



2009



 


There-
after



 



Total



 


Fair
Value



 



Total



 


Fair
Value


(Millions of Dollars, Except Percentages)

Denominated in U.S. Dollars:

   Fixed rate

$11.7

 

$10.8

 

$10.7

 

$10.7

 

-

 

-

 

$43.9

 

$46.0

 

$59.9

 

$65.5

   Average interest rate

6.4

%

6.5

%

6.5

%

6.5

%

-

 

-

 

6.5

%

-

 

6.5

%

-

The Company has the following payments under contractual obligations due by period:

 


 


 


 


 


 


 

 

  Less than

 

 

  More than

 


    Total


  1 year


1-3 years


3-5 years


  5 years


(Thousands of Dollars)

 

 

 

 

 

Long-term debt

$  43,857

$  11,714

$21,429

$10,714

$      -

Estimated interest on long-term debt

2,834

746

1,392

696

-

Capital leases

47

20

23

4

-

Operating leases

55,517

10,736

16,901

12,503

15,377

Purchase obligations (1)

147,720

147,720

-

-

-

Deferred compensation

2,356

325

628

544

859

Pension (2)

3,000

3,000

-

-

-

SERP

12,871

589

1,177

1,177

9,928

Dividends declared

7,387

7,387

-

-

-

Minimum royalties

4,620

1,118

1,788

1,714

-

Minimum advertising


7,606


1,433


2,995


3,178


-


Total


$287,815


$184,788


$46,333


$30,530


$26,164



(1)

Purchase obligations primarily relate to inventory and capital expenditure commitments.

 

 

(2)

Pension obligations reflect only planned pension funding as there are currently no required funding obligations under government regulation. Funding amounts are calculated on an annual basis and no required or planned funding beyond one year has been determined.


Should additional funds be required, the Company had $173.5 million of additional borrowing capacity available under all of its existing credit facilities at January 1, 2005. The Company's additional borrowing capacity is summarized as follows:



29


 


 


 


 


 


Expiration of availability



 



 


Total commitments
available



 


Less than
1 year



 


1 year or
greater


(Millions of Dollars)

 

 

 

 

 

 

Revolving credit

 

$150.0              

 

$      -      

 

$150.0    

Commercial letters of credit

 

21.5              

 

21.5      

 

-    

Standby letters of credit

 

2.0              

 

2.0      

 

-    



Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

          The response to this Item is set forth under the caption "Quantitative and Qualitative Disclosures About Market Risk" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and is incorporated herein 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 incorporated herein by reference.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

          None.

Item 9A.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

          An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on and as of the time of such evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings with the SEC.

Management's Report on Internal Control Over Financial Reporting.

          Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of January 1, 2005, based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of January 1, 2005.

          Management's assessment of the effectiveness of our internal control over financial reporting as of January 1, 2005 has been audited by Ernst & Young LLP, an independent registered public accounting

30


firm, as stated in their attestation report which is included in Appendix A and is incorporated into this Item 9A by reference.


Changes in Internal Control Over Financial Reporting.

          There was no change in the Company's internal control over financial reporting that occurred during the sixteen-week period ended January 1, 2005 that has materially affected, or that is reasonably likely to materially affect, the Company's internal control over financial reporting.


PART III

Item 10.  Directors and Executive Officers of the Registrant.

          The Company's Audit Committee is comprised of four Board members, all of whom are independent under independence standards adopted by the Board and applicable regulations of the SEC and the New York Stock Exchange (including independence standards related specifically to Audit Committee membership). The Audit Committee members each have financial and business experience with companies of substantial size and complexity and have a significant understanding of generally accepted accounting principles, financial statements, internal controls and audit committee functions. The Company's Board of Directors has determined that David T. Kollat and Phillip D. Matthews are audit committee financial experts as defined by the SEC. Additional information regarding the Audit Committee is provided in the Definitive Proxy Statement of the Company dated March 14, 2005, under the caption "Wolverine's Board of Directors" under the subheading "Board Committees and Meetings-Audit Committee. "

          The Company has adopted an Accounting and Finance Code of Ethics that applies to the Company's principal executive officer, principal financial officer and principal accounting officer. The Accounting and Finance Code of Ethics is available on the Company's website, www.wolverineworldwide.com. Any waiver from or amendment to the Accounting and Finance Code of Ethics will be disclosed on the Company's website.

          The information regarding directors of the Company contained under the caption "Election of Directors" and under the caption "Wolverine's Board of Directors" under the subheadings "Nominees for Terms Expiring in 2008," "Continuing Directors - Terms Expiring in 2007," and "Continuing Directors - Terms Expiring in 2006" in the definitive Proxy Statement of the Company dated March 14, 2005, is incorporated herein by reference.

          In addition to the directors discussed in the definitive Proxy Statement, the Company's Board of Directors currently includes Elizabeth A. Sanders (age 59), who will retire at this year's annual meeting. Her term was scheduled to expire at the annual meeting in 2006. Ms. Sanders is retiring after 10 years of service as a director. Ms. Sanders is the principal of The Sanders Partnership, a management consulting practice. Ms. Sanders has held that position since 1990. Ms. Sanders was previously Vice President of Nordstrom, Inc., a retailer. Ms. Sanders is also a director of Washington Mutual, Inc.; Denny's Corporation; and Wellpoint Health Networks, Inc.

          The information regarding directors and executive officers of the Company under the caption "Related Matters" under the subheading "Section 16(a) Beneficial Ownership Reporting Compliance" in the definitive Proxy Statement of the Company dated March 14, 2005, is incorporated herein by


31


reference. Additional 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 caption "Wolverine's Board of Directors" under the subheadings "Compensation of Directors" and "Board Committees and Meetings-Compensation Committee," and under the captions "Executive Compensation," "Compensation Committee Report on Executive Compensation," "Employment Agreements and Termination of Employment and Change in Control Arrangements" and "Wolverine's Stock Price Performance" in the definitive Proxy Statement of the Company dated March 14, 2005, is incorporated herein by reference.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

          The information contained under the caption "Ownership of Wolverine Stock" and under the caption "Executive Compensation" under the subheading "Equity Compensation Plan Information" contained in the definitive Proxy Statement of the Company dated March 14, 2005, is incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions.

          The information contained under the caption "Related Matters" under the subheading "Certain Relationships and Related Transactions" contained in the definitive Proxy Statement of the Company dated March 14, 2005, are incorporated herein by reference.

Item 14.  Principal Accountant Fees and Services.

          The information contained under the caption "Selection of Auditors" in the definitive Proxy Statement of the Company dated March 14, 2005, is incorporated herein by reference.

PART IV

Item 15.  Exhibits and Financial Statement Schedules.

          Item 15(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 1, 2005 and January 3, 2004.

 

 

 

 

Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Fiscal Years Ended January 1, 2005, January 3, 2004 and December 28, 2002.

 

 

 

 

Consolidated Statements of Operations for the Fiscal Years Ended January 1, 2005, January 3, 2004 and December 28, 2002.

 

 

 

 

Consolidated Statements of Cash Flows for the Fiscal Years Ended January 1, 2005, January 3, 2004 and December 28, 2002.



32


 

Notes to the Consolidated Financial Statements as of January 1, 2005.

 

 

 

 

Reports of Independent Registered Public Accounting Firm.

          Item 15(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 of Continuing Operations.

          All other schedules (I, III, IV, and V) for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted.

          Item 15(a)(3).  Exhibits.

          The following exhibits are filed as part of this report:

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 September 7, 2002. Here incorporated by reference.

 

 

3.2

Amended and Restated By-laws. Previously filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the period ended September 7, 2002. Here incorporated by reference.

 

 

4.1

Certificate of Incorporation, as amended. See Exhibit 3.1 above.

 

 

4.2

Amended and Restated By-laws. See Exhibit 3.2 above.

 

 

4.3

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.

 

 

4.4

Amendment No. 1 dated as of June 30, 2000, to the Rights Agreement dated as of April 17, 1997. Previously filed as Exhibit 4.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000. Here incorporated by reference.

 

 

4.5

Second Amendment dated as of February 11, 2002, to the Rights Agreement dated as of April 17, 1997. Previously filed as Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the period ended March 23, 2002. Here incorporated by reference.

 

 

4.6

Third Amendment dated as of December 10, 2002, to the Rights Agreement dated as of April 17, 1997. Previously filed as Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2002. Here incorporated by reference.



33


4.7

Note Purchase Agreement dated as of December 8, 1998, relating to 6.50% Senior Notes due on December 8, 2008.

 

 

4.8

The Registrant has several classes of long-term debt instruments outstanding in addition to those described in Exhibits 4.7 and 4.9. The authorized amount of none of these classes of debt 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.

 

 

4.9

Credit Agreement dated as of May 29, 2001, with Bank One, Michigan, as agent. Previously filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 16, 2001. Here incorporated by reference.

 

 

4.10

First Amendment dated as of February 8, 2002, to the Credit Agreement dated as of May 29, 2001. Previously filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 23, 2002. Here incorporated by reference.

 

 

4.11

Second Amendment dated as of August 30, 2002, to the Credit Agreement dated as of May 29, 2001. Previously filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 7, 2002. Here incorporated by reference.

 

 

4.12

Third Amendment dated as of December 19, 2002, to the Credit Agreement dated as of May 29, 2001. Previously filed as Exhibit 4.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2002. Here incorporated by reference.

 

 

4.13

Fourth Amendment dated as of April 30, 2003, to the Credit Agreement dated as of May 29, 2001.

 

 

4.14

Fifth Amendment dated as of August 31, 2004, to the Credit Agreement dated as of May 29, 2001.

 

 

10.1

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.

 

 

10.2

1993 Stock Incentive Plan.* Previously filed as an exhibit to the Company's registration statement on Form S-8, filed June 22, 1993, Registration No. 33-64854. Here incorporated by reference.

 

 

10.3

1995 Stock Incentive Plan.* Previously filed as an exhibit to the Company's registration statement on Form S-8, filed October 26, 1995, Registration No. 33-63689. Here incorporated by reference.

 

 

10.4

1997 Stock Incentive Plan.* Previously filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2001. Here incorporated by reference.



34


10.5

Stock Incentive Plan of 1999.*

 

 

10.6

Stock Incentive Plan of 2001.* 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 26, 2001. Here incorporated by reference.

 

 

10.7

Stock Incentive Plan of 2003.* 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 24, 2003. Here incorporated by reference.

 

 

10.8

Amended and Restated Directors Stock Option Plan.* Previously filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000. Here incorporated by reference.

 

 

10.9

Amended and Restated Directors' Stock Option Plan.* Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 14, 2003. Here incorporated by reference.

 

 

10.10

Amended and Restated Outside Directors' Deferred Compensation Plan.* Previously filed as Appendix E to the Company's Definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders held on April 25, 2002. Here incorporated by reference.

 

 

10.11

Amended and Restated 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 25, 2002. Here incorporated by reference.

 

 

10.12

Amended and Restated 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 25, 2002. Here incorporated by reference.

 

 

10.13

Amended and Restated Stock Option Loan Program.* Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 7, 2002. Here incorporated by reference.

 

 

10.14

Executive Severance Agreement.* An updated participant schedule is attached as Exhibit 10.14.

 

 

10.15

Form of Indemnification Agreement.* The Company has entered into an Indemnification Agreement with each director and executive officer. Previously filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000. Here incorporated by reference.

 

 

10.16

Benefit Trust Agreement dated May 19, 1987, and Amendments Number 1, 2, 3 and 4 thereto.* Previously filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000. Here incorporated by reference.



35


10.17

Amended and Restated Supplemental Executive Retirement Plan.* Previously filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000. An updated participant schedule is attached as Exhibit 10.17.

 

 

10.18

Employees' Pension Plan (Restated as amended through July 7, 2004).*

 

 

10.19

Form of Incentive Stock Option Agreement. Previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated February 9, 2005.*

 

 

10.20

Form of Non-Qualified Stock Option Agreement for Steven M. Duffy, Stephen L. Gulis, Blake W. Krueger and Timothy J. O'Donovan. Previously filed as Exhibit 10.2 to the Company's Current Report on Form 8-K dated February 9, 2005.*

 

 

10.21

Form of Non-Qualified Stock Option Agreement for other employees. Previously filed as Exhibit 10.3 to the Company's Current Report on Form 8-K dated February 9, 2005.*

 

 

10.22

Form of Restricted Stock Agreement. Previously filed as Exhibit 10.4 to the Company's Current Report on Form 8-K dated February 9, 2005.*

 

 

10.23

Form of Stock Option Agreement for non-employee directors.*

 

 

21

Subsidiaries of Registrant.

 

 

23

Consent of Ernst & Young LLP.

 

 

24

Powers of Attorney.

 

 

31.1

Certification of President and Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2

Certification of Executive Vice President, Chief Financial Officer and Treasurer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32

Certification pursuant to 18 U.S.C. § 1350.

____________________________
*Management contract or compensatory plan or arrangement.

          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 and Secretary, 9341 Courtland Drive, Rockford, Michigan 49351.








36


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  March 16, 2005

By:

/s/ Stephen L. Gulis, Jr.


 

 

Stephen L. Gulis, Jr.
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial 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


Geoffrey B. Bloom

 

Chairman of the Board
of Directors

March 16, 2005

 

 

 

 

 

 

 

 

/s/ Timothy J. O'Donovan


Timothy J. O'Donovan

 

Chief Executive Officer,
President (Principal Executive Officer)
and Director

March 16, 2005

 

 

 

 

 

 

 

 

/s/ Stephen L. Gulis, Jr.


Stephen L. Gulis, Jr.

 

Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)

March 16, 2005

 

 

 

 

 

 

 

 

/s/ Nicholas P. Ottenwess


Nicholas P. Ottenwess

 

Vice President of Finance and
Corporate Controller (Principal
Accounting Officer)

March 16, 2005

 

 

 

 

 

 

 

 

*/s/ Donald V. Fites


Donald V. Fites

 

Director

March 16, 2005

 

 

 

 

 

 

 

 

*/s/ Alberto L. Grimoldi


Alberto L. Grimoldi

 

Director

March 16, 2005



37


*/s/ David T. Kollat


David T. Kollat

 

Director

March 16, 2005

 

 

 

 

 

 

 

 

*/s/ Brenda J. Lauderback


Brenda J. Lauderback

 

Director

March 16, 2005

 

 

 

 

 

 

 

 

*/s/ Phillip D. Matthews


Phillip D. Matthews

 

Director

March 16, 2005

 

 

 

 

 

 

 

 

*/s/ David P. Mehney


David P. Mehney

 

Director

March 16, 2005

 

 

 

 

 

 

 

 

*/s/ Elizabeth A. Sanders


Elizabeth A. Sanders

 

Director

March 16, 2005

 

 

 

 

 

 

 

 

*/s/ Paul D. Schrage


Paul D. Schrage

 

Director

March 16, 2005

 

 

 

 

 

 

 

 

*by /s/ Stephen L. Gulis, Jr.


Stephen L. Gulis, Jr.
Attorney-in-Fact

 

Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)

March 16, 2005












38


APPENDIX A

Financial Statements



























1


CONSOLIDATED BALANCE SHEETS

 


 


As of Fiscal Year End


 


 


2004  


 


2003  


 


(Thousands of Dollars)

 

 

 

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

   Cash and cash equivalents

$

72,172

 

$

55,356

 

   Accounts receivable, less allowances (2004-$8,200; 2003-$10,462)

 

151,174

 

 

146,879

 

   Inventories:

 

 

 

 

 

 

      Finished products

 

161,315

 

 

143,127

 

      Raw materials and work-in-process


 


21,609


 


 


21,777


 


 

 

182,924

 

 

164,904

 

 

 

 

 

 

 

 

   Deferred income taxes

 

6,113

 

 

6,528

 

   Other current assets


 


18,472


 


 


12,969


 


Total current assets

 

430,855

 

 

386,636

 

 

 

 

 

 

 

 

Property, plant and equipment:

 

 

 

 

 

 

   Land

 

962

 

 

1,080

 

   Buildings and improvements

 

65,246

 

 

64,235

 

   Machinery and equipment

 

136,950

 

 

128,954

 

   Software


 


49,686


 


 


44,081


 


 

 

252,844

 

 

238,350

 

 

 

 

 

 

 

 

Less accumulated depreciation


 


157,914


 


 


142,343


 


 

 

94,930

 

 

96,007

 

Other assets:

 

 

 

 

 

 

   Goodwill

 

35,552

 

 

34,391

 

   Other non-amortizable intangibles

 

8,090

 

 

7,739

 

   Cash surrender value of life insurance

 

26,930

 

 

24,880

 

   Prepaid pension costs

 

35,289

 

 

34,332

 

   Other


 


7,925


 


 


9,777


 


 


 


113,786


 


 


111,119


 


Total assets


$


639,571


 


$


593,762


 


 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

   Accounts payable

$

50,521

 

$

26,328

 

   Salaries, wages and other compensation

 

19,435

 

 

16,696

 

   Income taxes

 

-

 

 

1,513

 

   Taxes, other than income taxes

 

4,736

 

 

3,416

 

   Other accrued expenses

 

23,824

 

 

21,793

 

   Current maturities of long-term debt


 


11,735


 


 


16,020


 


Total current liabilities

 

110,251

 

 

85,766

 

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

32,169

 

 

43,903

 

Deferred compensation

 

9,024

 

 

5,736

 

Accrued pension liabilities

 

14,979

 

 

14,881

 

Deferred income taxes

 

14,291

 

 

13,068

 

Minority interest

 

566

 

 

314

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

   Common stock, $1 par value: authorized 80,000,000 shares; issued,

 

 

 

 

 

 

      including treasury shares: 2004-67,350,495; 2003-66,389,233

 

67,350

 

 

66,389

 

   Additional paid-in capital

 

99,518

 

 

81,980

 

   Retained earnings

 

437,406

 

 

382,603

 

   Accumulated other comprehensive income

 

19,446

 

 

8,540

 

   Unearned compensation

 

(4,954

)

 

(4,138

)

   Cost of shares in treasury: 2004-9,452,361 shares; 2003-7,209,313 shares


 


(160,474


)


 


(105,280


)


Total stockholders' equity


 


458,291


 


 


430,094


 


Total liabilities and stockholders' equity


$


639,571


 


$


593,762


 


( ) Denotes deduction.
See accompanying notes to consolidated financial statements.



2


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME

 


 


Fiscal Year


 


 


2004  


 


2003  


 


2002  


 


(Thousands of Dollars, Except Per Share Data)

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

   Balance at beginning of the year

$

66,389

 

$

65,825

 

$

66,192

 

   Common stock issued under stock incentive plans

 

 

 

 

 

 

 

 

 

      (2004-2,081,586 shares; 2003-1,234,893 shares;

 

 

 

 

 

 

 

 

 

       2002-639,814 shares)

 

2,082

 

 

1,235

 

 

640

 

   Impact of stock split on treasury shares


 


(1,121


)


 


(671


)


 


(1,007


)


   Balance at end of the year

 

67,350

 

 

66,389

 

 

65,825

 

 

 

 

 

 

 

 

 

 

 

Additional Paid-In Capital

 

 

 

 

 

 

 

 

 

   Balance at beginning of the year

 

81,980

 

 

71,009

 

 

65,993

 

   Amounts associated with common stock issued

 

 

 

 

 

 

 

 

 

      under stock incentive plans:

 

 

 

 

 

 

 

 

 

         Proceeds over par value

 

8,878

 

 

8,281

 

 

3,333

 

         Income tax benefits

 

7,782

 

 

1,710

 

 

531

 

   Impact of stock split on treasury shares

 

1,121

 

 

671

 

 

1,007

 

   Issuance of treasury shares (2004-8,924 shares;

 

 

 

 

 

 

 

 

 

      2003-27,886 shares; 2002-142,894 shares)

 

87

 

 

51

 

 

409

 

   Net change in employee notes receivable


 


(330


)


 


258


 


 


(264


)


   Balance at end of the year

 

99,518

 

 

81,980

 

 

71,009

 

 

 

 

 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

 

 

 

 

   Balance at beginning of the year

 

382,603

 

 

339,475

 

 

298,755

 

   Net earnings

 

65,938

 

 

51,716

 

 

47,912

 

   Cash dividends (2004-$.19 per share;

 

 

 

 

 

 

 

 

 

      2003-$.15 per share; 2002-$.12 per share)


 


(11,135


)


 


(8,588


)


 


(7,192


)


Balance at end of the year

 

437,406

 

 

382,603

 

 

339,475

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

   Balance at beginning of the year

 

8,540

 

 

(23,522

)

 

(4,109

)

   Foreign currency translation adjustments

 

9,727

 

 

10,922

 

 

6,101

 

   Change in fair value of foreign exchange contracts, net of

 

 

 

 

 

 

 

 

 

      taxes (2004-$174; 2003-$730; 2002- $89)

 

160

 

 

(1,393

)

 

(244

)

   Minimum pension liability adjustment, net of taxes

 

 

 

 

 

 

 

 

 

      (2004-$524; 2003-$11,608; 2002-$13,016)


 


1,019


 


 


22,533


 


 


(25,270


)


   Balance at end of the year

 

19,446

 

 

8,540

 

 

(23,522

)

 

 

 

 

 

 

 

 

 

 

Unearned Compensation

 

 

 

 

 

 

 

 

 

   Balance at beginning of the year

 

(4,138

)

 

(3,833

)

 

(4,649

)

   Awards under restricted stock incentive plans

 

(4,165

)

 

(2,488

)

 

(2,037

)

   Compensation expense


 


3,349


 


 


2,183


 


 


2,853


 


   Balance at end of the year

 

(4,954

)

 

(4,138

)

 

(3,833

)

 

 

 

 

 

 

 

 

 

 

Cost of Shares in Treasury

 

 

 

 

 

 

 

 

 

   Balance at beginning of the year

 

(105,280

)

 

(79,857

)

 

(48,030

)

   Common stock purchased for treasury

 

 

 

 

 

 

 

 

 

      (2004-2,251,972 shares; 2003-1,367,770 shares;

 

 

 

 

 

 

 

 

 

         2002-2,154,335 shares)

 

(55,331

)

 

(25,656

)

 

(33,626

)

   Issuance of treasury shares (2004-8,924 shares;

 

 

 

 

 

 

 

 

 

      2003-27,886 shares; 2002-142,894 shares)


 


137


 


 


233


 


 


1,799


 


   Balance at end of the year


 


(160,474


)


 


(105,280


)


 


(79,857


)


Total stockholders' equity at end of the year


$


458,291


 


$


430,094


 


$


369,097


 


 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

 

 

 

 

 

 

 

 

   Net earnings

$

65,938

 

$

51,716

 

$

47,912

 

   Foreign currency translation adjustments

 

9,727

 

 

10,922

 

 

6,101

 

   Change in fair value of foreign exchange contracts, net of taxes

 

160

 

 

(1,393

)

 

(244

)

   Minimum pension liability adjustment, net of taxes


 


1,019


 


 


22,533


 


 


(25,270


)


Total comprehensive income


$


76,844


 


$


83,778


 


$


28,499


 


( ) Denotes deduction.
See accompanying notes to consolidated financial statements.



3


CONSOLIDATED STATEMENTS OF OPERATIONS

 


 


Fiscal Year


 


 


2004  


 


2003  


 


2002  


 


(Thousands of Dollars, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

991,909

 

$

888,926

 

$

827,106

 

 

 

 

 

 

 

 

 

 

 

Cost and expenses:

 

 

 

 

 

 

 

 

 

   Cost of products sold

 

617,774

 

 

562,338

 

 

532,878

 

   Selling and administrative expenses

 

274,125

 

 

246,652

 

 

217,154

 

   Interest expense

 

4,185

 

 

5,896

 

 

6,721

 

   Interest income

 

(940

)

 

(422

)

 

(255

)

   Other income - net


 


(305


)


 


(686


)


 


(1,046


)


 


 


894,839


 


 


813,778


 


 


755,452


 


Earnings before income taxes and minority interest

 

97,070

 

 

75,148

 

 

71,654

 

 

 

 

 

 

 

 

 

 

 

Income taxes


 


30,879


 


 


23,262


 


 


23,599


 


Earnings before minority interest

 

66,191

 

 

51,886

 

 

48,055

 

 

 

 

 

 

 

 

 

 

 

Minority interest


 


253


 


 


170


 


 


143


 


 

 

 

 

 

 

 

 

 

 

Net earnings


$


65,938


 


$


51,716


 


$


47,912


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share:

 

 

 

 

 

 

 

 

 

   Basic

$

1.15

 

$

0.88

 

$

0.79

 

   Diluted


 


1.09


 


 


0.85


 


 


0.77


 




See accompanying notes to consolidated financial statements.







4


CONSOLIDATED STATEMENTS OF CASH FLOWS

 


 


Fiscal Year


 


 


2004  


 


2003  


 


2002  


 


(Thousands of Dollars)

 

 

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

 

 

 

 

Net earnings

$

65,938

 

$

51,716

 

$

47,912

 

Adjustments necessary to reconcile net earnings

 

 

 

 

 

 

 

 

 

   to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

      Depreciation

 

18,683

 

 

17,664

 

 

16,633

 

      Amortization

 

388

 

 

283

 

 

227

 

      Deferred income taxes (credit)

 

1,179

 

 

(902

)

 

216

 

      Unearned compensation

 

3,349

 

 

2,183

 

 

2,853

 

      Other

 

4,624

 

 

(3,721

)

 

(185

)

      Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

         Accounts receivable

 

(2,332

)

 

15,534

 

 

(5,879

)

         Inventories

 

(15,833

)

 

17,069

 

 

24,884

 

         Other operating assets

 

(2,776

)

 

529

 

 

(1,076

)

         Accounts payable

 

21,229

 

 

(5,820

)

 

(656

)

         Other operating liabilities


 


11,912


 


 


7,668


 


 


3,350


 


Net cash provided by operating activities

 

106,361

 

 

102,203

 

 

88,279

 

 

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

 

Business acquisitions, net of cash acquired

 

-

 

 

(14,780

)

 

(27,366

)

Additions to property, plant and equipment

 

(18,080

)

 

(16,015

)

 

(13,875

)

Other


 


(104


)


 


58


 


 


607


 


Net cash used in investing activities

 

(18,184

)

 

(30,737

)

 

(40,634

)

 

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

 

Payments of short-term debt

 

-

 

 

-

 

 

(90

)

Proceeds from long-term borrowings

 

44,385

 

 

66,194

 

 

94,215

 

Payments of long-term debt

 

(60,404

)

 

(81,176

)

 

(112,226

)

Cash dividends

 

(11,135

)

 

(8,588

)

 

(7,192

)

Purchase of common stock for treasury

 

(55,331

)

 

(25,656

)

 

(33,626

)

Proceeds from shares issued under stock incentive plans


 


6,688


 


 


7,570


 


 


2,202


 


Net cash used in financing activities

 

(75,797

)

 

(41,656

)

 

(56,717

)

Effect of foreign exchange rate changes


 


4,436


 


 


(1,532


)


 


330


 


Increase (decrease) in cash and cash equivalents

 

16,816

 

 

28,278

 

 

(8,742

)

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of the year


 


55,356


 


 


27,078


 


 


35,820


 


Cash and cash equivalents at end of the year


$


72,172


 


$


55,356


 


$


27,078


 


 

 

 

 

 

 

 

 

 

 

Other Cash Flow Information

 

 

 

 

 

 

 

 

 

Interest paid

$

4,056

 

$

5,461

 

$

6,633

 

Net income taxes paid


 


23,868


 


 


22,725


 


 


18,201


 


( ) Denotes reduction in cash and cash equivalents.
See accompanying notes to consolidated financial statements.



5


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

NATURE OF OPERATIONS
Wolverine World Wide, Inc. (NYSE: WWW) is a leading designer, manufacturer and marketer of a broad line of quality casual shoes, performance outdoor footwear, work shoes and boots, uniform shoes and boots, constructed slippers and moccasins. The Company's global portfolio of owned and licensed brands includes: Bates, CAT®, Harley-Davidson®, Hush Puppies®, HyTest®, Merrell®, Sebago®, Stanley® and Wolverine®. Apparel and licensing programs are utilized to extend the Company's owned brands into product categories beyond footwear. The Company also operates a retail division to showcase its brands and branded footwear from other manufacturers, a tannery that produces Wolverine Performance Leathers™ and a pigskin procurement operation.

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Wolverine World Wide, Inc. and its wholly and majority owned subsidiaries (collectively, the "Company"). All intercompany accounts and transactions have been eliminated in consolidation.

FISCAL YEAR
The Company's fiscal year is the 52- or 53-week period that ends on the Saturday nearest to December 31. Fiscal years presented in this report include the 52-week period ended January 1, 2005, the 53-week period ended January 3, 2004 and the 52-week period ended December 28, 2002.

USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 manufactured or sourced by the Company when the related goods have been shipped and legal title has passed to the customer. Revenue generated through programs with licensees and distributors involving products bearing the Company's trademarks is recognized as earned according to stated contractual terms upon either the purchase or shipment of branded products by distributors and licensees.

The Company records provisions against gross revenue for estimated stock returns and cash discounts in the period when the related revenue is recorded. These estimates are based on factors that include, but are not limited to, historical stock returns, historical discounts taken and analysis of credit memorandum activity.

COST OF PRODUCTS SOLD
Cost of products sold for the Company's operations include the actual product costs, including inbound freight charges, purchasing and receiving costs, inspection costs, and internal transfer costs. Warehousing costs are included in selling and administrative expenses.

SHIPPING AND HANDLING COSTS
Shipping and handling costs that are charged to and reimbursed by the customer are recognized as revenue, while the related expenses incurred by the Company are recorded as cost of products sold in the consolidated statements of operations.

CASH EQUIVALENTS
All short-term investments with a maturity of three months or less when purchased are considered cash equivalents.



6


ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
The Company maintains an allowance for uncollectible accounts receivable for estimated losses resulting from its customers' inability to make required payments. Company management evaluates the allowance for uncollectible accounts receivable based on a review of current customer status and historical collection experience. Adjustments to these estimates may be required if the financial condition of the Company's customers were to change. The Company does not require collateral or other security on trade accounts receivable.

INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for all domestic raw materials and work-in-process inventories, and certain domestic finished goods inventories. Cost is determined using methods approximating cost under the first-in, first-out (FIFO) method for all raw materials, work-in-process and finished goods inventories in foreign countries where LIFO is not permitted. The FIFO method is also used for all finished goods inventories of the Company's retail business, due to the unique nature of that operation, and for certain domestic finished goods inventories that were acquired as part of asset purchase transactions. Once elected, the Company has applied these inventory cost valuation methods consistently from year to year.

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 property, plant and equipment is computed using the straight-line method. The depreciable lives range from five to forty years for buildings and improvements and from three to ten years for machinery, equipment and software.

GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets of acquired businesses. Other intangibles consist primarily of trademarks, brand names, patents and customer lists. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to impairment tests at least annually in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. The Company reviews the carrying amounts of goodwill and other non-amortizable intangible assets annually to determine if such assets may be impaired. If the carrying amounts of these assets are not recoverable based upon a discounted cash flow analysis, such assets are reduced by the estimated shortfall of fair value to recorded value. Other amortizable intangible assets (principally patents) are amortized using the straight-line method over their estimated useful lives (periods ranging from two to fifteen years). Ot her amortizable intangible assets are included in other assets on the consolidated balance sheets and have net carrying amounts of $1,492,000 and $986,000 for 2004 and 2003, respectively, and accumulated amortization of $1,159,000 and $694,000 for 2004 and 2003, respectively. Estimated aggregate amortization expense for such intangibles for each of the five fiscal years subsequent to 2004 are as follows: 2005-$440,000; 2006-$407,000; 2007-$317,000; 2008-$181,000; 2009-$89,000.

The Company has performed the required annual impairment tests and has determined that there was no impairment indicated for recorded goodwill and other non-amortizable intangibles.

The changes in the carrying amount of goodwill and other non-amortizable intangibles for the years ended January 1, 2005 and January 3, 2004 are as follows:

 


 


 


 


 


 


 


 


Goodwill


 


Trademarks


 


Total


 


(Thousands of Dollars)

 

 

 

 

 

 

 

 

 

Balance at December 28, 2002

$

30,706

 

$

2,582

 

$

33,288

 

Intangibles acquired

 

820

 

 

5,157

 

 

5,977

 

Purchase accounting adjustments

 

(614

)

 

-

 

 

(614

)

Foreign currency translation effects


 


3,479


 


 


-


 


 


3,479


 


Balance at January 3, 2004

 

34,391

 

 

7,739

 

 

42,130

 

Intangibles acquired

 

-

 

 

351

 

 

351

 

Purchase accounting adjustments

 

(613

)

 

-

 

 

(613

)

Foreign currency translation effects


 


1,774


 


 


-


 


 


1,774


 


Balance at January 1, 2005


$


35,552


 


$


8,090


 


$


43,642


 




7


IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or an asset group may not be recoverable. Each impairment test is based on a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the assets or asset group. If such assets are considered to be impaired, the impairment amount to be recognized is the amount by which the carrying value of the assets exceeds their fair value.

STOCK-BASED COMPENSATION
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 awards. Under APB Opinion No. 25, compensation expense is recognized when the market price of the stock underlying an award on the date of grant exceeds any related exercise price.

Where compensation expense has been determined by APB Opinion No. 25, 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 the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 3.4% (2.9% in 2003 and 4.2% in 2002); dividend yield of 1.0% (1.3% in 2003 and 1.1% in 2002); expected market price volatility factor of 0.317 (0.386 in 2003 and 0.420 in 2002); and an expected option life of four years.

The estimated weighted-average fair value for each option granted was $4.68 in 2004, $3.30 in 2003 and $3.65 in 2002.

For purposes of pro forma disclosures, the estimated fair values of stock options are amortized to expense over the related vesting periods. The Company recognizes compensation cost for fixed awards with pro rata vesting using the straight-line attribution method. The Company's pro forma information under SFAS No. 123 is as follows:

 


 


 


 


 


 


 


 


2004  


 


2003  


 


2002  


 


(Thousands of Dollars, Except Per Share Data)

 

 

 

 

 

 

 

 

 

Net earnings, as reported

$

65,938

 

$

51,716

 

$

47,912

 

Add:

Total stock-based employee compensation

 

 

 

 

 

 

 

 

 

 

expense included in reported net income, net of

 

 

 

 

 

 

 

 

 

 

related tax effects

 

3,374

 

 

2,326

 

 

2,862

 

Deduct:

Total stock-based employee compensation

 

 

 

 

 

 

 

 

 

 

expense determined under fair value

 

 

 

 

 

 

 

 

 

 


method for all awards, net of related tax effects


 


8,330


 


 


5,456


 


 


5,873


 


Pro forma net earnings


$


60,982


 


$


48,586


 


$


44,901


 

 

 

 

 

 

 

 

 

 

 

Net earnings per share:

 

 

 

 

 

 

 

 

 

   Basic-as reported

$

1.15

 

$

0.88

 

$

0.79

 

   Basic-pro forma

 

1.06

 

 

0.83

 

 

0.75

 

   Diluted-as reported

 

1.09

 

 

0.85

 

 

0.77

 

   Diluted-pro forma

 

1.01

 

 

0.79

 

 

0.72

 

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), Share-Based Payment, which would require all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated statements of operations based on their fair values, effective for public companies for interim periods beginning after June 15, 2005. The Company intends to adopt SFAS No. 123(R) effective June 19, 2005. SFAS No. 123(R) permits public companies to adopt its requirements using either the modified prospective or retrospective method. The Company is currently evaluating the alternative methods of adoption.

The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the pro forma impact of SFAS No. 123 as disclosed above. SFAS No.123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature.


8


ADVERTISING COSTS
Advertising costs are expensed as incurred and customer specific advertising dollars are expensed when earned by customers.  Total advertising expense was $38,611,000 in 2004, $35,254,000 in 2003, and $33,584,000 in 2002 and includes customer specific advertising dollars of $9,689,000 in 2004, $9,652,000 in 2003, and $8,311,000 in 2002. The Company provides sales incentives to certain retail customers in the form of a cooperative advertising program and accounts for this in accordance with EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products).  Under this program, customers are reimbursed for Company-approved advertising expenditures where the value to the Company is objectively verifiable.

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 values of assets and liabilities for financial statement and income tax purposes.

EARNINGS PER SHARE
Basic earnings per share is computed based on weighted average shares of common stock outstanding during each year after adjustment for restricted nonvested common stock issued under restricted stock incentive plans. Diluted earnings per share assumes the exercise of dilutive stock options and the vesting of all common stock under restricted stock programs.

The following table sets forth the reconciliation of weighted average shares used in the computation of basic and diluted earnings per share:

 


 


 


 


 


 


 


 


2004


 


2003


 


2002


 


Weighted average shares outstanding during the year

58,498,042

 

59,846,151

 

61,524,543

 

Adjustment for nonvested common stock


(1,099,677


)


(1,081,869


)


(1,156,123


)


Denominator for basic earnings per share

57,398,365

 

58,764,282

 

60,368,420

 

Effect of dilutive stock options

2,265,984

 

1,570,782

 

1,165,296

 

Adjustment for nonvested common stock - treasury method


809,708


 


746,343


 


799,695


 


Denominator for diluted earnings per share


60,474,057


 


61,081,407


 


62,333,411


 


Options to purchase 588,978 shares of common stock in 2004, 988,601 shares in 2003 and 1,194,730 shares in 2002 have not been included in the denominator for the computation of diluted earnings per share because the related exercise prices were greater than the average market price for the period and, therefore, they were antidilutive.

STOCK SPLIT
On December 15, 2004 the Company announced a three-for-two stock split in the form of a stock dividend on shares of common stock outstanding at January 3, 2005 distributed to shareholders on February 1, 2005. All share and per share amounts in the consolidated financial statements and related notes have been adjusted for all periods to reflect the stock split. Treasury shares were excluded from the stock split.

FOREIGN CURRENCY
For the Company's international subsidiaries, the local currency is the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the year-end exchange rate. Operating statement amounts are translated at average exchange rates for the period. The cumulative translation adjustments resulting from changes in exchange rates are included in the consolidated balance sheets as a component of accumulated other comprehensive income (loss) in stockholders' equity. Transaction gains and losses are included in the consolidated statements of operations and were not material.



9


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. Except for fixed rate long-term debt with a carrying value of $43,857,000 and a fair value of $45,996,000 at January 1, 2005 and a carrying value of $59,857,000 and a fair value of $65,465,000 at January 3, 2004, the Company's estimate of the fair values of these financial instruments approximates their carrying amounts for the respective years. 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.

The Company follows SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS Nos. 137 and 138, which requires that all derivative instruments be recorded on the consolidated balance sheets at fair value and establishes criteria for designation and effectiveness of hedging relationships. The Company utilizes foreign currency forward exchange contracts to manage the volatility associated with foreign currency inventory purchases made by non-U.S. wholesale operations in the normal course of business. At January 1, 2005 and January 3, 2004, foreign exchange contracts with a notional value of $46,974,500 and $37,902,000, respectively, were outstanding to purchase various currencies (principally U.S. dollars) with maturities ranging up to 280 days. These contracts have been designated as cash flow hedges. As of January 1, 2005 and January 3, 2004, a liability of $1,821,000 and $2,270,000, respectively, has been recognized for the fair value of the foreign currency fo rward exchange contracts.

The fair value of the foreign currency forward exchange contracts represents the estimated receipts or payments necessary to terminate the contracts. Hedge effectiveness is evaluated by the hypothetical derivative method. Any hedge ineffectiveness is reported within the cost of products sold caption of the consolidated statements of operations. Hedge ineffectiveness was not material in 2004 or 2003. If, in the future, the foreign exchange contracts are determined to be ineffective hedges or terminated before their contractual termination dates, the Company would be required to reclassify into earnings all or a portion of the unrealized amounts related to the cash flow hedges that are currently included in accumulated other comprehensive income (loss) within stockholders' equity.

COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents net earnings and any revenue, expenses, gains and losses that, under accounting principles generally accepted in the United States, are excluded from net earnings and recognized directly as a component of stockholders' equity.

Ending accumulated other comprehensive income (loss) is as follows:

 


2004  


 


2003  


 


(Thousands of Dollars)

 

 

 

 

 

 

Foreign currency translation adjustments

$

23,787

 

$

14,060

 

Foreign currency cash flow hedge adjustments, net of taxes

 

 

 

 

 

 

   (2004 - $993; 2003 - $819)

 

(1,477

)

 

(1,637

)

Minimum pension liability adjustments, net of taxes

 

 

 

 

 

 

   (2004 - $1,476; 2003 - $2,000)


 


(2,864


)


 


(3,883


)


Accumulated other comprehensive income


$


19,446


 


$


8,540


 


RECLASSIFICATIONS
Certain amounts previously reported in 2003 and 2002 have been reclassified to conform with the presentation used in 2004.

2. Inventories
Inventories of $81,771,000 at January 1, 2005 and $90,368,000 at January 3, 2004 have been valued using the LIFO method. If the FIFO method had been used, inventories would have been $8,614,000 and $9,324,000 higher than reported at January 1, 2005 and January 3, 2004, respectively.



10


3. Debt
Long-term debt consists of the following obligations:


 


2004  


 


2003  


 


(Thousands of Dollars)

 

 

 

 

 

 

6.5% senior notes payable

$

42,857

 

$

53,571

 

7.81% senior notes payable

 

-

 

 

4,286

 

Revolving credit obligations

 

-

 

 

-

 

Other


 


1,047


 


 


2,066


 


 

 

43,904

 

 

59,923

 

Less current maturities


 


11,735


 


 


16,020


 


 


$


32,169


 


$


43,903


 


The 6.5% unsecured senior notes payable require annual principal payments of $10,714,000 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 in 1998 and resulted in a prepayment of interest of $2,200,000. This prepayment is being amortized over the remaining term of the notes using the effective interest method.

The 7.81% unsecured senior notes payable was paid in full on August 13, 2004.

The Company has an unsecured revolving credit agreement that allows for borrowings up to $150,000,000, of which $10,000,000 pertains to the Company's Canadian subsidiary. Of the remaining $140,000,000 facility available to the U.S. operations, $35,000,000 may also be utilized by the European subsidiaries. This agreement, which expires May 2006, requires that interest be paid at a variable rate based on one of the following options elected by the Company: prime or LIBOR or money market rate plus applicable spread.

The Company had commercial letters of credit outstanding of $3,175,000 and $2,380,000 at January 1, 2005 and January 3, 2004, respectively.

The long-term loan agreements contain restrictive covenants that, among other things, require the Company to maintain certain financial ratios and minimum levels of consolidated net worth. At January 1, 2005, the Company was in compliance with all restrictive covenants and retained earnings in excess of covenant requirements were $83,968,000. 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 subsequent to 2005 are as follows: 2006-$10,730,000; 2007-$10,721,000; 2008-$10,718,000.

Interest costs of $408,000 in 2004, $235,000 in 2003 and $254,000 in 2002 were capitalized in connection with various capital improvement and computer hardware and software installation projects.

4. Leases
The Company leases machinery, equipment and certain warehouse, office and retail store space under operating lease agreements that expire at various dates through 2018. At January 1, 2005, minimum rental payments due under all noncancelable leases were as follows: 2005-$10,736,000; 2006-$9,082,000; 2007-$7,819,000; 2008-$6,762,000; 2009-$5,741,000; thereafter-$15,377,000.

Rental expense under all operating leases consisted primarily of minimum rentals and totaled $11,542,000 in 2004, $11,614,000 in 2003 and $11,011,000 in 2002.

5. Capital Stock
The Company has 2,000,000 authorized shares of $1 par value preferred stock, of which none is issued or outstanding.

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. Two-thirds of 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-


11


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 preferred 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.

If, after a triggering event, the Company is a party to a merger or other business combination, regardless of whether the Company is the surviving corporation, right 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 certain 15% stockholders or the activities of an adverse person (as defined in the plan). 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 Board of Directors can elect to exclude certain transactions from triggering the exercise of preferred stock rights and other actions under the plan.

The Company has stock incentive plans under which options to purchase shares of common stock may be granted to officers, other key employees and non-employee directors. Options granted are exercisable over no more than ten years and vest over various periods. All unexercised options are available for future grant upon their cancellation.

A summary of the transactions under the stock option plans is as follows:

 


 


 


 


 



 


Shares Under
Option



 


Weighted-Average
Option Price



 


Outstanding at December 29, 2001

5,971,896

 

$

9.65

 

 

Granted

1,196,991

 

 

10.39

 

 

Exercised

(482,803

)

 

7.25

 

 

Cancelled


(67,787


)


 


10.57


 


 


Outstanding at December 28, 2002

6,618,297

 

 

9.93

 

 

Granted

1,208,001

 

 

10.81

 

 

Exercised

(1,127,250

)

 

7.96

 

 

Cancelled


(66,084


)


 


13.45


 


 


Outstanding at January 3, 2004

6,632,964

 

 

10.41

 

 

Granted

1,938,069

 

 

17.75

 

 

Exercised

(2,880,662

)

 

9.90

 

 

Cancelled


(108,186


)


 


13.60


 


 


Outstanding at January 1, 2005


5,582,185


 


$


13.14


 


 


Shares available for grant under the stock option plans were 2,067,445 at January 1, 2005, 3,147,514 at January 3, 2004, and 2,416,321 at December 28, 2002.

The exercise prices of options outstanding at January 1, 2005 range from $4.36 to $21.13. A summary of stock options outstanding and options exercisable at January 1, 2005 is as follows:

 

Options Outstanding


 

Options Exercisable


Range of
Exercise
Price




Number




 


Weighted-
Average
Exercise Price




 


Average
Remaining
Contractual Life




 




Number




 


Weighted-
Average
Exercise Price


Less than $10

903,207

 

$

7.46

 

 

3.7 years

 

901,933

 

$

7.46

 

$10 to $15

2,348,358

 

 

10.58

 

 

6.6 years

 

1,677,360

 

 

10.60

 

Greater than $15


2,330,620


 


 


17.91


 


 


6.2 years


 


1,763,673


 


 


18.72


 


 


5,582,185


 


$


13.14


 


 


6.0 years


 


4,342,966


 


$


13.25


 




12


The number of options exercisable at January 3, 2004 and December 28, 2002 totaled 5,273,376 and 5,256,171, respectively, with weighted-average exercise prices of $10.40 and $9.98, respectively.

The Company also has stock award plans for officers and other key employees. Common stock issued under these plans is subject to certain restrictions, including a prohibition against any sale, transfer or other disposition by the officer or employee (except for certain transfers for estate planning purposes for certain officers), a requirement to forfeit the award upon certain terminations of employment in cases other than death, disability, retirement or consensual severance and performance criteria in certain instances. These restrictions lapse over a three- to five-year period from the date of the award. Shares aggregating 294,120 in 2004, 242,850 in 2003 and 242,550 in 2002 were awarded under these plans. The weighted-average grant date fair value was $15.37 in 2004, $10.57 in 2003 and $10.31 in 2002 for the shares awarded. There were 13,734 awards cancelled in 2004 and 27,336 awards cancelled in 2002. There were no awards cancelled in 2003. The market value of the shares awarded without performance c riteria is recognized as unearned compensation in the consolidated statements of stockholders' equity and is amortized to operations over the vesting period. Awards based on performance criteria are amortized to operations over the combined performance and vesting period.

6. 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 employees' years of service and final average earnings (as defined in the plan), while the other plan provides 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.

The Company has a Supplemental Executive Retirement Plan ("SERP") for certain current and former employees that entitles them to receive payments from the Company following retirement based on the employees' years of service and final average earnings (as defined in the SERP). Under the SERP, the employees can elect early retirement with a corresponding reduction in benefits. The Company also has individual deferred compensation agreements with certain former employees that entitle them to receive payments from the Company for a period of fifteen to eighteen years following retirement. The Company maintains life insurance policies with a cash surrender value of $26,245,000 at January 1, 2005 and $24,648,000 at January 3, 2004 that are intended to fund deferred compensation benefits under the SERP and deferred compensation agreements.

The Company has a defined contribution money accumulation plan covering substantially all domestic employees that provides for Company contributions based on earnings. This plan is combined with the principal defined benefit pension plan for funding purposes to the extent allowable under applicable regulations. The Company recognized expense for the money accumulation plan of $1,788,000 in 2004, $1,620,000 in 2003 and $1,500,000 in 2002. The Company also has certain defined contribution plans at foreign subsidiaries. Contributions to these plans were $832,000 in 2004, $662,000 in 2003, and $506,000 in 2002.




13


The Company uses a September 30 measurement date for its defined benefit plans. The following summarizes the status of and changes in the Company's pension assets and related obligations for its pension plans (which include the Company's defined benefit pension plans and the SERP) as of:

 


September 30


 


 


2004  


 


2003  


 


(Thousands of Dollars)

 

 

 

 

 

 

Change in projected benefit obligations:

 

 

 

 

 

 

     Projected benefit obligations at beginning of the year

$

146,486

 

$

132,544

 

     Service cost pertaining to benefits earned during the year

 

3,983

 

 

3,243

 

     Interest cost on projected benefit obligations

 

8,991

 

 

8,634

 

     Effect of changes in actuarial assumptions

 

37

 

 

(401

)

     Actuarial losses

 

4,176

 

 

9,027

 

     Benefits paid to plan participants


 


(6,805


)


 


(6,561


)


Projected benefit obligations at end of the year


$


156,868


 


$


146,486


 


 

 

 

 

 

 

 

Change in fair value of pension assets:

 

 

 

 

 

 

     Fair value of pension assets at beginning of the year

$

127,854

 

$

102,486

 

     Actual net investment gain

 

17,559

 

 

22,195

 

     Company contributions

 

5,664

 

 

9,734

 

     Benefits paid to plan participants


 


(6,805


)


 


(6,561


)


Fair value of pension assets at end of the year


$


144,272


 


$


127,854


 


 

 

 

 

 

 

 

Funded status

$

(12,596

)

$

(18,632

)

Unrecognized prior service costs

 

3,253

 

 

3,879

 

Unrecognized net actuarial losses


 


35,118


 


 


41,465


 


Net amount recognized


$


25,775


 


$


26,712


 


 

 

 

 

 

 

 

Amounts recognized in the consolidated balance sheets:

 

 

 

 

 

 

Prepaid benefit cost

$

36,416

 

$

37,578

 

Accrued benefit cost

 

(16,778

)

 

(18,887

)

Intangible assets

 

1,797

 

 

2,138

 

Accumulated other comprehensive loss


 


4,340


 


 


5,883


 


Net amount recognized


$


25,775


 


$


26,712


 



Funded status of pension plans and SERP (supplemental):

 

 

 

 

 

 

   Funded status of qualified defined benefit plans and SERP

$

(12,596

)

$

(18,632

)

   Nonqualified trust assets (cash surrender value of life insurance) recorded

 

 

 

 

 

 

      in other assets and intended to satisfy the projected benefit obligation

 

 

 

 

 

 

      of unfunded supplemental employee retirement plans


 


23,631


 


 


21,708


 


Net funded status of pension plans and SERP (supplemental)


$


11,035


 


$


3,076


 


The Company made contributions of $159,000 and $194,000 subsequent to the measurement date and before the fiscal years ended 2004 and 2003, respectively.

Information for pension plans with an accumulated benefit obligation in excess of plan assets:

 


 


September 30


 


 


2004  


 


2003  


 


(Thousands of Dollars)

 

 

 

 

 

 

Projected benefit obligations

$

28,381

 

$

27,805

 

Accumulated benefit obligations

 

27,295

 

 

26,502

 

Fair value of plan assets

 

10,517

 

 

7,615

 

The accumulated benefit obligations for all defined benefit pension plans and the SERP were $147,933,000 and $138,419,000 at September 30, 2004 and 2003, respectively.



14


The following is a summary of net pension and SERP expense recognized by the Company:

 


 


 


 


 


 


 


 


2004  


 


2003  


 


2002  


 


(Thousands of Dollars)

 

 

 

 

 

 

 

 

 

Service cost pertaining to benefits earned during the year

$

(3,983

)

$

(3,243

)

$

(4,435

)

Interest cost on projected benefit obligations

 

(8,991

)

 

(8,634

)

 

(8,959

)

Expected return on pension assets

 

11,906

 

 

10,175

 

 

12,477

 

Net amortization loss


 


(5,548


)


 


(5,491


)


 


(1,010


)


Net pension expense


$


(6,616


)


$


(7,193


)


$


(1,927


)


Expense for qualified defined benefit pension plans was $4,825,000 in 2004 and $6,014,000 in 2003, and pension income was $1,314,000 in 2002

 


 


 


 


 


 


2004


 


2003


 


 

 

 

 

 

Weighted average assumptions used to determine benefit obligations at September 30:

     Discount rate

5.98%

 

6.11%

 

     Rate of compensation increase

3.50%

 

3.50%

 

 

 

 

 

 

Weighted average assumptions used to determine net periodic benefit cost for the years ended:

     Discount rate

6.11%

 

6.76%

 

     Expected long-term rate of return on plan assets

8.75%

 

8.90%

 

     Rate of compensation increase-qualified plans

3.50%

 

3.50%

 

     Rate of compensation increase-SERP

3.50%

 

3.85%

 

Unrecognized net experience losses exceeding certain corridors are amortized over a five-year period, unless the minimum amortization method based on average remaining service periods produces a higher amortization.

The long-term rate of return is based on overall market expectations for a balanced portfolio with an asset mix similar to the Company's, utilizing historic returns for broad market and fixed income indices.

 


 


 


 


 


 


2004


 


2003


 


 

 

 

 

 

Weighted average asset allocations at September 30 by asset category are as follows:

     Equity securities

72.3%

 

71.8%

 

     Debt instruments

22.7%

 

22.9%

 

     Cash and money market investments


5.0%


 


5.3%


 


 


100.0%


 


100.0%


 


The Company's investment policy for plan assets uses a blended approach of U.S. and foreign equities combined with U.S. fixed income investments. Policy guidelines indicate that total equities should not exceed 80% and fixed income securities should not exceed 50%. Within the equity and fixed income classifications, the investments are diversified.

Equity securities include shares of the Company's common stock with a fair value of $9,477,000 at September 30, 2003. There were no holdings of Company common stock at September 30, 2004. Dividends received on Company common stock holdings were $10,000 in 2004, $134,000 in 2003 and $120,000 in 2002.

The Company expects to contribute $3,000,000 to its qualified defined benefit pension plans and $588,000 to the SERP in 2005.

Expected benefit payments for the five years subsequent to 2004 and the sum of the five years following those are as follows: 2005 - $7,040,000; 2006 - $7,543,000; 2007 - $7,805,000; 2008 - $8,074,000; 2009 - $8,349,000; and 2010 through 2014 - $48,935,000.



15


7. Income Taxes
The provisions for income taxes consist of the following:

 


 


 


 


 


 


 


 


2004  


 


2003  


 


2002  


 


(Thousands of Dollars)

 

 

 

 

 

 

 

 

 

Currently payable:

 

 

 

 

 

 

 

 

 

   Federal

$

23,096

 

$

19,818

 

$

20,002

 

   State and foreign

 

6,604

 

 

4,346

 

 

3,381

 

Deferred (credit) expense


 


1,179


 


 


(902


)


 


216


 


 


$


30,879


 


$


23,262


 


$


23,599


 


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:

 


 


 


 


 


 


 


 


2004  


 


2003  


 


2002  


 


(Thousands of Dollars)

 

 

 

 

 

 

 

 

 

Income taxes at statutory rate

$

33,975

 

$

26,302

 

$

25,079

 

State income taxes, net of federal income tax reduction

 

343

 

 

183

 

 

271

 

Nontaxable earnings of foreign affiliates

 

(2,186

)

 

(1,605

)

 

(1,674

)

Research and development credits

 

(550

)

 

(1,870

)

 

-

 

Foreign earnings taxed at rates differing from

 

 

 

 

 

 

 

 

 

   the U.S. statutory rate

 

(313

)

 

718

 

 

121

 

Other


 


(390


)


 


(466


)


 


(198


)


 


$


30,879


 


$


23,262


 


$


23,599


 


Significant components of the Company's deferred income tax assets and liabilities as of the end of 2004 and 2003 are as follows:

 


 


 


 


 


 


2004  


 


2003  


 


(Thousands of Dollars)

 

 

 

 

 

 

Deferred income tax assets:

 

 

 

 

 

 

   Accounts receivable and inventory valuation allowances

$

2,444

 

$

3,086

 

   Deferred compensation accruals

 

2,163

 

 

2,187

 

   Future benefit of foreign net operating losses

 

254

 

 

254

 

   Accrued pension costs

 

1,476

 

 

2,000

 

   Other amounts not deductible until paid


 


6,470


 


 


5,906


 


Total deferred income tax assets

 

12,807

 

 

13,433

 

 

 

 

 

 

 

 

Deferred income tax liabilities:

 

 

 

 

 

 

   Tax over book depreciation

 

(10,336

)

 

(9,256

)

   Prepaid pension costs

 

(9,250

)

 

(9,738

)

   Other


 


(1,399


)


 


(979


)


Total deferred income tax liabilities


 


(20,985


)


 


(19,973


)


Net deferred income tax liabilities


$


(8,178


)


$


(6,540


)


No provision has been made for U.S. federal and state income taxes or foreign taxes that may result from future remittances of the undistributed earnings ($96,052,000 at January 1, 2005 and $69,558,000 at January 3, 2004) of foreign subsidiaries as the Company expects such earnings will be reinvested overseas indefinitely. However, the Company is analyzing the potential impact of the repatriation provision of the American Jobs Creation Act of 2004 (the "Act"), which would allow the Company to bring these foreign earnings back to the United States at reduced tax rates effective until December 31, 2005. If elected, the amount of repatriation is not expected to exceed $70,000,000 because a dividend of earnings from certain jurisdictions would not result in a tax benefit where foreign statutory rates exceed the U.S. rate. Technical corrections to the Act are pending issuance and therefore it is not currently practicable to estimate the potential range of impact on income taxes.



16


8. 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 costs 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 material effect on the Company's consolidated financial position or future results of operations.

Pursuant to certain of the Company's lease agreements, the Company has provided financial guarantees to third parties in the form of indemnification provisions. These provisions indemnify and reimburse the third parties for costs, including but not limited to adverse judgments in lawsuits and taxes and operating costs. The terms of the guarantees are equal to the terms of the related lease agreements. The Company is not able to calculate the maximum potential amount of future payments it could be required to make under these guarantees, as the potential payment is dependent upon the occurrence of future unknown events.

The Company has future minimum royalty obligations due under the terms of certain licenses held by the Company. These minimum future obligations are as follows:

 


 


 


 


 


 


 


 


 


 


 


 


2005


 


2006


 


2007


 


2008


 


2009


 


(Thousands of Dollars)

 

 

 

 

 

 

 

 

 

 

Minimum royalties

$1,118

 

$969

 

$820

 

$844

 

$869

 

Minimum royalties are based on both fixed obligations and assumptions regarding the consumer price index. Royalty obligations in excess of minimum requirements are based upon future sales levels. In accordance with these agreements, the Company incurred royalty expense of $3,083,000, $3,132,000 and $2,929,000 for 2004, 2003 and 2002, respectively.

The terms of certain license agreements also require advertising expenditures based on the level of sales. In accordance with these agreements, the Company's advertising obligations, based on actual sales, totaled $1,982,000, $2,915,000 and $2,741,000 for 2004, 2003 and 2002, respectively.

9. Business Segments
The Company has one reportable segment that is engaged in manufacturing, sourcing, marketing, licensing and distributing branded footwear and licensed apparel and accessories to the retail sector, including casual shoes, dress shoes, performance outdoor footwear, boots, uniform shoes, work shoes, slippers, moccasins and apparel and accessories. Revenue of this segment is derived from the sale of branded footwear to external customers as well as royalty income from the licensing of the Company's trademarks and brand names to licensees and distributors. The business units comprising the branded footwear and licensing segment manufacture or source, market and distribute products in a similar manner. Branded footwear and licensed products are distributed through wholesale channels and under licensing and distributor arrangements.

The other business units in the following tables consist of the Company's retail, tannery and pigskin procurement operations. The Company operated 70 domestic retail stores and 5 consumer-direct internet sites at January 1, 2005 that sell Company-manufactured and sourced products, as well as 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 and minority interest. The accounting policies used to determine profitability and total assets of the branded footwear and other business segments are the same as disclosed in Note 1.



17


Business segment information is as follows:

 


 


 


2004




 


Branded
Footwear
and Licensing




 



Other
Businesses




 




Corporate




 




Consolidated


(Thousands of Dollars)

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

903,611

 

$

88,298

 

$

-

 

$

991,909

Intersegment sales

 

30,750

 

 

2,939

 

 

-

 

 

33,689

Interest (income) expense - net

 

9,266

 

 

968

 

 

(6,989

)

 

3,245

Depreciation expense

 

6,585

 

 

3,215

 

 

8,883

 

 

18,683

Earnings (loss) before income taxes

 

 

 

 

 

 

 

 

 

 

 

   and minority interest

 

111,261

 

 

4,226

 

 

(18,417

)

 

97,070

Total assets

 

453,522

 

 

39,260

 

 

146,789

 

 

639,571

Additions to property, plant and equipment

 

8,920

 

 

3,890

 

 

5,270

 

 

18,080


 


 


 


2003




 


Branded
Footwear
and Licensing




 



Other
Businesses




 




Corporate




 




Consolidated


(Thousands of Dollars)

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

812,590

 

$

76,336

 

$

-

 

$

888,926

Intersegment sales

 

27,288

 

 

2,471

 

 

-

 

 

29,759

Interest (income) expense - net

 

9,314

 

 

1,059

 

 

(4,899

)

 

5,474

Depreciation expense

 

5,667

 

 

2,587

 

 

9,410

 

 

17,664

Earnings (loss) before income taxes

 

 

 

 

 

 

 

 

 

 

 

   and minority interest

 

85,294

 

 

1,357

 

 

(11,503

)

 

75,148

Total assets

 

399,276

 

 

36,594

 

 

157,922

 

 

593,792

Additions to property, plant and equipment

 

6,229

 

 

3,355

 

 

6,431

 

 

16,015


 


 


 


2002




 


Branded
Footwear
and Licensing




 



Other
Businesses




 




Corporate




 




Consolidated


(Thousands of Dollars)

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

748,807

 

$

78,299

 

$

-

 

$

827,106

Intersegment sales

 

24,814

 

 

3,099

 

 

-

 

 

27,913

Interest (income) expense - net

 

10,458

 

 

1,706

 

 

(5,698

)

 

6,466

Depreciation expense

 

5,340

 

 

2,406

 

 

8,887

 

 

16,633

Earnings (loss) before income taxes

 

 

 

 

 

 

 

 

 

 

 

   and minority interest

 

81,266

 

 

4,361

 

 

(13,973

)

 

71,654

Total assets

 

384,723

 

 

40,453

 

 

106,818

 

 

531,994

Additions to property, plant and equipment

 

8,732

 

 

1,700

 

 

3,443

 

 

13,875


Geographic information, based on shipping destination, related to revenue from external customers included in the consolidated statements of operations is as follows:




18


 


 


 


 


 


 


 


 


2004  


 


2003  


 


2002  


 


(Thousands of Dollars)

 

 

 

 

 

 

 

 

 

United States

$

718,674

 

$

674,794

 

$

644,647

 

Foreign countries:

 

 

 

 

 

 

 

 

 

   Europe and Russia

 

193,461

 

 

150,643

 

 

127,461

 

   Canada

 

49,797

 

 

45,422

 

 

39,363

 

   Central and South America

 

9,084

 

 

6,639

 

 

6,417

 

   Asia

 

11,990

 

 

8,132

 

 

6,780

 

   Middle East/Africa


 


8,903


 


 


3,296


 


 


2,438


 


      Total foreign countries revenue


 


273,235


 


 


214,132


 


 


182,459


 


 


$


991,909


 


$


888,926


 


$


827,106


 


The Company's long-lived assets (primarily property, plant and equipment and intangible assets) are as follows:

 


 


 


 


 


 


 


 


2004  


 


2003  


 


2002  


 


(Thousands of Dollars)

 

 

 

 

 

 

 

 

 

United States

$

132,651

 

$

135,914

 

$

135,346

 

Foreign countries


 


40,776


 


 


36,880


 


 


32,005


 


The Company does not believe that it is dependent upon any single customer, since none accounts for more than 10% of consolidated revenue.

The Company sources approximately 88% (based on pairs) of its footwear products from unrelated suppliers primarily located in Asia. The remainder is produced in Company-owned manufacturing facilities in the United States and the Dominican Republic. All licensed apparel and accessories are sourced from unrelated suppliers. While changes in suppliers could cause delays in manufacturing and a possible loss of sales, management believes that other suppliers could provide similar products on comparable terms.

No product groups, other than branded footwear and licensing, account for more than 10% of consolidated revenue. Revenues derived from the sale and licensing of footwear, apparel and accessories accounted for approximately 91% of revenue in 2004, 2003 and 2002.

Approximately 12% of the Company's employees are subject to bargaining unit contracts extending through various dates through 2006.

10. Quarterly Results of Operations (unaudited)
The Company reports its quarterly results of operations on the basis of 12-week periods for each of the first three quarters and a 16- or 17-week period for the fourth quarter. The fourth quarter of 2004 includes 16 weeks and the fourth quarter of 2003 includes 17 weeks.

The Company's unaudited quarterly results of operations are as follows:

 


 


 


 


2004


 



 


First
Quarter



 


Second
Quarter



 


Third
Quarter



 


Fourth
Quarter



 


(Thousands of Dollars, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

224,871

 

$

198,774

 

$

260,897

 

$

307,367

 

Gross margin

 

85,441

 

 

75,514

 

 

98,177

 

 

115,003

 

Net earnings

 

12,299

 

 

10,985

 

 

21,946

 

 

20,708

 

Net earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

$

.21

 

$

.19

 

$

.38

 

$

.37

 

   Diluted


 


.20


 


 


.18


 


 


.37


 


 


.34


 




19


 


 


 


 


2003


 



 


First
Quarter



 


Second
Quarter



 


Third
Quarter



 


Fourth
Quarter



 


(Thousands of Dollars, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

191,485

 

$

184,040

 

$

230,571

 

$

282,830

 

Gross margin

 

69,196

 

 

65,724

 

 

86,714

 

 

104,954

 

Net earnings

 

7,414

 

 

9,281

 

 

16,414

 

 

18,607

 

Net earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

$

.13

 

$

.16

 

$

.28

 

$

.31

 

   Diluted


 


.12


 


 


.15


 


 


.27


 


 


.31


 


Adjustments in the fourth quarter were immaterial in 2004 and resulted in an increase in net earnings of $579,000 ($0.01 per share) in 2003. These adjustments related primarily to inventories.

11. Business Acquisitions
On January 3, 2005, the Company expanded its owned Wolverine® brand operations in Canada. Based on a preliminary purchase price allocation, assets consisting primarily of inventory and fixed assets totaling approximately $1,700,000 were acquired from a former Wolverine® and CAT® Footwear distributor for cash of $2,200,000, subject to certain post-closing adjustments, and resulted in goodwill and intangible assets of approximately $500,000.

On January 3, 2005, the Company expanded its owned Merrell® operations in Sweden and Finland and its Sebago® operations in the United Kingdom and Germany. Based on a preliminary purchase price allocation, assets consisting primarily of inventory totaling approximately $544,000 were acquired from former distributors for cash.

On November 3, 2003, the Company acquired significant operating assets of Sebago, Inc., an international distributor of performance nautical and American-inspired footwear, consisting of accounts receivable, inventory, fixed assets, trademarks and other amortizable intangible assets totaling approximately $18,627,000 and assumed liabilities of approximately $1,987,000. The total purchase price of Sebago, Inc., was $16,886,000, which consisted of $14,886,000 paid in cash and a note payable for $2,000,000 ($1,000,000 paid in 2004 and $1,000,000 due in 2005), resulting in goodwill of $246,000 after allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the results of operations since November 3, 2003 are included in the Company's consolidated statements of operations.

An independent valuation of the Sebago® trademarks was performed as of the date of the acquisition, which totaled $4,904,000. Pursuant to SFAS No. 142, goodwill and indefinite-lived intangibles will not be amortized, but will be evaluated for impairment annually. Goodwill was assigned to the Company's Branded Footwear and Licensing segment. The majority of the goodwill is expected to be deductible for tax purposes. The other amortizable intangible assets have a weighted average useful life of approximately nine years.

The following table sets forth the unaudited pro forma information for the Company as if the Sebago® acquisition had occurred as of the beginning of 2002 utilizing the Company's effective tax rate. The unaudited pro forma financial information is provided for informational purposes only and does not purport to be indicative of the Company's results of operations that would actually have been achieved had the acquisition been completed at the beginning of the periods presented or that may be achieved in the future. The unaudited pro forma financial information was derived from the annual financial statements of the acquired company and does not give effect to any operational synergies or integration costs that may occur as a result of or following the acquisition.


20


 


 


 


 


 


 


2003  


 


2002  


 


(Thousands of Dollars, Except Per Share Data)

 

 

 

 

 

 

Revenue

$

921,944

 

$

865,469

 

Net earnings

 

53,460

 

 

49,732

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.91

 

$

0.83

 

Diluted earnings per share

 

0.87

 

 

0.80

 

Immediately after the acquisition was consummated, management of the Company began to implement an integration plan for the Sebago acquisition. In conjunction with the integration plan, the Company recorded additional liabilities of approximately $1,792,000, which were included in the acquisition cost allocation in accordance with Emerging Issues Task Force Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. The additional liabilities include severance and related costs for approximately 100 manufacturing and administrative employees in Maine, and exit costs for specific product lines of Sebago, Inc.

The following table is a summary of the activity in the reserves by category:

 


 


 


 


 


 


 



 


Employee
Severance



 



Exit Costs



 



Total



 


(Thousands of Dollars)

 

 

 

 

 

 

 

 

 

Amounts recognized as charges in 2003 and accrued at

 

 

 

 

 

 

 

 

 

   January 3, 2004

$

1,496

 

$

296

 

$

1,792

 

Payments

 

(1,187

)

 

(282

)

 

(1,469

)

Adjustments


 


(309


)


 


-


 


 


(309


)


Balance at January 1, 2005


$


-


 


$


14


 


$


14


 


On January 16, 2002, the Company established a new subsidiary to operate the CAT® footwear business in the European market. This new entity, Wolverine Europe Limited, purchased assets consisting of accounts receivable, inventory, limited amortizable intangible assets and fixed assets totaling approximately $21,247,000 from Overland Group Limited of London, England and assumed liabilities of approximately $8,514,000. Cash and other consideration of $27,790,000 was remitted for the acquisition, resulting in goodwill of $15,057,000 after allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The former owner of Overland Group Limited is a 5% minority stockholder in the new subsidiary. The markets served directly by Wolverine Europe Limited include Austria, France, Germany, Ireland, The Netherlands, Switzerland and the United Kingdom. Wolverine Europe Limited also coordinates and supports other European markets serve d by independently-owned distributors. Consolidated pro forma revenue for 2002, assuming the transaction occurred at the beginning of the year, would not have been materially different from reported amounts. Consolidated pro forma net earnings for 2002, assuming the transaction occurred at the beginning of that year, are not materially different from reported amounts.





21


Report of Independent Registered Public Accounting Firm

The 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 1, 2005 and January 3, 2004, 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 1, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(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 the standards of the Public Company Accounting Oversight Board (United States). 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 1, 2005 and January 3, 2004, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended January 1, 2005, in conformity with U.S. 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.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Wolverine World Wide, Inc.'s internal control over financial reporting as of January 1, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Grand Rapids, Michigan
February 23, 2005







22


Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

The Board of Directors and Stockholders
Wolverine World Wide, Inc.

We have audited management's assessment, included in the accompanying management's report on internal control over financial reporting, that Wolverine World Wide, Inc. maintained effective internal control over financial reporting as of January 1, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Wolverine World Wide, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company' s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that Wolverine World Wide, Inc. maintained effective internal control over financial reporting as of January 1, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Wolverine World Wide, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 1, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2004 consolidated financial statements of Wolverine World Wide, Inc. and subsidiaries and our report dated February 23, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Grand Rapids, Michigan
February 23, 2005



23


APPENDIX B

Schedule II

Valuation and Qualifying Accounts of Continuing Operations

Wolverine World Wide, Inc. and Subsidiaries


Column A


Column B


 


Column C


 


Column D


 


Column E


 

 

 

Additions


 

 

 

 




Description



Balance at
Beginning of
Period





 


(1)
Charged to
Costs and
Expenses





 


(2)
Charged to
Other Accounts
(Describe)





 




Deductions
(Describe)





 



Balance at
End of
Period


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal year ended January 1, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Deducted from asset accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

  Allowance for doubtful accounts

$

7,335,000

 

$

3,638,000

 

 

 

$

6,139,000

(A)

$

4,834,000

  Allowance for sales returns

 

1,997,000

 

 

23,611,000

 

 

 

 

23,822,000

(B)

 

1,786,000

  Allowance for cash discounts

 

1,130,000

 

 

13,539,000

 

 

 

 

13,089,000

(C)

 

1,580,000

  Inventory valuation allowances

 


6,355,000


 


 


8,622,000


 


 


 


 


9,133,000


(D)


 


5,844,000


 

$


16,817,000


 


$


49,410,000


 


 


 


$


52,183,000


 


$


14,044,000


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal year ended January 3, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

Deducted from asset accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

  Allowance for doubtful accounts

$

7,387,000

 

$

4,962,000

 

 

 

$

5,014,000

(A)

$

7,335,000

  Allowance for sales returns

 

1,587,000

 

 

26,610,000

 

 

 

 

26,200,000

(B)

 

1,997,000

  Allowance for cash discounts

 

1,217,000

 

 

12,632,000

 

 

 

 

12,719,000

(C)

 

1,130,000

  Inventory valuation allowances

 


4,751,000


 


 


12,011,000


 


 


 


 


10,407,000


(D)


 


6,355,000


 

$


14,942,000


 


$


56,215,000


 


 


 


$


54,340,000


 


$


16,817,000


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal year ended December 28, 2002

 

 

 

 

 

 

 

 

 

 

 

Deducted from asset accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

  Allowance for doubtful accounts

$

5,438,000

 

$

5,717,000

 

 

 

$

3,768,000

(A)

$

7,387,000

  Allowance for sales returns

 

1,110,000

 

 

29,433,000

 

 

 

 

28,956,000

(B)

 

1,587,000

  Allowance for cash discounts

 

834,000

 

 

11,081,000

 

 

 

 

10,698,000

(C)

 

1,217,000

  Inventory valuation allowances

 


4,014,000


 


 


7,698,000


 


 


 


 


6,961,000


(D)


 


4,751,000


 

$


11,396,000


 


$


53,929,000


 


 


 


$


50,383,000


 


$


14,942,000






(A)

Accounts charged off, net of recoveries.

(B)

Actual customer returns.

(C)

Discounts given to customers.

(D)

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 1, 2005









Wolverine World Wide, Inc.
9341 Courtland Drive
Rockford, Michigan 49351





EXHIBIT INDEX

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 September 7, 2002. Here incorporated by reference.

 

 

3.2

Amended and Restated By-laws. Previously filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the period ended September 7, 2002. Here incorporated by reference.

 

 

4.1

Certificate of Incorporation, as amended. See Exhibit 3.1 above.

 

 

4.2

Amended and Restated By-laws. See Exhibit 3.2 above.

 

 

4.3

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.

 

 

4.4

Amendment No. 1 dated as of June 30, 2000, to the Rights Agreement dated as of April 17, 1997. Previously filed as Exhibit 4.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000. Here incorporated by reference.

 

 

4.5

Second Amendment dated as of February 11, 2002, to the Rights Agreement dated as of April 17, 1997. Previously filed as Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the period ended March 23, 2002. Here incorporated by reference.

 

 

4.6

Third Amendment dated as of December 10, 2002, to the Rights Agreement dated as of April 17, 1997. Previously filed as Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2002. Here incorporated by reference.

 

 

4.7

Note Purchase Agreement dated as of December 8, 1998, relating to 6.50% Senior Notes due on December 8, 2008.

 

 

4.8

The Registrant has several classes of long-term debt instruments outstanding in addition to those described in Exhibits 4.7 and 4.9. The authorized amount of none of these classes of debt 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.

 

 

4.9

Credit Agreement dated as of May 29, 2001, with Bank One, Michigan, as agent. Previously filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 16, 2001. Here incorporated by reference.

 

 

4.10

First Amendment dated as of February 8, 2002, to the Credit Agreement dated as of May 29, 2001. Previously filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 23, 2002. Here incorporated by reference.

 

 

4.11

Second Amendment dated as of August 30, 2002, to the Credit Agreement dated as of May 29, 2001. Previously filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 7, 2002. Here incorporated by reference.



i


4.12

Third Amendment dated as of December 19, 2002, to the Credit Agreement dated as of May 29, 2001. Previously filed as Exhibit 4.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2002. Here incorporated by reference.

 

 

4.13

Fourth Amendment dated as of April 30, 2003, to the Credit Agreement dated as of May 29, 2001.

 

 

4.14

Fifth Amendment dated as of August 31, 2004, to the Credit Agreement dated as of May 29, 2001.

 

 

10.1

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.

 

 

10.2

1993 Stock Incentive Plan.* Previously filed as an exhibit to the Company's registration statement on Form S-8, filed June 22, 1993, Registration No. 33-64854. Here incorporated by reference.

 

 

10.3

1995 Stock Incentive Plan.* Previously filed as an exhibit to the Company's registration statement on Form S-8, filed October 26, 1995, Registration No. 33-63689. Here incorporated by reference.

 

 

10.4

1997 Stock Incentive Plan.* Previously filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2001. Here incorporated by reference.

 

 

10.5

Stock Incentive Plan of 1999.*

 

 

10.6

Stock Incentive Plan of 2001.* 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 26, 2001. Here incorporated by reference.

 

 

10.7

Stock Incentive Plan of 2003.* 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 24, 2003. Here incorporated by reference.

 

 

10.8

Amended and Restated Directors Stock Option Plan.* Previously filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000. Here incorporated by reference.

 

 

10.9

Amended and Restated Directors' Stock Option Plan.* Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 14, 2003. Here incorporated by reference.

 

 

10.10

Amended and Restated Outside Directors' Deferred Compensation Plan.* Previously filed as Appendix E to the Company's Definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders held on April 25, 2002. Here incorporated by reference.

 

 

10.11

Amended and Restated 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 25, 2002. Here incorporated by reference.



ii


10.12

Amended and Restated 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 25, 2002. Here incorporated by reference.

 

 

10.13

Amended and Restated Stock Option Loan Program.* Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 7, 2002. Here incorporated by reference.

 

 

10.14

Executive Severance Agreement.* An updated participant schedule is attached as Exhibit 10.14.

 

 

10.15

Form of Indemnification Agreement.* The Company has entered into an Indemnification Agreement with each director and executive officer. Previously filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000. Here incorporated by reference.

 

 

10.16

Benefit Trust Agreement dated May 19, 1987, and Amendments Number 1, 2, 3 and 4 thereto.* Previously filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000. Here incorporated by reference.

 

 

10.17

Amended and Restated Supplemental Executive Retirement Plan.* Previously filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000. An updated participant schedule is attached as Exhibit 10.17.

 

 

10.18

Employees' Pension Plan (Restated as amended through July 7, 2004).*

 

 

10.19

Form of Incentive Stock Option Agreement. Previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated February 9, 2005.*

 

 

10.20

Form of Non-Qualified Stock Option Agreement for Steven M. Duffy, Stephen L. Gulis, Blake W. Krueger and Timothy J. O'Donovan. Previously filed as Exhibit 10.2 to the Company's Current Report on Form 8-K dated February 9, 2005.*

 

 

10.21

Form of Non-Qualified Stock Option Agreement for other employees. Previously filed as Exhibit 10.3 to the Company's Current Report on Form 8-K dated February 9, 2005.*

 

 

10.22

Form of Restricted Stock Agreement. Previously filed as Exhibit 10.4 to the Company's Current Report on Form 8-K dated February 9, 2005.*

 

 

10.23

Form of Stock Option Agreement for non-employee directors.*

 

 

21

Subsidiaries of Registrant.

 

 

23

Consent of Ernst & Young LLP.

 

 

24

Powers of Attorney.

 

 

31.1

Certification of President and Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2

Certification of Executive Vice President, Chief Financial Officer and Treasurer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32

Certification pursuant to 18 U.S.C. § 1350.

 

 

____________________________
*Management contract or compensatory plan or arrangement.


iii

Wolverine Exhibit 4.7 to Form 10-K

EXHIBIT 4.7








==========================================================


WOLVERINE WORLD WIDE, INC.



$75,000,000 6.50% Senior Notes due December 8, 2008








NOTE PURCHASE AGREEMENT




Dated December 8, 1998


==========================================================






TABLE OF CONTENTS

1. AUTHORIZATION OF NOTES

1

 

 

 

2. SALE AND PURCHASE OF NOTES

1

 

 

 

3. CLOSING

2

 

 

 

4. CONDITIONS TO CLOSING

2

 

 

 

 

4.1 Representations and Warranties

2

 

 

 

 

4.2 Performance; No Default

2

 

 

 

 

4.3 Compliance Certificates

3

 

 

 

 

4.4 Opinions of Counsel

3

 

 

 

 

4.5 Purchase Permitted by Applicable Law

3

 

 

 

 

4.6 Sale of Other Notes

4

 

 

 

 

4.7 Payment of Special Counsel Fees

4

 

 

 

 

4.8 Private Placement Number

4

 

 

 

 

4.9 Changes in Corporate Structure

4

 

 

 

 

4.10 Proceedings and Documents

4

 

 

 

 

4.11 Offeree Letter

4

 

 

 

5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY

5

 

 

 

 

5.1 Organization; Power and Authority

5

 

 

 

 

5.2 Authorization, etc

5

 

 

 

 

5.3 Disclosure

5

 

 

 

 

5.4 Organization and Ownership of Shares of Subsidiaries; Affiliates

6

 

 

 

 

5.5 Financial Statements

7

 

 

 

 

5.6 Compliance with Laws, Other Instruments, etc.

7

 

 

 

 

5.7 Governmental Authorizations, etc.

8

 

 

 

 

5.8 Litigation; Observance of Agreements, Statutes and Orders

8

 

 

 

 

5.9 Taxes

8

 

 

 

 

5.10 Title to Property; Leases

9

 

 

 

 

5.11 Licenses, Permits, etc

9

 

 

 

 

5.12 Compliance with ERISA

9

 

 

 

 

5.13 Private Offering by the Company

10



i


 

5.14 Use of Proceeds; Margin Regulations

11

 

 

 

 

5.15 Existing Indebtedness; Future Liens

11

 

 

 

 

5.16 Foreign Assets Control Regulations, etc

12

 

 

 

 

5.17 Status under Certain Statutes

12

 

 

 

 

5.18 Environmental Matters

12

 

 

 

 

5.19 Year 2000 Issues

13

 

 

 

6. REPRESENTATIONS OF THE PURCHASER

13

 

 

 

 

6.1 Purchase for Investment

13

 

 

 

 

6.2 Source of Funds

14

 

 

 

7. INFORMATION AS TO COMPANY

15

 

 

 

 

7.1 Financial and Business Information

15

 

 

 

 

7.2 Officer's Certificate

18

 

 

 

 

7.3 Inspection

19

 

 

 

8. PREPAYMENT OF THE NOTES

19

 

 

 

 

8.1 Required Prepayments; Payment at Maturity

19

 

 

 

 

8.2 Optional Prepayments with Make-Whole Amounts

20

 

 

 

 

8.3 Allocation of Partial Prepayments

20

 

 

 

 

8.4 Maturity; Surrender, etc.

20

 

 

 

 

8.5 Purchase of Notes

21

 

 

 

 

8.6 Make-Whole Amount

21

 

 

 

 

8.7 Offer to Prepay Notes in the Event of a Debt Prepayment Application

22

 

 

 

9. AFFIRMATIVE COVENANTS

23

 

 

 

 

9.1 Compliance with Law

23

 

 

 

 

9.2 Insurance

24

 

 

 

 

9.3 Maintenance of Properties

24

 

 

 

 

9.4 Payment of Taxes and Claims

24

 

 

 

 

9.5 Corporate Existence, etc.

25

 

 

 

10. NEGATIVE COVENANTS

25

 

 

 

 

10.1 Fixed Charge Coverage

25

 

 

 

 

10.2 Maintenance of Consolidated Net Worth

25

 

 

 

 

10.3 Liens

25



ii


 

10.4 Incurrence of Funded Debt

28

 

 

 

 

10.5 Priority Debt

28

 

 

 

 

10.6 Merger or Consolidation

28

 

 

 

 

10.7 Sale of Assets

29

 

 

 

 

10.8 Transactions With Affiliates

30

 

 

 

 

10.9 Nature of Business

30

 

 

 

11. EVENTS OF DEFAULT

30

 

 

 

12. REMEDIES ON DEFAULT, ETC.

33

 

 

 

 

12.1 Acceleration

33

 

 

 

 

12.2 Other Remedies

34

 

 

 

 

12.3 Rescission

34

 

 

 

 

12.4 No Waivers or Election of Remedies, Expenses, etc.

34

 

 

 

13. REGISTRATION; EXCHANGE, SUBSTITUTION OF NOTES

35

 

 

 

 

13.1 Registration of Notes

35

 

 

 

 

13.2 Transfer and Exchange of Notes

35

 

 

 

 

13.3 Replacement of Notes

36

 

 

 

14. PAYMENTS ON NOTES

36

 

 

 

 

14.1 Place of Payment

36

 

 

 

 

14.2 Home Office Payment

36

 

 

 

15. EXPENSES, ETC.

37

 

 

 

 

15.1 Transaction Expenses

37

 

 

 

 

15.2 Survival

37

 

 

 

16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
              ENTIRE AGREEMENT


37

 

 

 

17. AMENDMENT AND WAIVER

38

 

 

 

 

17.1 Requirements

38

 

 

 

 

17.2 Solicitation of Holders of Notes

38

 

 

 

 

17.3 Binding Effect, etc.

39

 

 

 

 

17.4 Notes held by Company, etc.

39



iii


18. NOTICES

39

 

 

 

19. REPRODUCTION OF DOCUMENTS

40

 

 

 

20. CONFIDENTIAL INFORMATION

40

 

 

 

21. SUBSTITUTION OF PURCHASER

41

 

 

 

22. MISCELLANEOUS

41

 

 

 

 

22.1 Successors and Assigns

41

 

 

 

 

22.2 Payments Due on Non-Business Days

42

 

 

 

 

22.3 Severability

42

 

 

 

 

22.4 Construction

42

 

 

 

 

22.5 Counterparts

42

 

 

 

 

22.6 Governing Law

43














iv


SCHEDULE A

--

Information Relating to Purchasers

 

 

 

SCHEDULE B

--

Defined Terms

 

 

 

SCHEDULE 4.9

--

Changes in Corporate Structure

 

 

 

SCHEDULE 5.3

--

Disclosure Materials

 

 

 

SCHEDULE 5.4

--

Subsidiaries of the Company and Ownership of
   Subsidiary Stock; Company's Affiliates; Company's
   Directors and Senior Officers

 

 

 

SCHEDULE 5.11

--

Disclosures Regarding Patents, etc.

 

 

 

SCHEDULE 5.14

--

Use of Proceeds

 

 

 

SCHEDULE 5.15

--

Existing Indebtedness; Liens

 

 

 

EXHIBIT 1

--

Form of Senior Note

 

 

 

EXHIBIT 4.4(a)

--

Form of Opinion of Special Counsel for the Company



















v


WOLVERINE WORLD WIDE, INC.
9341 Courtland Drive, NE
Rockford, Michigan 49351


6.50% Senior Notes due December 8, 2008



December 8, 1998

TO EACH OF THE PURCHASERS
LISTED IN THE ATTACHED SCHEDULE A:

Ladies and Gentlemen:

                    Wolverine World Wide, Inc., a Delaware corporation (the "Company"), agrees with you as follows:

1.          AUTHORIZATION OF NOTES.

                    The Company will authorize the issue and sale of Seventy-Five Million Dollars ($75,000,000) aggregate principal amount of its 6.50% Senior Notes due December 8, 2008 (the "Notes", such term to include any such notes issued in substitution therefor pursuant to Section 13 of this Agreement or the Other Agreements (as hereinafter defined)). The Notes shall be substantially in the form set out in Exhibit 1, with such changes therefrom, if any, as may be approved by you and the Company. Certain capitalized terms used in this Agreement are defined in Schedule B; references to a "Schedule" or an "Exhibit" are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement.

2.          SALE AND PURCHASE OF NOTES.

                    Subject to the terms and conditions of this Agreement, the Company will issue and sell to you and you will purchase from the Company, at the Closing provided for in Section 3, Notes in the principal amounts specified opposite your name in Schedule A at the purchase price of 100% of the principal amount thereof. Contemporaneously with entering into this Agreement, the Company is entering into separate Note Purchase Agreements (the "Other Agreements") identical with this Agreement with each of the other purchasers named in Schedule A (the "Other Purchasers"), providing for the sale at such Closing to each of the Other Purchasers of Notes in the principal amount specified opposite its name in Schedule A. Your obligations hereunder and the obligations of the Other Purchasers under the Other Agreements are several and not joint obligations and




you shall have no obligation under any Other Agreement and no liability to any Person for the performance or nonperformance by any Other Purchaser thereunder.

3.          CLOSING.

                    The sale and purchase of the Notes to be purchased by you and the Other Purchasers shall occur at the offices of Kilpatrick Stockton, LLP, at 1100 Peachtree Street, Suite 2800, Atlanta, Georgia 30309, at a closing (the "Closing") on December 8, 1998 or on such other Business Day thereafter as may be agreed upon by the Company and you and the Other Purchasers. At the Closing the Company will deliver to you the Notes to be purchased by you in the form of a single Note (or such greater number of Notes in denominations of at least $100,000 as you may request) dated the date of the Closing and registered in your name (or in the name of your nominee), against delivery by you to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 04 045 53, Account Name: "Wolverine World Wide, Inc.", at NBD Ba nk N.A., Detroit, Michigan, ABA Routing # 072000326. If at the Closing the Company shall fail to tender such Notes to you as provided above in this Section 3, or any of the conditions specified in Section 4 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any rights you may have by reason of such failure or such nonfulfillment.

4.          CONDITIONS TO CLOSING.

                    Your obligation to purchase and pay for the Notes to be sold to you at the Closing is subject to the fulfillment to your satisfaction, prior to or at the Closing, of the following conditions:

4.1          Representations and Warranties.

                    The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing.

4.2          Performance; No Default.

                    The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Schedule 5.14) no Default or Event of Default shall have occurred and be continuing. Neither the Company nor any Subsidiary shall have entered into any transaction since the date of the Memorandum that would have been prohibited by this Agreement had it applied since such date.



- -2-


4.3          Compliance Certificates.

                    (a)          Officer's Certificate. The Company shall have delivered to you an Officer's Certificate, dated the date of the Closing, certifying that the conditions specified in Sections 4.1, 4.2 and 4.9 have been fulfilled.

                    (b)          Secretary's Certificate. The Company shall have delivered to you a certificate from a duly authorized Secretary or Assistant Secretary of the Company certifying as to the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of the Notes, this Agreement and the Other Agreements.

4.4          Opinions of Counsel.

                    You shall have received opinions in form and substance satisfactory to you, dated the date of the Closing (a) from Warner, Norcross & Judd LLP, counsel for the Company, in the form attached hereto as Exhibit 4.4(a) and additional opinions of such counsel covering such other matters incident to the transactions contemplated hereby as you or your counsel may reasonably request (and the Company hereby instructs its counsel to deliver such opinions to you) and (b) from Kilpatrick Stockton LLP, your special counsel in connection with such transactions, covering the enforceability of this Agreement and the Notes, the absence of any requirement to register the Notes under the Securities Act or to qualify as an indenture under the Trust Indenture Act of 1939, as amended, and such other matters incident to such transactions as you may reasonably request.

4.5          Purchase Permitted by Applicable Law, etc.

                    On the date of the Closing your purchase of Notes shall (i) be permitted by the laws and regulations of each jurisdiction to which you are subject, without recourse to provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (ii) not violate any applicable Law (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (iii) not subject you to any Tax, penalty or liability under or pursuant to any applicable Law, which Law was not in effect on the date hereof. If requested by you, you shall have received an Officer's Certificate certifying as to such matters of fact as you may reasonably specify to enable you to determine whether such purchase is so permitted.

4.6          Sale of Other Notes.

                    Contemporaneously with the Closing, the Company shall sell to the Other Purchasers and the Other Purchasers shall purchase the Notes to be purchased by them at the Closing as specified in Schedule A.



- -3-


4.7          Payment of Special Counsel Fees.

                    Without limiting the provisions of Section 15.1, the Company shall have paid on or before the Closing the reasonable fees, charges and disbursements of your special counsel referred to in Section 4.4 to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing.

4.8          Private Placement Number.

                    A Private Placement number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Notes.

4.9          Changes in Corporate Structure.

                    Except as specified in Schedule 4.9, the Company shall not have changed its jurisdiction of incorporation or been a party to any merger or consolidation and shall not have succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Section 5.5.

4.10          Proceedings and Documents.

                    All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to you and your special counsel, and you and your special counsel shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request.

4.11          Offeree Letter.

                    The Company shall have delivered a letter from First Chicago Capital Markets, Inc. to you and your special counsel describing in such detail as you may request the number and character of Persons to whom the Company or any Person acting on its behalf has offered any of the Notes or any similar securities of the Company and such other matters regarding the manner of such offering as you may request.

5.          REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

                    The Company represents and warrants to you that:

5.1          Organization; Power and Authority.

                    The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and is duly qualified as a foreign


- -4-


corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the Other Agreements and the Notes and to perform the provisions hereof and thereof.

5.2          Authorization, etc.

                    This Agreement and the Other Agreements and the Notes have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement constitutes, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

5.3          Disclosure.

                    The Company, through its agent, First Chicago Capital Markets, Inc., has delivered to you and each Other Purchaser a copy of a Confidential Offering Memorandum, dated October, 1998 (the "Memorandum"), relating to the transactions contemplated hereby. The Memorandum fairly describes, in all material respects, the general nature of the business and principal properties of the Company and its Subsidiaries. Except as disclosed in Schedule 5.3, this Agreement, the Memorandum, the documents, certificates or other writings delivered to you by or on behalf of the Company in connection with the transactions contemplated hereby and the financial statements identified in Section 5.5, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. Except as disclosed in the Memorandum o r as expressly described in Schedule 5.3, or in one of the documents, certificates or other writings identified therein, or in the financial statements identified in Section 5.5, since January 3, 1998, there has been no change in the financial condition, operations, business, properties or prospects of the Company or any Subsidiary except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Memorandum or in the other documents, certificates and other writings delivered to you by or on behalf of the Company specifically for use in connection with the transactions contemplated hereby.



- -5-


5.4          Organization and Ownership of Shares of Subsidiaries; Affiliates.

                    (a)          Schedule 5.4 contains (except as noted therein) complete and correct lists (i) of the Company's Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary, and specifying those Subsidiaries that are Material Subsidiaries, (ii) of the Company's Affiliates, other than Subsidiaries, and (iii) of the Company's directors and senior officers.

                    (b)          All of the outstanding shares of capital stock or similar equity interests of each Subsidiary shown in Schedule 5.4 as being owned by the Company and its Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Company or another Subsidiary free and clear of any Lien (except as otherwise disclosed in Schedule 5.4).

                    (c)          Each Subsidiary identified in Schedule 5.4 is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each such Subsidiary has the corporate or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact.

                    (d)          No Subsidiary is a party to, or otherwise subject to any legal restriction or any agreement (other than this Agreement, the agreements listed on Schedule 5.4, and customary limitations imposed by corporate law statutes) restricting the ability of such Subsidiary to pay dividends out of profits or make any other similar distributions of profits to the Company or any of its Subsidiaries that owns outstanding shares of capital stock or similar equity interests of such Subsidiary.

5.5          Financial Statements.

                    The Company has delivered to you and to each Other Purchaser the consolidated balance sheets of the Company and its Subsidiaries as of December 31, 1994, December 30, 1995, December 28, 1996, and January 3, 1998 and the statements of income and retained earnings and changes in financial position or cash flows for the fiscal years ended on said dates, each accompanied by a report thereon containing an opinion unqualified as to scope limitations imposed by the Company and otherwise without qualification except as therein noted, by Ernst & Young. All of such statements (including in each case the related schedules and notes) have been prepared in accordance with GAAP except as therein noted, are correct and complete and present fairly the financial position of the Company and its Subsidiaries as of such dates and the


- -6-


consolidated results of their operations and changes in their financial position or cash flows for such periods. The Company has delivered to you and to each Other Purchaser the unaudited consolidated balance sheets of the Company and its Subsidiaries as of September 12, 1998 and September 6, 1997, and the unaudited statements of operations and cash flows for the nine-month periods ended on said dates. Such financial statements have been prepared in accordance with GAAP consistently applied, are correct and complete and present fairly the financial position of the Company and its Subsidiaries as of said dates and the consolidated results of their operations and cash flows for such periods except as therein noted (subject to normal year-end adjustments).

5.6          Compliance with Laws, Other Instruments, etc.

                    The execution, delivery and performance by the Company of this Agreement, the Other Agreements, and the Notes will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company or any Subsidiary under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws, or any other agreement or instrument to which the Company or any Subsidiary is bound or by which the Company or any Subsidiary or any of their respective properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Subsidiary or (iii) violate any provision of any Law of any Governmental Authority applicable to the Company or any Subsidiary.

5.7          Governmental Authorizations, etc.

                    No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company of this Agreement, the Other Agreements, or the Notes.

5.8          Litigation; Observance of Agreements, Statutes and Orders.

                    (a)          There are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or any property of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

                    (b)          Neither the Company nor any Subsidiary is in default under any term of any agreement or instrument to which it is a party or by which it is bound, or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any Law (including without limitation Environmental Laws) of any


- -7-


Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

5.9          Taxes.

                    The Company and its Subsidiaries have filed all tax returns that are required to have been filed in any jurisdiction, and have paid or reflected appropriate reserves or accruals on its balance sheets for all taxes (including federal, state, local, sales, use, VAT, customs, excise, franchise, assets, ad valorem and withholding taxes), duties, assessments and levies (collectively "Taxes"), except for any Taxes (i) the amount of which is not individually or in the aggregate Material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Com pany and its Subsidiaries in respect of federal, state or other Taxes for all fiscal periods are adequate. The federal income tax returns of the Company and its Subsidiaries have been audited by the Internal Revenue Service for all fiscal years up to and including the fiscal year ended December 30, 1995 and any resulting deficiencies, additional assessments, fines, penalties, interest or other charges have either been paid or adequately reserved for in the financial statements identified in Section 5.5.

5.10          Title to Property; Leases.

                    The Company and its Subsidiaries have good and sufficient title to their respective properties that individually or in the aggregate are Material, including all such properties reflected as owned in the most recent audited balance sheet referred to in Section 5.5 or purported to have been acquired by the Company or any Subsidiary after said date (except as sold or otherwise disposed of in the ordinary course of business), in each case free and clear of Liens prohibited by this Agreement. All leases that individually or in the aggregate are Material are valid and subsisting and are in full force and effect in all material respects.

5.11          Licenses, Permits, etc.

                    Except as disclosed in Schedule 5.11,

          (a)          the Company and its Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that individually or in the aggregate are Material;

          (b)          the ownership or use of the licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and tradenames,



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and other rights owned or used by the Company and its Subsidiaries do not conflict with the rights of others, except for such conflicts which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;

          (c)          to the best knowledge of the Company, no product of the Company or any Subsidiary infringes in any material respect any license, permit, franchise, authorization, patent, copyright, service mark, trademark, trade name or other right owned by any other Person; and

          (d)          to the best knowledge of the Company, there is no Material violation by any Person of any right of the Company or any of its Subsidiaries with respect to any patent, copyright, service mark, trademark, trade name or other right owned or used by the Company or any of its Subsidiaries.

5.12          Compliance with ERISA.

                    (a)          The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in Section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29 ) or 412 of the Code, other than such liabilities or Liens as would not be individually or in the aggregate Material.

                    (b)          The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan's most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan's most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities by more than $50,000 in the aggregate for all Plans. The term "benefit liabilities" has the meaning specified in section 4001 of ERISA and the terms "current value" and "present value" have the meaning specified in section 3 of ERISA.

                    (c)          The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material.



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                    (d)          The expected post-retirement benefit obligation (determined as of the last day of the Company's most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company and its Subsidiaries is not Material.

                    (e)          The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any transaction that is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(F) of the Code. The representation by the Company in the first sentence of this Section 5.12(e) is made in reliance upon and subject to (i) the accuracy of your representation in Section 6.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by you and (ii) the assumption, made solely for the purpose of making such representation, that Department of Labor Interpretive Bulletin 75-2 with respect to prohibited transactions remains valid in the circumstances of the transactions contemplated herein.

5.13          Private Offering by the Company.

                    Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any Person other than you, the Other Purchasers and not more than 45 other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act.

5.14          Use of Proceeds; Margin Regulations.

                    The Company will apply the proceeds of the sale of the Notes as set forth in Schedule 5.14. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). Margin stock does not constitute more than 1% of the value of the consolidated assets of the Company and its Subsidiaries and the Company does not have any present intention that margin stock will constitute more than 1% of the value of such assets. As used in this Section, the terms "margin stock" and "purpos e of buying or carrying" shall have the meanings assigned to them in said Regulation U.



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5.15          Existing Indebtedness; Future Liens.

                    (a)          Except as described therein, Schedule 5.15 sets forth a complete and correct list of all outstanding Indebtedness of the Company and its Subsidiaries as of September 12, 1998 and, as to each item listed, a general description of any property securing such Indebtedness. Since the date as of which the Company has prepared Schedule 5.15, there has been no Material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company or its Subsidiaries or the security therefor. Neither the Company nor any Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Indebtedness of the Company or such Subsidiary and no event or condition exists with respect to any Indebtedness of the Company or any Subsidiary that would permit (or that with notice or the lapse of time, or both, would per mit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment.

                    (b)          Except as disclosed in Schedule 5.15, neither the Company nor any Subsidiary has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not permitted by Section 10.3.

5.16          Foreign Assets Control Regulations, etc.

                    Neither the sale of the Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.

5.17          Status under Certain Statutes.

                    Neither the Company nor any Subsidiary is subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, the Interstate Commerce Act, as amended, or the Federal Power Act, as amended.







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5.18          Environmental Matters.

                    Neither the Company nor any Subsidiary has knowledge of any claim or has received any notice of any claim, and no proceeding has been instituted raising any claim against the Company or any of its Subsidiaries or any of their respective real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect. Except as otherwise disclosed to you in writing,

          (a)          neither the Company nor any Subsidiary has knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by any of them or to other assets or their use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect;

          (b)          neither the Company nor any of its Subsidiaries has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them and has not disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and

          (c)          all buildings on all real properties now owned, leased or operated by the Company or any of its Subsidiaries are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect.

5.19          Year 2000 Issues.

                    The Company and its Subsidiaries have made a reasonable assessment of Year 2000 Issues, have adopted a program intended to remediate all Year 2000 Issues concerning the information and other systems and computer applications operated or used by the Company and its Subsidiaries on a timely basis, and have fully complied with the requirements of the Securities and Exchange Commission regarding disclosure of Year 2000 issues. Based on such assessment and program, the Company does not reasonably anticipate that Year 2000 Issues concerning the information and other systems and computer applications operated or used by the Company and its Subsidiaries will have a Material Adverse Effect. The Company has delivered to you a copy of its Quarterly Report on Form 10-Q for the most recently ended fiscal quarter of the Company filed with the Securities and Exchange Commission. There is no fact known to the Company that is inconsistent with the conti nued accuracy of the information contained in such Form under the heading "Year 2000 Readiness Disclosure" and such information continues to represent


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the Company's best estimate of the estimated impact of Year 2000 Issues on the Company and its Subsidiaries as provided therein.

6.          REPRESENTATIONS OF THE PURCHASER.

6.1          Purchase for Investment.

                    You represent that (i) you are not a "creditor" as defined in Regulation T of the Board of Governors of the Federal Reserve System (12 CFR 220), (ii) you are an insurance company having its principal place of business in a state set forth on the Purchaser Schedule attached as Schedule A, (iii) you (and any separate accounts for which you are purchasing a Note or Notes) are an "accredited investor" as defined in Rule 501 of Regulation D promulgated under the Securities Act, and (iv) that you are purchasing the Notes for your own account or for one or more separate accounts maintained by you and not with a view to the distribution thereof, provided that the disposition of your or their property shall at all times be within your or their control. You understand that the Notes have not been registered under the Securities Act or any other state securities law and may be resold only if registered pursuant to the provisions of the Securities Act and applicable state securities laws or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes.

6.2          Source of Funds.

                    You represent that at least one of the following statements is an accurate representation as to each source of funds (a "Source") to be used by you to pay the purchase price of the Notes to be purchased by you hereunder:

          (a)          the Source is an "insurance company general account" within the meaning of Prohibited Transaction Exemption ("PTE") 95-60 (issued July 12, 1995) and there is no employee benefit plan (treating as a single plan all plans maintained by the same employer or employee organization) with respect to which the amount of the general account reserves and liabilities for all contracts held by or on behalf of such plan exceeds 10% of the total reserves and liabilities of such general account (exclusive of separate account liabilities) plus surplus, as set forth in your most recent annual statement in the form required by the National Association of Insurance Commissioners as filed with your state of domicile; or

          (b)          the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1 (issued January 29, 1990), or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 (issued July 12, 1991) and, except as you have disclosed to the Company in writing pursuant to this paragraph (b), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or



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          (c)          the Source constitutes assets of an "investment fund" (within the meaning of Part V of the QPAM Exemption) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a Person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company, and (i) the identity of such QPAM and (ii)  ;the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (c); or

          (d)          the Source is a governmental plan; or

          (e)          the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (e); or

          (f)          the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA.

As used in this Section 6.2, the terms "employee benefit plan", "governmental plan", and "separate account" shall have the respective meanings assigned to such terms in Section 3 of ERISA.

7.          INFORMATION AS TO COMPANY.

7.1          Financial and Business Information.

                    The Company shall deliver to each holder of Notes that is an Institutional Investor:

          (a)          Quarterly Statements -- within 45 days after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of,

                    (i)          a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and


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                    (ii)          consolidated statements of operations and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter,

setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments;

provided that delivery within the time period specified above of copies of the Company's Quarterly Report on Form 10-Q prepared in compliance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section 7.1(a) so long as such requirements of the Securities and Exchange Commission continue to require that Form 10-Q include the financial statements described in subparagraphs (i) and (ii) above;

          (b)          Annual Statements -- within 90 days after the end of each fiscal year of the Company, duplicate copies of,

          (i)          a consolidated balance sheet of the Company and its Subsidiaries, as at the end of such year, and

          (ii)          consolidated statements of operations, changes in stockholders' equity and cash flows of the Company and its Subsidiaries, for such year,

setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by:

                              (A)          an opinion thereon of Ernst & Young LLP, or another firm of independent certified public accountants of comparable national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances; and



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                              (B)          a certificate of such accountants stating that they have reviewed this Agreement and stating further whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that such accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any Default or Event of Default unless such accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit);

provided that the delivery within the time period specified above of the Company's Annual Report on Form 10-K for such fiscal year (together with the Company's annual report to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act) prepared in accordance with the requirements therefor and filed with the Securities and Exchange Commission, together with the accountant's certificate described in clause (B) above, shall be deemed to satisfy the requirements of this Section 7.1(b) so long as such requirements of the Securities and Exchange Commission continue to require that Form 10-K include the financial statements described in subparagraphs (i) and (ii) above;

          (c)          SEC and Other Reports -- promptly upon their becoming available, one copy of (i) each financial statement, report, notice or proxy statement sent by the Company or any Subsidiary to public securities holders generally, and (ii) each regular or periodic report, each registration statement (without exhibits except as expressly requested by such holder), and each prospectus and all amendments thereto filed by the Company or any Subsidiary with the Securities and Exchange Commission and of all press releases and other statements made available generally by the Company or any Subsidiary to the public concerning developments that are Material;

          (d)          Notice of Default or Event of Default -- promptly, and in any event within five days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 11(f), a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto;

          (e)          ERISA Matters -- promptly, and in any event within ten days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto:



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          (i)          with respect to any Plan, any reportable event, as defined in section 4043(b) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or

          (ii)          the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan if such termination is reasonably likely to result in liability of the Company or any Subsidiary to PBGC or any Plan in excess of $200,000; or

          (iii)          any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect; or

          (iv)          if at any time the aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001(a)(18) of ERISA) under all Plans, determined in accordance with Title IV of ERISA, shall exceed $50,000;

          (f)          Notices From Governmental Authority -- promptly, and in any event within 30 days of receipt thereof, copies of any notice to the Company or any Subsidiary from any Federal or state Governmental Authority relating to any Law that could reasonably be expected to have a Material Adverse Effect;

          (g)          Rule 144A Information -- with reasonable promptness, any information necessary to permit any such holder to comply with Rule 144A under the Securities Act, or any successor rule; and

          (h)          Requested Information -- with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any holder of Notes that is an Institutional Investor.



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7.2          Officer's Certificate.

                    Each set of financial statements delivered to a holder of Notes pursuant to Section 7.1(a) or Section 7.1(b) hereof shall be accompanied by a certificate of a Senior Financial Officer setting forth:

          (a)          Covenant Compliance -- the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Sections 10.1 through 10.7 hereof, inclusive, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and

          (b)          Event of Default -- a statement that such officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of the Company or any Subsidiary to comply with any Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto.

7.3          Inspection.

                    The Company shall permit the representatives of each holder of Notes that is an Institutional Investor:

          (a)          No Default -- if no Default or Event of Default then exists, at the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the Company's officers, and (with the consent of the Company, which consent will not be unreasonably withheld, and after giving the Company the opportunity to accompany the holder on such visitation) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and

          (b)          Default -- if a Default or Event of Default then exists, at the expense of the Company to visit and inspect any of the offices or properties of the



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Company or any Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested.

8.          PREPAYMENT OF THE NOTES.

8.1          Required Prepayments; Payment at Maturity.

                    On December 8, 2002 and on each December thereafter to and including December, 2007, the Company will prepay $10,714,285, and on December 8, 2008 the Company will make a final payment of $10,714,290 of principal amount (or such amount as shall then be the remaining outstanding principal amount) of the Notes at par and without payment of the Make-Whole Amount or any premium, provided that upon any partial prepayment of the Notes pursuant to Section 8.2 or Section 8.7 the principal amount of each required prepayment and the payment at final maturity of the Notes becoming due under this Section 8.1 on and after the date of such prepayment shall be reduced in the same proportion as the aggregate unpaid principal amount of the Notes is reduced as a result of such prepayment.

8.2          Optional Prepayments with Make-Whole Amount.

                    The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes in an amount not less than 10% of the aggregate principal amount of the Notes then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid, plus the Make-Whole Amount determined for the prepayment date with respect to such principal amount. Any such optional payment shall be on a Business Day. The Company will give each holder of Notes written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date, the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such holder to be prepaid (determined in accordance with Section 8.3), and the interest to be paid on the prepayment date with res pect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each holder of Notes a certificate via facsimile transmission of a Senior Financial Officer specifying the calculation of such Make-Whole Amount as of the specified prepayment date. The Notes shall not be subject to prepayment at the option of the Company except pursuant to this Section 8.2.



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8.3          Allocation of Partial Prepayments.

                    Except as otherwise provided in Section 8.7, in the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts of all such Notes not theretofore called for prepayment.

8.4          Maturity; Surrender, etc.

                    In the case of each prepayment of Notes pursuant to this Section 8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable Make-Whole Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note.

8.5          Purchase of Notes.

                    The Company will not, and will not permit any Affiliate to, purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment, prepayment or purchase of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes.

8.6          Make-Whole Amount.

                    The term "Make-Whole Amount" means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings:

          "Called Principal" means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires.

          "Discounted Value" means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments



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with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal.

          "Reinvestment Yield" means, with respect to the Called Principal of any Note, the rate per annum equal to 0.50% plus the yield to maturity implied by (i) the yields reported (offer side), as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the Bloomberg Financial Markets Service for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield in (i) and (ii) above will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the maturity closest to and greater than the Remaining Average Life and (2) the actively traded U.S. Treasury security with the maturity closest to and less than the Remaining Average Life.

          "Remaining Average Life" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment.

          "Remaining Scheduled Payments" means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or 12.1.



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          "Settlement Date" means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires.

8.7          Offer to Prepay Notes in the Event of a Debt Prepayment Application.

          (a)          Notice of Debt Prepayment Application. In the event of a Debt Prepayment Application pursuant to Section 10.7, the Company shall offer to prepay, in accordance with and subject to the definition of Debt Prepayment Application, the Ratable Portion of each Note held by each holder on the Business Day specified in such offer, which date shall occur prior to the expiration of the 365 day period specified in Section 10.7 and no later than the first Debt Prepayment Application with respect to any other Senior Funded Debt of the Company or any of its Subsidiaries (the "Proposed DPA Prepayment Date"). The Proposed DPA Prepayment Date shall be not less than 30 days and not more than 60 days after the date of such offer (if the Proposed DPA Prepayment Date shall not be specified in such offer, the Proposed DPA Prepayment Date shall be the 60th day after the date of such offer, or if such date is not a Business Day, then on the la st Business Day prior to such date). Each offer under this Section 8.7(a) shall be accompanied by the certificate described in subparagraph (d) of this Section 8.7.

          (b)          Acceptance. A holder of Notes may accept an offer to prepay made pursuant to Section 8.7(a) by causing a notice of such acceptance to be delivered to the Company at least five Business Days prior to the Proposed DPA Prepayment Date. A failure by any holder of Notes to respond to an offer to prepay made pursuant to this Section 8.7 shall be deemed to constitute a rejection of such offer by such holder.

          (c)          Prepayment. Prepayment of the Notes to be prepaid pursuant to this Section 8.7 shall be at 100% of the principal amount of such Notes, or such lesser principal amount as shall equal the Ratable Portion of the Notes being repaid, together with interest on such Notes accrued to the date of prepayment. The prepayment shall be made on the Proposed DPA Prepayment Date.

          (d)          Officer's Certificate. Each offer to prepay the Notes pursuant to Section 8.7(a) shall be accompanied by a certificate of a Senior Financial Officer of the Company, dated the date of such offer and specifying: (i) the Proposed DPA Prepayment Date; (ii) that such offer is made pursuant to Section 8.7(a); (iii) the aggregate principal amount of all Notes, and the principal amount of each Note, offered to be prepaid (determined in accordance with the definition of Ratable Portion); (iv) the interest that would be due on each Note offered to be prepaid, accrued to the Proposed DPA Prepayment Date; and (v) in reasonable



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detail, the respective natures, dates and Net Proceeds Amounts of the Asset Dispositions giving rise to such offer of prepayment.

9.          AFFIRMATIVE COVENANTS.

                    The Company covenants that so long as any of the Notes are outstanding:

9.1          Compliance with Law.

                    The Company will and will cause each of its Subsidiaries to comply with all Laws to which each of them is subject, including, without limitation, Environmental Laws and ERISA, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such Laws or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

9.2          Insurance.

                    The Company will and will cause each of its Subsidiaries to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated.

9.3          Maintenance of Properties.

                    The Company will and will cause each of its Subsidiaries to maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section shall not prevent the Company or any Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

9.4          Payment of Taxes and Claims.

                    The Company will and will cause each of its Subsidiaries to file all tax returns required to be filed in any jurisdiction and to pay and discharge all Taxes shown


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to be due and payable on such returns and all other Taxes imposed on them or any of their properties, assets, income or franchises, to the extent such Taxes have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, provided that neither the Company nor any Subsidiary need pay any such Tax or claims if (i) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (ii) the nonpayment of all such taxes and assessments in the aggregate could not reasonably be expected to have a Material Adverse Effect.

9.5          Corporate Existence, etc..

                    The Company will at all times preserve and keep in full force and effect its corporate existence. Subject to Sections 10.6, 10.7 and 10.8, the Company will at all times preserve and keep in full force and effect the legal existence of each of its Subsidiaries (unless merged into the Company or a Wholly-Owned Subsidiary) and all rights and franchises of the Company and its Subsidiaries unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such legal existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect.

10.          NEGATIVE COVENANTS.

                    The Company covenants that so long as any of the Notes are outstanding:

10.1          Fixed Charge Coverage.

                    The Company will not, at any time, permit the Fixed Charges Coverage Ratio to be less than 1.5 to 1.0.

10.2          Maintenance of Consolidated Net Worth.

                    The Company shall not, at any time, permit Consolidated Net Worth to be less than the sum of (a) $220,000,000, minus (b) Net Repurchase Expenditures, if any, at such time, plus (c) 40% of its aggregate Consolidated Net Earnings (but only if a positive number) for the period beginning on September 13, 1998 and ending at the end of the fiscal quarter most recently completed at such time.

10.3          Liens.

                    The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly create, incur, assume or permit to exist (upon the happening of a contingency or otherwise) any Lien on or with respect to any property (including, without


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limitation, any document or instrument in respect of goods or accounts receivable) of the Company or any Subsidiary, whether now owned or held or hereafter acquired, or any income or profits therefrom (whether or not provision is made for the equal and ratable securing of the Notes in accordance with the last paragraph of this Section 10.3), or assign or otherwise convey any right to receive income or profits, except:

          (a)          Liens for Taxes which are not yet due and payable or the payment of which is not at the time required by Section 9.4;

          (b)          any attachment or judgment Lien, unless the judgment it secures shall not, within 60 days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall not have been discharged within 60 days after the expiration of any such stay, provided that the Company and its Subsidiaries may incur and permit to exist attachment and judgment Liens not otherwise permitted by this subparagraph (b) if the judgments secured thereby shall not at any time exceed, in the aggregate, $5,000,000, and provided, further, that no attachment or judgment Lien permitted by this subparagraph shall secure a judgment in excess of $10,000,000 for a period in excess of 60 days after the entry thereof;

          (c)          leases or subleases granted to others, easements, rights-of-way, restrictions and other similar charges or encumbrances, in each case incidental to, and not interfering with, the ordinary conduct of the business of the Company or any of its Subsidiaries, provided that such Liens do not, in the aggregate, materially detract from the value of such property;

          (d)          other Liens incidental to the normal conduct of the business of the Company or any Subsidiary or the ownership of their respective properties which are not incurred in connection with the incurrence or maintenance of Indebtedness and which do not in the aggregate materially impair the use of any property subject thereto in the operation of the business of the Company or any Subsidiary, or materially detract from the value of such property;

          (e)          Liens existing on the date of this Agreement on the property described by category in the column entitled "Collateral" on Schedule 5.15 and securing, in each case, the Debt of the Company and its Subsidiaries referred to in the corresponding item of such Schedule 5.15;

          (f)          any Lien renewing, extending or refunding any Lien permitted by subparagraph (e) of this Section, provided that (i) the principal amount of Debt secured by such Lien immediately prior to such extension, renewal or refunding is not increased or the maturity thereof reduced, (ii) such Lien is not extended to any other property, and (iii) immediately after such extension, removal or refunding no Default or Event of Default would exist;



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          (g)          Liens on property of any Subsidiary of the Company securing Indebtedness owing to the Company or to any of its Wholly-Owned Subsidiaries;

          (h)          any Lien created to secure all or any part of the purchase price, or to secure Debt incurred or assumed to pay all or any part of the purchase price or cost of construction, of tangible property (or any improvement thereon) acquired or constructed by the Company or a Subsidiary after the date of the Closing, provided that

                    (i)          any such Lien shall extend solely to the item or items of such property (or improvement thereon) so acquired or constructed and, if required by the terms of the instrument originally creating such Lien, other property (or improvement thereon) which is an improvement to or is acquired for specific use in connection with such acquired or constructed property (or improvement thereon) or which is real property being improved by such acquired or constructed property (or improvement thereon),

                    (ii)          the principal amount of the Debt secured by any such Lien shall at no time exceed an amount equal to the lesser of (A) the cost to the Company or such Subsidiary of the property (or improvement thereon) so acquired or constructed or (B) the Fair Market Value (as determined in good faith by the Board of Directors of the Company) of such property (or improvement thereon) at the time of such acquisition or construction, and

                    (iii)          any such Lien shall be created contemporaneously with, or within 180 days after, the acquisition or the completion of construction of such property;

          (i)          any Lien existing on property of a Person immediately prior to its being consolidated or merged with the Company or its becoming a Subsidiary, or any Lien existing on any property acquired by the Company or any Subsidiary at the time such property is so acquired (whether or not the Debt secured thereby shall have been assumed), provided that (i) no such Lien shall have been created or assumed in contemplation of such consolidation or merger or such Person's becoming a Subsidiary or such acquisition of property, (ii) each such Lien shall extend solely to the item or items of property so acquired and, if required by the terms of the instrument originally creating such Lien, other property which is an improvement to or is acquired for specific use in connection with such acquired property and (iii) the principal amount of the Debt secured by any such Lien shall at no time exceed an amount equal to the lesser of (A) the cost to the Company or such Subsidiary of such property, as reflected on the books of the Company or such Subsidiary immediately after such merger, consolidation or acquisition in accordance with GAAP, or (B) the Fair Market Value (as



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determined in good faith by the Board of Directors of the Company) of such property at the time of such merger, consolidation or acquisition.; and

          (j)          other Liens not otherwise permitted by subparagraphs (a) through (i) of this section securing Funded Debt of the Company or any Subsidiary, provided that the aggregate amount of such Funded Debt secured by Liens permitted by this subparagraph (j) shall not at any time exceed 20% of Consolidated Net Worth as of the end of the then most recently ended fiscal quarter of the Company.

10.4          Incurrence of Funded Debt.

                    The Company will not, and will not permit any Subsidiary to, directly or indirectly create, incur, assume, guarantee or otherwise become directly or indirectly liable with respect to, any Funded Debt, except:

                    (a)          the Notes;

                    (b)          Funded Debt of a Subsidiary to the Company or to a Wholly-Owned Subsidiary; and

                    (c)          additional Funded Debt of the Company and its Subsidiaries, provided that immediately after giving effect to the incurrence thereof and to the application of the proceeds therefrom, Consolidated Funded Debt does not exceed 55% of Consolidated Total Capitalization.

For the purposes of this Section 10.4, any Person becoming a Subsidiary after the date hereof shall be deemed, at the time it becomes a Subsidiary, to have incurred all of its then outstanding Debt, and any Person extending, renewing or refunding any Debt shall be deemed to have incurred such Debt at the time of such extension, renewal or refunding.

10.5          Priority Debt.

                    The Company shall not at any time permit Priority Debt to exceed the greater of (i) $59,000,000 or (ii) 20% of Consolidated Net Worth as of the end of the then most recently ended fiscal quarter of the Company.

10.6          Merger or Consolidation.

                    The Company shall not, and shall not permit any Subsidiary to, merge or consolidate with any other Person, except that:

          (i)          any Subsidiary may merge or consolidate with and into the Company or a Wholly-Owned Subsidiary, provided that the Company or such



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Wholly-Owned Subsidiary shall be the successor formed by such consolidation or the survivor of such merger; and

          (ii)          the Company may merge or consolidate with any other corporation so long as:

                    (a)          the successor formed by such consolidation or the survivor of such merger, as the case may be (the "Successor Corporation"), shall be a solvent corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia;

                    (b)          if the Company is not the Successor Corporation, such corporation shall have executed and delivered to each holder of Notes its assumption of the due and punctual performance and observance of each covenant and condition of this Agreement and the Notes (pursuant to such agreements and instruments as shall be reasonably satisfactory to the Required Holders), and the Company shall have caused to be delivered to each holder of Notes an opinion of Warner, Norcross & Judd LLP, or other nationally recognized independent counsel reasonably satisfactory to the Required Holders, to the effect that all agreements or instruments effecting such assumption are enforceable in accordance with their terms and comply with the terms hereof; and

                    (c)          immediately after giving effect to such transaction:

                              (1)          no Default or Event of Default would exist, and

                              (2)          the Successor Corporation would be permitted by the provisions of Section 10.4 hereof to incur at least $1.00 of additional Funded Debt owing to a Person other than a Subsidiary of the Successor Corporation.

10.7          Sale of Assets.

                    The Company will not, and will not permit any Subsidiary to, make any Asset Disposition unless:

          (a)          in the good faith opinion of the Company, the Asset Disposition is in exchange for consideration having a Fair Market Value at least equal to that of the property exchanged and is in the best interest of the Company or such Subsidiary;

          (b)          immediately after giving effect to the Asset Disposition, no Default or Event of Default would exist, and the Company would be permitted by the provisions of Section 10.4 hereof to incur at least $1.00 of additional Funded Debt owing to a Person other than a Subsidiary; and


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          (c)          immediately after giving effect to the Asset Disposition, the Disposition Value of all property that was the subject of any Asset Disposition occurring in the period of four fiscal quarters of the Company then next ending would not exceed 10% of Consolidated Total Assets as of the end of the then most recently ended fiscal quarter of the Company.

                    If the Net Proceeds Amount for any Transfer is applied to a Debt Prepayment Application or a Property Reinvestment Application within 365 days after such Transfer, then such Transfer, only for the purpose of determining compliance with subsection (c) of this Section 10.7 as of a date on or after the Net Proceeds Amount is so applied, shall be deemed not to be an Asset Disposition.

10.8          Transactions With Affiliates.

                    The Company will not and will not permit any Subsidiary to enter into directly or indirectly any transaction or Material group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Subsidiary), except in the ordinary course and pursuant to the reasonable requirements of the Company's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtainable in a comparable arm's length transaction with a Person not an Affiliate.

10.9          Nature of Business.

                    The Company will not, and will not permit any of its Subsidiaries to, engage to any substantial extent in any business other than the businesses in which the Company and its Subsidiaries are engaged on the date of this Agreement as described in the Memorandum, and businesses reasonably related thereto or in furtherance thereof.

11.          EVENTS OF DEFAULT.

                    An "Event of Default" shall exist if any of the following conditions or events shall occur and be continuing:

          (a)          the Company defaults in the payment of any principal or Make-Whole Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or

          (b)          the Company defaults in the payment of any interest on any Note for more than five Business Days after the same becomes due and payable; or



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          (c)          the Company defaults in the performance of or compliance with any term contained in Sections 7.1(d) or Section 10.1 through Section 10.9, inclusive; or

          (d)          the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in paragraphs (a), (b) and (c) of this Section 11) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a "notice of default" and to refer specifically to this paragraph (d) of Section 11); or

          (e)          any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or

          (f)          (i) the Company or any Subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $5,000,000 beyond any period of grace provided with respect thereto, or (ii) the Company or any Subsidiary is in default in the performance of or compliance with any term of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least $5,000,000 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared, due and payable before the stated maturity or before the regularly scheduled dates of payment of such Indebtedness, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of any Indebtedness to convert such Indebtedness into equity interests), the Company or any Subsidiary has become obligated to purchase, redeem, collateralize or pay, or to establish a sinking fund for, any Indebtedness before the regular maturity or before the regularly scheduled dates of payment (or before any regularly scheduled date of mandatory purchase, redemption, collateralization, or sinking fund payment) of such Indebtedness in an aggregate outstanding principal amount of at least $5,000,000.

          (g)          the Company or any Material Subsidiary (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of



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its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or

          (h)          a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by the Company or any of its Material Subsidiaries, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any of its Material Subsidiaries, or any such petition shall be filed against the Company or any of its Material Subsidiaries and such petition shall not be dismissed within 60 days; or

          (i)          a final judgment or judgments or one or more final orders of one or more courts or Governmental Authorities of competent jurisdiction providing for the payment of money aggregating in excess of $5,000,000 are rendered against one or more of the Company and its Subsidiaries and such judgments or orders are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or

          (j)          if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) the aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001(a)(18) of ERISA) under all Plans, determined in accordance with Title IV of ERISA, shall exceed $200,000, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company or any Subsidiary establishes or amends any employee welfare benefit plan that provides post employment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect.



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As used in Section 11(j), the terms "employee benefit plan" and "employee welfare benefit plan" shall have the respective meanings assigned to such terms in Section 3 of ERISA.

12.          REMEDIES ON DEFAULT, ETC.

12.1          Acceleration.

                    (a)          If an Event of Default with respect to the Company described in paragraph (g) or (h) of Section 11 (other than an Event of Default described in clause (i) of paragraph (g) or described in clause (vi) of paragraph (g) by virtue of the fact that such clause encompasses clause (i) of paragraph (g)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable.

                    (b)          If any other Event of Default has occurred and is continuing, any holder or holders of 35% or more in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable.

                    (c)          If any Event of Default described in paragraph (a) or (b) of Section 11 has occurred and is continuing, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable.

                    Upon any Notes becoming due and payable under this Section 12.1, whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon and (y) the Make-Whole Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Make-Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation fo r the deprivation of such right under such circumstances.

12.2          Other Remedies.

                    If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement


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contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise.

12.3          Rescission.

                    At any time after any Notes have been declared due and payable pursuant to clause (b) or (c) of Section 12.1, the holders of not less than 66% in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on the Notes, all principal of and Make-Whole Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and (to the extent permitted by applicable Law) all interest on such overdue principal and Make-Whole Amount, if any, and any overdue interest in respect of the Notes, at the Default Rate, (b) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17, and (c) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon.

12.4          No Waivers or Election of Remedies, Expenses, etc.

                    No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15, the Company will pay to the holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this Section 12, including, without limitation, reasonable attorneys' fees, expenses and disbursements.

13.          REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.

13.1          Registration of Notes.

                    The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company


- -33-


shall give to any holder of a Note that is an Institutional Investor promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Notes.

13.2          Transfer and Exchange of Notes.

                    Upon surrender of any Note at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or his attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or part thereof), the Company shall execute and deliver, at the Company's expense (except as provided below), one or more new Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such holder may request and shall be substantially in the form of Exhibit 1. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the su rrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $1,000,000 or, prior to the occurrence of any Default or Event of Default, to any person which is not (i) you or any Other Purchaser, (ii) an Affiliate of you or of any Other Purchaser, (iii) an Institutional Investor, or (iv) a nominee of a Person referred to in the foregoing clauses (i)-(iii), provided that such nominee is an Affiliate of such Person or is an entity or institution described in clause (c) of the definition of Institutional Investor, provided that if necessary to enable the registration of transfer by a holder of its entire holding of Notes, one Note may be in a denomination of less than $1,000,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Section 6.2.

13.3          Replacement of Notes.

                    Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and

                   (a)          in the case of loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to it (provided that if the holder of such Note is, or is a nominee for, an original Purchaser or another holder of a Note with a minimum net worth of at least $50,000,000, such Person's own unsecured agreement of indemnity shall be deemed to be satisfactory), or



- -34-


                    (b)          in the case of mutilation, upon surrender and cancellation thereof, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon.

14.          PAYMENTS ON NOTES.

14.1          Place of Payment.

                    Subject to Section 14.2, payments of principal, Make-Whole Amount, if any, and interest becoming due and payable on the Notes shall be made in New York, New York, at the principal office of The Bank of New York in such jurisdiction. The Company may at any time, by notice to each holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction.

14.2          Home Office Payment.

                    So long as you or your nominee shall be the holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose below your name in Schedule A, or by such other method or at such other address as you shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, you shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Sect ion 14.1. Prior to any sale or other disposition of any Note held by you or your nominee you will, at your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2. The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by you under this Agreement and that has made the same agreement relating to such Note as you have made in this Section 14.2.




- -35-


15.          EXPENSES, ETC.

15.1          Transaction Expenses.

                    Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys' fees of a special counsel and, if reasonably required, local or other counsel) incurred by you and each Other Purchaser or holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a holder of any Note, and (b) the costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes. The Company will pay, and will save you and each other holder of a Note harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those retained by you).

15.2          Survival.

                    The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement.

16.          SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE
               AGREEMENT.

                    All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by you of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent holder of a Note, regardless of any investigation made at any time by or on behalf of you or any other holder of a Note. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between you and the Company and supersede all prior agreements and understandings relating to the subject matter hereof.




- -36-


17.          AMENDMENT AND WAIVER.

17.1          Requirements.

                    This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to you unless consented to by you in writing, and (b) no such amendment or waiver may, without the written consent of the holder of each Note at the time outstanding affected thereby, (i) subject to the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Make-Whole Amount on, the Notes, (ii) change the percentage of the principal amount of the Notes the holders of which are required to consent to any such amendment or waiver, or (iii) amend any of Sections 8, 11(a), 11(b), 12, 17 or 20.

17.2          Solicitation of Holders of Notes.

                    (a)          Solicitation. The Company will provide each holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite holders of Notes.

                    (b)          Payment. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security, to any holder of Notes as consideration for or as an inducement to the entering into by any holder of Notes of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to each holder of Notes then outstanding even if such holder did not consent to such waiver or amendment.

17.3          Binding Effect, etc.

                    Any amendment or waiver consented to as provided in this Section 17 applies equally to all holders of Notes and is binding upon them and upon each future holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not


- -37-


expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein, the term "this Agreement" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented.

17.4          Notes held by Company, etc.

                    Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates (including without limitation any Subsidiaries) shall be deemed not to be outstanding.

18.          NOTICES.

                    All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent:

          (i)          if to you or your nominee, to you or it at the address specified for such communications in Schedule A, or at such other address as you or it shall have specified to the Company in writing,

          (ii)          if to any other holder of any Note, to such holder at such address as such other holder shall have specified to the Company in writing, or

          (iii)          if to the Company, to the Company at its address set forth at the beginning hereof to the attention of the Chief Financial Officer (with a copy to the same address to the attention of the General Counsel), or at such other address as the Company shall have specified to the holder of each Note in writing.

Notices under this Section 18 will be deemed given only when actually received.

19.          REPRODUCTION OF DOCUMENTS.

                    This Agreement and all documents relating thereto including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by you at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter


- -38-


furnished to you, may be reproduced by you by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and you may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction.

20.          CONFIDENTIAL INFORMATION.

                    For the purposes of this Section 20, "Confidential Information" means information delivered to you by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by you as being confidential information of the Company or such Subsidiary, provided that such term does not include information that (a) was publicly known or otherwise known to you prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by you or any Person acting on your behalf, (c) otherwise becomes known to you other than through disclosure by the Company or any Subsidiary or (d) constitutes financial statements delivered to you under Section 7.1 that are otherwise publicly available. You will maintain t he confidentiality of such Confidential Information in accordance with procedures adopted by you in good faith to protect confidential information of third parties delivered to you, provided that you may deliver or disclose Confidential Information to (i) your directors, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by your Notes), (ii) your financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20, (iii) any other holder of any Note, (iv) any Institutional Investor to which you sell or offer to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (v) any Person from which you offer to purchase any securi ty of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (vi) any federal or state regulatory authority having jurisdiction over you, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about your investment portfolio or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to you, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which you are a party or (z) if an


- -39-


Event of Default has occurred and is continuing, to the extent you may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under your Notes and this Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Company embodying the provisions of this Section 20.

21.          SUBSTITUTION OF PURCHASER.

                    You shall have the right to substitute any one of your Affiliates as the purchaser of the Notes that you have agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both you and such Affiliate, shall contain such Affiliate's agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6. Upon receipt of such notice, wherever the word "you" is used in this Agreement (other than in this Section 21), such word shall be deemed to refer to such Affiliate in lieu of you. In the event that such Affiliate is so substituted as a purchaser hereunder and such Affiliate thereafter transfers to you all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, wherever the word "you" is used in this Agreement (other than in this Section 21), such word shall n o longer be deemed to refer to such Affiliate, but shall refer to you, and you shall have all the rights of an original holder of the Notes under this Agreement.

22.          MISCELLANEOUS.

22.1          Successors and Assigns.

                    All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of a Note) whether so expressed or not.

22.2          Payments Due on Non-Business Days.

                    Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or Make-Whole Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day.




- -40-


22.3          Severability.

                    Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.

22.4          Construction.

                    Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person.

22.5          Counterparts.

                    This Agreement may be executed in any number of identical counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.

22.6          Governing Law.

                    THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK EXCLUDING CHOICE-OF-LAW PRINCIPLES OF THE LAW OF SUCH STATE THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN SUCH STATE.

[Signatures on Following Pages]






- -41-


                    If you are in agreement with the foregoing, please sign the form of agreement on the accompanying counterpart of this Agreement and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company.

 

Very truly yours,

 

 

 

 

 

WOLVERINE WORLD WIDE, INC.

 

 

 

 

 

 

 

 

By:


 

 

Stephen L. Gulis, Jr.
Executive Vice President,
Chief Financial Officer and Treasurer

 

[Signatures Continued on Following Page]

















- -42-


The foregoing is
hereby agreed to
as of the date thereof.

[PURCHASER]

 

 

 

By:

 


 

Name:

 


 

Title:

 


 






















- -43-


SCHEDULE A TO NOTE PURCHASE AGREEMENT

Information Relating To Purchasers





Purchaser

Aggregate Principal
Amount of Notes
to be Purchased


Note
Denomination(s)

 

 

 

EQUITABLE LIFE INSURANCE
COMPANY OF IOWA

U.S.$4,000,000

U.S.$4,000,000

 

 

 

 

(1)

All payments on account of
Notes held by such purchaser
shall be made by wire transfer
of immediately available funds
for credit to:

 

 

 

 

 

 

The Bank of New York
ABA #021000018
BNF: IOC566
Attn: William Cashman
Re: Equitable Life Insurance Company of Iowa - Account #068071
Reference: Cusip on bond description

 

 

 

 

 

Each such wire transfer shall set forth the name of the Corporation, the full
title (including the Coupon rate, issuance date, and final maturity date) of
the Notes on account of which such payment is made, a reference to the
PPN, and the due date and application (as among principal, premium and
interest) of the payment being made.

 

 

 

 

(2)

Address for all notices relating to payments:

 

 

 

 

 

ING Investment Management LLC
5780 Powers Ferry Road, NW, Suite 300
Atlanta, Georgia 30327-4349
Attention: Securities Accounting
Fax: (770) 690-4899

 

 

 

 

(3)

Address for all other communications and notices:

 

 

 

 

 

ING Investment Management LLC
5780 Powers Ferry Road, NW, Suite 300
Atlanta, Georgia 30327-4349
Attention: Private Placements
Fax: (770) 690-4899

 

 

 

 

(4)

Tax Identification No: 42-0236150

 




A-1




Purchaser

Aggregate Principal
Amount of Notes
to be Purchased


Note
Denomination(s)

 

 

 

USG ANNUITY & LIFE COMPANY

U.S.$8,000,000

U.S.$8,000,000

 

 

 

 

(1)

All payments on account of
Notes held by such purchaser
shall be made by wire transfer
of immediately available funds
for credit to:

 

 

 

 

 

 

The Bank of New York
ABA #021000018
BNF: IOC566
Attn: William Cushman
Re: USG Annuity & Life Company - Account #368520
Reference: Cusip on bond description

 

 

 

 

 

Each such wire transfer shall set forth the name of the Corporation, the full
title (including the Coupon rate, issuance date, and final maturity date) of
the Notes on account of which such payment is made, a reference to the
PPN, and the due date and application (as among principal, premium and
interest) of the payment being made.

 

 

 

 

(2)

Address for all notices relating to payments:

 

 

 

 

 

ING Investment Management LLC
5780 Powers Ferry Road, NW, Suite 300
Atlanta, Georgia 30327-4349
Attention: Securities Accounting
Fax: (770) 690-4899

 

 

 

 

(3)

Address for all other communications and notices:

 

 

 

 

 

ING Investment Management LLC
5780 Powers Ferry Road, NW, Suite 300
Atlanta, Georgia 30327-4349
Attention: Private Placements
Fax: (770) 690-4899

 

 

 

 

(4)

Tax Identification No: 73-0663836

 




A-2




Purchaser

Aggregate Principal
Amount of Notes
to be Purchased


Note
Denomination(s)

 

 

 

SECURITY LIFE OF DENVER
INSURANCE COMPANY

U.S.$7,000,000

U.S.$7,000,000

 

 

 

 

(1)

All payments on account of
Notes held by such purchaser
shall be made by wire transfer
of immediately available funds
for credit to:

 

 

 

 

 

 

Boston Safe Deposit & Trust Co.
Boston, Massachusetts
MBS Income
Account DD#: 125261
ABA #: 011-001-234
CC 1253
Credit to:     Security Life of Denver Insurance Company
                    Account #INGF1007002

 

 

 

 

 

Each such wire transfer shall set forth the name of the Corporation, the full
title (including the Coupon rate, issuance date, and final maturity date) of
the Notes on account of which such payment is made, a reference to the
PPN, and the due date and application (as among principal, premium and
interest) of the payment being made.

 

 

 

 

(2)

Address for all notices relating to payments:

 

 

 

 

 

ING Investment Management LLC
5780 Powers Ferry Road, NW, Suite 300
Atlanta, Georgia 30327-4349
Attention: Securities Accounting
Fax: (770) 690-4899

 

 

 

 

(3)

Address for all other communications and notices:

ING Investment Management LLC
5780 Powers Ferry Road, NW, Suite 300
Atlanta, Georgia 30327-4349
Attention: Private Placements
Fax: (770) 690-4899

 

 

 

 

(4)

Tax Identification No: 84-0499703

 




A-3




Purchaser

Aggregate Principal
Amount of Notes
to be Purchased


Note
Denomination(s)

 

 

 

MIDWESTERN UNITED LIFE
INSURANCE COMPANY

U.S.$3,000,000

U.S.$3,000,000

 

 

 

 

(1)

All payments on account of
Notes held by such purchaser
shall be made by wire transfer
of immediately available funds
for credit to:

 

 

 

 

 

 

Boston Safe Deposit & Trust Co.
Boston, Massachusetts
MBS Income
Account DD#: 125261
ABA #: 011-001-234
CC 1253
Credit to:     Midwestern United Life Insurance Company
                    Account #INGF1003002

 

 

 

 

 

Each such wire transfer shall set forth the name of the Corporation, the full
title (including the Coupon rate, issuance date, and final maturity date) of
the Notes on account of which such payment is made, a reference to the
PPN, and the due date and application (as among principal, premium and
interest) of the payment being made.

 

 

 

 

(2)

Address for all notices relating to payments:

 

 

 

 

 

ING Investment Management LLC
5780 Powers Ferry Road, NW, Suite 300
Atlanta, Georgia 30327-4349
Attention: Securities Accounting
Fax: (770) 690-4899

 

 

 

 

(3)

Address for all other communication and notices:

 

 

 

 

 

ING Investment Management LLC
5780 Powers Ferry Road, NW, Suite 300
Atlanta, Georgia 30327-4349
Attention: Private Placements
Fax: (770) 690-4899

 

 

 

 

(4)

Tax Identification No: 35-0838945

 




A-4




Purchaser

Aggregate Principal
Amount of Notes
to be Purchased


Note
Denomination(s)

 

 

 

SOUTHLAND LIFE INSURANCE
COMPANY

U.S.$3,000,000

U.S.$3,000,000

 

 

 

(1)

All payments on account of
Notes held by such purchaser
shall be made by wire transfer
of immediately available funds
for credit to:

 

 

 

 

 

 

Boston Safe Deposit & Trust Co.
Boston, Massachusetts
MBS Income
Account DD#: 125261
ABA #: 011-001-234
CC 1253
Credit to:     Southland Life Insurance Company
                    Account #INGF1013002

 

 

 

 

 

Each such wire transfer shall set forth the name of the Corporation, the full
title (including the Coupon rate, issuance date, and final maturity date) of
the Notes on account of which such payment is made, a reference to the
PPN, and the due date and application (as among principal, premium and
interest) of the payment being made.

 

 

 

 

(2)

Address for all notices relating to payments:

 

 

 

 

 

ING Investment Management LLC
5780 Powers Ferry Road, NW, Suite 300
Atlanta, Georgia 30327-4349
Attention: Securities Accounting
Fax: (770) 690-4899

 

 

 

 

(3)

Address for all other communications and notices:

 

 

 

 

 

ING Investment Management LLC
5780 Powers Ferry Road, NW, Suite 300
Atlanta, Georgia 30327-4349
Attention: Private Placements
Fax: (770) 690-4899

 

 

 

 

(4)

Tax Identification No: 75-0572420

 




A-5




Purchaser

Aggregate Principal
Amount of Notes
to be Purchased


Note
Denomination(s)

 

 

 

THE GUARDIAN LIFE
INSURANCE COMPANY OF
AMERICA (in the nominee name of
CUDD & CO.)

U.S.$19,000,000

U.S.$19,000,000

 

 

 

 

(1)

Payment by wire to:

The Chase Manhattan Bank
ABA #021000021
CHASE/NYC/CTR/BNF
A/C 900-9-000200
Reference A/C #G05978 The Guardian
and the name and CUSIP for which
payment is being made

 

 

 

 

 

 

(2)

Address for all notices relating to payments:

The Guardian Life Insurance Company of America
Attn: Investment Accounting M-IA
201 Park Avenue South
New York, NY 10003
Fax (212) 677-9023

 

 

 

 

 

(3)

Address for all other communications and notices:

The Guardian Life Insurance Company of America
201 Park Avenue South
New York, NY 10003
Attn: Raymond Henry and
Thomas M. Donohue, Investment Dept. 7B
Fax (212) 777-6715

 

 

 

 

 

(4)

Tax Identification No.: 13-6022143

 




A-6




Purchaser

Aggregate Principal
Amount of Notes
to be Purchased


Note
Denomination(s)

 

 

 

THE GUARDIAN INSURANCE &
ANNUITY COMPANY, INC. (in the
nominee name of SIGLER &
COMPANY)

U.S.$1,000,000

U.S.$1,000,000

 

 

 

 

(1)

Payment

Wire:
The Chase Manhattan Bank
ABA # 021000021
For account #544755102
Reference #MR9228419

Payment by check to:

Chase Manhattan Bank
P.O. Box 50000
Newark, NJ 07101

 

 

 

 

 

 

(2)

Confirmations

Guardian Insurance & Annuity
Securities Investment Department
201 Park Avenue South - 8B
New York, NY 10003

No Duplicate Confirms

 

 

 

 

 

(3)

Address for all notices relating to payments:

The Guardian Life Insurance Company of America
Attn: Investment Accounting MIA
201 Park Avenue South
New York, NY 10003
Fax (212) 677-9023

 

 

 

 

 

(4)

Address for all other communications and notices:

The Guardian Life Insurance Company of America
201 Park Avenue South
New York, NY 10003
Attn: Raymond Henry and
          Thomas M. Donohue, Investment Dept. 7B
(212) 598-7133
Fax: (212) 777-6715

Inquiries concerning confirmations: Dorene Smith (212) 598-8234

 

 

 

 

 

(5)

Tax Identification No.: 13-3641527

 




A-7




Purchaser

Aggregate Principal
Amount of Notes
to be Purchased


Note
Denomination(s)

 

 

 

PRINCIPAL LIFE INSURANCE
COMPANY

U.S.$6,500,000

U.S.$6,500,000

 

 

 

(1)

All payments on account of the Notes to be made by 12:00 noon (New
York City time) by wire transfer of immediately available funds to:

 

 

 

 

 

ABA #073000228
Norwest Bank Iowa, N.A.
7th and Walnut Streets
Des Moines, Iowa 50309
For credit to Principal Life Insurance Company
Account No. 0000032395
OBI PFGSE (S) B0061889() Wolverine World Wide, Inc.

In each case with sufficient information (including interest rate, maturity
date, interest amount, principal amount and premium amount, if
applicable) to identify the source and application of such funds.

 

 

 

 

(2)

All notices with respect to payments to:

Principal Life Insurance Company
711 High Street
Des Moines, Iowa 50392-0960
Attn: Investment Accounting - Securities
Fax (515) 248-2643
Confirmation (515) 247-0689

 

 

 

 

(3)

All other communications to:

Principal Life Insurance Company
711 High Street
Des Moines, Iowa 50392-0800
Attn: Investment - Securities
Fax (515) 248-2490
Confirmation (515) 248-3495

 

 

 

 

(4)

Tax Identification No.: 42-0127290

 




A-8


 

Aggregate Principal
Amount of Notes
to be Purchased


Note
Denomination(s)

 

 

 

COMMERCIAL UNION LIFE
INSURANCE COMPANY OF
AMERICA

U.S.$1,500,000

U.S.$1,500,000

 

 

 

 

(1)

All payments on account of the
Notes to be made by 12:00
noon (New York City time) by
wire transfer of immediately
available funds to:

 

 

 

 

 

 

CoreStates Bank (Philadelphia)
ABA No. 031-0000-11
1500 Market Street
Philadelphia, PA 19102-2509
Attn: Joe Amen
DDA 0123-9806
For further credit to Account No. 060073-02-4 (Commercial Union Life
Insurance Company of America/Principal)

 

 

 

 

 

 

OBI PFGSE (S) B0061889() Wolverine World Wide, Inc.

In each case with sufficient information (including interest rate, maturity
date, interest amount, principal amount and premium amount, if
applicable) to identify the source and application of such funds.

 

 

 

 

 

(2)

All notices with respect to payments to:

Commercial Union Life Insurance Company of America
711 High Street
Des Moines, Iowa 50392-0960
Attn: Investment Accounting - Securities
Fax (515) 248-2643
Confirmation (515) 247-0689

 

 

 

 

 

(3)

All other communications to:

Commercial Union Life Insurance Company of America
711 High Street
Des Moines, Iowa 50392-0800
Attn: Investment - Securities - Jon Davidson
Fax (515) 248-2490
Confirmation (515) 248-3495

 

 

 

 

 

(4)

Tax Identification No.: 04-2235236

 

 

 

 

 

(5)

The principal place of business of Commercial Union Life Insurance
Company of America is located in the State of Massachusetts.

 




A-9




Purchaser

Aggregate Principal
Amount of Notes
to be Purchased


Note
Denomination(s)

     

AMERICAN INVESTORS LIFE
INSURANCE COMPANY (in the
nominee name of SALKELD & CO.)

U.S.$7,000,000

U.S.$7,000,000

       

(1)

Address for all Notices with Respect to Payments:

AmerUS Capital Management
699 Walnut Street, Suite 1700
Des Moines, Iowa 50309
Attn: Dan Owens
Tele: (515) 283-3431
Fax: (515) 283-3434

 
     

(2)

Address for all Other Communications:

AmerUS Capital Management
699 Walnut Street, Suite 1700
Des Moines, Iowa 50309
Attn: Investment Department
Tele: (515) 362-3527
Fax: (515) 283-3434

 
     

(3)

Wire instructions for American Investors Life Insurance Company:

Bankers Trust Company
New York, NY
ABA #021001033
Credit Account #99911145
For Further Credit Account #093398
American Investors Life Insurance Co.
Ref: Wolverine World Wide, Inc. 6.50% Senior Note issued December 8, 1998,
due December 8, 2008; PPN: 978097B*3

   

(4)

American Investors Life Insurance Company Tax ID #48-0696320

Salkeld & Co. Tax ID #13-6065491




A-10




Purchaser

Aggregate Principal
Amount of Notes
to be Purchased


Note
Denomination(s)

     

AMERICAN UNITED LIFE
INSURANCE COMPANY

U.S.$5,000,000

U.S.$2,500,000
$2,500,000

     

(1)

Payment:

The Company shall make payment of principal and interest on the Notes in
immediately available funds by wire transfer to the following bank
account:

 

     
 

Bank of New York
Attn: P&I Department
One Wall Street, 3rd Floor
Window A
New York, NY 10286
ABA #021000018, BNF: IOC566
Acct. #186683/AUL

 

     
 

Payments should contain sufficient information to identify the breakdown
of principal and interest and should identify the full description of the
Notes and the payment date.

 

     

(2)

Address for all notices:

American United Life Insurance Company
Attn: Christopher D. Pahlke
Securities Department
One American Square
Indianapolis, IN 46282

 

     

(3)

Tax Identification No.: 35-0145825

 




A-11




Purchaser

Aggregate Principal
Amount of Notes
to be Purchased


Note
Denomination(s)

     

MODERN WOODMEN OF
AMERICA

U.S.$5,000,000

U.S.5,000,000

       

(1)

All payments on account of
Notes held by such purchaser
shall be made by wire transfer
of immediately available funds
for credit to:

 

 

       
 

The Northern Trust Company
50 South LaSalle Street
Chicago, IL 60675
ABA No. 071-000-152
Account Name: Modern Woodmen of America
Account No. 84352

 

       
 

Each such sire transfer shall set forth the name of the Company, the full
title (including the applicable coupon rate and final maturity date) of the
Notes, a reference to PPN No. 978097B*3 and the due date and
application (as among principal, premium and interest) of the payment
being made.

 

       

(2)

Address for all notices relating to payments:

Modern Woodmen of America
Attn: Investment Accounting Department
1701 First Avenue
Rock Island, IL 61201

 

       

(3)

Address for all other communications and notices:

Modern Woodmen of America
Attn: Investment Department
1701 First Avenue
Rock Island, IL 61201

 

       

(4)

Tax Identification Number: 36-1493430

 




A-12




Purchaser

Aggregate Principal
Amount of Notes
to be Purchased


Note
Denomination(s)

       

WOODMEN ACCIDENT AND
LIFE COMPANY

U.S.$3,000,000

U.S.$3,000,000

       

(1)

All payments on or in respect
of the Notes to be by bank
wire transfer of Federal funds
(identifying each payment as
principal, premium or interest)
to:

 

 

     
 

US Bank
13 and M Streets
Lincoln, Nebraska 68508
ABA #: 1040-000-29

 

       
 

Credit to:

Woodmen Accident and Life Company's
General Fund
Account #1-494-0092-9092

 
     

(2)

Notices

All notices and communications, including notices with respect to
payments and written confirmation of each such payment, shall be
addressed as follows:

P.O. Box 82288
Lincoln, Nebraska 68501
Attention: Securities Division
Telecopy No. (402) 437-4392

provided, however, all notices and communications delivered by overnight
courier shall be addressed as follows:

          Woodmen Accident and Life Company
          1526 K Street
          Lincoln, Nebraska 68508
          Attention: Securities Division

 

   

(3)

Tax Identification No: 47-0339220

 




A-13




Purchaser

Aggregate Principal
Amount of Notes
to be Purchased


Note
Denomination(s)

     

THE MUTUAL GROUP (in the
nominee name of TMG LIFE
INSURANCE COMPANY)

U.S.$2,000,000

U.S.$2,000,000

       

(1)

All payments on account of the
Notes shall be made by wire or
intrabank transfer of
immediately available funds
to:

 

 

       
 

Norwest Bank Minnesota, N.A.
ABA #: 091000019
BNF A/C: 0840245
BNF: Trust Clearing Account
REF: ATTN: Income Collections
TRUST ACCOUNT: 12250600
Wolverine World Wide, Inc.
Company PPN:

 

 

     

(2)

All notices in respect of payment shall be delivered to:

 

     
 

          TMG Life Insurance Company
          c/o The Mutual Group (U.S.), Inc.
          Attn: Tamie Greenwood
          401 North Executive Drive, Suite 300
          Brookfield, WI 53008-0503
          Telephone: (414) 641-4027
          Facsimile: (414) 641-4055

 

     

(3)

All other communications shall be delivered to:

 

     
 

          TMG Life Insurance Company
          c/o The Mutual Group (U.S.), Inc.
          Attn: Connie Keller
          401 North Executive Drive, Suite 300
          Brookfield, WI 53008-0503
          Telephone: (414) 641-4027
          Facsimile: (414) 641-4055

 
     

(4)

Tax Identification No: 45-0208990

 



A-14


SCHEDULE B TO NOTE PURCHASE AGREEMENT

Defined Terms

                    As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term:

                    "Affiliate" means, at any time, and with respect to any Person, (a) any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person, and (b) when used with reference to the Company or any Subsidiary, any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interests of the Company or any Subsidiary or any Person of which the Company and its Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests. As used in this definition, "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires , any reference to an "Affiliate" is a reference to an Affiliate of the Company, including without limitation a Subsidiary.

                    "Asset Disposition" means any Transfer except :

                    (a)          any Transfer from a Subsidiary to the Company or a Wholly-Owned Subsidiary;

                    (b)          any Transfer from the Company to a Wholly-Owned Subsidiary;

                    (c)          any Transfer made in the ordinary course of business and involving only property that is either (i) inventory held for sale or (ii) equipment, fixtures, supplies or other property no longer required in the operation of the business of the Company or any of its Subsidiaries or that is obsolete; or

                    (d)          any Transfer of Subsidiary Stock to the Company or to a Wholly-Owned Subsidiary.

                    "Business Day" means (a) for the purposes of Section 8.6 only, any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed, and (b) for the purposes of any other provision of this Agreement, any day other than a Saturday, a Sunday or a day on which commercial banks in New York City, New York, Chicago Illinois, or Grand Rapids, Michigan, are required or authorized to be closed.

                    "Capitalized Rentals" means, with respect to any Person, the amount at which the aggregate Rentals due and to become due under all Capitalized Leases under

B-1


which such Person is a lessee would be reflected as a liability on a consolidated balance sheet of such Person determined in accordance with GAAP.

                    "Closing" is defined in Section 3.

                    "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time.

                    "Company" means Wolverine World Wide, Inc., a Delaware corporation.

                    "Competitor" shall mean any Person which is substantially engaged in the business of the manufacture or marketing of footwear.

                    "Confidential Information" is defined in Section 20.

                    "Consolidated Funded Debt" means, as of any date of determination, the total of all Funded Debt of the Company and its Subsidiaries outstanding on such date, after eliminating all offsetting debits and credits between the Company and its Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP.

                    "Consolidated Net Earnings" means, with reference to any period, the net income (or loss) of the Company and its Subsidiaries for such period (taken as a cumulative whole), as determined in accordance with GAAP, after eliminating all offsetting debits and credits between the Company and its Subsidiaries, all earnings or losses attributable to minority interests in Subsidiaries, and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP, provided that there shall be excluded:

                    (a)          the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary or is merged into or consolidated with the Company or a Subsidiary, and the income (or loss) of any Person, substantially all of the assets of which have been acquired in any manner, realized by such other Person prior to the date of acquisition,

                    (b)          the income (or loss) of any Person (other than a Subsidiary) in which the Company or any Subsidiary has an ownership interest, except to the extent that any such income has been actually received by the Company or such Subsidiary in the form of cash dividends or similar cash distributions,

                    (c)          the undistributed earnings of any Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary is not at

B-2


the time permitted by the terms of its charter or any agreement, instrument, judgment, decree, order, or Law applicable to such Subsidiary,

                    (d)          any restoration to income of any contingency reserve, except to the extent that provision for such reserve was made out of income accrued during such period,

                    (e)          any aggregate net gain or net loss during such period arising from the sale, conversion, exchange or other disposition of capital assets (such term to include, without limitation, (i) all non-current assets and, without duplication, (ii) the following, whether or not current: all fixed assets, whether tangible or intangible, all inventory sold in conjunction with the disposition of fixed assets, and all Securities),

                    (f)          any gains resulting from any write-up of any assets,

                    (g)          any net gain from the collection of the proceeds of life insurance policies,

                    (h)          any gain arising from the acquisition of any Security, or the extinguishment, under GAAP, of any Debt, of the Company or any Subsidiary,

                    (i)          any net income or gain or net loss during such period from (i) any change in accounting principles in accordance with GAAP, (ii) any prior period adjustments resulting from any change in accounting principles in accordance with GAAP, (iii) any extraordinary items, or (iv) any discontinued operations or the disposition thereof,

                    (j)          any deferred credit representing the excess of equity in any Subsidiary at the date of acquisition over the cost of the investment in such Subsidiary,

                    (k)          in the case of a successor to the Company by consolidation or merger, any earnings of the successor corporation prior to such consolidation or merger, and

                    (l)          any portion of such net income that cannot be freely converted into United States Dollars.

                    "Consolidated Net Worth" means, at any time, (a) the sum of (i) the par value (or value stated on the books of the corporation) of the capital stock (but excluding treasury stock and capital stock subscribed and unissued) of the Company and its Subsidiaries plus (ii) the amount of the paid-in capital and retained earnings of the Company and its Subsidiaries, in each case as such amounts would be shown on a consolidated balance sheet of the Company and its Subsidiaries as of such time prepared in accordance with GAAP, minus (b) to the extent included in clause (a), all amounts properly attributable to minority interests, if any, in the stock and surplus of Subsidiaries.


B-3


                    "Consolidated Total Assets" means as of the date of any determination thereof, total assets of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP.

                    "Consolidated Total Capitalization" means, at any time, the sum of Consolidated Net Worth and Consolidated Funded Debt.

                    "Current Maturities of Funded Debt" means, at any time and with respect to any item of Funded Debt, the portion of such Funded Debt outstanding at such time which by the terms of such Funded Debt or the terms of any instrument or agreement relating thereto is due on demand or within one year from such time (whether by sinking fund, other required prepayment or final payment at maturity).

                    "Debt" means, with respect to any Person, without duplication, all obligations of such Person which would be classified as liabilities of such Person on a balance sheet of such Person prepared in accordance with GAAP, and in any case shall include:

          (a)          all liabilities of such Person for borrowed money;

          (b)          all liabilities of such Person incurred in connection with the acquisition of property (excluding accounts payable arising in the ordinary course of business but including, without limitation, all liabilities created or arising under any conditional sale or other title retention agreement with respect to any property, whether or not the rights and remedies of the seller, lender or lessor under agreement, in the event of default are limited to repossession or sale of property);

          (c)          all liabilities of such Person for Capitalized Rentals;

          (d)          all liabilities for borrowed money secured by any Lien with respect to any property owned directly or indirectly by such Person (whether or not it has assumed or otherwise become liable for such liabilities); and

          (e)          any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (d) hereof.

Debt of any Person shall include all obligations of such Person of the character described in clauses (a) through (e) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP.

                    "Debt Prepayment Application" means, with respect to any Transfer of property, the application by the Company or its Subsidiaries of cash in an amount equal to

B-4


the Net Proceeds Amount with respect to such Transfer to pay Senior Funded Debt of the Company (other than Senior Funded Debt owing to the Company, any of its Subsidiaries or any other Affiliate of the Company and other than Senior Funded Debt in respect of any revolving credit or similar credit facility providing the Company or any of its Subsidiaries with the right to obtain loans or other extensions of credit from time to time, except to the extent that in connection with such payment of Senior Funded Debt the availability of credit under such credit facility is permanently reduced by an amount not less than the amount of such proceeds applied to the payment of such Senior Funded Debt), provided that in the course of making such application the Company shall offer to prepay each outstanding Note in accordance with Section 8.7 in a principal amount which equals the Ratable Portion for such Note. If any holder of a Note fails to accept such offer of prepayment, then, the Ratable Portion for such Note shall not be deemed to constitute a Debt Prepayment Application except to the extent the Company shall pay other Senior Funded Debt with the Net Proceeds Amount otherwise payable on such Note. "Ratable Portion" for any Note means an amount equal to the product of (x) the Net Proceeds Amount being so applied to the payment of Senior Funded Debt multiplied by (y) a fraction the numerator of which is the outstanding principal amount of such Note and the denominator of which is the aggregate principal amount of Senior Funded Debt of the Company and its Subsidiaries.

                    "Default" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default.

                    "Default Rate" means that rate of interest that is from time to time the greater of (i) 2% per annum above the rate of interest stated in clause (a) of the first paragraph of the Notes or (ii) 2% over the rate of interest publicly announced by First Chicago NBD in Chicago, Illinois as its "base" or "prime" rate, such rate to change for purposes of determining the Default Rate when and as changes therein are made by such bank; provided that in no event shall the Default Rate at any time be greater than the maximum rate permitted by applicable law.

                    "Disposition Value" means, at any time, with respect to any property

                    (a)          in the case of property that does not constitute Subsidiary Stock, the book value thereof, valued at the time of such disposition in good faith by the Company, and

                    (b)          in the case of property that constitutes Subsidiary Stock, an amount equal to that percentage of book value of the assets of the Subsidiary that issued such Subsidiary Stock as is equal to the percentage that the book value of such Subsidiary Stock represents of the book value of all of the outstanding capital stock or other equity interests of such Subsidiary (assuming, in making such calculations, that all agreements and investments convertible into such capital stock or other equity interests are so converted and giving full effect to all transactions that would occur or

B-5


be required in connection with such conversion) determined at the time of the disposition thereof, in good faith by the Company.

                    "Environmental Laws" means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems.

                    "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.

                    "ERISA Affiliate" means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code.

                    "Event of Default" is defined in Section 11.

                    "Exchange Act" means the Securities Exchange Act of 1934, as amended.

                    "Fair Market Value" means, at any time, the sale value of property that would be realized in an arm's length sale at such time between an informed and willing buyer, and an informed and willing seller, under no compulsion to buy or sell, respectively.

                    "Fixed Charges" for any period means on a consolidated basis the sum of (a) all Rentals (other than Rentals on Capitalized Leases) payable during such period by the Company and its Subsidiaries, and (b) all Interest Charges on all Debt (including the interest component of Rentals on Capitalized Leases) of the Company and its Subsidiaries.

                    "Fixed Charges Coverage Ratio" means, at any time, the ratio of (a) Net Earnings Available for Fixed Charges for the period of four consecutive fiscal quarters ending on, or most recently ended prior to, such time to (b) Fixed Charges for such period.

                    "Funded Debt" means, with respect to any Person, (a) all Debt of such Person which by its terms or by the terms of any instrument or agreement relating thereto matures, or which is otherwise payable or unpaid, one year or more from, or is directly or indirectly renewable or extendible at the option of the obligor in respect thereof to a date one year or more (including, without limitation, an option of such obligor under a revolving credit or similar agreement obligating the lender or lenders to extend credit over a period of one year or more) from, the date of the creation thereof, (b) all

B-6


Capitalized Rentals of such Person, and (c) all Guaranties by such Person of Funded Debt of others. "Funded Debt" shall not include Debt of such Person outstanding under any revolving credit or similar agreement, if such agreement has been in effect for the one year period ending on the date of determination and during such period all Debt under such agreement has been fully paid (and not refinanced or otherwise financed from any other Debt) for a period of not less than 30 consecutive days in such one year period pursuant to the terms of such agreement; provided, that at the time of or as a result of the making of any such payment of such Debt, no Default or Event of Default shall have occurred at any time during such 30 consecutive day period. "Funded Debt" shall include, as of any date of determination, Current Maturities of Funded Debt.

                    "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America, consistently applied.

                    "Governmental Authority" means

          (a)          the government of

          (i)          the United States of America or any State or other political subdivision thereof, or

          (ii)          any jurisdiction in which the Company or any Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company or any Subsidiary, or

          (b)          any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government.

                    "Guaranty" means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person:

          (a)          to purchase such Indebtedness or obligation or any property constituting security therefor;

          (b)          to advance or supply funds (i) for the purchase or payment of such Indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such Indebtedness or obligation;



B-7


          (c)          to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of any other Person to make payment of the Indebtedness or obligation; or

                    (d)          otherwise to assure the owner of such Indebtedness or obligation against loss in respect thereof. In any computation of the Indebtedness or other liabilities of the obligor under any Guaranty, the Indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor.

                    "Hazardous Material" means any and all pollutants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is or shall be restricted, prohibited or penalized by any applicable law (including, without limitation, asbestos, urea formaldehyde foam insulation and polychlorinated biphenyls).

                    "holder" means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1.

                    "Indebtedness" with respect to any Person means, at any time, without duplication,

          (a)          its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock;

          (b)          its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property);

          (c)          all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases;

          (d)          all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities);

          (e)          all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money);

          (f)          Swaps of such Person; and


B-8


          (g)          any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof.

Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP.

                    "Institutional Investor" means (a) any original purchaser of a Note, (b) any holder of a Note holding more than 5% of the aggregate principal amount of the Notes then outstanding, (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form and (d) any other Person (other than a natural person) that is engaged in the business of purchasing notes, securities, obligations or financial assets, is an "accredited investor" as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act, and is not, insofar as known to you, a Competitor.

                    "Interest Charges" means, with respect to any period, the sum (without duplication) of the following (in each case, eliminating all offsetting debits and credits between the Company and its Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP): (a) all interest in respect of Debt of the Company and its Subsidiaries (including imputed interest on Capitalized Leases) deducted in determining Consolidated Net Earnings for such period, and (b) all debt discount and expense amortized or required to be amortized in the determination of Consolidated Net Earnings for such period.

                    "Law" means any constitution, statute, regulation, rule, permit, administrative order, franchise, ordinance, judicial principle, or other law.

                    "Lien" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capitalized Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). The term "Lien" does not include the interest or title of a lessor to such Person pursuant to a Capitalized Lease of such Person.

                    "Make-Whole Amount" is defined in Section 8.6.

                    "Material" means material in relation to the business, operations, affairs, financial condition, assets, properties, or prospects of the Company and its Subsidiaries taken as a whole.


B-9


                    "Material Adverse Effect" means a material adverse effect on (a) the business, operations, affairs, financial condition, assets, properties or prospects of the Company and its Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under this Agreement and the Notes, or (c) the validity or enforceability of this Agreement or the Notes.

                    "Material Subsidiary" means, at the date of any determination thereof, any Subsidiary that either (a) had assets that constituted 10% or more of Consolidated Total Assets as of the end of the then most recently completed fiscal quarter of the Company or (b) contributed 10% or more of Consolidated Net Earnings for the period of four fiscal quarters then most recently ended.

                    "Memorandum" is defined in Section 5.3.

                    "Multiemployer Plan" means any Plan that is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA).

                    "Net Earnings Available for Fixed Charges" means, with respect to any period, the sum of (a) Consolidated Net Earnings for such period, plus (to the extent deducted in determining Consolidated Net Earnings) (b) all federal, state and other Taxes imposed on or measured by income or excess profits made by the Company and its Subsidiaries for such period, and plus (to the extent deducted in determining Consolidated Net Earnings) (c) Fixed Charges of the Company and its Subsidiaries for such period.

                    "Net Proceeds Amount" means, with respect to any Transfer of any property by any Person, an amount equal to the difference of

                    (a)          the aggregate amount of the consideration (valued at the Fair Market Value of such consideration at the time of the consummation of such Transfer) received by such Person in respect of such Transfer, minus

                    (b)          all ordinary and reasonable out-of-pocket costs and expenses actually incurred by such Person in connection with such Transfer.

                    "Net Proceeds of Capital Stock" means, with respect to any period, cash proceeds (net of all costs and out-of-pocket expenses in connection therewith, including, without limitation, placement, underwriting and brokerage fees and expenses), received by the Company and its Subsidiaries during such period, from the sale of all capital stock of the Company, including in such net proceeds:

                    (a)          the net amount paid upon issuance and exercise during such period of any right to acquire any capital stock, or paid during such period to convert a convertible debt Security to capital stock (but excluding any amount paid to the Company upon issuance of such convertible debt Security); and


B-10


                    (b)          any amount paid to the Company upon issuance of any convertible debt Security issued after the date of Closing and thereafter converted to capital stock during such period.

                    "Net Repurchase Expenditures" means, as of any date of determination, the amount, if any, by which (a) the aggregate cash expenditures by the Company during the period (the "Relevant Period") beginning with the date of the Closing and ending on the earlier of (i) such date of determination and (ii) the first anniversary of the date of the Closing, for the repurchase of capital stock of the Company exceeds (b) the Net Proceeds of Capital Stock for the Relevant Period; provided, however, that for purposes of Section 10.2 Net Repurchase Expenditures shall not at any time exceed $75,000,000.

                    "Notes" is defined in Section 1.

                    "Officer's Certificate" means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate.

                    "Other Agreements" is defined in Section 2.

                    "Other Purchasers" is defined in Section 2.

                    "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto.

                    "Person" means an individual, corporation, company, limited liability company, voluntary association, partnership, limited liability partnership, trust, unincorporated organization or joint venture or a government or any agency, instrumentality or political subdivision thereof, and for the purpose of the definition of "ERISA Affiliate", a trade or business.

                    "Plan" means an "employee benefit plan" (as defined in section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability.

                    "Preferred Stock" means any class of capital stock of a corporation that is preferred over any other class of capital stock of such corporation as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such corporation.

                    "Priority Debt" means as of the date of any determination, the sum of (a) all Debt of Subsidiaries (except Debt held by the Company or a Wholly-Owned

B-11


Subsidiary) plus (b) Debt of the Company secured by a Lien other than a Lien permitted by any of clauses (a) - (i) of Section 10.3.

                    "property" or "properties" means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate.

                    "Property Reinvestment Application" means, with respect to any Transfer of property, the satisfaction of each of the following conditions:

          a)          an amount equal to the Net Proceeds Amount with respect to such Transfer shall have been applied to the acquisition by the Company, or any of its Subsidiaries making such Transfer, of property that upon such acquisition is unencumbered by any Lien (other than Liens described in subparagraphs (a) through (j), inclusive, of Section 10.3 and that

          i)          constitutes property that is (x) property classifiable under GAAP as non-current to the extent that such proceeds are derived from the transfer of property that was properly classifiable as non-current, and otherwise properly classifiable as either current or non-current, and (y) to be used in the ordinary course of business of the Company and the Subsidiaries, or

          ii)          constitutes equity interests of a Person that shall be, on or prior to the time of such acquisition, a Subsidiary of the Company, and that shall invest the proceeds of such acquisition in property of the nature described in the immediately preceding clause (i); and

          b)          the Company shall have delivered a certificate of a Responsible Officer of the Company to each holder of a Note referring to Section 10.7 and identifying the property that was the subject of such Transfer, the Disposition Value of such property, and the nature, terms, amount and application of the proceeds from the Transfer.

                    "QPAM Exemption" means Prohibited Transaction Class Exemption 84-14 issued by the United States Department of Labor.

                    "Rentals" means, with respect to any period, the sum of all payments (including as such all payments which a lessee is obligated to make to the lessor on termination of the lease or surrender of the property) payable by the Company or a Subsidiary, as lessee or sublessee under a lease of real or personal property (other than Capitalized Leases), excluding any amounts required to be paid by the Company or a Subsidiary (whether or not designated as rents or additional rents) (a) on account of maintenance, repairs, insurance, taxes and similar charges, or (b) which are based on profits, revenues or sales realized by the lessee from the leased property or otherwise based on the performance of the lessee.



B-12


                    "Required Holders" means, at any time, the holders of at least 51% of the principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates).

                    "Responsible Officer" means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this agreement.

                    "Security" has the meaning set forth in section 2(1) of the Securities Act of 1933, as amended.

                    "Securities Act" means the Securities Act of 1933, as amended from time to time.

                    "Senior Funded Debt" means (a) all Funded Debt of the Company that is not subordinated in right of payment and security to the Debt evidenced by the Notes in accordance with agreements and instruments satisfactory to the Required Holders and (b) all Funded Debt of any Subsidiary.

                    "Senior Financial Officer" means the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, or the Treasurer of the Company.

                    "Subsidiary" means, as to any Person, any corporation, association or other business entity in which such Person, or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries, owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries, or such Person and one or more of its Subsidiaries (unless such partnership can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary of the Company.

                    "Subsidiary Stock" means, with respect to any Person, the stock or other equity interests (or any options or warrants to purchase stock or other equity interests, or other Securities exchangeable for or convertible into stock or other equity interests) of any Subsidiary of such Person.

                    "Successor Corporation" has the meaning set forth in Section 10.6.

                    "Swaps" means, with respect to any Person, payment obligations with respect to interest rate swaps, currency swaps and similar obligations obligating such Person to make payments, whether periodically or upon the happening of a contingency.

B-13


For the purposes of this Agreement, the amount of the obligation under any Swap shall be the amount determined in respect thereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such Swap had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such Swap provides for the netting of amounts payable by and to such Person thereunder or if any such agreement provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligation shall be the net amount so determined.

                    "Taxes" has the meaning set forth in Section 5.9.

                    "Transfer" means, with respect to any Person, any transaction in which such Person sells, conveys, transfers or leases (as lessor) any of its property, including, without limitation, Subsidiary Stock, but excluding cash or marketable securities or stock of the Company. An issuance of capital stock or other equity interests of a Subsidiary shall constitute a Transfer by such Subsidiary; provided that the issuance thereof to the Company or a Wholly-Owned Subsidiary shall not constitute a Transfer and further provided that the issuance of capital stock or other equity interests in a Subsidiary shall not constitute a Transfer if, after giving effect thereto, the direct and indirect ownership interest of the Company in the issuing Subsidiary is at least equal to, or greater than, such ownership prior thereto. For purposes of determining the application of the Net Proceeds Amount in respect of any Transfer, the Company may designate an y Transfer as one or more separate Transfers each yielding a separate Net Proceeds Amount. In any such case, the Disposition Value of any property subject to each such separate Transfer shall be determined by ratably allocating the aggregate Disposition Value of all property subject to all such separate Transfers to each such separate Transfer on a proportionate basis.

                    "Wholly-Owned Subsidiary" means, at any time, any Subsidiary one hundred percent (100%) of all of the equity interests (except directors' qualifying shares) and voting interests of which are owned by any one or more of the Company and the Company's other Wholly-Owned Subsidiaries at such time.

                    "Year 2000 Issues" means the anticipated costs, problems and uncertainties associated with the inability of certain computer applications to handle effectively data that includes dates before, on, and after January 1, 2000, as such inability affects the business, operations, affairs, financial condition, assets, properties or prospects of the Company and its Subsidiaries and of their respective customers, suppliers and vendors.





B-14


EXHIBIT 1 TO NOTE PURCHASE AGREEMENT

Form of Senior Note due December 8, 2008

WOLVERINE WORLD WIDE, INC.

6.50% SENIOR NOTE DUE DECEMBER 8, 2008


No. [R-_____]
$[____________]

[Date of Issue]
PPN 978097B*3



                    FOR VALUE RECEIVED, the undersigned, Wolverine World Wide, Inc. (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to [___________________], or registered assigns, the principal sum of [_____________________] DOLLARS on [____________], with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 6.50% per annum from the date hereof, payable semiannually, on the 8th day of December and June in each year, commencing with the December or June next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law, on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreements referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the Default Rate (as defined in the Note Purchase Agreements referred to below).

                    Subject to Section 14.2 of each Note Purchase Agreement (as defined below), payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the principal office of The Bank of New York, New York City, New York, or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreements.

                    This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to separate Note Purchase Agreements, dated as of December 8, 1998 (as from time to time amended, the "Note Purchase Agreements"), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreements and (ii) to have made the representation set forth in Section 6.2 of the Note Purchase Agreements.





                    This Note is registered on the books of the Company and, as provided in the Note Purchase Agreements, upon surrender of this Note for registration, in the books of the Company, of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary.

                    The Company will make required prepayments of principal on the dates and in the amounts specified in the Note Purchase Agreements. This Note is also subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreements, but not otherwise.

                    If an Event of Default, as defined in the Note Purchase Agreements, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreements.

                    THIS NOTE IS GOVERNED BY AND IS TO BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, EXCLUDING CHOICE OF LAW PRINCIPLES OF THE LAW OF SUCH STATE THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN SUCH STATE.


 

WOLVERINE WORLD WIDE, INC.

 
     
     
 

By:

 
 
   

Name:
Title:

 






- - 2 -

Wolverine World Wide, Inc. - Exhibit 4.13 to Form 10-K (03-16-05)

EXHIBIT 4.13

FOURTH AMENDMENT TO CREDIT AGREEMENT

          THIS FOURTH AMENDMENT TO CREDIT AGREEMENT, dated as of April 30, 2003 (this "Amendment"), is among WOLVERINE WORLD WIDE, INC., a Delaware corporation (the "Company"), the Foreign Subsidiary Borrowers (collectively with the Company, the "Borrowers" and each a "Borrower"), the lenders party hereto from time to time (collectively, the "Banks" and, individually, a "Bank"), Bank One, Michigan, a Michigan banking corporation, as Agent, Harris Trust and Savings Bank, as syndication agent (in such capacity, the "Syndication Agent") and Comerica Bank, as documentation agent (in such capacity, the "Documentation Agent").

RECITAL

          The Borrowers, the Banks party thereto and the Agent are parties to a Credit Agreement dated as of May 29, 2001, as amended by a First Amendment to Credit Agreement dated as of February 8, 2002, a Second Amendment to Credit Agreement dated as of August 30, 2002 and a Third Amendment to Credit Agreement dated as of December 19, 2002 (the "Credit Agreement"). The Borrowers desire to amend the Credit Agreement and the Agent and the Banks are willing to do so in accordance with the terms hereof.

TERMS

          In consideration of the premises and of the mutual agreements herein contained, the parties agree as follows:


ARTICLE 1.
AMENDMENTS

          The Credit Agreement is amended as follows:

          1.1          Reference in Section 3.7(a) to "April 30, 2003" shall be deleted and "September 30, 2003" is substituted in place thereof.


ARTICLE 2.
REPRESENTATIONS

          Each Borrower represents and warrants to the Agent and the Banks that:

          2.1          The execution, delivery and performance by each Borrower of this Amendment are within its corporate powers, have been duly authorized by all necessary corporate action and are not in contravention of any law, rule or regulation, or any judgment, decree, writ, injunction, order or award of any arbitrator, court or governmental authority, or of the terms of such Borrower's charter or by-laws, or of any contract or undertaking to which such Borrower is a party or by which such Borrower or its property may be bound or affected.

          2.2          This Amendment is the legal, valid and binding obligations of each Borrower enforceable against such Borrower in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting enforcement of





creditors' rights generally and by general principles of equity (whether applied in a proceeding at law or in equity).

          2.3          After giving effect to the amendments herein contained, the representations and warranties contained in the Loan Documents are true in all material respects on and as of the date hereof with the same force and effect as if made on and as of the date hereof.

          2.4          After giving effect to the amendments herein contained, no Event of Default or Unmatured Default exists or has occurred and is continuing on the date hereof.


ARTICLE 3.
CONDITIONS PRECEDENT.

          This Amendment shall be effective as of the date hereof when it shall be executed by the Borrowers, the Required Banks and the Agent.


ARTICLE 4.
MISCELLANEOUS.


          4.1          References in the Credit Agreement and any other Loan Document to the Credit Agreement shall be deemed to be references to the Credit Agreement as amended hereby and as further amended from time to time.

          4.2          Except as expressly amended hereby, each Borrower agrees that the Loan Documents are ratified and confirmed and shall remain in full force and effect and that it has no set off, counterclaim, defense or other claim or dispute with respect to any of the foregoing. The terms used but not defined herein shall have the respective meanings ascribed thereto in the Credit Agreement.

          4.3          This Amendment may be signed upon any number of counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument, and telecopied signatures shall be enforceable as originals.


















2


          IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written.

 

WOLVERINE WORLD WIDE, INC.

   
 

By:

 
 

Its:

 
   
 

HUSH PUPPIES CANADA FOOTWEAR, LTD.

   
   
 

By:

 
 

Its:

 
   
 

HUSH PUPPIES (U.K.) LTD.

   
   
 

By:

 
 

Its:

 
   
 

MERRELL (EUROPE) LIMITED

   
 

By:

 
 

Its:

 
   
 

WOLVERINE EUROPE B.V.

   
   
 

By:

 
 

Its:

 
   
 

WOLVERINE EUROPE LIMITED

   
   
 

By:

 
 

Its:

 
   
 

WOLVERINE WORLD WIDE
EUROPE LIMITED

   
 

By:

 
 

Its:

 

















3


 

BANK ONE, NA,

 

     as a Bank and as Agent

   
   
 

By:

 
     
   

Its:

 

















4


 

HARRIS TRUST AND SAVINGS BANK,

 

     as a Bank and as Syndication Agent

   
   
 

By:

 
     
   

Its:

 

















5


 

COMERICA BANK,

 

     as a Bank and as Documentation Agent

   
   
 

By:

 
     
   

Its:

 

















6


 

STANDARD FEDERAL BANK N.A.

   
   
 

By:

 
     
   

Its:

 

















7


 

NATIONAL CITY BANK OF
MICHIGAN/ILLINOIS

   
   
 

By:

 
     
   

Its:

 

















8


 

FIFTH THIRD BANK

   
   
 

By:

 
     
   

Its:

 

















9


 

BANK ONE, NA, CANADA BRANCH

   
   
 

By:

 
     
   

Its:

 

















10
Wolverine World Wide, Inc. - Exhibit 4.14 to Form 10-K 03-16-05

EXHIBIT 4.14

FIFTH AMENDMENT TO CREDIT AGREEMENT

          THIS FIFTH AMENDMENT TO CREDIT AGREEMENT, dated as of August 31, 2004 (this "Amendment"), is among WOLVERINE WORLD WIDE, INC., a Delaware corporation (the "Company"), the Foreign Subsidiary Borrowers (collectively with the Company, the "Borrowers" and each a "Borrower"), the lenders party hereto from time to time (collectively, the "Banks" and, individually, a "Bank"), Bank One, Michigan, a Michigan banking corporation, as Agent, Harris Trust and Savings Bank, as syndication agent (in such capacity, the "Syndication Agent") and Comerica Bank, as documentation agent (in such capacity, the "Documentation Agent").

RECITAL

          The Borrowers, the Banks party thereto and the Agent are parties to a Credit Agreement dated as of May 29, 2001, as amended by a First Amendment to Credit Agreement dated as of February 8, 2002, a Second Amendment to Credit Agreement dated as of August 30, 2002, a Third Amendment to Credit Agreement dated as of December 19, 2002 and a Fourth Amendment to Credit Agreement dated as of April 30, 2003 (the "Credit Agreement"). The Borrowers desire to amend the Credit Agreement and the Agent and the Banks are willing to do so in accordance with the terms hereof.

TERMS

          In consideration of the premises and of the mutual agreements herein contained, the parties agree as follows:


ARTICLE 1.
AMENDMENTS

          The Credit Agreement is amended as follows:

          1.1          Section 3.7(a) is restated as follows:

          (a)          Amount of Swing Line Loans. Any U.S./U.K. Borrower may request the Agent to make, and the Agent may, in its sole discretion from time to time prior to the Termination Date, make Swing Line Loans in any permitted Agreed Currencies requested by such U.S./U.K. Borrower from time to time prior to the Termination Date in an aggregate principal amount outstanding at any one time not to exceed the U.S. Dollar Amount of $15,000,000. Notwithstanding the preceding sentence of this Section 3.7(a), the U.S. Dollar Amount of the Aggregate Outstanding U.S./U.K. Credit Exposure shall not at any time exceed the Aggregate U.S./U.K. Revolving Commitments. Within the limits of this Section 3.7, so long as the Agent, in its sole discretion, elects to make, or arrange for Swing Line Loans, the U.S./U.K. Borrowers may borrow and reborrow under this Section 3.7.


ARTICLE 2.
REPRESENTATIONS

          Each Borrower represents and warrants to the Agent and the Banks that:





          2.1          The execution, delivery and performance by each Borrower of this Amendment are within its corporate powers, have been duly authorized by all necessary corporate action and are not in con-

travention of any law, rule or regulation, or any judgment, decree, writ, injunction, order or award of any arbitrator, court or governmental authority, or of the terms of such Borrower's charter or by-laws, or of any contract or undertaking to which such Borrower is a party or by which such Borrower or its property may be bound or affected.

          2.2          This Amendment is the legal, valid and binding obligations of each Borrower enforceable against such Borrower in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and by general principles of equity (whether applied in a proceeding at law or in equity).

          2.3          After giving effect to the amendments herein contained, the representations and warranties contained in the Loan Documents are true in all material respects on and as of the date hereof with the same force and effect as if made on and as of the date hereof .

          2.4          After giving effect to the amendments herein contained, no Event of Default or Unmatured Default exists or has occurred and is continuing on the date hereof.


ARTICLE 3.
CONDITIONS PRECEDENT.

          This Amendment shall be effective as of the date hereof when it shall be executed by the Borrowers, the Required Banks and the Agent.


ARTICLE 4.
MISCELLANEOUS.


          4.1          References in the Credit Agreement and any other Loan Document to the Credit Agreement shall be deemed to be references to the Credit Agreement as amended hereby and as further amended from time to time.

          4.2          Except as expressly amended hereby, each Borrower agrees that the Loan Documents are ratified and confirmed and shall remain in full force and effect and that it has no set off, counterclaim, defense or other claim or dispute with respect to any of the foregoing. The terms used but not defined herein shall have the respective meanings ascribed thereto in the Credit Agreement.

          4.3          This Amendment may be signed upon any number of counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument, and telecopied signatures shall be enforceable as originals.




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          IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written.

 

WOLVERINE WORLD WIDE, INC.

   
 

By:

 
 

Its:

 
   
 

HUSH PUPPIES CANADA FOOTWEAR, LTD.

   
 

By:

 
 

Its:

 
   
 

HUSH PUPPIES (U.K.) LTD.

   
   
 

By:

 
 

Its:

 
   
 

MERRELL (EUROPE) LIMITED

   
 

By:

 
 

Its:

 
   
 

MERRELL EUROPE B.V., f/k/a Wolverine
Europe B.V.

   
   
 

By:

 
 

Its:

 
   
 

WOLVERINE EUROPE LIMITED

   
   
 

By:

 
 

Its:

 
   
 

WOLVERINE WORLD WIDE
EUROPE LIMITED

   
 

By:

 
 

Its:

 


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BANK ONE, NA,

 

     as a Bank and as Agent

   
   
 

By:

 
     
   

Its:

 

















4


 

HARRIS TRUST AND SAVINGS BANK,

 

     as a Bank and as Syndication Agent

   
   
 

By:

 
     
   

Its:

 

















5


 

COMERICA BANK,

 

     as a Bank and as Documentation Agent

   
   
 

By:

 
     
   

Its:

 

















6


 

STANDARD FEDERAL BANK N.A.

   
   
 

By:

 
     
   

Its:

 

















7


 

NATIONAL CITY BANK OF THE MIDWEST
(f/k/a National City Bank of Michigan/Illinois)

   
   
 

By:

 
     
   

Its:

 

















8


 

FIFTH THIRD BANK

   
   
 

By:

 
     
   

Its:

 

















9


 

BANK ONE, NA, CANADA BRANCH

   
   
 

By:

 
     
   

Its:

 

















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Wolverine World Wide Exhibt 10.5 to Form 10-K - 03-16-05

EXHIBIT 10.5


WOLVERINE WORLD WIDE, INC.
STOCK INCENTIVE PLAN OF 1999

SECTION 1

ESTABLISHMENT OF PLAN; PURPOSE OF PLAN

          1.1          Establishment of Plan. The Company hereby establishes the STOCK INCENTIVE PLAN OF 1999 (the "Plan") for its corporate, divisional and Subsidiary officers and other key employees. The Plan permits the grant and award of Stock Options, Restricted Stock, Stock Awards and Tax Benefit Rights.

          1.2          Purpose of Plan. The purpose of the Plan is to provide officers and key management employees of the Company, its divisions and its Subsidiaries with an increased incentive to contribute to the long-term performance and growth of the Company and its Subsidiaries, to join the interests of officers and key employees with the interests of the Company's stockholders through the opportunity for increased stock ownership and to attract and retain officers and key employees. The Plan is further intended to provide flexibility to the Company in structuring long-term incentive compensation to best promote the foregoing objectives. Within that context, the Plan is intended to provide performance-based compensation under Section 162(m) of the Code and shall be interpreted, administered and amended if necessary to achieve that purpose.

SECTION 2

DEFINITIONS

          The following words have the following meanings unless a different meaning plainly is required by the context:

          2.1          "Act" means the Securities Exchange Act of 1934, as amended.

          2.2          "Board" means the Board of Directors of the Company.

          2.3          "Change in Control," unless otherwise defined in an Incentive Award, means (a) the failure of the Continuing Directors at any time to constitute at least a majority of the members of the Board; (b) the acquisition by any Person other than an Excluded Holder of beneficial ownership (within the meaning of Rule 13d-3 issued under the Act) of 20% or more of the outstanding Common Stock or the combined voting power of the Company's outstanding securities entitled to vote generally in the election of directors; (c) the approval by the stockholders of the Company of a reorganization, merger or consolidation, unless with or into a Permitted Successor; or (d) the approval by the stockholders of the Company of a complete




liquidation or dissolution of the Company or the sale or disposition of all or substantially all of the assets of the Company other than to a Permitted Successor.

          2.4          "Code" means the Internal Revenue Code of 1986, as amended.

          2.5          "Committee" means the Compensation Committee of the Board. The Committee shall consist of at least 2 members of the Board and all of its members shall be "non-employee directors" as defined in Rule 16b-3 issued under the Act and "outside directors" as defined in the regulations issued under Section 162(m) of the Code.

          2.6          "Common Stock" means the Common Stock, $1 par value, of the Company.

          2.7          "Company" means Wolverine World Wide, Inc., a Delaware corporation, and its successors and assigns.

          2.8          "Continuing Directors" mean the individuals constituting the Board as of the date this Plan was adopted and any subsequent directors whose election or nomination for election by the Company's stockholders was approved by a vote of three-quarters (3/4) of the individuals who are then Continuing Directors, but specifically excluding any individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as the term is used in Rule 14a-11 of Regulation 14A issued under the Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board.

          2.9          "Employee Benefit Plan" means any plan or program established by the Company or a Subsidiary for the compensation or benefit of employees of the Company or any of its Subsidiaries.

          2.10          "Excluded Holder" means (a) any Person who at the time this Plan was adopted was the beneficial owner of 20% or more of the outstanding Common Stock; or (b) the Company, a Subsidiary or any Employee Benefit Plan of the Company or a Subsidiary or any trust holding Common Stock or other securities pursuant to the terms of an Employee Benefit Plan.

          2.11          "Incentive Award" means the award or grant of a Stock Option, Restricted Stock, Stock Award or Tax Benefit Right to a Participant pursuant to the Plan.

          2.12          "Market Value" shall equal the mean of the highest and lowest sale prices of shares of Common Stock reported on the New York Stock Exchange (or any successor exchange that is the primary stock exchange for trading of Common Stock) on the date of grant, exercise or vesting, as applicable, or if the New York Stock Exchange (or any such successor) is closed on that date, the last preceding date on which the New York Stock Exchange (or any such successor) was open for trading and on which shares of Common Stock were traded.

          2.13          "Participant" means a corporate officer, divisional officer or any key employee of the Company, its divisions or its Subsidiaries who is granted an Incentive Award under the Plan.



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          2.14          "Permitted Successor" means a company that, immediately following the consummation of a transaction specified in clauses (c) and (d) of the definition of "Change in Control" above, satisfies each of the following criteria: (a) 50% or more of the outstanding common stock of the company and the combined voting power of the outstanding securities of the company entitled to vote generally in the election of directors (in each case determined immediately following the consummation of the applicable transaction) is beneficially owned, directly or indirectly, by all or substantially all of the Persons who were the beneficial owners of the Company's outstanding Common Stock and outstanding securities entitled to vote generally in the election of directors (respectively) immediately prior to the applicable transaction; (b) no Person other than an Excluded Holder beneficially owns, directly or indirectly, 20% or more of the outstanding common stock of the company or the combined voting power of the outstanding securities of the company entitled to vote generally in the election of directors (for these purposes the term Excluded Holder shall include the company, any subsidiary of the company and any employee benefit plan of the company or any such subsidiary or any trust holding common stock or other securities of the company pursuant to the terms of any such employee benefit plan); and (c) at least a majority of the board of directors of the company is comprised of Continuing Directors.

          2.15          "Person" has the same meaning as set forth in Sections 13(d) and 14(d)(2) of the Act.

          2.16          "Restricted Period" means the period of time during which Restricted Stock awarded under the Plan is subject to restrictions. The Restricted Period may differ among Participants and may have different expiration dates with respect to shares of Common Stock covered by the same Incentive Award.

          2.17          "Restricted Stock" means Common Stock awarded to a Participant pursuant to Section 6 of the Plan.

          2.18          "Retirement" means the voluntary termination of all employment by a Participant after the Participant has attained 60 years of age, or such other age as shall be determined by the Committee in its sole discretion or as otherwise may be set forth in the Incentive Award agreement or other grant document with respect to a Participant and a particular Incentive Award.

          2.19          "Stock Award" means an award of Common Stock awarded to a Participant pursuant to Section 7 of the Plan.

          2.20          "Stock Option" means the right to purchase Common Stock at a stated price for a specified period of time. For purposes of the Plan, a Stock Option may be either an incentive stock option within the meaning of Section 422(b) of the Code or a nonqualified stock option.

          2.21          "Subsidiary" means any corporation or other entity of which 50% or more of the outstanding voting stock or voting ownership interest is directly or indirectly owned or controlled by the Company or by 1 or more Subsidiaries of the Company.



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          2.22          "Tax Benefit Right" means any right granted to a Participant pursuant to Section 8 of the Plan.

SECTION 3

ADMINISTRATION

          3.1          Power and Authority. The Committee shall administer the Plan. The Committee may delegate record keeping, calculation, payment and other ministerial administrative functions to individuals designated by the Committee, who may be officers or employees of the Company or its Subsidiaries. Except as limited in this Plan or as may be necessary to ensure that this Plan provides performance-based compensation under Section 162(m) of the Code, the Committee shall have all of the express and implied powers and duties set forth in the Bylaws of the Company and this Plan, shall have full power and authority to interpret the provisions of the Plan and Incentive Awards granted under the Plan and shall have full power and authority to supervise the administration of the Plan and Incentive Awards granted under the Plan and to make all other determinations considered necessary or advisable for the administration of the Plan. All determinations, interpretations and selections made by the Committee regarding the Plan shall be final and conclusive. The Committee shall hold its meetings at such times and places as it considers advisable. Action may be taken by a written instrument signed by a majority of the members of the Committee and any action so taken shall be fully as effective as if it had been taken at a meeting duly called and held. The Committee shall make such rules and regulations for the conduct of its business as it considers advisable.

          3.2          Grants or Awards to Participants. In accordance with and subject to the provisions of the Plan, the Committee shall have the authority to determine all provisions of Incentive Awards as the Committee may consider necessary or desirable and as are consistent with the terms of the Plan, including, without limitation, the following: (a) the persons who shall be selected as Participants; (b) the nature and, subject to the limitation set forth in Section 4.2 of the Plan, extent of the Incentive Awards to be made to each Participant (including the number of shares of Common Stock to be subject to each Incentive Award, any exercise price, the manner in which an Incentive Award will vest or become exercisable and the form of payment for the Incentive Award); (c) the time or times when Incentive Awards will be granted; (d) the duration of each Incentive Award; and (e) the restrictions and other conditions to which payment or vesting of Incentive Awards may be subject.

          3.3          Amendments or Modifications of Awards. The Committee shall have the authority to amend or modify the terms of any outstanding Incentive Award in any manner, provided that the amended or modified terms are not prohibited by the Plan as then in effect, including, without limitation, the authority to: (a) modify the number of shares or other terms and conditions of an Incentive Award; (b) extend the term of an Incentive Award; (c) accelerate the exercisability or vesting or otherwise terminate, waive or modify any restrictions relating to an Incentive Award; (d) accept the surrender of any outstanding Incentive Award; and (e) to the extent not previously exercised or vested, authorize the grant of new Incentive Awards in substitution for surrendered Incentive Awards; provided, that Incentive Awards issued under the Plan may not be repriced, replaced, regranted through cancellation or modified without


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stockholder approval if the effect of such repricing, replacement, regrant or modification would be to reduce the exercise price of then outstanding Incentive Awards to the same Participants.

          3.4          Indemnification of Committee Members. Neither any member or former member of the Committee nor any individual to whom authority is or has been delegated shall be personally responsible or liable for any act or omission in connection with the performance of powers or duties or the exercise of discretion or judgment in the administration and implementation of the Plan. Each person who is or shall have been a member of the Committee shall be indemnified and held harmless by the Company from and against any cost, liability or expense imposed or incurred in connection with such person's or the Committee's taking or failing to take any action under the Plan. Each such person shall be justified in relying on information furnished in connection with the Plan's administration by any appropriate person or persons.

SECTION 4

SHARES SUBJECT TO THE PLAN

          4.1          Number of Shares. Subject to adjustment as provided in Section 4.3 of the Plan, the total number of shares of Common Stock available for Incentive Awards under the Plan shall be 2,000,000 shares of Common Stock; plus shares subject to Incentive Awards that are canceled, surrendered, modified, exchanged for substitute Incentive Awards or expire or terminate prior to the exercise or vesting of the Incentive Award in full and shares that are surrendered to the Company in connection with the exercise or vesting of an Incentive Award, whether previously owned or otherwise subject to such Incentive Award. Such shares shall be authorized and may be either unissued or treasury shares or shares repurchased by the Company, including shares purchased on the open market.

          4.2          Limitation Upon Incentive Awards. No Participant shall be granted, during any calendar year, Incentive Awards with respect to more than 25% of the total number of shares of Common Stock available for Incentive Awards under the Plan set forth in Section 4.1 of the Plan, subject to adjustment as provided in Section 4.3 of the Plan. The purpose of this Section 4.2 is to ensure that the Plan provides performance-based compensation under Section 162(m) of the Code and this Section 4.2 shall be interpreted, administered and amended if necessary to achieve that purpose.

          4.3          Adjustments.

          (a)          Stock Dividends and Distributions. If the number of shares of Common Stock outstanding changes by reason of a stock dividend, stock split, recapitalization or other general distribution of Common Stock or other securities to holders of Common Stock, the number and kind of securities subject to Incentive Awards and reserved for issuance under the Plan, together with applicable exercise prices, as well as the number of shares available for issuance under the Plan, shall be adjusted appropriately. No fractional shares shall be issued pursuant to the Plan and any fractional shares resulting from such adjustments shall be eliminated from the respective Incentive Awards.



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          (b)          Other Actions Affecting Common Stock. If there occurs, other than as described in the preceding subsection, any merger, business combination, recapitalization, reclassification, subdivision or combination approved by the Board that would result in the Persons who were stockholders of the Company immediately prior to the effective time of any such transaction owning or holding, in lieu of or in addition to shares of Common Stock, other securities, money and/or property (or the right to receive other securities, money and/or property) immediately after the effective time of such transaction, then the outstanding Incentive Awards and reserves for Incentive Awards under this Plan shall be adjusted in such manner and at such time as shall be equitable under the circumstances. It is intended that in the event of any such transaction, Incentive Awards under this Plan shall entitle the holder of each Incentive Award to receive (upon ex ercise in the case of Stock Options), in lieu of or in addition to shares of Common Stock, any other securities, money and/or property receivable upon consummation of any such transaction by holders of Common Stock with respect to each share of Common Stock outstanding immediately prior to the effective time of such transaction; upon any such adjustment, holders of Incentive Awards under this Plan shall have only the right to receive in lieu of or in addition to shares of Common Stock such other securities, money and/or other property as provided by the adjustment. If the agreement, resolution or other document approved by the Board to effect any such transaction provides for the adjustment of Incentive Awards under the Plan in connection with such transaction, then the adjustment provisions contained in such agreement, resolution or other document shall be final and conclusive.

SECTION 5

STOCK OPTIONS

          5.1          Grant. A Participant may be granted one or more Stock Options under the Plan. The Committee, in its discretion, may provide in the initial grant of a Stock Option or other Incentive Award for the subsequent automatic grant of additional Stock Options for the number of shares, if any, that are subject to the initial Stock Option or other Incentive Award and surrendered to the Company in connection with the exercise or vesting of the initial or any subsequently granted Stock Option or other Incentive Award. Stock Options shall be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion. In addition, the Committee may vary, among Participants and among Stock Options granted to the same Participant, any and all of the terms and conditions of the Stock Options granted under the Plan. Subject to the limitation imposed by Section 4.2 of the Pla n, the Committee shall have complete discretion in determining the number of Stock Options granted to each Participant. The Committee may designate whether or not a Stock Option is to be considered an incentive stock option as defined in Section 422(b) of the Code; provided, that the number of shares of Common Stock that may be designated as subject to incentive stock options for any given Participant shall be limited to that number of shares that become exercisable for the first time by the Participant during any calendar year (under all plans of the Company and its Subsidiaries) and have an aggregate Market Value less than or equal to $100,000 (or such other amount as may be set forth in the Code) and all shares subject to an



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Incentive Award that have a Market Value in excess of such aggregate amount shall automatically be subject to Stock Options that are not incentive stock options.

          5.2          Stock Option Agreements. Stock Options shall be evidenced by stock option agreements and/or certificates of award containing the terms and conditions applicable to such Stock Options. To the extent not covered by the stock option agreement, the terms and conditions of this Section 5 shall govern.

          5.3          Stock Option Price. The per share Stock Option price shall be determined by the Committee, but shall be a price that is equal to or higher than the par value of the Company's Common Stock; provided, that the per share Stock Option price for any shares designated as incentive stock options shall be equal to or greater than 100% of the Market Value on the date of grant.

          5.4          Medium and Time of Payment. The exercise price for each share purchased pursuant to a Stock Option granted under the Plan shall be payable in cash or, if the Committee consents or provides in the applicable stock option agreement or grant, in shares of Common Stock (including Common Stock to be received upon a simultaneous exercise of that or any other Incentive Award) or other consideration substantially equivalent to cash. The time and terms of payment may be amended with the consent of a Participant before or after exercise of a Stock Option. The Committee may from time to time authorize payment of all or a portion of the Stock Option price in the form of a promissory note or other deferred payment installments according to such terms as the Committee may approve. The Board may restrict or suspend the power of the Committee to permit such loans and may require that adequate security be provided.

          5.5          Stock Options Granted to 10% Stockholders. No Stock Option granted to any Participant who at the time of such grant owns, together with stock attributed to such Participant under Section 424(d) of the Code, more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries may be designated as an incentive stock option, unless such Stock Option provides an exercise price equal to at least 110% of the Market Value of the Common Stock and the exercise of the Stock Option after the expiration of 5 years from the date of grant of the Stock Option is prohibited by its terms.

          5.6          Limits on Exercisability. Except as set forth in Section 5.5, Stock Options shall be exercisable for such periods, not to exceed 10 years from the date of grant, as may be fixed by the Committee. At the time of the exercise of a Stock Option, the holder of the Stock Option, if requested by the Committee, must represent to the Company that the shares are being acquired for investment and not with a view to the distribution thereof. The Committee may in its discretion require a Participant to continue the Participant's service with the Company and its Subsidiaries for a certain length of time prior to a Stock Option becoming exercisable and may eliminate such delayed vesting provisions.


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          5.7          Restrictions on Transferability.

          (a)          General. Unless the Committee otherwise consents or permits (before or after the option grant) or unless the stock option agreement or grant provides otherwise, Stock Options granted under the Plan may not be sold, exchanged, transferred, pledged, assigned or otherwise alienated or hypothecated except by will or the laws of descent and distribution, and, as a condition to any transfer permitted by the Committee or the terms of the stock option agreement or grant, the transferee must execute a written agreement permitting the Company to withhold from the shares subject to the Stock Option a number of shares having a Market Value at least equal to the amount of any federal, state or local withholding or other taxes associated with or resulting from the exercise of a Stock Option. All provisions of a Stock Option that are determined with reference to the Participant, including without limitation those that refer to the Participant 's employment with the Company or its Subsidiaries, shall continue to be determined with reference to the Participant after any transfer of a Stock Option.

          (b)          Other Restrictions. The Committee may impose other restrictions on any shares of Common Stock acquired pursuant to the exercise of a Stock Option under the Plan as the Committee deems advisable, including, without limitation, restrictions under applicable federal or state securities laws.

          5.8          Termination of Employment or Officer Status. Unless the Committee otherwise consents or permits (before or after the option grant) or unless the stock option agreement or grant provides otherwise:

          (a)          General. If a Participant ceases to be employed by or an officer of the Company or one of its Subsidiaries for any reason other than the Participant's death, disability, Retirement or termination for cause, the Participant may exercise his or her Stock Options in accordance with their terms for a period of 3 months after such termination of employment or officer status, but only to the extent the Participant was entitled to exercise the Stock Options on the date of termination. For purposes of the Plan, the following shall not be considered a termination of employment or officer status: (i) a transfer of an employee from the Company to any Subsidiary; (ii) a leave of absence, duly authorized in writing by the Company, for military service or for any other purpose approved by the Company if the period of such leave does not exceed 90 days; (iii) a leave of absence in excess of 90 days, duly authorized in writing by the Company, provided that the employee's right to re-employment is guaranteed by statute, contract or written policy of the Company; or (iv) a termination of employment with continued service as an officer. For purposes of the Plan, termination of employment shall be considered to occur on the date on which the employee is no longer obligated to perform services for the Company or any of its Subsidiaries and the employee's right to re-employment is not guaranteed by statute, contract or written policy of the Company, regardless of whether the employee continues to receive compensation from the Company or any of its Subsidiaries after such date.



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          (b)          Death. If a Participant dies either while an employee or officer of the Company or one of its Subsidiaries or after the termination of employment other than for cause but during the time when the Participant could have exercised a Stock Option, the Stock Options issued to such Participant shall be exercisable in accordance with their terms by the personal representative of such Participant or other successor to the interest of the Participant for 1 year after the Participant's death, but only to the extent that the Participant was entitled to exercise the Stock Options on the date of death or termination of employment, whichever first occurred, and not beyond the original terms of the Stock Options.

          (c)          Disability. If a Participant ceases to be an employee or officer of the Company or one of its Subsidiaries due to the Participant's disability, the Participant may exercise his or her Stock Options in accordance with their terms for 1 year following such termination of employment, but only to the extent that the Participant was entitled to exercise the Stock Options on the date of such event and not beyond the original terms of the Stock Options.

          (d)          Participant Retirement. If a Participant Retires as an employee or officer of the Company or one of its Subsidiaries, Stock Options granted under the Plan may be exercised in accordance with their terms during the remaining terms of the Stock Options.

          (e)          Termination for Cause. If a Participant is terminated for cause, the Participant shall have no further right to exercise any Stock Options previously granted. The Committee or officers designated by the Committee shall have absolute discretion to determine whether a termination is for cause.

SECTION 6

RESTRICTED STOCK

          6.1          Grant. A Participant may be granted Restricted Stock under the Plan. Restricted Stock shall be subject to such terms and conditions, consistent with the other provisions of the Plan, as shall be determined by the Committee in its sole discretion. The Committee may impose such restrictions or conditions, consistent with the provisions of the Plan, to the vesting of Restricted Stock as it considers appropriate. The Committee may also require that certificates representing shares of Restricted Stock be retained and held in escrow by a designated employee or agent of the Company or any Subsidiary until any restrictions applicable to shares of Common Stock so retained have been satisfied or lapsed.

          6.2          Restricted Stock Agreements. Awards of Restricted Stock shall be evidenced by restricted stock agreements or certificates of award containing such terms and conditions, consistent with the provisions of the Plan, as the Committee shall from time to time determine. Unless a restricted stock agreement or certificate provides otherwise, Restricted Stock awards shall be subject to the terms and conditions set forth in this Section 6.


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          6.3          Termination of Employment or Officer Status. Unless the Committee otherwise consents or permits (before or after the grant of Restricted Stock) or unless the restricted stock agreement or grant provides otherwise:

          (a)          General. In the event of termination of employment or officer status during the Restricted Period for any reason other than death, disability, Retirement or termination for cause, any shares of Restricted Stock still subject to restrictions at the date of such termination shall automatically be forfeited and returned to the Company. For purposes of the Plan, the following shall not be considered a termination of employment or officer status: (i) a transfer of an employee from the Company to any Subsidiary; (ii) a leave of absence, duly authorized in writing by the Company, for military service or for any other purpose approved by the Company if the period of such leave does not exceed 90 days; (iii) a leave of absence in excess of 90 days duly authorized in writing by the Company, provided that the employee's right to re-employment is guaranteed by statute, contract or written policy of the Company; and (iv) a termination of em ployment with continued service as an officer. For purposes of the Plan, termination of employment shall be considered to occur on the date on which the employee is no longer obligated to perform services for the Company or any of its Subsidiaries and the employee's right to re-employment is not guaranteed by statute, contract or written policy of the Company, regardless of whether the employee continues to receive compensation from the Company or any of its Subsidiaries after such date.

          (b)          Death, Retirement or Disability. In the event a Participant terminates his or her employment with the Company because of death, disability or Retirement during the Restricted Period, the restrictions applicable to the shares of Restricted Stock shall terminate automatically with respect to that number of shares (rounded to the nearest whole number) equal to the total number of shares of Restricted Stock granted to such Participant multiplied by the number of full months that have elapsed since the date of grant divided by the total number of full months in the Restricted Period. All remaining shares shall be forfeited and returned to the Company; provided, that the Committee may, in its sole discretion, waive the restrictions remaining on any or all such remaining shares of Restricted Stock either before or after the death, disability or Retirement of the Participant.

          (c)          Termination for Cause. If a Participant's employment is terminated for cause, the Participant shall have no further right to exercise or receive any Restricted Stock and all Restricted Stock still subject to restrictions at the date of such termination shall automatically be forfeited and returned to the Company. The Committee or officers designated by the Committee shall have absolute discretion to determine whether a termination is for cause.

          6.4          Restrictions on Transferability.

          (a)          General. Unless the Committee otherwise consents or permits or unless the terms of the restricted stock agreement or grant provide otherwise: (i) shares of Restricted Stock shall not be sold, exchanged, transferred, pledged, assigned or otherwise


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alienated or hypothecated during the Restricted Period except by will or the laws of descent and distribution; and (ii) all rights with respect to Restricted Stock granted to a Participant under the Plan shall be exercisable during the Participant's lifetime only by such Participant, his or her guardian or legal representative.

          (b)          Other Restrictions. The Committee may impose other restrictions on any shares of Common Stock acquired pursuant to an award of Restricted Stock under the Plan as the Committee considers advisable, including, without limitation, restrictions under applicable federal or state securities laws.

          6.5          Legending of Restricted Stock. Any certificates evidencing shares of Restricted Stock awarded pursuant to the Plan shall bear the following legend:

The shares represented by this certificate were issued subject to certain restrictions under the Wolverine World Wide, Inc. Stock Incentive Plan of 1999 (the "Plan"). This certificate is held subject to the terms and conditions contained in a restricted stock agreement that includes a prohibition against the sale or transfer of the stock represented by this certificate except in compliance with that agreement and that provides for forfeiture upon certain events. Copies of the Plan and the restricted stock agreement are on file in the office of the Secretary of the Company.

          6.6          Rights as a Stockholder. A Participant shall have all voting, dividend, liquidation and other rights with respect to Restricted Stock held of record by such Participant as if the Participant held unrestricted Common Stock; provided, that the unvested portion of any award of Restricted Stock shall be subject to any restrictions on transferability or risks of forfeiture imposed pursuant to Sections 6.1, 6.3 and 6.4 of the Plan. Unless the Committee otherwise determines or unless the terms of the restricted stock agreement or grant provide otherwise, any noncash dividends or distributions paid with respect to shares of unvested Restricted Stock shall be subject to the same restrictions as the shares to which such dividends or distributions relate.

SECTION 7

STOCK AWARDS

          7.1          Grant. A Participant may be granted one or more Stock Awards under the Plan. Stock Awards shall be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion.

          7.2          Rights as a Stockholder. A Participant shall have all voting, dividend, liquidation and other rights with respect to shares of Common Stock issued to the Participant as a Stock Award under this Section 7 upon the Participant becoming the holder of record of the Common Stock granted pursuant to such Stock Award; provided, that the Committee may impose such restrictions on the assignment or transfer of Common Stock awarded pursuant to a Stock Award as it considers appropriate.


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SECTION 8

TAX BENEFIT RIGHTS

          8.1          Grant. A Participant may be granted Tax Benefit Rights under the Plan to encourage a Participant to exercise Stock Options and provide certain tax benefits to the Company. A Tax Benefit Right entitles a Participant to receive from the Company or a Subsidiary a cash payment not to exceed the amount calculated by multiplying the ordinary income, if any, realized by the Participant for federal tax purposes as a result of the exercise of a nonqualified stock option, or the disqualifying disposition of shares acquired under an incentive stock option, by the maximum federal income tax rate (including any surtax or similar charge or assessment) for corporations, plus the applicable state and local tax imposed on the exercise of the Stock Option or the disqualifying disposition.

          8.2          Restrictions. A Tax Benefit Right may be granted only with respect to a Stock Option issued and outstanding or to be issued under the Plan or any other plan of the Company or its Subsidiaries that has been approved by the stockholders as of the date of the Plan and may be granted concurrently with or after the grant of the Stock Option. Such rights with respect to outstanding Stock Options shall be issued only with the consent of the Participant if the effect would be to disqualify an incentive stock option, change the date of grant or the exercise price or otherwise impair the Participant's existing Stock Options.

          8.3          Terms and Conditions. The Committee shall determine the terms and conditions of any Tax Benefit Rights granted and the Participants to whom such rights will be granted with respect to Stock Options under the Plan or any other plan of the Company. The Committee may amend, cancel, limit the term of or limit the amount payable under a Tax Benefit Right at any time prior to the exercise of the related Stock Option, unless otherwise provided under the terms of the Tax Benefit Right. The net amount of a Tax Benefit Right, subject to withholding, may be used to pay a portion of the Stock Option price, unless otherwise provided by the Committee.

SECTION 9

CHANGE IN CONTROL

          9.1          Acceleration of Vesting.