diff --git a/raw/filings/0000110471/2000/0000905729-01-500086/rp_note.txt b/raw/filings/0000110471/2000/0000905729-01-500086/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000110471/2001/0000905729-02-000051/filing.txt b/raw/filings/0000110471/2001/0000905729-02-000051/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..ab3167bbf6f5f7fa08999e5efa53533ad7faf9a6 --- /dev/null +++ b/raw/filings/0000110471/2001/0000905729-02-000051/filing.txt @@ -0,0 +1,2874 @@ +10-K +1 +wwwform10k032702.htm +Wolverine World Wide, Inc. Form 10-K 03-27-02 +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +___________________ +Form 10-K +FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO +SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +[X] +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 29, 2001 +[ ] +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, Non-Cumulative +New York Stock Exchange/Pacific Exchange, Inc. +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. +Yes +X +No +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] +Number of shares outstanding of the registrant's Common Stock, $1 par value (excluding shares of treasury stock) as of March 22, 2002: 41,658,411. +The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant based on the closing price on the New York Stock Exchange on March 22, 2002: $698,225,757. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the definitive proxy statement for the registrant's annual stockholders' meeting to be held April 25, 2002, are incorporated by reference into Part III of this report. +PART I +Item 1. Business . +General. +Wolverine World Wide, Inc. (the "Company") is a leading designer, manufacturer and marketer of a broad line of quality casual shoes, rugged outdoor and work footwear, and constructed slippers and moccasins. The Company, a Delaware corporation, is the successor of a 1969 reorganization of a Michigan corporation of the same name, originally organized in 1906, which in turn was the successor of a footwear business established in Grand Rapids, Michigan in 1883. +Consumers around the world purchased more than 36 million pairs of Company branded footwear during fiscal 2001, making the Company a global leader among U.S. shoe companies in the marketing of branded casual, work and outdoor footwear. The Company's products generally feature contemporary styling with proprietary technologies designed to provide maximum comfort. The products are marketed throughout the world under widely recognized brand names, including Bates ®, CAT ®, Coleman ®, Harley-Davidson ®, Hush Puppies ®, HyTest ®, Merrell ®, Stanley® and Wolverine ®. The Company believes that its primary competitive strengths are its well-recognized brand names, broad range of comfortable footwear, patented and proprietary comfort technologies, numerous distribution channels and diversified manufacturing and sourcing base. +The Company's footwear is sold under a variety of brand names designed to appeal to most consumers of casual, work and outdoor footwear at numerous price points. The Company's footwear products are organized under three operating divisions: (i) the Wolverine Footwear Group, focusing on work, outdoor and lifestyle boots and shoes, (ii) the Performance Footwear Group, focusing on the CAT ® and Merrell ® product lines of performance and lifestyle footwear and (iii) the Casual Footwear Group, focusing on Hush Puppies ® brand comfortable casual shoes, slippers and moccasins under the Hush Puppies® brand and other private labels for third party retailers. 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 64 Company-owned retail stores and to 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 Company-owned tannery and is one of the premier tanners of quality pigskin leather for the shoe and leather goods industries. The pigskin leather tanned by the Company is used in a significant portion of the footwear manufactured and sold by the Company, and is also sold to Company licensees and other domestic and foreign manufacturers of shoes. In addition, Wolverine Procurement, Inc., a Company-owned subsidiary, both performs skinning operations and purchases raw pigskins which it then cures and sells to the Wolverine Leathers Division and to outside customers for processing into pigskin leather products. +For financial information regarding the Company, see the consolidated financial statements of the Company, which are attached as Appendix A to this Form 10-K. The Company has one reportable operating segment, Branded Footwear. The "Branded Footwear" segment is engaged in the manufacture and marketing of branded footwear, including casual shoes, slippers, moccasins, dress shoes, boots, uniform shoes, work shoes and performance outdoor footwear. The Company's "Other Businesses" category consists of the Company's retail stores, apparel and accessory licensing, tannery and pigskin +procurement operations. Financial information regarding the Company's operating segments and financial information about geographic areas can be found in Note 9 to the consolidated financial statements of the Company, which are attached as Appendix A to this Form 10-K. +Branded Footwear. +The Company sources and markets a broad range of footwear styles including shoes, boots and sandals under many recognizable brand names including Bates ®, CAT ®, Coleman ®, Harley-Davidson ®, Hush Puppies ®, HyTest ®, Merrell ®, Stanley® and Wolverine ®. The Company, through its wholly owned subsidiary, Wolverine Slipper Group, Inc., also sources constructed slippers and moccasins and markets them under the Hush Puppies ® and Turtle Fur ® trademarks and on a private label basis. The Company combines quality materials and skilled workmanship from around the world to produce footwear according to its specifications at both Company-owned and independent manufacturing facilities. +The Company's three branded footwear operating divisions are described below. +1. The Wolverine Footwear Group . The Wolverine Footwear Group encompasses multiple brands designed with performance and comfort features to serve a variety of work, outdoor and lifestyle functions. The Wolverine ® brand, which has been in existence for 119 years, is identified with performance and quality and markets work and outdoor footwear in two categories: (i) work and industrial footwear; and (ii) rugged outdoor and sport footwear. The Wolverine Footwear Group also includes the Bates ® and HyTest ® product lines. These products feature quality materials and components and patented technologies and designs, such as DuraShocks ®, DuraShocks SR ™, Wolverine Fusion ™ and Wolverine Durashocks Motion Control ™, and unique proprietary technologies such as the SEMC ® non-metallic composite safety toe and the new Wolverine Compressor ™ technology. The Wolverine Footwear Group also markets Harley-Davidson® footwear. Harley-Davidson® footwear styles include traditional motorcycle riding designs as well as contemporary fashion, military and western inspired footwear. The Wolverine Footwear Group also markets hiking and outdoor shoes, boots and sandals through the Coleman ® footgear line of products. In addition, the Wolverine Footwear Group markets Stanley® work boots and shoes. +Wolverine ® Work and Industrial Footwear . The Company believes the Wolverine ® brand has built its reputation by offering quality, durable and comfortable work boots and shoes. The development of DuraShocks ® technology allowed the Wolverine ® brand to introduce a broad line of work footwear with a focus on comfort. The Wolverine Fusion ™, Wolverine Durashocks Motion Control™, SEMC® composite safety toe and Compressor™ technologies continue the Company's tradition of comfortable work and industrial footwear. The Wolverine® work product line features work boots and shoes, including steel toe boots and shoes, targeting male and female industrial and farm workers. +-2- +Wolverine ® Rugged Outdoor and Sport Footwear . The Wolverine ® rugged outdoor and sport product lines incorporate DuraShocks ®, DuraShocks SR ™, Wolverine Fusion ™, Wolverine Durashocks Motion Control ™ and Compressor ™ technology and other comfort features into products designed for rugged outdoor and casual use. This broad product line targets active lifestyles and includes all-terrain sport boots, walking shoes, trail hikers, rugged casuals and outdoor sandals. The Company also produces boots that target hunters, fishermen and other active outdoor users. Warmth, waterproofing and comfort are achieved through the use of Gore-Tex ® and Thinsulate ® brand fabrics and the Company's performance leathers and patented DuraShocks ® technologies. +Bates ® Uniform Footwear . The Company's Bates Uniform Footwear Division is an industry leader in supplying footwear to military and civilian uniform users. The Bates Uniform Footwear Division utilizes DuraShocks ®, 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 other governmental organizations to supply military footwear. Civilian uniform uses include police, security, postal, restaurant and other industrial occupations. Bates Uniform Footwear Division products are also distributed through specialty retailers and catalogs. +HyTest ®. 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 safety features into its product lines, including steel toe, composite toe, 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 and the proprietary SEMC® composite toe 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. +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 approximately 650 +3 +independent Harley-Davidson ® dealerships as well as through department stores and specialty retailers. +Coleman ® Footgear . The Company has been granted the exclusive rights to manufacture, market, distribute and sell outdoor footwear under the Coleman ® brand in Europe, Asia and the Middle East. Coleman ® brand footwear products include lightweight hiking boots, outdoor sport boots, rubber footgear and outdoor sandals, which are sold primarily at value-oriented prices through specialty retailers and mass merchants. +Stanley ® Footgear . Pursuant to a license arrangement completed in 2000 with the Stanley Works, the Company has an exclusive license to manufacture, market, distribute and sell footwear under the Stanley® brand. The Stanley® Footgear line provides the Company with an entry into the value-price work footwear market. Stanley® Footgear is currently marketed in Payless ShoeSource, Inc. stores throughout the United States. +2. The Performance Footwear Group . The Performance Footwear Group began operating as a separate division of the Company in 1999. The Performance Footwear Group is comprised of two of the Company's performance-lifestyle brands, CAT ® and Merrell ®. +CAT ® Footwear . The Company has been granted the 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 boots for quality, ruggedness and durability. CAT ® brand footwear products include work boots and shoes, sport boots, rugged casuals and lifestyle footwear. 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. +Merrell ® Footwear . The Merrell ® product line consists primarily of technical hiking, rugged outdoor and outdoor inspired casual footwear designed for backpacking, day hiking and every day use. The Merrell ® product line also includes the "After-Sport" product line, 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. Merrell ® products are sold primarily through outdoor specialty retailers, department stores and catalogs. +4 +3. The Casual Footwear Group . The Casual Footwear Group consists of the Hush Puppies Company and the Wolverine Slipper Group, Inc. Each of these groups is described below. +The Hush Puppies Company . Over its 44-year heritage, the Hush Puppies ® brand has been a pioneer of comfortable casual shoes. The diverse product line includes numerous styles for both work and casual wear and utilizes comfort features, such as the Comfort Curve ® sole, Float Fx™ , patented Bounce ® technology and lightweight Zero-G ™ constructions. Hush Puppies ® shoes are sold to men, women and children in over 90 countries through department stores, catalogs, and independent retailers. +Wolverine Slipper Group, Inc. Through its wholly owned subsidiary, Wolverine Slipper Group, Inc., the Company is one of the leading suppliers of constructed slippers in the United States. The styling of Wolverine Slipper Group's footwear reflects consumer demand for the "rugged indoor" look by using natural leathers such as moosehide, shearling and suede in constructed slipper and indoor and outdoor moccasin designs. Wolverine Slipper Group, Inc., designs and manufactures constructed slippers, aftersport footwear and moccasins on a private label basis according to customer specifications. In addition to its traditional line of private label slippers, Wolverine Slipper Group, Inc. also manufactures and markets slipper products under the popular Hush Puppies ® and Turtle Fur ® brands and has developed a College Clogs™ program for the sale of licensed collegiate slipper products. +Other Businesses. +In addition to the manufacture and marketing of the Company's footwear products that are reported in the Branded Footwear segment, the Company also (i) operates a Company-owned pigskin tannery through its Wolverine Leathers Division, (ii) purchases and cures raw pigskins for sale to various customers through its wholly owned subsidiary Wolverine Procurement, Inc., (iii) operates 64 domestic retail footwear stores, and (iv) licenses the Company's brand names for use on non-footwear products. +1. The Wolverine Leathers Division . The Wolverine Leathers Division produces pigskin leathers primarily for use in the footwear industry . Wolverine Leathers ® brand products are 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, stain resistant and washable leathers are featured in many of the Company's domestic footwear lines and many products offered by the Company's international licensees and distributors. 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 then cures and sells to the Wolverine Leathers Division and to outside customers for processing into pigskin leather products. +5 +3. Retail Stores . The Company operated 64 domestic retail shoe stores as of February, 2002, under three formats, consisting of 61 factory outlet stores under the Hush Puppies and Family name, two mall-based stores called Up Footgear ™ and one Hush Puppies specialty store. The Company expects the scope of its retail operations to remain relatively consistent in the foreseeable future. Most of the Company's 61 factory outlet stores carry a large selection of first quality Company branded footwear at discounted retail prices. The Up Footgear ™ stores feature Company brands such as Wolverine ®, Merrell ®, Hush Puppies ®, CAT ® and Harley-Davidson ®. These stores also carry a selection of branded footwear from other manufacturers. The Hush Puppies ® specialty store is located in the Mall of America in Minneapolis, Minnesota and showcases Hush Puppies ® footwear. +4. Apparel and Accessory Licensing . The Company's Apparel and Accessory Licensing Division licenses the Company's brands for use on non-footwear products including apparel, eyewear, watches, socks, handbags and plush toys. Current licensing programs include Hush Puppies ® brand apparel, eyewear, watches and plush toys, and Wolverine ® brand apparel, gloves and watches. +Marketing. +The Company's overall marketing strategy is to develop brand-specific plans and related promotional materials for the United States market to foster a differentiated and 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. Domestic marketing campaigns target both the Company's retail accounts and consumers, and strive to increase overall brand awareness for the Company's branded products. The Company's advertisements typically emphasize fashion, comfort, quality, durability, functionality and other performance and lifestyle aspects of the Company's footwear. Components of the brand-specific plans include print, radio and television advertising, in-store point of purchase displays, promotional materials, and sales and technical assistance. +The Company's footwear brand groups provide its international licensees and distributors with creative direction and materials to convey consistent messages and brand images. Examples of marketing assistance provided by the Company to its licensees and distributors are (i) direction concerning the categories of footwear to be promoted, (ii) photography and layouts, (iii) broadcast advertising, including commercials and film footage, (iv) point of purchase presentation specifications, blueprints and packaging, (v) sales materials and (vi) consulting concerning retail store layout and design. The Company believes its footwear brand names provide a competitive advantage. In support of this belief, the Company makes significant 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 three primary distribution strategies. +• +Traditional wholesale distribution is used to service department stores (such as J.C. Penney, Sears and Nordstrom), large footwear chains (such as Walking Company and Famous Footwear), specialty retailers (such as Eastern Mountain Sports), catalog and independent retailers, and military outlets. A dedicated sales force and customer service team, advertising and point of purchase support, and in-stock inventories are used to service these accounts. +6 +• +Volume direct programs provide branded and private label footwear at competitive prices with limited marketing support. These programs service major retail, mail order, mass merchants and government customers. +• +A network of independent Shoemobile ® distribution outlets is used to distribute the Company's work and occupational footwear at industrial facilities. +In addition to its wholesale activities, the Company also operates domestic retail shoe stores as described above. The Company is developing various programs both independently and with its retail customers for the distribution of its products over the Internet and operates a direct to customer site at www.upfootgear.com . +A broad distribution base insulates the Company from dependence on any one customer . No customer of the Company accounted for more than 10% of the Company's net sales and other operating income in fiscal 2001. +Footwear sales are seasonal with significant increases in sales experienced during the fall hunting season, Christmas, Easter and back-to-school periods. Due to this seasonal nature of footwear sales, the Company experiences some fluctuation in its levels of working capital. The Company provides working capital for such fluctuations through internal financing and through a revolving credit agreement that the Company has in place. The Company expects the seasonal sales pattern to continue in future years. +International Operations and Global Licensing. +The Company records revenue from foreign sources through a combination of sales of branded footwear products generated from the Company's owned operations in Canada, the United Kingdom, France, Germany, and The Netherlands and from royalty income through a network of independent licensees and distributors. The Company's owned operations include Hush Puppies (UK) Ltd., Merrell (Europe) Limited, Hush Puppies Canada Footwear, Ltd., and the Merrell Canada division. In addition, in January 2002, the Company established a new subsidiary to manage the CAT® footwear brand in the European market. This new joint venture entity, Wolverine Europe Limited, purchased on-going operations and assets of the European CAT footwear business from Overland Group Limited of London, England. The markets served directly by Wolverine Europe will include Austria, France, Germany, The Netherlands, and the United Kingdom, and it will continue to coordinate and oversee support for other European markets served by independently-owned distributors. In October of 2001, the Company also expanded its owned Merrell operations in the United Kingdom to cover the additional countries of Austria, Belgium, France, Germany, Luxembourg, The Netherlands and Spain. A new subsidiary, Merrell Europe B.V. was formed to direct the operations of these additional countries. The Company's owned operations are located in markets where the Company believes it can gain a strategic advantage. +The Company derives royalty income from sales of Company footwear bearing the Hush Puppies ®, Wolverine ®, Bates ®, HyTest ®, Merrell ® and other trademarks by independent distributors and licensees. The Company also derives royalty income from sales of footwear bearing the CAT ®, Coleman ® and Harley-Davidson ® trademarks through foreign distributors. License and distribution arrangements enable the Company to develop international markets without the capital commitment required to maintain inventories or fund localized marketing programs. In fiscal 2001, the Company's +7 +wholly owned foreign operations, together with the Company's foreign licensees and distributors sold an estimated 18 million pairs of footwear, which is similar to the level of international sales in fiscal 2000. +The Company continues to develop a global network of licensees and distributors to market its footwear brands. The Company assists in designing products that are appropriate to each foreign market but are consistent with the global brand position. The licensees and distributors then purchase goods from either the Company or authorized third-party manufacturers pursuant to a distribution agreement or manufacture branded products consistent with Company standards pursuant to a license agreement. Distributors and licensees are responsible for independently marketing and distributing Company branded products in their respective territories, with product and market support provided by the Company. +Manufacturing and Sourcing. +The Company controls the sourcing and manufacture of approximately 75% 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 85% are purchased or sourced from third parties, with the remainder produced at Company-owned facilities. Footwear produced by the Company is manufactured at Company-owned facilities in several domestic and certain affiliated foreign facilities located in Michigan, Arkansas, the Dominican Republic and Mexico. For some of the Company-produced footwear, the Company has implemented a "twin plant" concept whereby a majority of the labor intensive cutting and fitting construction of the "upper" portion of shoes and boots is performed at the Company's facilities in the Dominican Republic and Mexico and the technology intensive construction, or "bottoming," is performed at the Company's domestic facilities. +The Company's factories each have the flexibility to produce a variety of footwear, and depart from the industry's historic practice of dedicating a given facility to production of specific footwear products. This flexibility allows the Company to quickly respond to changes in market preference and demand. The Company produces primarily slippers and work footwear in its domestic and international facilities, allowing the Company to respond to both market and customer-specific demand. In fiscal 2000, the Company announced its intention to close its facilities in Malone, New York; Kirksville, Missouri; Aguadilla, Puerto Rico; San Jose, Costa Rica; and Alexandria, Ontario, Canada. Consolidating operations into the remaining facilities allows the Company to take better advantage of sophisticated global sourcing alternatives. The Company significantly completed these closures in 2001 resulting in more flexible and efficient sourcing of Company products. +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 developed its "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. +The Company's domestic manufacturing operations allow the Company to (i) reduce its lead time, enabling it to quickly respond to market demand and reduce inventory risk, (ii) lower freight and shipping +8 +costs, and (iii) closely monitor product quality. The Company's foreign manufacturing strategy allows the Company to (i) benefit from lower labor costs, (ii) source the highest quality raw materials from around the world, and (iii) avoid additional capital expenditures necessary for factories and equipment. The Company believes that its overall global manufacturing strategy gives the Company maximum flexibility to properly balance the need for timely shipments, high quality products and competitive pricing. +The Company owns and operates 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 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 shearling and cowhide leather eliminates any reliance by the Company upon a sole supplier. The Company currently purchases the vast majority of the raw pigskins used in a significant portion of its tannery operations from 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 and loss of most favored nation trading status. With respect to international sourcing activities, management believes that over a period of time, it could arrange adequate alternative sources of supply for the products currently obtained from its foreign suppliers. A sustained disruption of such sources of supply could, particularly on a short-term basis, have an adverse impact on the Company's operations. +Trademarks, Licenses and Patents. +The Company holds a significant portfolio of registered and common law trademarks that identify its branded footwear products. The trademarks that are most widely used by the Company include Hush Puppies ®, Wolverine ®, Bates ®, Wolverine Fusion ™, DuraShocks ®, Hidden Tracks ®, Bounce ®, Comfort Curve ®, HyTest ®, Merrell ® and FootRests ®. The Company has obtained the right to manufacture, market and distribute footwear throughout most countries of the world under the CAT ® and Harley-Davidson ® trademarks; the right to manufacture, market and distribute footwear in the United States and other countries under the Stanley ® trademark; the right to manufacture, market and distribute slippers in the United States and certain other countries under the Turtle Fur ® trademark; and the right to manufacture, market and distribute footwear in Europe, Asia and the Middle East under the Coleman ® trademark ― all pursuant to license arrangements with the respective trademark owners. All of the Company's licenses are long term and extend for three or more years with renewal options with the exception of the Turtle Fur® license which expires in March 2004. Pigskin leather produced by the Company's Wolverine Leathers Division is sold under the trademarks Wolverine Leathers ®, Weather Tight ® and All Season Weather Leathers ™. +9 +The Company believes that its products are identified by consumers by its trademarks and that its trademarks are valuable assets. The Company is not aware of any infringing uses or any prior claims of ownership of its trademarks that could materially affect its current business. It is the policy of the Company to pursue registration of its primary marks whenever possible and to vigorously defend its trademarks against infringement or other threats to the greatest extent practicable under the laws of the United States and other countries. The Company also holds 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 23, 2002, the Company had a backlog of footwear orders of approximately $233 million compared with a backlog of approximately $195 million at March 24, 2001. Approximately half of the backlog increase is related to orders for products expected to be shipped in the third and fourth quarters of 2002 and can be affected by the timing of customer requests for shipment of the ordered products. While orders in backlog are subject to cancellation by customers, the Company has not experienced significant cancellation of orders in the past and the Company expects that substantially all of the orders will be shipped in fiscal 2002. The backlog at a particular time is affected by a number of factors, including seasonality, retail conditions, 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 eight major competitors in connection with the sale of its sport boots, and at least twenty 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 new and improved materials for use in its +10 +branded footwear and other products and in the development and adaptation of new production techniques. The Company's continuing relationship with the Biomechanics Evaluation Laboratory at Michigan State University, 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. +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, and in the past has used and generated, certain substances and wastes that are regulated or may be deemed hazardous under certain federal, state and local regulations with respect to the environment. The Company from time to time works with federal, state and local agencies to resolve cleanup issues at various waste sites or other regulatory issues. +Employees. +As of December 29, 2001, the Company had approximately 4,614 domestic and foreign production, office and sales employees. Approximately 753 employees were covered by four union contracts expiring at various dates through March 31, 2004. The Company has experienced no work stoppages since 1990. The Company presently considers its employee relations to be good. +11 +Item 2. Properties . +The Company either directly or through its subsidiaries owned or leased the following offices and manufacturing facilities as of December 29, 2001: +LOCATION +TYPE OF FACILITY +OWNED +LEASED +SQUARE +FOOTAGE +Rockford, MI +Administration/Sales +Owned +223,300 +Jonesboro, AR +Administration/Sales +Leased +5,680 +Malone, NY* +Administration/Sales +Owned +11,718 +New York, NY +Administration/Sales +Leased +3,811 +St. Laurent, Quebec, Canada +Administration/Sales +Leased +2,800 +Saint-Sauveur-des-Monts, +Quebec, Canada +Administration/Sales +Leased +1,500 +Tai Chung, Taiwan +Administration/Sales +Leased +19,000 +Leicester, England +Administration/Sales +Leased +13,250 +Bristol, England +Administration/Sales +Leased +5,200 +London, England +Administration/Sales +Leased +19,800 +Dusseldorf, Germany +Administration/Sales +Leased +6,250 +Paris, France +Administration/Sales +Leased +7,731 +Utrecht, The Netherlands +Administration/Sales +Leased +950 +Almere, The Netherlands +Administration/Sales +Leased +1,600 +Total Administration/Sales +322,590 +Rockford, MI +Tannery +Owned +160,000 +Des Moines, IA +Procurement +Owned +6,200 +Dyersburg, TN +Procurement +Leased +12,000 +Durant, OK +Procurement +Leased +12,900 +Dennison, KS +Procurement +Leased +1,855 +Total Tannery and Procurement +192,955 +Jonesboro, AR +Manufacturing +Leased +79,197 +Jonesboro, AR +Manufacturing +Owned +11,680 +Monette, AR +Manufacturing +Owned +18,030 +Rockford, MI +Manufacturing +Owned +20,833 +Rockford, MI +Manufacturing +Owned +19,624 +Rockford, MI +Manufacturing +Owned +7,790 +Big Rapids, MI +Manufacturing +Owned +77,626 +Kirksville, MO* +Manufacturing +Owned +104,000 +Malone, NY* +Manufacturing +Owned +90,664 +Malone, NY* +Manufacturing +Owned +37,596 +Malone, NY* +Manufacturing +Owned +8,100 +Malone, NY* +Manufacturing +Owned +27,125 +12 +Monterrey, MX +Manufacturing +Leased +60,000 +San Pedro, Dominican Republic +Manufacturing +Leased +65,111 +Santo Domingo, Dominican Republic +Manufacturing +Leased +54,332 +Total Manufacturing +681,708 +Jonesboro, AR +Warehouse +Leased +2,000 +Jonesboro, AR +Warehouse +Owned +13,500 +Jonesboro, AR +Warehouse +Owned +15,478 +Rockford, MI +Warehouse +Owned +304,278 +Rockford, MI +Warehouse +Owned +93,140 +Rockford, MI +Warehouse +Owned +75,000 +Cedar Springs, MI +Warehouse +Leased +32,900 +Cedar Springs, MI +Warehouse +Leased +230,000 +Howard City, MI +Warehouse +Leased +350,000 +Malone, NY +Warehouse +Owned +115,211 +St. Laurent, Quebec, Canada +Warehouse +Leased +33,000 +Wellingborough, England +Warehouse +Leased +2,500 +Total Warehouse +1,267,007 +* Facility is currently idle. +In addition, the Company's subsidiary, Hush Puppies Retail, Inc., operates retail stores through leases with various third-party landlords. The Company believes that its current facilities are suitable and adequate to meet its anticipated needs for the next twelve months. +Item 3. Legal Proceedings . +The Company is involved in litigation and various legal matters arising in the normal course of business, including certain environmental compliance activities. The Company has considered facts that have been ascertained and opinions of counsel handling these matters, and does not believe the ultimate resolution of such proceedings will have a material adverse effect on the Company's financial condition or 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 the date of this Annual Report on Form 10-K, and the positions presently held with the Company. The information provided below the table lists the business experience of each such Executive Officer during the past five years. All Executive Officers serve at the pleasure of the Board of Directors of the Company, or if not appointed by the Board of Directors, they serve at the pleasure of management. +13 +Name +Age +Positions held with the Company +Geoffrey B. Bloom +60 +Chairman of the Board +Steven M. Duffy +49 +Executive Vice President and President, +Global Operations Group +V. Dean Estes +52 +Vice President and President, +Wolverine Footwear Group +Stephen L. Gulis, Jr. +44 +Executive Vice President, Chief Financial +Officer and Treasurer +Blake W. Krueger +48 +Executive Vice President, General Counsel +and Secretary +Timothy J. O'Donovan +56 +Chief Executive Officer and President +Nicholas P. Ottenwess +39 +Vice President of Finance and Corporate Controller +Robert J. Sedrowski +52 +Vice President of Human Resources +James D. Zwiers +34 +Associate General Counsel and Assistant +Secretary +Geoffrey B. Bloom has served the Company as Chairman of the Board since 1996. From 1996 to 2000 he served the Company as Chief Executive Officer and Chairman of the Board. From 1993 to 1996 he served the Company as President and Chief Executive Officer. +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 the Company as Vice President. +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 and related businesses. +Stephen L. Gulis, Jr., has served the Company as Executive Vice President, Chief Financial Officer and Treasurer since April 1996. From 1994 to April 1996 he served the Company as Vice President and Chief Financial Officer. +Blake W. Krueger has served the Company as Executive Vice President, General Counsel and Secretary since April 1996. From 1993 to April 1996 he served the Company as General Counsel and Secretary. From 1985 to 1996 he was a partner 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 the Company as Chief Operating Officer and President. From 1982 to April 1996 he served the Company 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 the Company as Corporate +14 +Controller. From 1993 to September 1997 he served the Company as Vice President of Finance & Administration for The Hush Puppies Company. +Robert J. Sedrowski has served the Company as Vice President of Human Resources since October 1993. +James D. Zwiers has served the Company as Associate General Counsel and Assistant Secretary since January 1998. From 1995 to 1998 he was an attorney with the law firm of Warner Norcross & Judd LLP. +PART II +Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. +Wolverine World Wide, Inc. common stock is traded on the New York Stock Exchange and the Pacific Exchange under the symbol "WWW." The following table shows the high and low sales prices on the New York Stock Exchange and dividends declared by calendar quarter for 2001 and 2000. The number of stockholders of record on March 1, 2002, was 1,811. +2001 +2000 +High +Low +High +Low +First quarter +$ +19.56 +$ +12.96 +$ +13.38 +$ +9.00 +Second quarter +18.49 +13.30 +13.50 +10.19 +Third quarter +19.50 +15.00 +12.69 +9.00 +Fourth quarter +16.98 +12.25 +17.50 +8.56 +Cash Dividends Declared Per Share: +2001 +2000 +First quarter +$ +.04 +$ +.035 +Second quarter +.04 +.035 +Third quarter +.04 +.035 +Fourth quarter +.04 +.035 +Dividends of $.045 were declared in the first quarter of fiscal 2002. +15 +Item 6. Selected Financial Data . +Five-Year Operating and Financial Summary (1) +(Thousands of Dollars, Except Per Share Data) +2001 +2000 +1999 +1998 +1997 +Summary of Operations +Net sales and other +operating income +$720,066 +$701,291 +$665,576 +$669,329 +$665,125 +Net earnings +45,240 +10,690 +32,380 +41,651 +41,539 +Per share of common stock: +Net earnings, as reported: (2)(3) +Basic +$1.11 +$.26 +$.80 +$1.00 +$1.00 +Diluted +1.07 +.26 +.78 +.97 +.96 +Cash dividends declared (3) +.16 +.14 +.12 +.11 +.09 +Financial Position at Year End +Total assets +$543,678 +$494,568 +$534,395 +$521,478 +$449,663 +Long-term debt +90,848 +92,194 +139,201 +161,650 +94,264 +Notes to Five-Year Operating and Financial Summary +1. +This summary should be read in conjunction with the consolidated financial statements of the Company and the notes thereto, which are attached as Appendix A to this Form 10-K. In particular, see the discussion of the nonrecurring charges in Note 11 to the consolidated financial statements. +2. +Basic earnings per share are based on the weighted average number of shares of common stock outstanding during the year after adjustment for nonvested common stock. Diluted earnings per share assume the exercise of dilutive stock options and the vesting of all outstanding common stock. +3. +On April 17, 1997, the Company announced a three-for-two stock split on shares of common stock outstanding at May 2, 1997. All share and per share data have been adjusted for the increased shares resulting from this split. +Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. +Operations +Results of Operations--2001 Compared to 2000 +Net sales and other operating income increased 2.7% to $720.1 million in 2001 compared to $701.3 million in 2000. On a combined basis, net sales and other operating income for the Company's branded footwear businesses, consisting of the Casual Footwear Group (comprised of The Hush Puppies Company, the Children's Footwear Group, and the Wolverine Slipper Group, Inc.), the Wolverine Footwear Group (comprised of the Wolverine®, HYTEST®, Stanley®, Coleman®, Bates® and Harley-Davidson® brands), and the Performance Footwear Group (comprised of the CAT® and Merrell® +16 +brands) increased $22.0 million (3.5%) in 2001 compared to 2000. The Company's other business units, consisting of Wolverine Retail, Apparel and Accessory Licensing, Wolverine Leathers and Wolverine Procurement, Inc., reported a $3.2 million (4.1%) decrease in net sales and other operating income in 2001 compared to 2000. 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 utilizing the Company's trademarks and brand names is recognized as earned based on the completion of stated contractual terms. +The Casual Footwear Group reported a decrease in net sales and other operating income of $12.0 million (6.4%) in 2001 compared to 2000. Net sales and other operating income for the Hush Puppies Company decreased from 2000 levels as Hush Puppies U.S. experienced soft sales as a result of a weak retail environment. Many retailers remained reluctant to place reorders due to concerns about the economy and rising inventory levels. Hush Puppies Canada recorded a 4.6% increase in net sales and other operating income due to the successful launch of Steps by Hush Puppies™, a middle market product for men and women. Hush Puppies U.K. experienced a slight decline for the year due to the loss of its largest customer during the second quarter of 2001. This customer transitioned its business to the discount retail market, which is not serviced by the Company. The Children's Footwear Group experienced a decrease in net sales and other operating income for 2001 as a result of losing several customers that exited the childrens' footwear business. Net sales and other operating income for the Wolverine Slipper Group was generally consistent with 2000 levels. +The Wolverine Footwear Group's net sales and other operating income increased $5.5 million (2.0%) in 2001 compared to 2000. Wolverine®, Harley-Davidson® and Stanley® footwear provided the increase with expanded distribution networks in 2001. In 2001, Stanley® footgear, a new footwear line for the Company as of the third quarter of 2000, expanded its distribution network to include the HYTEST® mobile retail units in addition to its current distribution to Payless ShoeSource, Inc. These increases were partially offset by Bates®, which reported a 3.4% decrease in net sales and other operating income from 2000, primarily due to the timing of contract awards for the Department of Defense. Also reporting a decrease in net sales and other operating income was the HYTEST® work boot business. HYTEST® sells primarily to employees of large manufacturing companies that were adversely affected by the weakened economy. +The Performance Footwear Group reported record net sales and other operating income, reflecting an increase of $28.5 million (18.5%) for 2001 compared to 2000. The Merrell® outdoor footwear business accounted for the majority of the increase as a result of strong consumer demand for the brand, new product offerings and expansion of its domestic and international distribution. Partially offsetting the Merrell® increase was a decrease in net sales and other operating income reported by CAT® footwear due to retail account closings, weak retail performance and a decline in the European business. +The Company's other business units reported a combined $3.2 million (4.1%) decrease in net sales and other operating income in 2001 compared to 2000. Wolverine Retail reported a $0.8 million (1.9%) increase in net sales and other operating income in 2001 compared to 2000. Wolverine Procurement's net sales and other operating income increased $2.4 million in 2001 over 2000 due to an increase in the market price for sow skins. These increases were offset by Wolverine Leathers, which recorded a $5.8 million decrease in net sales and other operating income primarily as a result of a decline in production of Hush Puppies® and CAT® products worldwide. Net sales and other operating income for Apparel and Accessory Licensing increased slightly for 2001 compared to 2000. +17 +As discussed in Note 11 to the consolidated financial statements, on July 12, 2000, the Company announced a strategic realignment of its global sourcing and manufacturing operations. In connection with this realignment, the Company closed manufacturing facilities in New York, Missouri, Canada, Puerto Rico and Costa Rica in the second half of 2000. A nonrecurring, pre-tax charge to earnings of $45.0 million was recorded in 2000, of which $15.0 million was reflected in cost of products sold for inventory write-downs, $29.6 million was recognized in selling and administrative expenses for severance, bad debt, loss on disposal of fixed assets and goodwill impairment, and $0.4 million was recorded in other expenses. These charges resulted in a $0.71 per share reduction of net earnings for 2000. The realignment activities were primarily completed in the third and fourth quarters of 2000 and the first half of 2001. Remaining liabilities of $2.8 million associated with the sourcing realignment include pension benefits for certain terminated employees and lease termination costs. +The following table summarizes the 2001 results and the effect of the 2000 nonrecurring charge on certain components of the Company's operating results (thousands of dollars, except per share data; percentages relate to total net sales and other operating income): +Results +As Reported +Effect of +Nonrecurring +Charges +Results +Excluding +Nonrecurring Charges +2001 +Net sales +$ +720,066 +100.0% +$ +- +$ +720,066 +100.0% +Gross margin +257,036 +35.7% +- +257,036 +35.7% +Selling and administrative expenses +182,178 +25.3% +- +182,178 +25.3% +Other expenses +6,311 +0.9% +- +6,311 +0.9% +Earnings before income taxes +68,547 +9.5% +- +68,547 +9.5% +Net earnings +45,240 +6.3% +- +45,240 +6.3% +Diluted earnings per share +$ +1.07 +- +$ +- +$ +1.07 +- +2000 +Net sales +$ +701,291 +100.0% +$ +- +$ +701,291 +100.0% +Gross margin +223,973 +31.9% +15,036 +239,009 +34.1% +Selling and administrative expenses +198,953 +28.4% +29,589 +169,364 +24.2% +Other expenses +10,005 +1.4% +425 +9,580 +1.4% +Earnings before income taxes +15,015 +2.1% +45,050 +60,065 +8.6% +Net earnings +10,690 +1.5% +29,813 +40,503 +5.8% +Diluted earnings (loss) per share +$ +.26 +- +$ +(.71 +) +$ +.97 +- +The analysis in this paragraph excludes the nonrecurring charge in 2000. Gross margin as a percentage of net sales and other operating income was 35.7% and 34.1% in 2001 and 2000, respectively. Gross margin dollars in 2001 increased $18.0 million or 7.5% to $257.0 million compared to $239.0 million in 2000. The gross margin percentage for the branded footwear businesses increased to 35.6% in +18 +2001 from 33.5% in 2000. The increase in gross margins for the branded footwear businesses resulted primarily from initial pricing margin improvements and benefits from the 2000 realignment discussed above. Additionally, increased shipments of higher margin Merrell® and Harley-Davidson® products improved the mix of overall margins. The gross margin percentage for the other business units decreased to 36.6% in 2001 compared to 38.5% in 2000, primarily due to a reduction in process efficiencies resulting from a decline in sales volume at Wolverine Leathers. +The analysis in this paragraph excludes the nonrecurring charge in 2000. Selling and administrative expenses of $182.2 million for 2001 increased $12.8 million (7.6%) from the 2000 level of $169.4 million and, as a percentage of net sales and other operating income, increased to 25.3% in 2001 from 24.2% in 2000. The change in selling and administrative expenses primarily includes increases of $2.2 million in advertising costs and $10.1 million in selling and administrative costs related to the expansion of the Merrell®, Harley-Davidson® and Stanley® brands. +Interest expense in 2001 was $7.2 million compared to $10.3 million in 2000. The decrease in interest expense reflected lower average borrowings and declining interest rates in 2001 compared to 2000. +The Company's 2001 effective income tax rate of 34.0% compared to 28.8% for 2000. The increase is due to income tax benefits from nontaxable earnings of foreign affiliates representing a smaller percentage of taxable income 2001. The carrying value of the Company's gross 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 in the future, the Company may be required to record valuation allowances against its gross deferred tax assets in future years. Management evaluates the potential for realizing gross deferred tax assets and assesses the need for valuation allowances on a quarterly basis. The Company has not recorded a valuation allowance in 2001, 2000 or 1999. +Net earnings were $45.2 million for 2001 compared to $10.7 million for 2000. Diluted earnings per share were $1.07 for 2001 compared to $0.26 for 2000. Excluding the 2000 nonrecurring charges, net earnings were $40.5 million and diluted earnings per share were $0.97 for 2000. +Results of Operations--2000 Compared to 1999 +Net sales and other operating income increased 5.4% to $701.3 million in 2000 compared to $665.6 million in 1999. On a combined basis, net sales and other operating income for the Company's branded footwear businesses, consisting of the Casual Footwear Group (which, in 1999, included the Russian wholesale business), the Wolverine Footwear Group, and the Performance Footwear Group increased $31.9 million (5.4%) in 2000 compared to 1999. The Company's other business units reported a $3.8 million (5.1%) increase in net sales and other operating income in 2000 compared to 1999. +The Casual Footwear Group reported a decrease in net sales and other operating income of $18.5 million (8.9%) in 2000 compared to 1999. The decline was attributable to a decrease in shipments of adult and children's Hush Puppies â +classic suede products to department stores in the United States and a reduction in sales to three large retailers in the United Kingdom as a result of the depressed retail activity in that market. This decrease was partially offset by an increase in net sales and other operating income reported by the Wolverine Slipper Group as a result of expanded distribution efforts and new product offerings. +19 +The Wolverine Footwear Group's net sales and other operating income increased $13.2 million (4.9%) in 2000 compared to 1999. Harley-Davidson® footwear provided the majority of this increase with an expanded distribution network in 2000. Stanley® footgear, a new footwear line for the Company, also contributed to the increase with a marketing arrangement launched with Payless ShoeSource, Inc. near the end of the third quarter of 2000. These increases were partially offset by the Wolverine â +and HYTEST® work boot businesses, which reported decreases in net sales and other operating income from 1999, primarily due to retailers reducing seasonal work boot reorders in an effort to manage their inventory levels. +The Performance Footwear Group reported record net sales and other operating income, reflecting an increase of $37.2 million (32.0%) for 2000 compared to 1999. The Merrell® outdoor footwear business accounted for the increase in net sales and other operating income as a result of strong consumer demand for the brand, new product offerings and expansion of its domestic and international distribution. Partially offsetting this increase was a net sales and other operating income decrease reported by CAT® footwear. +The Company's other business units reported a combined $3.8 million (5.1%) increase in net sales and other operating income in 2000 compared to 1999. Wolverine Retail reported a $5.2 million increase in net sales and other operating income in 2000 compared to 1999. This increase was partially offset by Wolverine Leathers, which recorded a decrease in net sales and other operating income primarily as a result of a decline in production of Hush Puppies® classic sueded product worldwide. Net sales and other operating income for the Apparel and Accessory Licensing and Wolverine Procurement operations remained flat for 2000 compared to 1999. +As discussed above, on July 12, 2000, the Company announced a strategic realignment of its global sourcing and manufacturing operations. These charges resulted in a $0.71 per share reduction of net earnings for 2000. The realignment was initiated to improve factory efficiencies, reduce factory and corporate overhead, and improve margins as the production of various footwear products was shifted to lower cost offshore manufacturing facilities. The realignment activities were primarily completed in the third and fourth quarters of 2000. +During 1999, the Company recorded a nonrecurring, pre-tax charge to earnings of $14.0 million related to the closing of its Russian wholesale footwear business, of which $6.9 million was reflected as a write-down of inventory in cost of products sold, $6.6 million was recognized in selling and administrative expenses for goodwill impairment, bad debt, severance, and other exit costs, and $0.5 million was recorded in other expenses. These charges resulted in a $0.23 per share reduction of earnings in 1999. The closure was completed in 1999. +The following table summarizes the effect of the 2000 and 1999 nonrecurring charges on reported results for those years (thousands of dollars, except per share data; percentages relate to total net sales and other operating income): +20 +Results +As Reported +Effect of +Nonrecurring +Charges +Results +Excluding +Nonrecurring Charges +2000 +Net sales +$ +701,291 +100.0% +$ +- +$ +701,291 +100.0% +Gross margin +223,973 +31.9% +15,036 +239,009 +34.1% +Selling and administrative expenses +198,953 +28.4% +29,589 +169,364 +24.2% +Other expenses +10,005 +1.4% +425 +9,580 +1.4% +Earnings before income taxes +15,015 +2.1% +45,050 +60,065 +8.6% +Net earnings +10,690 +1.5% +29,813 +40,503 +5.8% +Diluted earnings (loss) per share +$ +.26 +- +$ +(.71 +) +$ +.97 +- +1999 +Net sales +$ +665,576 +100.0% +$ +- +$ +665,576 +100.0% +Gross margin +220,344 +33.1% +6,900 +227,244 +34.1% +Selling and administrative expenses +159,749 +24.0% +6,600 +153,149 +23.0% +Other expenses +11,049 +1.7% +500 +10,549 +1.6% +Earnings before income taxes +49,546 +7.4% +14,000 +63,546 +9.6% +Net earnings +32,380 +4.9% +9,338 +41,718 +6.3% +Diluted earnings (loss) per share +$ +.78 +- +$ +(.23 +) +$ +1.01 +- +The analysis in this paragraph excludes the nonrecurring charges in 2000 and 1999. Gross margin as a percentage of net sales and other operating income remained flat at 34.1% for both 2000 and 1999. Gross margin dollars increased $11.8 million or 5.2% in 2000 to $239.0 million compared to $227.2 million in 1999. The gross margin percentage for the branded footwear businesses increased to 33.5% in 2000 from 33.0% in 1999. The increase in gross margins for the branded footwear businesses resulted primarily from increased shipments of higher margin Merrell® and Harley-Davidson® products. This increase was partially offset by the strengthening of the U.S. dollar against European and Canadian currencies and additional markdowns taken to reduce inventory levels in 2000. The gross margin percentage for the other business units decreased to 38.5% in 2000 compared to 43.5% in 1999, primarily due to an increase in raw stock prices experienced by Wolverine Leathers and Wolverine Procurement. +The analysis in this paragraph excludes the nonrecurring charges in 2000 and 1999. Selling and administrative expenses of $169.4 million for 2000 increased $16.3 million (10.6%) from the 1999 level of $153.1 million and, as a percentage of net sales and other operating income, increased to 24.2% in 2000 from 23.0% in 1999. The change in selling and administrative expenses includes increased selling, advertising and administration costs of $12.6 million for Merrell® and Harley-Davidson® and increased depreciation expense of $2.7 million related to capital investments in distribution centers and information services. +21 +Interest expense in 2000 was $10.3 million compared to $11.1 million in 1999. The decrease in interest expense reflected lower average borrowings in 2000 compared to 1999. This decrease was partially offset by a slight increase in interest rates on the Company's revolving credit facility and lower capitalization of interest due to the completion of major capital projects during 1999. +The Company's 2000 effective income tax rate of 28.8% compared to 34.6% for 1999. The decrease is due to income tax benefits from nontaxable earnings of foreign affiliates representing a higher percentage of taxable income in 2000. Also, the Company's effective income tax rate in 2000 was favorably impacted by an increase in earnings from certain foreign subsidiaries that are taxed at lower rates. Such entities represented a higher percentage of total consolidated net earnings in 2000. +Net earnings were $10.7 million for 2000 compared to $32.4 million for 1999. Diluted earnings per share were $0.26 for 2000 compared to $0.78 for 1999. Excluding nonrecurring charges, net earnings were $40.5 million for 2000 compared to $41.7 million for 1999 and diluted earnings per share were $0.97 for 2000 compared to $1.01 for 1999. +Liquidity and Capital Resources +Net cash provided by operating activities was $53.9 million in 2001 compared to $71.0 million in 2000. The reduction of cash provided occurred because $11.6 million was used to fund working capital in 2001, primarily related to growth in inventories, compared to $5.1 million that was provided by reductions in working capital requirements in 2000. +Accounts receivable of $152.3 million at December 29, 2001 reflected a $9.6 million (5.9%) decrease from the $161.9 million balance at December 30, 2000. The decline in accounts receivable was the result of a focused asset reduction program and a decrease in fourth quarter sales when compared to the same period in 2000. No single customer accounts for more than 5% of the outstanding accounts receivable balance at December 29, 2001. Corporate management evaluates the allowance for uncollectible accounts receivable, discounts and stock returns based on a review of current customer status and historical collection experience. At December 29, 2001 and December 30, 2000, management believes that it has provided sufficient reserves to address future collection uncertainties. +Inventories of $177.0 million at December 29, 2001 increased $32.8 million (22.8%) from $144.2 million at December 30, 2000. The increase in inventories relates primarily to Merrell® and Wolverine® brand products. A significant portion of the Merrell® increase was in-transit at year-end and is required to support expected 2002 customer orders. The Wolverine® brand inventories were core products purchased to support anticipated fourth quarter 2001 reorder business that did not materialize due to a warm winter and cautious retailers. As of December 29, 2001, the Company's backlog was 4.2% higher than the prior year's level. The Company values its inventory using actual costs on a last-in, first-out (LIFO) basis for the majority of its inventory and first-in, first-out (FIFO) basis for foreign, retail and certain other domestic inventories, less allowances to reflect the lower of cost or market. The Company reduces the value of its inventories to the lower of cost or market for unsaleable or obsolete inventories based upon assumptions about future demand and market conditions. Inventory quantities are verified at various times throughout the year by performing physical and perpetual inventory cycle count procedures. +Account payable of $28.4 million at December 29, 2001 increased $7.5 million (35.6%) over the $20.9 million balance at December 30, 2000, primarily due to increases in inventories as described above. +22 +Other accrued liabilities of $31.0 million at December 29, 2001 reflected a $3.1 million (11.3%) increase from the $27.9 million balance at December 30, 2000. The growth in other accrued liabilities was primarily attributable to an increase in income taxes payable that resulted from higher pre-tax income in 2001 compared to 2000. +Additions to property, plant and equipment were $11.3 million in 2001 compared to $12.0 million in 2000. Depreciation and amortization expense of $17.6 million in 2001 compares to $17.7 million in 2000. +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 pertains to the Company's Canadian subsidiary. Of the remaining $140.0 million facility available to the U.S. operations, $35.0 million may be utilized by the United Kingdom subsidiaries. The revolving credit facility is used to support working capital requirements. 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 forseeable future. Any excess cash flows from operations are expected to be used to pay down existing debt, fund growth initiatives and repurchase the Company's common stock. +Long-term debt, including current maturities, of $90.8 million at the end of 2001 decreased $1.4 million from the $92.2 million balance at the end of 2000. The decrease in debt was the result of improved operating cash flows that provided funds to pay down amounts borrowed. The Company had commercial letter-of-credit facilities outstanding and other related commitments of $30.8 million and $24.4 million at the end of 2001 and 2000, respectively. +Assets held for exchange in the amount of $5.7 million represent barter credits that were acquired in exchange for inventories in December of 1997. Such credits are redeemable through 2005 for a percentage of supplies purchased from certain vendors. The Company evaluates the recoverability of such assets on a quarterly basis and expects to utilize all available credits prior to their expiration. Barter credits of $2.2 million have been utilized through December 29, 2001. +The Company evaluates the carrying amounts of tangible and intangible assets annually to determine if they may be impaired. If the carrying amounts of these assets are not recoverable based upon an undiscounted cash flow analysis, they are reduced by the estimated shortfall of fair value compared to the recorded value. No impairment adjustments were recorded during 2001. Impairment losses of $1.1 million and $2.5 million were recognized as part of the realignment charges in 2000 and 1999, respectively. +The Company has significant pension benefit costs and credits that are developed from actuarial valuations. Inherent in these valuations are key assumptions, including discount rates and expected return on plan assets. The Company is required to consider market conditions, including changes in interest rates, in selecting these assumptions. Pre-tax, non-cash charges resulting from the Company's defined benefit pension plans, excluding the effect of special termination gains and expenses, increased $0.3 million in 2001 when compared to 2000 due to market conditions and declining interest rates that affected asset values and the Company's discount rate. As a result of these factors, the Company anticipates that pre-tax, non-cash charges relating to defined benefit pension plans will increase by approximately $3.8 million in 2002. +23 +Effective October 3, 2000, the Company's Board of Directors approved a common stock repurchase program authorizing the repurchase of up to 2.0 million shares of common stock over 24 months. The primary purpose of this stock repurchase program is to increase stockholder value. Total cumulative common shares repurchased under the program were 495,500 as of December 29, 2001. The Company intends to continue to repurchase shares of its common stock in open market transactions, from time to time, depending upon market conditions and other factors. +The Company declared dividends of $6.6 million in 2001, or $0.16 per share, which reflected a 14.6% increase over the $5.8 million, or $0.14 per share, declared in 2000. Additionally, shares issued under stock incentive plans provided cash of $3.9 million in 2001 compared to $0.2 million during 2000. +On January 16, 2002, the Company acquired, through a newly formed subsidiary, Wolverine Europe Limited, certain assets and assumed certain liabilities of the European CAT® footwear business from Overland Group Limited of London, England for cash and other consideration of $21.0 million, subject to certain post closing adjustments. On October 17, 2001, the Company acquired, through a newly formed subsidiary, Merrell Europe BV, assets from certain European distributors for cash and other consideration of $1.9 million. While subject to external factors, management believes that future net sales and other operating income could to be positively impacted as a result of this acquisition activity. These acquisitions are discussed further in Note 12 to the consolidated financial statements. +The current ratio was 5.0 to 1.0 at year-end 2001 compared to 6.0 to 1.0 at year-end 2000. The Company's total debt to total capital ratio decreased to .20 to 1.0 in 2001 from .22 to 1.0 in 2000. +Market Risk +The Company has assets, liabilities and inventory purchase commitments outside of the United States that are subject to fluctuations in foreign currency exchange rates. A substantial portion of inventory sourced from foreign countries is purchased in U.S. dollars and accordingly is not subject to exchange rate fluctuations. Similarly, revenues from products sold in foreign countries under licensing and distribution arrangements are denominated in U.S. dollars. As a result, the Company engages in forward foreign exchange and other similar contracts to reduce its economic exposure to changes in exchange rates on a limited basis because the associated risk is not considered significant. +The Company conducts wholesale operations outside of the United States in Europe and Canada where the functional currencies are primarily the British Pound, Canadian Dollar and euro. Accordingly, the Company could be subject to related currency exchange rate fluctuations in 2002 and beyond. +Assets and liabilities outside the United States are primarily located in Canada and the United Kingdom. The Company's investment in foreign subsidiaries with a functional currency other than the U.S. dollar are generally considered long-term. Accordingly, the Company does not hedge these net investments. +Because the Company markets, sells and licenses its products throughout the world, it could be significantly affected by weak economic conditions in foreign markets that could reduce demand for its products. +24 +The Company is exposed to changes in interest rates primarily as a result of its long-term debt requirements. The Company's interest rate risk management objectives are to limit the effect of interest +rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve its objectives, the Company maintains substantially all fixed-rate debt to take advantage of lower relative interest rates currently available and finances seasonal working capital needs with variable-rate debt. The Company has not historically utilized interest rate swaps or similar hedging arrangements to fix interest rates, but in 1998 entered into an interest rate lock agreement to fix the interest rate prior to the issuance of 6.5% senior notes in the amount of $75 million. The contract was settled in 1998 and resulted in a prepayment of $2.2 million that is being amortized over the term of the senior notes. The amortization of the prepayment creates an effective interest rate of 6.78% on the senior notes. +The following table provides principal cash flows and related interest rates of the Company's short- and long-term debt by fiscal year of maturity. For foreign currency-denominated debt, the information is presented in U.S. dollar equivalents. Variable interest rates are based on the weighted average rates of the portfolio at the respective consolidated balance sheet dates. +2001 +2000 +2002 +2003 +2004 +2005 +2006 +There- +after +Total +Fair +Value +Total +Fair +Value +Denominated in U.S. Dollars: +(Millions of Dollars, Except Percentages) +Fixed Rate +Average Interest Rate +$15.0 +6.9% +$15.0 +6.9% +$15.0 +6.9% +$10.7 +6.5% +$10.7 +6.5% +$21.5 +6.5% +$87.9 +6.7% +$88.2 +- +$92.1 +6.7% +$92.3 +- +Denominated in Canadian Dollars: +Variable Rate +Average Interest Rate +- +- +- +- +- +- +- +- +- +- +- +- +- +- +- +- +$0.9 +7.4% +$0.9 +Denominated in British Sterling: +Variable Rate +Average Interest Rate +- +- +- +- +- +- +- +- +$2.9 +4.8% +- +- +$2.9 +4.8% +$2.9 +- +- +- +- +- +The Company does not enter into contracts for speculative or trading purposes, nor is it a party to any leveraged derivative instruments. +Forward-Looking Statements +This Item 7 and other sections of this Form 10-K contain 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 sales, earnings, margins, benefits from the sourcing and factory alignment and cash flows; expected economic returns; the ability to build and support profitable operations in Europe; expected level and success of advertising programs; expected penetration into distribution channels; the ability to reduce inventories; projected 2002 operating results; continued supply to the U.S. Military; anticipated product introductions or brand extensions; repurchases under the common stock repurchase program; sufficiency of credit facilities; expected excess cash flow; 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," variations 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 +25 +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; the cost and availability of inventories, services, labor and equipment furnished to the Company; the cost and availability of contract manufacturers; the cost and availability of raw materials, including leather; the impact of competition and pricing by the Company's competitors; 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 including the severity of the current slowdown in the U.S. economy; the size and growth of footwear markets; 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; the ability to retain rights to brands licensed by the Company; loss of significant customers; dependence on international distributors and licensees: the Company's ability to meet at-once orders; the risk of doing business in developing countries and economically volatile areas; uncertainties relating to the effect of the European Union's conversion to the euro; and domestic and international terrorism and war. 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, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Furthermore, the Company undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise. +Item 7A. Quantitative and Qualitative Disclosures About Market Risk. +The response to this Item is set forth under the caption " Market Risk " 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. +26 +PART III +Item 10. Directors and Executive Officers of the Registrant . +The information regarding directors of the Company contained under the caption "Wolverine's Board of Directors" in the definitive Proxy Statement of the Company dated March 15, 2002, is incorporated herein by reference. In addition to the directors discussed in the definitive Proxy Statement, the Company's board of directors currently includes Daniel T. Carroll (age 75), whose term expires at this year's annual meeting. Mr. Carroll is retiring after 23 years of service as a director. Mr. Carroll is Chairman of the Carroll Group, a management consulting firm. He has held that position since 1982. Mr. Carroll is Chairman of the Board of Directors of Comshare, Inc. Mr. Carroll is also a director of American Woodmark Corp.; A.M. Castle & Co.; Woodhead Industries, Inc.; and Oshkosh Truck Corporation. +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 15, 2002, is incorporated herein by 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 subheading "Compensation of Directors," under the caption "Related Matters" under the subheading "Compensation Committee Interlocks and Insider Participation," and under the captions "Executive Compensation" and "Employment Agreements and Termination of Employment and Change in Control Arrangements" in the definitive Proxy Statement of the Company dated March 15, 2002, is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management . +The information contained under the caption "Ownership of Wolverine Stock" contained in the definitive Proxy Statement of the Company dated March 15, 2002, is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions . +The information regarding certain employee loans following the caption "Executive Compensation," under the subheading "Stock Options," and the information contained under the caption "Wolverine's Board of Directors" under the subheading "Compensation of Directors" and under the caption "Related Matters" under the subheading "Certain Relationships and Related Transactions" contained in the definitive Proxy Statement of the Company dated March 15, 2002, are incorporated herein by reference. +27 +PART IV +Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . +Item 14(a)(1). Financial Statements . Attached as Appendix A. +The following consolidated financial statements of Wolverine World Wide, Inc. and subsidiaries are filed as a part of this report: +• +Consolidated Balance Sheets as of December 29, 2001 and December 30, 2000. +• +Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Fiscal Years Ended December 29, 2001, December 30, 2000, and January 1, 2000. +• +Consolidated Statements of Operations for the Fiscal Years Ended December 29, 2001, December 30, 2000, and January 1, 2000. +• +Consolidated Statements of Cash Flows for the Fiscal Years Ended December 29, 2001, December 30, 2000, and January 1, 2000. +• +Notes to Consolidated Financial Statements as of December 29, 2001. +• +Report of Independent Auditors. +Item 14(a)(2). Financial Statement Schedules . Attached as Appendix B. +The following consolidated financial statement schedule of Wolverine World Wide, Inc. and subsidiaries is filed as a part of this report: +• +Schedule II--Valuation and qualifying accounts. +All other schedules (I, III, IV, and V) for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. +Item 14(a)(3). Exhibits . +The following exhibits are filed as part of this report: +Exhibit +Number +Document +3.1 +Certificate of Incorporation, as amended. Previously filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 14, 1997. Here incorporated by reference. +3.2 +Amended and Restated By-laws. Previously filed as Exhibit 3.2 to the Company's Annual +28 +Report on Form 10-K for the fiscal year ended January 2, 1999. 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 +Note Purchase Agreement dated as of August 1, 1994, relating to 7.81% Senior Notes. Previously filed as Exhibit 4.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000. Here incorporated by reference. +4.6 +Note Purchase Agreement dated as of December 8, 1998, relating to 6.50% Senior Notes due on December 8, 2008. Previously filed as Exhibit 4.5 to the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999. Here incorporated by reference. +4.7 +The Registrant has several classes of long-term debt instruments outstanding in addition to that described in Exhibits 4.5, 4.6 and 4.8. 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. +4.8 +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. +10.1 +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. +10.2 +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. +10.3 +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. +10.4 +Employees Pension Plan (Restated as Amended Through December 13, 2001).* +10.5 +Employment Agreement dated April 27, 1998, between the Company and Geoffrey B. +29 +Bloom.* Previously filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999. Here incorporated by reference. +10.6 +1994 Directors' Stock Option Plan.* Previously filed as an exhibit to the Company's registration statement on Form S-8, filed on August 24, 1994, Registration No. 33-55213. Here incorporated by reference. +10.7 +Amended and Restated Stock Option Loan Program.* Previously filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000. Here incorporated by reference. +10.8 +Executive Severance Agreement.* Previously filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1998. Here incorporated by reference. An updated participant schedule is attached as Exhibit 10.8. +10.9 +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. Here incorporated by reference. An updated participant schedule is attached as Exhibit 10.9. +10.10 +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. +10.11 +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. +10.12 +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. +10.13 +Outside Directors' Deferred Compensation Plan.* +10.14 +1984 Executive Incentive Stock Purchase Plan, and amendment.* Previously filed as an exhibit to the Company's registration statement on Form S-8, filed August 6, 1984, Registration No. 2-92600. Here incorporated by reference. +10.15 +1997 Stock Incentive Plan.* +10.16 +Executive Short-Term Incentive Plan (Annual Bonus Plan).* +10.17 +Executive Long-Term Incentive Plan (3-Year Bonus Plan).* +10.18 +Stock Incentive Plan of 1999.* Previously filed as Appendix A to the Company's Definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders +30 +held on April 23, 1999. Here incorporated by reference. +10.19 +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. +21 +Subsidiaries of Registrant. +23 +Consent of Ernst & Young LLP. +24 +Powers of Attorney. +____________________________ +*Management contract or compensatory plan or arrangement. +31 +The Company will furnish a copy of any exhibit listed above to any stockholder without charge upon written request to Mr. Blake W. Krueger, Executive Vice President, General Counsel and Secretary, 9341 Courtland Drive, Rockford, Michigan 49351. +Item 14(b). Reports on Form 8-K . +No reports on Form 8-K were filed in the fourth quarter of the fiscal year ended December 29, 2001. +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 29, 2002 +By: +/s/Stephen L. Gulis, Jr. +Stephen L. Gulis, Jr. +Executive Vice President, +Chief Financial Officer and Treasurer +(Principal Financial and Accounting Officer) +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. +Signature +Title +Date +*/s/Geoffrey B. Bloom +Geoffrey B. Bloom +Chairman of the Board +of Directors +March 29, 2002 +/s/Timothy J. O'Donovan +Timothy J. O'Donovan +Chief Executive Officer, +President (Principal Executive Officer) +and Director +March 29, 2002 +/s/Stephen L. Gulis, Jr. +Stephen L. Gulis, Jr. +Executive Vice President, Chief +Financial Officer and Treasurer +(Principal Financial and Accounting +Officer) +March 29, 2002 +32 +*/s/Daniel T. Carroll +Daniel T. Carroll +Director +March 29, 2002 +*/s/Donald V. Fites +Donald V. Fites +Director +March 29, 2002 +*/s/Alberto L. Grimoldi +Alberto L. Grimoldi +Director +March 29, 2002 +*/s/David T. Kollat +David T. Kollat +Director +March 29, 2002 +*/s/Phillip D. Matthews +Phillip D. Matthews +Director +March 29, 2002 +*/s/David P. Mehney +David P. Mehney +Director +March 29, 2002 +*/s/Joseph A. Parini +Joseph A. Parini +Director +March 29, 2002 +*/s/Joan Parker +Joan Parker +Director +March 29, 2002 +*/s/Elizabeth A. Sanders +Elizabeth A. Sanders +Director +March 29, 2002 +*/s/Paul D. Schrage +Paul D. Schrage +Director +March 29, 2002 +*by/s/Stephen L. Gulis, Jr. +Stephen L. Gulis, Jr. +Attorney-in-Fact +33 +APPENDIX A +Financial Statements +Wolverine World Wide, Inc. +Consolidated Balance Sheets +As of Fiscal Year End +2001 +2000 +Assets +(Thousands of Dollars) +Current assets: +Cash and cash equivalents +$ +35,820 +$ +8,434 +Accounts receivable, less allowances (2001--$7,382; 2000--$6,147) +152,330 +161,957 +Inventories: +Finished products +151,612 +114,855 +Raw materials and work-in-process +25,429 +29,337 +177,041 +144,192 +Deferred income taxes +2,927 +4,032 +Other current assets +6,684 +6,471 +Total current assets +374,802 +325,086 +Property, plant and equipment: +Land +1,105 +1,105 +Buildings and improvements +63,675 +63,286 +Machinery and equipment +114,018 +119,828 +Software +34,751 +32,524 +213,549 +216,743 +Less accumulated depreciation +114,555 +114,078 +98,994 +102,665 +Other assets: +Goodwill and other intangibles, less accumulated amortization +(2001 -- $5,814; 2000 -- $4,545) +14,957 +14,328 +Cash surrender value of life insurance +20,246 +18,307 +Net prepaid pension costs +23,511 +20,376 +Assets held for exchange +5,739 +6,881 +Notes receivable +2,366 +3,580 +Other +3,063 +3,345 +69,882 +66,817 +Total assets +$ +543,678 +$ +494,568 +Liabilities and Stockholders' Equity +Current liabilities: +Notes payable +$ +90 +$ +896 +Accounts payable +28,357 +20,907 +Salaries, wages and other compensation +8,758 +8,444 +Income taxes +6,376 +1,508 +Taxes, other than income taxes +2,908 +3,281 +Other accrued expenses +13,002 +14,652 +Current maturities of long-term debt +15,030 +4,316 +Total current liabilities +74,521 +54,004 +Long-term debt, less current maturities +75,818 +87,878 +Deferred compensation +6,283 +6,017 +Deferred income taxes +12,904 +9,431 +Stockholders' equity: +Common stock, $1 par value: authorized 80,000,000 shares; +issued, including treasury shares: 2001--45,413,788 shares; +2000--44,785,009 shares +45,414 +44,785 +Additional paid-in capital +86,771 +79,633 +Retained earnings +298,755 +260,158 +Accumulated other comprehensive loss +(4,109 +) +(2,532 +) +Unearned compensation +(4,649 +) +(5,921 +) +Cost of shares in treasury: 2001--3,857,988 shares; 2000--3,232,172 shares +(48,030 +) +(38,885 +) +Total stockholders' equity +374,152 +337,238 +Total liabilities and stockholders' equity +$ +543,678 +$ +494,568 +( ) Denotes deduction. +See accompanying notes to consolidated financial statements. +1 +Wolverine World Wide, Inc. +Consolidated Statements of Stockholders' Equity and Comprehensive Income +Fiscal Year +2001 +2000 +1999 +(Thousands of Dollars, Except Per Share Data) +Common Stock +Balance at beginning of the year +$ +44,785 +$ +44,426 +$ +43,832 +Common stock issued under stock incentive +plans (2001--628,779 shares; +2000--358,687 shares; 1999--594,252 shares) +629 +359 +594 +Balance at end of the year +45,414 +44,785 +44,426 +Additional Paid-In Capital +Balance at beginning of the year +79,633 +76,752 +72,825 +Amounts associated with common stock issued +under stock incentive plans: +Proceeds over par value +5,617 +2,839 +3,776 +Income tax benefits +1,521 +42 +151 +Balance at end of the year +86,771 +79,633 +76,752 +Retained Earnings +Balance at beginning of the year +260,158 +255,265 +227,829 +Net earnings +45,240 +10,690 +32,380 +Cash dividends (2001--$.16 per share; +2000--$.14 per share; 1999--$.12 per share) +(6,643 +) +(5,797 +) +(4,944 +) +Balance at end of the year +298,755 +260,158 +255,265 +Accumulated Other Comprehensive Income (Loss) +Balance at beginning of the year +(2,532 +) +(614 +) +(1,014 +) +Foreign currency translation adjustments +(431 +) +(1,918 +) +400 +Minimum pension liability adjustment, net of taxes (2001-- $591) +(1,146 +) +-- +-- +Balance at end of the year +(4,109 +) +(2,532 +) +(614 +) +Unearned Compensation +Balance at beginning of the year +(5,921 +) +(5,974 +) +(5,999 +) +Awards under stock incentive plans +(2,107 +) +(3,027 +) +(3,094 +) +Compensation expense +3,379 +3,080 +3,119 +Balance at end of the year +(4,649 +) +(5,921 +) +(5,974 +) +Cost of Shares in Treasury +Balance at beginning of the year +(38,885 +) +(37,750 +) +(37,153 +) +Common stock purchased for treasury +(2001--625,816 shares; 2000--106,220 shares; +1999--58,775 shares) +(9,145 +) +(1,135 +) +(597 +) +Balance at end of the year +(48,030 +) +(38,885 +) +(37,750 +) +Total stockholders' equity at end of the year +$ +374,152 +$ +337,238 +$ +332,105 +Comprehensive Income +Net earnings +$ +45,240 +$ +10,690 +$ +32,380 +Foreign currency translation adjustments +(431 +) +(1,918 +) +400 +Minimum pension liability adjustment, net of taxes (2001-- $591) +(1,146 +) +-- +-- +Total comprehensive income +$ +43,663 +$ +8,772 +$ +32,780 +( ) Denotes deduction. +See accompanying notes to consolidated financial statements. +2 +Wolverine World Wide, Inc. +Consolidated Statements of Operations +Fiscal Year +2001 +2000 +1999 +(Thousands of Dollars, Except Per Share Data) +Net sales and other operating income +$ +720,066 +$ +701,291 +$ +665,576 +Cost and expenses: +Cost of products sold +463,030 +477,318 +445,232 +Selling and administrative expenses +182,178 +198,953 +159,749 +Interest expense +7,239 +10,281 +11,074 +Interest income +(497 +) +(372 +) +(728 +) +Other (income) expenses -- net +(431 +) +96 +703 +651,519 +686,276 +616,030 +Earnings before income taxes +68,547 +15,015 +49,546 +Income taxes +23,307 +4,325 +17,166 +Net earnings +$ +45,240 +$ +10,690 +$ +32,380 +Net earnings per share: +Basic +$ +1.11 +$ +.26 +$ +.80 +Diluted +1.07 +.26 +.78 +See accompanying notes to consolidated financial statements. +3 +Wolverine World Wide, Inc. +Consolidated Statements of Cash Flows +Fiscal Year +2001 +2000 +1999 +(Thousands of Dollars) +Operating Activities +Net earnings +$ +45,240 +$ +10,690 +$ +32,380 +Adjustments necessary to reconcile net earnings +to net cash provided by operating activities: +Nonrecurring charges +-- +45,050 +14,000 +Depreciation +15,991 +16,495 +13,763 +Amortization +1,630 +1,200 +1,118 +Deferred income taxes (credit) +4,578 +(4,068 +) +9,597 +Other +(1,948 +) +(3,483 +) +(292 +) +Changes in operating assets and liabilities: +Accounts receivable +9,178 +2,175 +(20,822 +) +Inventories +(31,655 +) +11,678 +(7,872 +) +Other operating assets +2,425 +3,632 +3,774 +Accounts payable +7,450 +655 +2,388 +Other operating liabilities +1,046 +(13,055 +) +(820 +) +Net cash provided by operating activities +53,935 +70,969 +47,214 +Investing Activities +Business acquisitions, net of cash acquired +(1,410 +) +-- +-- +Additions to property, plant and equipment +(11,298 +) +(11,978 +) +(19,447 +) +Proceeds from the sale of property, plant and equipment +46 +707 +-- +Other +189 +268 +437 +Net cash used in investing activities +(12,473 +) +(11,003 +) +(19,010 +) +Financing Activities +Proceeds from short-term borrowings +6,706 +3,797 +1,080 +Payments of short-term debt +(7,512 +) +(3,049 +) +(7,478 +) +Proceeds from long-term borrowings +113,972 +120,812 +72,622 +Payments of long-term debt +(115,318 +) +(167,819 +) +(95,071 +) +Cash dividends +(6,643 +) +(5,797 +) +(4,944 +) +Purchase of common stock for treasury +(9,145 +) +(1,135 +) +(597 +) +Proceeds from shares issued under stock incentive plans +3,864 +213 +1,427 +Net cash used in financing activities +(14,076 +) +(52,978 +) +(32,961 +) +Increase (decrease) in cash and cash equivalents +27,386 +6,988 +(4,757 +) +Cash and cash equivalents at beginning of the year +8,434 +1,446 +6,203 +Cash and cash equivalents at end of the year +$ +35,820 +$ +8,434 +$ +1,446 +Other Cash Flow Information +Interest paid +$ +7,656 +$ +10,182 +$ +11,619 +Net income taxes paid (refund) +7,854 +1,280 +(186 +) +( ) Denotes reduction in cash and cash equivalents. +See accompanying notes to consolidated financial statements. +4 +Wolverine World Wide, Inc. +Notes to Consolidated Financial Statements +1. Summary of Significant Accounting Policies +Principles of Consolidation +The consolidated financial statements include the accounts of Wolverine World Wide, Inc. and its wholly owned subsidiaries (collectively, the Company). Upon consolidation, all intercompany accounts, transactions and profits have been eliminated. +Fiscal Year +The Company's fiscal year is the 52- or 53-week period that ends on the Saturday nearest the end of December. Fiscal years presented herein include the 52-week periods ended December 29, 2001, December 30, 2000 and January 1, 2000. +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 utilizing the Company's trademarks and brand names is recognized as earned based on the completion of stated contractual terms. +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. +Inventories +Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for certain domestic inventories. Foreign, retail and other domestic inventories are valued using methods approximating cost under the first-in, first-out (FIFO) method. +Property, Plant and Equipment +Property, plant and equipment are stated on the basis of cost and include expenditures for new facilities, major renewals, betterments and software. Normal repairs and maintenance are expensed as incurred. +Depreciation of plant, equipment and software is computed using the straight-line method. The depreciable lives range from five to forty years for buildings and improvements, from three to ten years for machinery and equipment, and from three to ten years for 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 and is amortized using the straight-line method over periods ranging up to fifteen years. Other intangibles consist primarily of trademarks, brand names and patents that are being amortized using the straight-line method over periods ranging from four to fifteen years. The Company reviews the carrying amounts of goodwill and other intangible assets annually to determine if such assets may be impaired. If the carrying amounts of these assets are not recoverable based upon an undiscounted cash flow analysis, such assets are reduced by the estimated shortfall of fair value to recorded value. +5 +Wolverine World Wide, Inc. +Notes to Consolidated Financial Statements (Cont.) +In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets , effective for the Company in fiscal 2002. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to impairment tests at least annually in accordance with SFAS No. 142. Other intangible assets will continue to be amortized over their contractual lives. +The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of SFAS No. 142 is expected to result in an increase in net earnings of approximately $800,000 ($0.02 per share) per year. The Company has performed the first of the required impairment tests of goodwill as of the first day of fiscal 2002 and has determined that the effect of these tests on the earnings and financial position of the Company will not be significant in 2002. +Assets Held for Exchange +Assets held for exchange represent barter credits that were acquired in exchange for inventories in December 1997. Such credits are redeemable through December 31, 2005 for a percentage of supplies purchased from certain vendors. The Company evaluates the recoverability of such assets on a quarterly basis and expects to utilize all available credits prior to their expiration. +Impairment or Disposal of Long-Lived Assets +In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of , and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations, for the disposal of a segment of a business. SFAS No. 144 is effective for the Company in fiscal 2002. The Company will adopt SFAS No. 144 as of December 30, 2001 and does not expect that the adoption of this statement will have a significant impact on the Company's financial position or results of operations. +Advertising Costs +Advertising costs are expensed as incurred and totaled $29,757,000 in 2001, $27,514,000 in 2000 and $21,889,000 in 1999. +The Company provides sales incentives to retail customers in the form of a cooperative advertising program. Under this program, customers are reimbursed for Company approved advertising-related expenditure. Cooperative advertising dollars are expensed by the Company as earned by customers. +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. Deferred income tax expense (credit) is measured by the net change in deferred income tax assets and liabilities during the year. +Earnings Per Share +Basic earnings per share is computed based on weighted average shares of common stock outstanding during each year after adjustment for nonvested common stock issued under stock incentive plans. Diluted earnings per share assumes the exercise of dilutive stock options and the vesting of all common stock under restricted stock programs. +6 +Wolverine World Wide, Inc. +Notes to Consolidated Financial Statements (Cont.) +The following table sets forth the reconciliation of weighted average shares used in the computation of basic and diluted earnings per share: +2001 +2000 +1999 +Weighted average shares outstanding during the year +41,571,272 +41,517,846 +41,146,525 +Adjustment for nonvested common stock +(832,991 +) +(911,412 +) +(843,849 +) +Denominator for basic earnings per share +40,738,281 +40,606,434 +40,302,676 +Effect of dilutive stock options +877,608 +277,316 +339,909 +Adjustment for nonvested common stock +832,991 +911,412 +843,849 +Denominator for diluted earnings per share +42,448,880 +41,795,162 +41,486,434 +Options to purchase 712,187 shares of common stock in 2001, 2,313,464 shares in 2000, and 1,651,494 shares in 1999 have not been included in the denominator for the computation of diluted earnings per share because related exercise prices were greater than the average market price for the period and, therefore, were antidilutive. +Financial Instruments and Risk Management +The Company's financial instruments consist of cash and cash equivalents, accounts and notes receivable, accounts and notes payable and long-term debt. The Company's estimate of the fair values of these financial instruments approximates their carrying amounts at December 29, 2001, December 30, 2000 and January 1, 2000. Fair value was determined using discounted cash flow analyses and current interest rates for similar instruments. The Company does not hold or issue financial instruments for trading purposes. +In fiscal 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities as amended by FASB Statement No. 137 and 138. The Statements require that all derivative instruments be recorded on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The Company utilizes limited foreign currency forward exchange contracts to manage the volatility associated with foreign currency purchases in the normal course of business. At December 29, 2001, foreign exchange contracts with a notional value of $9,000,000 were outstanding to purchase various currencies (principally U.S. dollars) with maturities ranging up to 180 days. These contracts were not designated as accounting hedges. The adoption of SFAS No. 133 did not have a material effect on the Company's 2001 net earnings or financial position. +The Company does not require collateral or other security on trade accounts receivable. +The earnings associated with the Company's investment in its foreign subsidiaries are considered to be permanently invested. Accordingly, no provision for income taxes has been provided. +Comprehensive Income +Comprehensive income represents net earnings and any revenues, 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. +Reclassifications +Certain amounts previously reported in 2000 and 1999 have been reclassified to conform with the presentation used in 2001. +2. Inventories +Inventories of $119,092,000 at December 29, 2001 and $110,986,000 at December 30, 2000 have been valued using the LIFO method. If the FIFO method had been used, inventories would have been $9,633,000 and $11,743,000 higher than reported at December 29, 2001 and December 30, 2000, respectively. +7 +Wolverine World Wide, Inc. +Notes to Consolidated Financial Statements (Cont.) +3. Debt +Long-term debt consists of the following obligations: +2001 +2000 +(Thousands of Dollars) +6.5% senior notes payable +$ +75,000 +$ +75,000 +7.81% senior notes payable to insurance companies +12,857 +17,143 +Revolving credit obligations +2,903 +-- +Other +88 +51 +90,848 +92,194 +Less current maturities +15,030 +4,316 +$ +75,818 +$ +87,878 +The 6.5% unsecured senior notes payable require payments of interest only through December 8, 2002, at which time annual principal payments of $10,714,000 become due through the maturity date of December 8, 2008. In connection with the issuance of these senior notes, the Company entered into an interest rate lock agreement with a bank that was settled in 1998 and resulted in a prepayment of $2,200,000. This prepayment is being amortized over the term of the notes using the effective interest method. +The 7.81% unsecured senior notes payable to insurance companies require equal annual principal payments of $4,285,000 through 2003, with the balance due on August 15, 2004. +The Company has an unsecured revolving credit agreement that allows for borrowings up to $150,000,000 ($182,126,000 in 2000), of which $10,000,000 ($6,670,000 in 2000) pertains to the Company's Canadian subsidiary. Of the remaining $140,000,000 facility available to the U.S. operations, $35,000,000 ($10,456,000 in 2000) may be utilized by the United Kingdom subsidiaries. This agreement requires that interest be paid at a variable rate based on LIBOR and expires in May 2006. +The Company had commercial letters-of-credit outstanding and other related commitments of $30,751,000 and $24,354,000 at December 29, 2001 and December 30, 2000, respectively. +The long-term loan agreements contain restrictive covenants which, among other things, require the Company to maintain certain financial ratios and minimum levels of tangible net worth. At December 29, 2001, unrestricted retained earnings were $66,055,000. The agreements also impose restrictions on securing additional debt, sale and merger transactions and the disposition of significant assets. +Principal maturities of long-term debt during the four years subsequent to 2002 are as follows: 2003--$15,020,000; 2004--$15,015,000; 2005--$10,728,000; 2006 ¾ +$13,627,000. +Interest costs of $427,000 in 2001, $286,000 in 2000 and $563,000 in 1999 were capitalized in connection with various capital improvement and computer hardware and software installation projects. +4. Leases +The Company leases machinery, transportation equipment and certain warehouse and retail store space under operating lease agreements that expire at various dates through 2012. At December 29, 2001, minimum rental payments due under all noncancelable leases are as follows: 2002-- +$7,896,000; 2003--$6,545,000; 2004--$5,543,000; 2005--$4,514,000; 2006--$3,784,000; thereafter--$11,152,000. +Rental expense under all operating leases consisted primarily of minimum rentals and totaled $10,105,000 in 2001, $10,845,000 in 2000 and $10,249,000 in 1999. +8 +Wolverine World Wide, Inc. +Notes to Consolidated Financial Statements (Cont.) +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. One right is associated with each share of common stock currently outstanding. The rights trade with the common stock and become exercisable only upon the occurrence of certain triggering events. Each right, when exercisable, will entitle the holder to purchase one one-hundredth of a share of Series B junior participating preferred stock for $120. The Company has designated 500,000 shares of preferred stock as Series B junior participating preferred stock for possible future issuance under the Company's 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. +In the event that 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 a 15% stockholder or the activities of an adverse person (as defined). The Company may redeem the rights for $.01 each at any time prior to a person being designated as an adverse person or fifteen days after a triggering event. Unless redeemed earlier, all rights expire on May 7, 2007. The Board of Directors can elect to exclude certain transactions from triggering the exercise of preferred stock rights and other actions under the plan. +The Company has stock incentive plans under which options to purchase shares of common stock may be granted to officers, other key employees and nonemployee directors. Options granted are exercisable over ten years and vest over various periods. All unexercised options are available for future grant upon their cancellation. +A summary of the transactions under the stock option plans is as follows: +Shares Under +Options +Weighted-Average +Option Price +Outstanding at January 2, 1999 +2,398,451 +$ +14.82 +Granted +967,592 +9.94 +Exercised +(264,334 +) +10.33 +Cancelled +(60,708 +) +13.62 +Outstanding at January 1, 2000 +3,041,001 +13.95 +Granted +857,709 +11.05 +Exercised +(78,394 +) +11.80 +Cancelled +(69,651 +) +13.32 +Outstanding at December 30, 2000 +3,750,665 +13.49 +Granted +900,229 +15.47 +Exercised +(643,035 +) +10.26 +Cancelled +(26,595 +) +16.68 +Outstanding at December 29, 2001 +3,981,264 +$ +14.48 +Shares available for grant under the stock option plans were 2,036,327 at December 29, 2001, 825,884 at December 30, 2000 and 1,894,747 at January 1, 2000. +The weighted-average fair value for the options granted was $6.57 in 2001, $4.84 in 2000 and $4.13 in 1999. +9 +Wolverine World Wide, Inc. +Notes to Consolidate Financial Statements (Cont.) +The exercise prices of options outstanding at December 29, 2001 range from $1.98 to $30.56. A summary of stock options outstanding at December 29, 2001 by range of option price is as follows: +Weighted-Average +Number of Options +Option Price +Remaining +Contractual Life +Outstanding +Exercisable +Outstanding +Exercisable +Less than $10 +836,248 +679,751 +$ +8.59 +$ +8.35 +5.3 years +$10 to $20 +2,534,834 +1,785,913 +13.63 +13.73 +7.3 years +Greater than $20 +610,182 +610,182 +25.74 +25.74 +5.0 years +3,981,264 +3,075,846 +$ +14.40 +$ +14.90 +6.5 years +The number of options exercisable at December 30, 2000 and January 1, 2000 totaled 2,711,858 and 2,066,411, respectively. +The Company has elected to follow Accounting Principles Board (APB) Opinion No. 25 , Accounting for Stock Issued to Employees , and related interpretations, in accounting for its stock incentive plans because the alternative fair value accounting provided under SFAS No.123, Accounting for Stock-Based Compensation , requires the use of option valuation models that were not specifically developed for valuing the types of stock incentive plans maintained by the Company. Under APB Opinion No. 25, compensation expense is recognized when the market price of the underlying stock award on the date of grant exceeds any related exercise price. +Pro forma information regarding net earnings and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its stock awards using the fair value method. The fair value of these awards was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 4.6% (6.1% in 2000 and 5.3% in 1999); dividend yield of 1.0% (0.5% in 2000 and 1999); expected market price volatility factor of 0.515 (0.495 in 2000 and 0.47 in 1999); and an expected option life of four years. +The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting provisions and are fully transferable. In addition, the model requires input of highly subjective assumptions. Because the Company's stock options have characteristics significantly different from traded options and the input assumptions can materially affect the estimate of fair value, management believes that the Black-Scholes option model does not necessarily provide a reliable measure of the fair value of the Company's stock options. +For purposes of pro forma disclosures, the estimated fair values of stock options are amortized to expense over the related vesting periods. The Company's pro forma information under SFAS No. 123 is as follows: +2001 +2000 +1999 +(Thousands of Dollars, Except Per Share Data) +Pro forma net earnings +$ +40,148 +$ +6,459 +$ +28,750 +Pro forma net earnings per share: +Basic +$ +.99 +$ +.16 +$ +.71 +Diluted +.96 +.16 +.70 +10 +Wolverine World Wide, Inc. +Notes to Consolidated Financial Statements (Cont.) +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), and a requirement to forfeit the award upon termination of employment. These restrictions lapse over a three- to five-year period from the date of the award. Shares aggregating 154,250 in 2001, 286,890 in 2000 and 340,665 in 1999 were awarded under these plans. The weighted-average grant date fair value was $15.11 in 2001, $10.95 in 2000 and $10.02 in 1999 for the shares awarded. Rights to awards were cancelled for 10,288 shares in 2001 and 11,956 shares in 1999 (there were no rights to awards cancelled in 2000). The market value of the shares awarded is recognized as unearned compensation in the consolidated statements of stockholders' equity and is amortized to operations over the vesting period. +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), while the other plans provide benefits at a fixed rate per year of service. The Company intends to annually contribute amounts deemed necessary to maintain the plans on a sound actuarial basis. +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). Under the SERP, the employees are eligible for reduced benefits upon early retirement. 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 $20,062,000 at December 29, 2001 and $18,124,000 at December 30, 2000 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 employees that provides for Company contributions based on earnings. This plan is combined with the principal defined benefit pension plan for funding purposes. Contributions to the money accumulation plan were $1,400,000 in 2001, $1,570,000 in 2000 and $1,500,000 in 1999. +The following summarizes the status of and changes in the Company's pension assets and related obligations for its defined benefit pension plans: +September 30 +2001 +2000 +(Thousands of Dollars) +Pension assets at fair value, including assets for underfunded plans of +$6,965 in 2001 and $491 in 2000 +$ +114,392 +$ +134,815 +Projected benefit obligation on services rendered to date for funded +defined benefit plans, including underfunded plan amounts of +$8,787 in 2001 and $853 in 2000 +(105,315 +) +(94,300 +) +Net pension assets of funded defined benefit plans +9,077 +40,515 +Nonqualified trust assets (cash surrender value of life insurance) recorded +in other assets and intended to satisfy the projected benefit obligation of +unfunded supplemental employee retirement plans +13,715 +11,988 +Projected benefit obligation on services rendered to date for unfunded +supplemental employee retirement plans +(14,022 +) +(10,530 +) +Net assets (liabilities) for nonqualified supplemental employee retirement plans +(307 +) +1,458 +Net pension and nonqualified trust assets +$ +8,770 +$ +41,973 +11 +Wolverine World Wide, Inc. +Notes to Consolidated Financial Statements (Cont.) +September 30 +2001 +2000 +(Thousands of Dollars) +Components of net pension assets: +Prepaid pension costs +$ +33,567 +$ +29,205 +Accrued pension liability +(15,428 +) +(10,351 +) +Intangible asset +3,075 +600 +Accumulated other comprehensive income +1,737 +-- +Net amounts recognized in balance sheets +22,951 +19,454 +Unrecognized amounts, net of amortization: +Transition assets +27 +53 +Prior service costs +(5,619 +) +(5,667 +) +Net experience gains (losses) +(22,304 +) +16,145 +Nonqualified trust assets +13,715 +11,988 +Net pension and nonqualified trust assets +$ +8,770 +$ +41,973 +Change in fair value of pension assets: +Fair value of pension assets at beginning of the year +$ +134,815 +$ +120,110 +Actual net investment income (loss) +(13,895 +) +19,255 +Company contributions +1,145 +1,008 +Benefits paid to plan participants +(7,673 +) +(5,558 +) +Fair value of pension assets at end of the year +$ +114,392 +$ +134,815 +Change in projected benefit obligations: +Projected benefit obligations at beginning of the year +$ +104,830 +$ +98,490 +Service cost pertaining to benefits earned during the year +3,753 +4,459 +Interest cost on projected benefit obligations +8,457 +7,841 +Effect of changes in actuarial assumptions +885 +339 +Actuarial (gains) losses +8,911 +(3,275 +) +Curtailment gain +-- +(667 +) +Special termination benefits +174 +3,201 +Benefits paid to plan participants +(7,673 +) +(5,558 +) +Projected benefit obligations at end of the year +$ +119,337 +$ +104,830 +The following is a summary of net pension income (expense) recognized by the Company: +2001 +2000 +1999 +(Thousands of Dollars) +Service cost pertaining to benefits earned during the year +$ +(3,753 +) +$ +(4,459 +) +$ +(4,571 +) +Interest cost on projected benefit obligations +(8,457 +) +(7,841 +) +(7,186 +) +Expected return on pension assets +13,310 +12,526 +11,944 +Net amortization +1,427 +1,544 +3,078 +Curtailment gain +-- +667 +-- +Special termination benefits +(174 +) +(3,201 +) +-- +Net pension income (expense) +$ +2,353 +$ +(764 +) +$ +3,265 +Pension income for qualified retirement plans excluding the effect of special termination gains and expenses was $4,040,000 in 2001, $4,349,000 in 2000 and $6,243,000 in 1999. +In connection with the realignment of its manufacturing operations in 2000 described in Note 11, certain of the Company's pension plans were amended to provide early retirement benefits. Special termination benefit costs of $174,000 and $3,201,000 in 2001 and 2000, respectively, and a curtailment gain of $667,000 in 2000 were recorded as a result of these changes in scheduled benefits. +The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.55% and 4.5%, respectively, in 2001 and 8.1% and 4.5%, respectively, in 2000. The expected long-term return on plan assets was 10% in each year. +12 +Wolverine World Wide, Inc. +Notes to Consolidated Financial Statements (Cont.) +Plan assets were invested in listed equity securities (71%), fixed income funds (20%) and short-term and other investments (9%). Equity securities include 688,512 shares of the Company's common stock with a fair value of $9,254,000 at September 30, 2001. Dividends paid per share of the Company's common stock were $.16 in 2001, $.14 in 2000 and $.12 in 1999. +7. Income Taxes +The provisions for income taxes consist of the following: +2001 +2000 +1999 +(Thousands of Dollars) +Currently payable: +Federal +$ +17,147 +$ +7,463 +$ +5,645 +State and foreign +991 +930 +1,924 +Deferred (credit) +5,169 +(4,068 +) +9,597 +$ +23,307 +$ +4,325 +$ +17,166 +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: +2001 +2000 +1999 +(Thousands of Dollars) +Income taxes at statutory rate +$ +23,991 +$ +5,255 +$ +17,341 +State income taxes, net of federal income tax reduction +460 +(20 +) +667 +Nontaxable earnings of foreign affiliates +(1,518 +) +(1,916 +) +(1,729 +) +Foreign earnings (losses) taxed at rates differing from +the U.S. statutory rate +(84 +) +163 +220 +Other +458 +843 +667 +$ +23,307 +$ +4,325 +$ +17,166 +Significant components of the Company's deferred income tax assets and liabilities as of the end of 2001 and 2000 are as follows: +2001 +2000 +(Thousands of Dollars) +Deferred income tax assets: +Accounts receivable and inventory valuation allowances +$ +1,712 +$ +991 +Deferred compensation accruals +1,597 +2,590 +Other amounts not deductible until paid +4,446 +5,120 +Total deferred income tax assets +7,755 +8,701 +Deferred income tax liabilities: +Tax over book depreciation +(8,940 +) +(6,867 +) +Prepaid pension costs +(7,882 +) +(6,170 +) +Unremitted earnings of Puerto Rican subsidiary +(792 +) +(918 +) +Other +(118 +) +(145 +) +Total deferred income tax liabilities +(17,732 +) +(14,100 +) +Net deferred income tax liabilities +$ +(9,977 +) +$ +(5,399 +) +13 +Wolverine World Wide, Inc. +Notes to Consolidated Financial Statements (Cont.) +The Company has provided for all taxes that would be payable if accumulated earnings of its Puerto Rican subsidiary were distributed. Similar taxes on the unremitted earnings of the Company's foreign affiliates have not been provided as such earnings are considered permanently invested. The additional taxes that would be payable if unremitted earnings of its foreign affiliates were distributed approximated $11,338,000 at December 29, 2001 and $9,909,000 at December 30, 2000. +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 cost between responsible parties and concurrence by regulatory authorities and have not yet advanced to a stage where the Company's liability is fixed. However, after taking into consideration legal counsel's evaluation of all actions and claims against the Company, management is currently of the opinion that their outcome will not have a significant effect on the Company's consolidated financial position or future results of operations. +9. Business Segments +The Company has one reportable segment that is engaged in the manufacture and marketing of branded footwear, including casual shoes, slippers, moccasins, dress shoes, boots, uniform shoes, work shoes and performance outdoor footwear, to the retail sector. Revenues of this segment are derived from the sale of branded footwear products to external customers and the Company's retail division as well as royalty income from the licensing of the Company's trademarks and brand names to licensees and distributors. The business units comprising the branded footwear segment manufacture or source, market and distribute products in a similar manner. Branded footwear is distributed through wholesale channels and under licensing and distributor arrangements. +The other business units in the following tables consist of the Company's retail, apparel and accessory licensing, tannery and pigskin procurement operations. The Company operated 64 domestic retail stores at December 29, 2001 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. 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. +14 +Wolverine World Wide, Inc. +Notes to Consolidated Financial Statements (Cont.) +Business segment information is as follows: +Branded +Footwear +Other +Businesses +Corporate +Consolidated +2001 +(Thousands of Dollars) +Net sales and other operating income +from external customers +$ +644,793 +$ +75,273 +$ +-- +$ +720,066 +Intersegment sales +19,599 +4,632 +-- +24,231 +Interest expense (net) +11,939 +1,273 +(6,470 +) +6,742 +Depreciation expense +5,445 +2,295 +8,251 +15,991 +Earnings (loss) before income taxes +68,086 +5,887 +(5,426 +) +68,547 +Assets +355,045 +45,165 +143,468 +543,678 +Additions to property, plant and equipment +2,001 +3,553 +5,744 +11,298 +2000 +Net sales and other operating income +from external customers +$ +622,829 +$ +78,462 +$ +-- +$ +701,291 +Intersegment sales +17,617 +5,503 +-- +23,120 +Interest expense (net) +13,561 +1,296 +(4,948 +) +9,909 +Depreciation expense +7,106 +2,141 +7,248 +16,495 +Nonrecurring charges +45,050 +-- +-- +45,050 +Earnings (loss) before income taxes +9,918 +7,555 +(2,458 +) +15,015 +Assets +346,235 +37,546 +110,787 +494,568 +Additions to property, plant and equipment +3,156 +5,062 +3,760 +11,978 +1999 +Net sales and other operating income +from external customers +$ +590,906 +$ +74,670 +$ +-- +$ +665,576 +Intersegment sales +16,567 +5,563 +-- +22,130 +Interest expense (net) +13,736 +1,539 +(4,929 +) +10,346 +Depreciation expense +7,524 +1,459 +4,780 +13,763 +Nonrecurring charges +14,000 +-- +-- +14,000 +Earnings (loss) before income taxes +39,423 +11,210 +(1,087 +) +49,546 +Assets +391,447 +34,038 +108,910 +534,395 +Additions to property, plant and equipment +4,967 +1,684 +12,796 +19,447 +Geographic information, based on shipping destination, related to net sales and other operating income included in the consolidated statements of operations is as follows: +2001 +2000 +1999 +(Thousands of Dollars) +United States +$ +617,711 +$ +598,115 +$ +564,374 +Foreign countries: +Europe +50,115 +54,555 +60,274 +Canada +34,221 +30,766 +25,698 +Central and South America +7,764 +7,852 +8,347 +Asia +6,356 +7,274 +5,029 +Middle East and Russia +3,899 +2,729 +1,854 +102,355 +103,176 +101,202 +$ +720,066 +$ +701,291 +$ +665,576 +15 +Wolverine World Wide, Inc. +Notes to Consolidated Financial Statements (Cont.) +The Company's long-lived assets (primarily intangible assets and property, plant and equipment) are as follows: +2001 +2000 +1999 +(Thousands of Dollars) +United States +$ +155,731 +$ +157,291 +$ +165,203 +Foreign countries +13,144 +12,191 +19,891 +The Company does not believe that it is dependent upon any single customer, since none accounts for more than 10% of consolidated net sales and other operating income. +No product groups, other than footwear, account for more than 10% of consolidated net sales and other operating income. Revenues derived from the sale and licensing of footwear accounted for over 90% of net sales and other operating income in 2001, 2000 and 1999. +Approximately 16% of the Company's employees are subject to bargaining unit contracts extending through various dates to 2004. +10. Quarterly Results of Operations (unaudited) +The Company generally reports its quarterly results of operations on the basis of 12-week periods for each of the first three quarters and a 16- or 17-week period for the fourth quarter. +The Company's unaudited quarterly results of operations are as follows: +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +2001 +(Thousands of Dollars, Except Per Share Data) +Net sales and other operating income +$ +158,223 +$ +151,699 +$ +186,175 +$ +223,969 +Gross margin +53,326 +55,269 +67,798 +80,643 +Net earnings +5,980 +8,858 +14,364 +16,038 +Net earnings per share: +Basic +$ +.15 +$ +.22 +$ +.35 +$ +.39 +Diluted +.14 +.21 +.34 +.38 +2000 +Net sales and other operating income +$ +147,370 +$ +140,558 +$ +175,529 +$ +237,834 +Gross margin +48,893 +48,198 +47,033 +79,849 +Net earnings (loss) +4,795 +7,595 +(15,480 +) +13,780 +Net earnings (loss) per share: +Basic +$ +.12 +$ +.19 +$ +(.38 +) +$ +.33 +Diluted +.12 +.18 +(.37 +) +.33 +As discussed in Note 11, the third and fourth quarters of 2000 were adversely affected by realignment and other nonrecurring charges totaling $0.71 per share. +Adjustments in the fourth quarter primarily relating to inventories resulted in an increase in net earnings of $1,435,000 ($0.03 per share) in 2001 and a decrease of $685,000 ($0.02 per share) in 2000. +16 +Wolverine World Wide, Inc. +Notes to Consolidated Financial Statements (Cont.) +11. Nonrecurring Charges +On July 12, 2000, the Company announced a strategic realignment of its global sourcing and manufacturing operations. In connection with this realignment, the Company decided to close five of its manufacturing facilities in New York, Missouri, Canada, Puerto Rico and Costa Rica, eliminate certain footwear product offerings and related raw material inventories, reduce administrative support services and incur other nonrecurring expenses. Workforce reductions totaling 1,391 employees occurred in the areas of manufacturing (1,272), general management (28) and administrative support (91). The realignment activities were primarily completed in the third and fourth quarters of 2000 and the first half of 2001. Remaining liabilities associated with the sourcing realignment primarily include pension benefits for certain terminated employees of $2,634,000 to be paid during their retirement and lease termination costs of $111,000 that are payable through 2004. +The following table summarizes the sourcing realignment, impairment and other nonrecurring pre-tax charges recorded in the consolidated statement of operations in 2000 (thousands of dollars): +Sourcing realignment charges: +Severance and related costs +$11,723 +Inventories +12,141 +Other exit costs +4,263 +28,127 +Impairment charges: +Property, plant and equipment +8,126 +Goodwill +1,077 +9,203 +Other nonrecurring charges +7,720 +$45,050 +Severance and related costs associated with the sourcing realignment included involuntary and voluntary employee termination expenses. Inventory charges represented the write-down to net realizable value of raw materials that are no longer used in production and certain finished footwear products that were discontinued as part of the realignment plan. Other exit costs primarily represented expenses required under contractual arrangements that have or are expected to be incurred prior to their estimated disposal dates. +Impairment charges consisted of write-downs of property, plant and equipment to their fair values less costs to sell, costs to close and reconfigure manufacturing facilities, and the write-off of goodwill previously recorded in connection with the purchase of the Company's Costa Rican operation. +Other nonrecurring charges pertained to one-time costs that were expensed as incurred and consisted primarily of the write-off of amounts for customer chargebacks and other deductions that the Company previously expected to collect, but will no longer pursue. +Within the consolidated statements of operations for 2000, cost of products sold, selling and administrative expenses and other expenses included $15,036,000, $29,589,000 and $425,000, respectively, for the sourcing realignment and other nonrecurring charges. These charges resulted in a $0.71 per share reduction of net earnings in 2000. +17 +The following table summarizes the activity and remaining liabilities associated with the sourcing realignment at December 29, 2001 and December 30, 2000, and for the fiscal years then ended (thousands of dollars): +Severance and +Related Costs +Inventories +Other Exit +Costs +Total +Amounts recognized as charges in the +consolidated statement of operations +$ +11,723 +$ +12,141 +$ +4,263 +$ +28,127 +Disposal of inventories +-- +(11,024 +) +-- +(11,024 +) +Payments +(5,720 +) +-- +(1,871 +) +(7,591 +) +Balance at December 30, 2000 +6,003 +1,117 +2,392 +9,512 +Changes in amounts recognized +680 +1,114 +15 +1,809 +Disposal of inventories +-- +(2,231 +) +-- +(2,231 +) +Payments +(4,049 +) +-- +(2,209 +) +(6,258 +) +Balance at December 29, 2001 +$ +2,634 +$ +-- +$ +198 +$ +2,832 +As a result of the significant deterioration in Russian economic and political conditions, the Company approved a plan in the second quarter of 1999 to close its Russian wholesale footwear business. In connection with the closure, the Company recorded a nonrecurring, pre-tax charge to earnings of $14,000,000, of which $6,900,000 was reflected as a write-down in cost of products sold for inventory, $6,600,000 was recognized in selling and administrative expenses for goodwill impairment, bad debt, severance, and other exit costs, and $500,000 was recorded in other expenses. The charge resulted in a reduction of net earnings of $0.23 per share. The closure was complete as of the end of 1999. +12. Business Acquisitions +On January 16, 2002, the Company announced the establishment of a new subsidiary to operate the CAT® footwear business in the European market. This new entity, Wolverine Europe Limited, purchased assets of the European CAT® footwear business consisting of accounts receivable, inventory and fixed assets totaling approximately $21,000,000 from Overland Group Limited of London, England and assumed liabilities of approximately $14,000,000. Cash and other consideration of $21,000,000, subject to certain post closing adjustments, was remittted for the acquisition, resulting in goodwill of approximately $14,000,000. The former owner of Overland Group Limited will be a minority stockholder in the new subsidiary. The markets served directly by Wolverine Europe Limited will include Austria, France, Germany, Ireland, The Netherlands and the United Kingdom. Wolverine Europe Limited will also coordinate and support other European markets served by independently-owned distributors. +In October 2001, the Company expanded its owned Merrell® operations in the United Kingdom to cover the additional countries of Austria, Belgium, France, Germany, Luxembourg, The Netherlands and Spain. A new subsidiary, Merrell Europe BV, was formed to direct the operations of these additional countries. Assets consisting primarily of inventory and fixed assets totaling $1,194,000 were acquired from certain former Merrell® distributors for cash and assumed liabilities of $1,858,000. Goodwill of $664,000 was recognized as of the purchase date. Consolidated proforma net sales and other operating income and net earnings in 2001 assuming the transaction occurred at the beginning of the year are not materially different from reported amounts. +18 +Report Of Independent Auditors +Board of Directors and Stockholders +Wolverine World Wide, Inc. +We have audited the accompanying consolidated balance sheets of Wolverine World Wide, Inc. and subsidiaries as of December 29, 2001 and December 30, 2000, 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 December 29, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. +We conducted our audits in accordance with auditing standards generally accepted in the 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 December 29, 2001 and December 30, 2000, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 29, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. +/s/ Ernst & Young LLP +Grand Rapids, Michigan +February 5, 2002 +19 +APPENDIX B +Schedule II +Schedule II - Valuation and Qualifying Accounts +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 December 29, 2001 +Deducted from asset accounts: +Allowance for doubtful accounts +$ +5,036,000 +$ +6,819,000 +$ +5,307,000 +(A) +$ +6,548,000 +Allowance for cash discounts +1,111,000 +8,028,000 +8,305,000 +(B) +834,000 +Inventory valuation allowances +6,233,000 +9,409,000 +10,014,000 +(C) +5,628,000 +$ +12,380,000 +$ +24,256,000 +$ +23,626,000 +$ +13,010,000 +Fiscal year ended December 30, 2000 +Deducted from asset accounts: +Allowance for doubtful accounts +$ +6,977,000 +$ +10,864,000 +$ +12,805,000 +(A) +$ +5,036,000 +Allowance for cash discounts +723,000 +6,711,000 +6,323,000 +(B) +1,111,000 +Inventory valuation allowances +8,351,000 +8,503,000 +10,621,000 +(C) +6,233,000 +$ +16,051,000 +$ +26,078,000 +$ +29,749,000 +$ +12,380,000 +Fiscal year ended January 1, 2000 +Deducted from asset accounts: +Allowance for doubtful accounts +$ +4,729,000 +$ +5,750,000 +$ +3,502,000 +(A) +$ +6,977,000 +Allowance for cash discounts +1,167,000 +6,529,000 +6,973,000 +(B) +723,000 +Inventory valuation allowances +9,257,000 +8,349,000 +9,255,000 +(C) +8,351,000 +$ +15,153,000 +$ +20,628,000 +$ +19,730,000 +$ +16,051,000 +(A) Accounts charged off, net of recoveries. +(B) Discounts given to customers. +(C) 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 +December 29, 2001 +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 June 14, 1997. Here incorporated by reference. +3.2 +Amended and Restated By-laws. Previously filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999. 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 +Note Purchase Agreement dated as of August 1, 1994, relating to 7.81% Senior Notes. Previously filed as Exhibit 4.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000. Here incorporated by reference. +4.6 +Note Purchase Agreement dated as of December 8, 1998, relating to 6.50% Senior Notes due on December 8, 2008. Previously filed as Exhibit 4.5 to the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999. Here incorporated by reference. +4.7 +The Registrant has several classes of long-term debt instruments outstanding in addition to that described in Exhibits 4.5, 4.6 and 4.8. 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. +4.8 +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. +10.1 +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. +10.2 +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 +1 +by reference. +10.3 +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. +10.4 +Employees Pension Plan (Restated as Amended Through December 13, 2001).* +10.5 +Employment Agreement dated April 27, 1998, between the Company and Geoffrey B. Bloom.* Previously filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999. Here incorporated by reference. +10.6 +1994 Directors' Stock Option Plan.* Previously filed as an exhibit to the Company's registration statement on Form S-8, filed on August 24, 1994, Registration No. 33-55213. Here incorporated by reference. +10.7 +Amended and Restated Stock Option Loan Program.* Previously filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000. Here incorporated by reference. +10.8 +Executive Severance Agreement.* Previously filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1998. Here incorporated by reference. An updated participant schedule is attached as Exhibit 10.8. +10.9 +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. Here incorporated by reference. An updated participant schedule is attached as Exhibit 10.9. +10.10 +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. +10.11 +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. +10.12 +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. +10.13 +Outside Directors' Deferred Compensation Plan.* +10.14 +1984 Executive Incentive Stock Purchase Plan, and amendment.* Previously filed as an exhibit to the Company's registration statement on Form S-8, filed August 6, 1984, Registration No. 2-92600. Here incorporated by reference. +10.15 +1997 Stock Incentive Plan.* +2 +10.16 +Executive Short-Term Incentive Plan (Annual Bonus Plan).* +10.17 +Executive Long-Term Incentive Plan (3-Year Bonus Plan).* +10.18 +Stock Incentive Plan of 1999.* Previously filed as Appendix A to the Company's Definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders held on April 23, 1999. Here incorporated by reference. +10.19 +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. +21 +Subsidiaries of Registrant. +23 +Consent of Ernst & Young LLP. +24 +Powers of Attorney. +____________________________ +*Management contract or compensatory plan or arrangement. +3 \ No newline at end of file diff --git a/raw/filings/0000110471/2001/0000905729-02-000051/filing_metadata.csv b/raw/filings/0000110471/2001/0000905729-02-000051/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..8aa856151a364914f20102281fb269e440042dd5 --- /dev/null +++ b/raw/filings/0000110471/2001/0000905729-02-000051/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000110471,WWW,WOLVERINE WORLD WIDE INC /DE/,10-K,2002-03-29,2001-12-29,2002-03-29T05:00:00.000Z,0000905729-02-000051,wwwform10k032702.htm,,1554622,0,0,https://www.sec.gov/Archives/edgar/data/110471/000090572902000051/wwwform10k032702.htm,https://www.sec.gov/Archives/edgar/data/110471/000090572902000051/,2001,2001,1 diff --git a/raw/filings/0000110471/2001/0000905729-02-000051/item1.txt b/raw/filings/0000110471/2001/0000905729-02-000051/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..0525a17a67e716cf8b2a71b1de7b0d4c8f15e909 --- /dev/null +++ b/raw/filings/0000110471/2001/0000905729-02-000051/item1.txt @@ -0,0 +1,85 @@ +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 1969 reorganization of a Michigan corporation of the same name, originally organized in 1906, which in turn was the successor of a footwear business established in Grand Rapids, Michigan in 1883. +Consumers around the world purchased more than 36 million pairs of Company branded footwear during fiscal 2001, making the Company a global leader among U.S. shoe companies in the marketing of branded casual, work and outdoor footwear. The Company's products generally feature contemporary styling with proprietary technologies designed to provide maximum comfort. The products are marketed throughout the world under widely recognized brand names, including Bates ®, CAT ®, Coleman ®, Harley-Davidson ®, Hush Puppies ®, HyTest ®, Merrell ®, Stanley® and Wolverine ®. The Company believes that its primary competitive strengths are its well-recognized brand names, broad range of comfortable footwear, patented and proprietary comfort technologies, numerous distribution channels and diversified manufacturing and sourcing base. +The Company's footwear is sold under a variety of brand names designed to appeal to most consumers of casual, work and outdoor footwear at numerous price points. The Company's footwear products are organized under three operating divisions: (i) the Wolverine Footwear Group, focusing on work, outdoor and lifestyle boots and shoes, (ii) the Performance Footwear Group, focusing on the CAT ® and Merrell ® product lines of performance and lifestyle footwear and (iii) the Casual Footwear Group, focusing on Hush Puppies ® brand comfortable casual shoes, slippers and moccasins under the Hush Puppies® brand and other private labels for third party retailers. 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 64 Company-owned retail stores and to 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 Company-owned tannery and is one of the premier tanners of quality pigskin leather for the shoe and leather goods industries. The pigskin leather tanned by the Company is used in a significant portion of the footwear manufactured and sold by the Company, and is also sold to Company licensees and other domestic and foreign manufacturers of shoes. In addition, Wolverine Procurement, Inc., a Company-owned subsidiary, both performs skinning operations and purchases raw pigskins which it then cures and sells to the Wolverine Leathers Division and to outside customers for processing into pigskin leather products. +For financial information regarding the Company, see the consolidated financial statements of the Company, which are attached as Appendix A to this Form 10-K. The Company has one reportable operating segment, Branded Footwear. The "Branded Footwear" segment is engaged in the manufacture and marketing of branded footwear, including casual shoes, slippers, moccasins, dress shoes, boots, uniform shoes, work shoes and performance outdoor footwear. The Company's "Other Businesses" category consists of the Company's retail stores, apparel and accessory licensing, tannery and pigskin +procurement operations. Financial information regarding the Company's operating segments and financial information about geographic areas can be found in Note 9 to the consolidated financial statements of the Company, which are attached as Appendix A to this Form 10-K. +Branded Footwear. +The Company sources and markets a broad range of footwear styles including shoes, boots and sandals under many recognizable brand names including Bates ®, CAT ®, Coleman ®, Harley-Davidson ®, Hush Puppies ®, HyTest ®, Merrell ®, Stanley® and Wolverine ®. The Company, through its wholly owned subsidiary, Wolverine Slipper Group, Inc., also sources constructed slippers and moccasins and markets them under the Hush Puppies ® and Turtle Fur ® trademarks and on a private label basis. The Company combines quality materials and skilled workmanship from around the world to produce footwear according to its specifications at both Company-owned and independent manufacturing facilities. +The Company's three branded footwear operating divisions are described below. +1. The Wolverine Footwear Group . The Wolverine Footwear Group encompasses multiple brands designed with performance and comfort features to serve a variety of work, outdoor and lifestyle functions. The Wolverine ® brand, which has been in existence for 119 years, is identified with performance and quality and markets work and outdoor footwear in two categories: (i) work and industrial footwear; and (ii) rugged outdoor and sport footwear. The Wolverine Footwear Group also includes the Bates ® and HyTest ® product lines. These products feature quality materials and components and patented technologies and designs, such as DuraShocks ®, DuraShocks SR ™, Wolverine Fusion ™ and Wolverine Durashocks Motion Control ™, and unique proprietary technologies such as the SEMC ® non-metallic composite safety toe and the new Wolverine Compressor ™ technology. The Wolverine Footwear Group also markets Harley-Davidson® footwear. Harley-Davidson® footwear styles include traditional motorcycle riding designs as well as contemporary fashion, military and western inspired footwear. The Wolverine Footwear Group also markets hiking and outdoor shoes, boots and sandals through the Coleman ® footgear line of products. In addition, the Wolverine Footwear Group markets Stanley® work boots and shoes. +Wolverine ® Work and Industrial Footwear . The Company believes the Wolverine ® brand has built its reputation by offering quality, durable and comfortable work boots and shoes. The development of DuraShocks ® technology allowed the Wolverine ® brand to introduce a broad line of work footwear with a focus on comfort. The Wolverine Fusion ™, Wolverine Durashocks Motion Control™, SEMC® composite safety toe and Compressor™ technologies continue the Company's tradition of comfortable work and industrial footwear. The Wolverine® work product line features work boots and shoes, including steel toe boots and shoes, targeting male and female industrial and farm workers. +-2- +Wolverine ® Rugged Outdoor and Sport Footwear . The Wolverine ® rugged outdoor and sport product lines incorporate DuraShocks ®, DuraShocks SR ™, Wolverine Fusion ™, Wolverine Durashocks Motion Control ™ and Compressor ™ technology and other comfort features into products designed for rugged outdoor and casual use. This broad product line targets active lifestyles and includes all-terrain sport boots, walking shoes, trail hikers, rugged casuals and outdoor sandals. The Company also produces boots that target hunters, fishermen and other active outdoor users. Warmth, waterproofing and comfort are achieved through the use of Gore-Tex ® and Thinsulate ® brand fabrics and the Company's performance leathers and patented DuraShocks ® technologies. +Bates ® Uniform Footwear . The Company's Bates Uniform Footwear Division is an industry leader in supplying footwear to military and civilian uniform users. The Bates Uniform Footwear Division utilizes DuraShocks ®, 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 other governmental organizations to supply military footwear. Civilian uniform uses include police, security, postal, restaurant and other industrial occupations. Bates Uniform Footwear Division products are also distributed through specialty retailers and catalogs. +HyTest ®. 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 safety features into its product lines, including steel toe, composite toe, 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 and the proprietary SEMC® composite toe 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. +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 approximately 650 +3 +independent Harley-Davidson ® dealerships as well as through department stores and specialty retailers. +Coleman ® Footgear . The Company has been granted the exclusive rights to manufacture, market, distribute and sell outdoor footwear under the Coleman ® brand in Europe, Asia and the Middle East. Coleman ® brand footwear products include lightweight hiking boots, outdoor sport boots, rubber footgear and outdoor sandals, which are sold primarily at value-oriented prices through specialty retailers and mass merchants. +Stanley ® Footgear . Pursuant to a license arrangement completed in 2000 with the Stanley Works, the Company has an exclusive license to manufacture, market, distribute and sell footwear under the Stanley® brand. The Stanley® Footgear line provides the Company with an entry into the value-price work footwear market. Stanley® Footgear is currently marketed in Payless ShoeSource, Inc. stores throughout the United States. +2. The Performance Footwear Group . The Performance Footwear Group began operating as a separate division of the Company in 1999. The Performance Footwear Group is comprised of two of the Company's performance-lifestyle brands, CAT ® and Merrell ®. +CAT ® Footwear . The Company has been granted the 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 boots for quality, ruggedness and durability. CAT ® brand footwear products include work boots and shoes, sport boots, rugged casuals and lifestyle footwear. 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. +Merrell ® Footwear . The Merrell ® product line consists primarily of technical hiking, rugged outdoor and outdoor inspired casual footwear designed for backpacking, day hiking and every day use. The Merrell ® product line also includes the "After-Sport" product line, 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. Merrell ® products are sold primarily through outdoor specialty retailers, department stores and catalogs. +4 +3. The Casual Footwear Group . The Casual Footwear Group consists of the Hush Puppies Company and the Wolverine Slipper Group, Inc. Each of these groups is described below. +The Hush Puppies Company . Over its 44-year heritage, the Hush Puppies ® brand has been a pioneer of comfortable casual shoes. The diverse product line includes numerous styles for both work and casual wear and utilizes comfort features, such as the Comfort Curve ® sole, Float Fx™ , patented Bounce ® technology and lightweight Zero-G ™ constructions. Hush Puppies ® shoes are sold to men, women and children in over 90 countries through department stores, catalogs, and independent retailers. +Wolverine Slipper Group, Inc. Through its wholly owned subsidiary, Wolverine Slipper Group, Inc., the Company is one of the leading suppliers of constructed slippers in the United States. The styling of Wolverine Slipper Group's footwear reflects consumer demand for the "rugged indoor" look by using natural leathers such as moosehide, shearling and suede in constructed slipper and indoor and outdoor moccasin designs. Wolverine Slipper Group, Inc., designs and manufactures constructed slippers, aftersport footwear and moccasins on a private label basis according to customer specifications. In addition to its traditional line of private label slippers, Wolverine Slipper Group, Inc. also manufactures and markets slipper products under the popular Hush Puppies ® and Turtle Fur ® brands and has developed a College Clogs™ program for the sale of licensed collegiate slipper products. +Other Businesses. +In addition to the manufacture and marketing of the Company's footwear products that are reported in the Branded Footwear segment, the Company also (i) operates a Company-owned pigskin tannery through its Wolverine Leathers Division, (ii) purchases and cures raw pigskins for sale to various customers through its wholly owned subsidiary Wolverine Procurement, Inc., (iii) operates 64 domestic retail footwear stores, and (iv) licenses the Company's brand names for use on non-footwear products. +1. The Wolverine Leathers Division . The Wolverine Leathers Division produces pigskin leathers primarily for use in the footwear industry . Wolverine Leathers ® brand products are 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, stain resistant and washable leathers are featured in many of the Company's domestic footwear lines and many products offered by the Company's international licensees and distributors. 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 then cures and sells to the Wolverine Leathers Division and to outside customers for processing into pigskin leather products. +5 +3. Retail Stores . The Company operated 64 domestic retail shoe stores as of February, 2002, under three formats, consisting of 61 factory outlet stores under the Hush Puppies and Family name, two mall-based stores called Up Footgear ™ and one Hush Puppies specialty store. The Company expects the scope of its retail operations to remain relatively consistent in the foreseeable future. Most of the Company's 61 factory outlet stores carry a large selection of first quality Company branded footwear at discounted retail prices. The Up Footgear ™ stores feature Company brands such as Wolverine ®, Merrell ®, Hush Puppies ®, CAT ® and Harley-Davidson ®. These stores also carry a selection of branded footwear from other manufacturers. The Hush Puppies ® specialty store is located in the Mall of America in Minneapolis, Minnesota and showcases Hush Puppies ® footwear. +4. Apparel and Accessory Licensing . The Company's Apparel and Accessory Licensing Division licenses the Company's brands for use on non-footwear products including apparel, eyewear, watches, socks, handbags and plush toys. Current licensing programs include Hush Puppies ® brand apparel, eyewear, watches and plush toys, and Wolverine ® brand apparel, gloves and watches. +Marketing. +The Company's overall marketing strategy is to develop brand-specific plans and related promotional materials for the United States market to foster a differentiated and 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. Domestic marketing campaigns target both the Company's retail accounts and consumers, and strive to increase overall brand awareness for the Company's branded products. The Company's advertisements typically emphasize fashion, comfort, quality, durability, functionality and other performance and lifestyle aspects of the Company's footwear. Components of the brand-specific plans include print, radio and television advertising, in-store point of purchase displays, promotional materials, and sales and technical assistance. +The Company's footwear brand groups provide its international licensees and distributors with creative direction and materials to convey consistent messages and brand images. Examples of marketing assistance provided by the Company to its licensees and distributors are (i) direction concerning the categories of footwear to be promoted, (ii) photography and layouts, (iii) broadcast advertising, including commercials and film footage, (iv) point of purchase presentation specifications, blueprints and packaging, (v) sales materials and (vi) consulting concerning retail store layout and design. The Company believes its footwear brand names provide a competitive advantage. In support of this belief, the Company makes significant 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 three primary distribution strategies. +• +Traditional wholesale distribution is used to service department stores (such as J.C. Penney, Sears and Nordstrom), large footwear chains (such as Walking Company and Famous Footwear), specialty retailers (such as Eastern Mountain Sports), catalog and independent retailers, and military outlets. A dedicated sales force and customer service team, advertising and point of purchase support, and in-stock inventories are used to service these accounts. +6 +• +Volume direct programs provide branded and private label footwear at competitive prices with limited marketing support. These programs service major retail, mail order, mass merchants and government customers. +• +A network of independent Shoemobile ® distribution outlets is used to distribute the Company's work and occupational footwear at industrial facilities. +In addition to its wholesale activities, the Company also operates domestic retail shoe stores as described above. The Company is developing various programs both independently and with its retail customers for the distribution of its products over the Internet and operates a direct to customer site at www.upfootgear.com . +A broad distribution base insulates the Company from dependence on any one customer . No customer of the Company accounted for more than 10% of the Company's net sales and other operating income in fiscal 2001. +Footwear sales are seasonal with significant increases in sales experienced during the fall hunting season, Christmas, Easter and back-to-school periods. Due to this seasonal nature of footwear sales, the Company experiences some fluctuation in its levels of working capital. The Company provides working capital for such fluctuations through internal financing and through a revolving credit agreement that the Company has in place. The Company expects the seasonal sales pattern to continue in future years. +International Operations and Global Licensing. +The Company records revenue from foreign sources through a combination of sales of branded footwear products generated from the Company's owned operations in Canada, the United Kingdom, France, Germany, and The Netherlands and from royalty income through a network of independent licensees and distributors. The Company's owned operations include Hush Puppies (UK) Ltd., Merrell (Europe) Limited, Hush Puppies Canada Footwear, Ltd., and the Merrell Canada division. In addition, in January 2002, the Company established a new subsidiary to manage the CAT® footwear brand in the European market. This new joint venture entity, Wolverine Europe Limited, purchased on-going operations and assets of the European CAT footwear business from Overland Group Limited of London, England. The markets served directly by Wolverine Europe will include Austria, France, Germany, The Netherlands, and the United Kingdom, and it will continue to coordinate and oversee support for other European markets served by independently-owned distributors. In October of 2001, the Company also expanded its owned Merrell operations in the United Kingdom to cover the additional countries of Austria, Belgium, France, Germany, Luxembourg, The Netherlands and Spain. A new subsidiary, Merrell Europe B.V. was formed to direct the operations of these additional countries. The Company's owned operations are located in markets where the Company believes it can gain a strategic advantage. +The Company derives royalty income from sales of Company footwear bearing the Hush Puppies ®, Wolverine ®, Bates ®, HyTest ®, Merrell ® and other trademarks by independent distributors and licensees. The Company also derives royalty income from sales of footwear bearing the CAT ®, Coleman ® and Harley-Davidson ® trademarks through foreign distributors. License and distribution arrangements enable the Company to develop international markets without the capital commitment required to maintain inventories or fund localized marketing programs. In fiscal 2001, the Company's +7 +wholly owned foreign operations, together with the Company's foreign licensees and distributors sold an estimated 18 million pairs of footwear, which is similar to the level of international sales in fiscal 2000. +The Company continues to develop a global network of licensees and distributors to market its footwear brands. The Company assists in designing products that are appropriate to each foreign market but are consistent with the global brand position. The licensees and distributors then purchase goods from either the Company or authorized third-party manufacturers pursuant to a distribution agreement or manufacture branded products consistent with Company standards pursuant to a license agreement. Distributors and licensees are responsible for independently marketing and distributing Company branded products in their respective territories, with product and market support provided by the Company. +Manufacturing and Sourcing. +The Company controls the sourcing and manufacture of approximately 75% 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 85% are purchased or sourced from third parties, with the remainder produced at Company-owned facilities. Footwear produced by the Company is manufactured at Company-owned facilities in several domestic and certain affiliated foreign facilities located in Michigan, Arkansas, the Dominican Republic and Mexico. For some of the Company-produced footwear, the Company has implemented a "twin plant" concept whereby a majority of the labor intensive cutting and fitting construction of the "upper" portion of shoes and boots is performed at the Company's facilities in the Dominican Republic and Mexico and the technology intensive construction, or "bottoming," is performed at the Company's domestic facilities. +The Company's factories each have the flexibility to produce a variety of footwear, and depart from the industry's historic practice of dedicating a given facility to production of specific footwear products. This flexibility allows the Company to quickly respond to changes in market preference and demand. The Company produces primarily slippers and work footwear in its domestic and international facilities, allowing the Company to respond to both market and customer-specific demand. In fiscal 2000, the Company announced its intention to close its facilities in Malone, New York; Kirksville, Missouri; Aguadilla, Puerto Rico; San Jose, Costa Rica; and Alexandria, Ontario, Canada. Consolidating operations into the remaining facilities allows the Company to take better advantage of sophisticated global sourcing alternatives. The Company significantly completed these closures in 2001 resulting in more flexible and efficient sourcing of Company products. +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 developed its "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. +The Company's domestic manufacturing operations allow the Company to (i) reduce its lead time, enabling it to quickly respond to market demand and reduce inventory risk, (ii) lower freight and shipping +8 +costs, and (iii) closely monitor product quality. The Company's foreign manufacturing strategy allows the Company to (i) benefit from lower labor costs, (ii) source the highest quality raw materials from around the world, and (iii) avoid additional capital expenditures necessary for factories and equipment. The Company believes that its overall global manufacturing strategy gives the Company maximum flexibility to properly balance the need for timely shipments, high quality products and competitive pricing. +The Company owns and operates 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 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 shearling and cowhide leather eliminates any reliance by the Company upon a sole supplier. The Company currently purchases the vast majority of the raw pigskins used in a significant portion of its tannery operations from 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 and loss of most favored nation trading status. With respect to international sourcing activities, management believes that over a period of time, it could arrange adequate alternative sources of supply for the products currently obtained from its foreign suppliers. A sustained disruption of such sources of supply could, particularly on a short-term basis, have an adverse impact on the Company's operations. +Trademarks, Licenses and Patents. +The Company holds a significant portfolio of registered and common law trademarks that identify its branded footwear products. The trademarks that are most widely used by the Company include Hush Puppies ®, Wolverine ®, Bates ®, Wolverine Fusion ™, DuraShocks ®, Hidden Tracks ®, Bounce ®, Comfort Curve ®, HyTest ®, Merrell ® and FootRests ®. The Company has obtained the right to manufacture, market and distribute footwear throughout most countries of the world under the CAT ® and Harley-Davidson ® trademarks; the right to manufacture, market and distribute footwear in the United States and other countries under the Stanley ® trademark; the right to manufacture, market and distribute slippers in the United States and certain other countries under the Turtle Fur ® trademark; and the right to manufacture, market and distribute footwear in Europe, Asia and the Middle East under the Coleman ® trademark ― all pursuant to license arrangements with the respective trademark owners. All of the Company's licenses are long term and extend for three or more years with renewal options with the exception of the Turtle Fur® license which expires in March 2004. Pigskin leather produced by the Company's Wolverine Leathers Division is sold under the trademarks Wolverine Leathers ®, Weather Tight ® and All Season Weather Leathers ™. +9 +The Company believes that its products are identified by consumers by its trademarks and that its trademarks are valuable assets. The Company is not aware of any infringing uses or any prior claims of ownership of its trademarks that could materially affect its current business. It is the policy of the Company to pursue registration of its primary marks whenever possible and to vigorously defend its trademarks against infringement or other threats to the greatest extent practicable under the laws of the United States and other countries. The Company also holds 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 23, 2002, the Company had a backlog of footwear orders of approximately $233 million compared with a backlog of approximately $195 million at March 24, 2001. Approximately half of the backlog increase is related to orders for products expected to be shipped in the third and fourth quarters of 2002 and can be affected by the timing of customer requests for shipment of the ordered products. While orders in backlog are subject to cancellation by customers, the Company has not experienced significant cancellation of orders in the past and the Company expects that substantially all of the orders will be shipped in fiscal 2002. The backlog at a particular time is affected by a number of factors, including seasonality, retail conditions, 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 eight major competitors in connection with the sale of its sport boots, and at least twenty 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 new and improved materials for use in its +10 +branded footwear and other products and in the development and adaptation of new production techniques. The Company's continuing relationship with the Biomechanics Evaluation Laboratory at Michigan State University, 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. +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, and in the past has used and generated, certain substances and wastes that are regulated or may be deemed hazardous under certain federal, state and local regulations with respect to the environment. The Company from time to time works with federal, state and local agencies to resolve cleanup issues at various waste sites or other regulatory issues. +Employees. +As of December 29, 2001, the Company had approximately 4,614 domestic and foreign production, office and sales employees. Approximately 753 employees were covered by four union contracts expiring at various dates through March 31, 2004. The Company has experienced no work stoppages since 1990. The Company presently considers its employee relations to be good. +11 \ No newline at end of file diff --git a/raw/filings/0000110471/2001/0000905729-02-000051/item13.txt b/raw/filings/0000110471/2001/0000905729-02-000051/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..c291705e851d160572bc9b881510be22d4e1d7c0 --- /dev/null +++ b/raw/filings/0000110471/2001/0000905729-02-000051/item13.txt @@ -0,0 +1,3 @@ +Item 13. Certain Relationships and Related Transactions . +The information regarding certain employee loans following the caption "Executive Compensation," under the subheading "Stock Options," and the information contained under the caption "Wolverine's Board of Directors" under the subheading "Compensation of Directors" and under the caption "Related Matters" under the subheading "Certain Relationships and Related Transactions" contained in the definitive Proxy Statement of the Company dated March 15, 2002, are incorporated herein by reference. +27 \ No newline at end of file diff --git a/raw/filings/0000110471/2001/0000905729-02-000051/item9a.txt b/raw/filings/0000110471/2001/0000905729-02-000051/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000110471/2001/0000905729-02-000051/rp_note.txt b/raw/filings/0000110471/2001/0000905729-02-000051/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000110471/2001/0000905729-02-000051/rpt_disclosure.txt b/raw/filings/0000110471/2001/0000905729-02-000051/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..2d4e56e38095ebfc934952d626e7f94525d7fa5d --- /dev/null +++ b/raw/filings/0000110471/2001/0000905729-02-000051/rpt_disclosure.txt @@ -0,0 +1,57 @@ +Certain Relationships and Related +Transactions +During 2001, Wolverine engaged J. Walter +Thompson, an international advertising firm, to perform public +relations and marketing services. Wolverine paid $258,543 in +fees and expenses to J. Walter Thompson. Ms. Joan +Parker, a director of Wolverine, is a Senior Partner with +J. Walter Thompson. Wolverine anticipates continuing its +relationship with J. Walter Thompson during the current +year. +Wolverine has entered into agreements with +Grimoldi, S.A., an Argentinean corporation of which +Mr. Alberto Grimoldi, a director of Wolverine, is a large +shareholder, granting to Grimoldi, S.A. the exclusive rights to +distribute and sell footwear products in Argentina under the +Hush Puppies® , Caterpillar® and +Merrell® trademarks. Wolverine and Grimoldi, S.A. +executed a similar agreement that grants rights with respect to +Brazil, which was subsequently terminated by mutual agreement in +fiscal 2001. Under these agreements, Grimoldi, S.A., or its +subsidiary, pays Wolverine royalties and certain sublicense fees +based on sales or purchases of footwear products in Argentina +and Brazil. +Under the agreements described above, Grimoldi, +S.A. was obligated to pay to Wolverine royalties, sublicense +fees and service fees in 2001 totaling $938,500. These +agreements were made under terms and conditions customary for +other international licensees and distributors, and all payments +due under these agreements were invoiced or paid in accordance +with Wolverine’s customary terms and practices. +In the ordinary course of their business, +Wolverine and its subsidiaries sell footwear for resale, +samples, components of footwear products (such as leather and +shoe soles), advertising materials and miscellaneous items to +licensees, distributors and customers. In 2001, purchases of +such items by Grimoldi, S.A. totaled $443,583 (including any +applicable sublicense fees for products containing licensed +proprietary technology). All of these purchases were made +pursuant to Wolverine’s customary trade terms and were +invoiced or paid in accordance with Wolverine’s customary +payment terms and schedules applicable to all licensees, +distributors and customers. +All of the transactions described above occurred +pursuant to continuing contractual arrangements +38 +Table of Contents +between Wolverine and Grimoldi, S.A. Wolverine +expects similar transactions to occur between Grimoldi, S.A. and +Wolverine and its subsidiaries during 2002. +Compensation Committee Interlocks and Insider +Participation +Wolverine’s Compensation Committee consists +of Donald V. Fites, Phillip D. Matthews, David P. +Mehney, Elizabeth A. Sanders, and Paul D. Schrage. +While Mr. Matthews was not at any time an employee of +Wolverine or its subsidiaries, he served as Chairman of the +Board of Wolverine from 1993 until 1996. \ No newline at end of file diff --git a/raw/filings/0000110471/2006/0000905729-07-000103/filing.txt b/raw/filings/0000110471/2006/0000905729-07-000103/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..ad254c3d9f0230e933e3e46774a4ce82b7745c83 --- /dev/null +++ b/raw/filings/0000110471/2006/0000905729-07-000103/filing.txt @@ -0,0 +1,3672 @@ +10-K +1 +www10k_022807.htm +WOLVERINE WORLD WIDE FORM 10-K +Wolverine World Wide Form 10-K - 02/28/07 +UNITED STATES +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 December 30, 2006 +[ ] +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: 001-6024 +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 +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +Yes +X +No +Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +Yes +No +X +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. X +Indicate by check mark whether the registrant is a large accelerated filer (as defined in Exchange Act Rule 12b-2), an accelerated filer (as defined in Exchange Act Rule 12b-2) or a non-accelerated filer. +Large accelerated filer +X +Accelerated filer +Non-accelerated filer +Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). +Yes +No +X +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 16, 2006, the last business day of the registrant's most recently completed second fiscal quarter: $1,252,095,162. +Number of shares outstanding of the registrant's Common Stock, $1 par value (excluding shares of treasury stock) as of February 21, 2007: 55,564,471. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the definitive proxy statement for the registrant's annual stockholders' meeting to be held April 19, 2006, 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 2007 operating results and dividend rates; future share repurchase activity; future strength of the Company; future brand positioning; achievement of the Company vision; future pension costs; future marketing investments; the introduction of new lines or categories of products, including Merrell ® Apparel and Patagonia ® Footwear; 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," variations 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; the cost and availability of inventories, services, labor and equipment furnished to the Company; the cost and availability of contract manufacturers; the cost and availability of raw materials, including leather and petroleum based materials; changes in planned consumer demand or at-once orders; customer order cancellations; the impact of competition and pricing by the Company's competitors; changes in government and regulatory policies; foreign currency fluctuation in valuations compared to the U.S. dollar; changes in monetary controls and valuations of the Chinese yuan renminbi and the relative value to the U.S. dollar; changes in duty structures in countries of import and export; the effect of anti-dumping measures in Europe that have been implemented by the European Commission with respect to leather footwear imported into the European Union from China and Vietnam at additional duty rates of 16.5% and 10.0%, respectively, from October 7, 2006 through October 6, 2008, for certain leather footwear; 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 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 Company's ability to adapt and compete in global apparel and accessory markets; customer acceptance of the Patagonia ® Footwear products; the ability to attract and retain qualified personnel; the ability to retain rights to brands licensed by the Company; loss 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; retail buying patterns; consolidation in the retail sector; and the acceptability of U.S. brands in international markets. Additionally, concerns 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 +2 +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, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Furthermore, the Company undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise. +PART I +Item 1. Business . +General. +Wolverine World Wide, Inc. (the "Company") is a leading designer, manufacturer and marketer of a broad line of quality casual shoes, rugged outdoor and work footwear. 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. +Approximately 46.9 million pairs of Company branded footwear were sold during fiscal 2006, 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 ®, Patagonia ®, Sebago ® and Wolverine ® footwear. The Company believes that its primary competitive strengths are its well-recognized brand names, broad range of comfortable footwear, patented and proprietary designs and comfort technologies, numerous distribution channels and diversified manufacturing and sourcing base. Cat ® is a registered trademark of Caterpillar Inc., Harley-Davidson ® is a registered trademark of H-D Michigan, Inc. and Patagonia ® is a registered trademark of Patagonia, Inc. +The Company's footwear is sold under a variety of brand names designed to appeal to most consumers of casual, work and outdoor footwear at numerous price points. The Company's footwear products are organized under four operating units: (i) the Wolverine Footwear Group, focusing primarily on the Bates ®, HyTest ® and Wolverine ® product lines of work, outdoor, uniform and lifestyle boots and shoes, and Wolverine ® brand apparel, (ii) the Outdoor Group, currently focusing on the Sebago ®, Patagonia ® and Merrell ® product lines of performance and lifestyle footwear, and, beginning with the anticipated product launch in 2007, Merrell ® brand apparel, (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, and (iv) The Hush Puppies Company, focusing on the Hush Puppies ® brand of comfortable casual and dress 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 82 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 which Wolverine distributes operate multiple storefront locations. The Company's products are marketed worldwide in more than 170 countries through Company-owned wholesale operations, licensees and distributors. +3 +The Company, through its Wolverine Leathers Division, operates a tannery which tans pigskin leather for the shoe and leather goods industries. A significant portion of the pigskin leather tanned by the Company is used in 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 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 and apparel, including casual shoes and apparel, dress shoes, boots, uniform shoes, work shoes and rugged outdoor footwear and apparel. 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 and sandals under many recognizable brand names including Bates ®, Cat ®, Harley-Davidson ®, Hush Puppies ®, HyTest ®, Merrell ®, Patagonia ®, Sebago ® 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, socks, handbags and plush toys, and Wolverine ® brand gloves, eyewear, socks and headwear. +The Company's four branded footwear and licensing operating units are described below. +1. The Outdoor Group . The Outdoor Group consists of Merrell ®, Sebago ®, and Patagonia ® 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 addition to footwear, the Outdoor Group markets a line of Merrell ® packs, bags and luggage. The Outdoor Group also intends to launch a line of Merrell ® brand apparel in fiscal 2007. Merrell ® products are sold primarily through outdoor specialty retailers, department stores and catalogs. Merrell ® footwear is marketed in approximately 100 countries worldwide. +Sebago® Footwear. The Sebago ® product line consists primarily of performance nautical and American-inspired casual footwear for men and women such as boat shoes and handsewn loafers that have been manufactured and distributed since 1946. +4 +Highly recognized Sebago ® line extensions include Sebago Docksides ®, Drysides™ , Campsides™ and Athletic Marine. The Sebago ® product line is marketed in approximately 110 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. +Patagonia® Footwear. In 2005, the Company entered into a license agreement providing the Company with exclusive worldwide rights to manufacture, market, distribute and sell footwear under the Patagonia®, Water Girl® and other trademarks. The Outdoor Group has launched its Patagonia® Footwear line for Spring 2007. +2. Wolverine Footwear Group . The Wolverine Footwear Group encompasses footwear primarily under the Wolverine ®, Bates ®, and HyTest ® 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 124 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 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 trail 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 ® (a registered trademark of W.L. Gore & Associates, Inc.) and Thinsulate ® (a registered trademark of Minnesota Mining and Manufacturing Company) brand fabrics, the Company's performance leathers and patented DuraShocks ® technologies. The Wolverine Footwear Group has also launched a line of work and rugged casual Wolverine ® brand apparel. In addition, the Wolverine ® brand is licensed for use on eyewear, headwear, gloves and socks. +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 +5 +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. +3. The Heritage Brands Group . The Heritage Brands Group consists of Caterpillar ® Footwear and Harley-Davidson ® Footwear. +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 approximately 150 countries worldwide. Cat ®, Caterpillar ®, Cat & Design ®, Walking Machines ® and Marine Power ® are registered trademarks of Caterpillar Inc. +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. Harley-Davidson ® is a registered trademark of H-D Michigan, Inc. +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 marketed in approximately 130 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, socks, watches and plush toys. +6 +Other Businesses. +In addition to manufacturing, sourcing, marketing and distributing the Company's footwear and apparel 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 82 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 82 domestic retail shoe stores as of February 2007. These stores are under the Hush Puppies ®, Hush Puppies and Family SM , Track'N Trail® and Rockford Footwear Depot SM names. Both the Rockford Footwear Depot SM and Track'N Trail® retail formats carry a large selection of Company branded footwear featuring such brands as Wolverine® , Merrell® , Hush Puppies® , Cat® , Patagonia®, Sebago® and Harley-Davidson® . The Company also operates direct-to-customer retail websites, including www.upfootgear.com , www.trackandtrail.com , www.catfootwear.com , www.hushpuppies.com and www.sebago.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 +7 +believes its footwear brand names provide a competitive advantage and the Company makes significant 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 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. Such contracts typically contain future purchase options that are not required to be exercised. +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 2006. +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 (i) sales of branded footwear products generated from the Company's owned operations in Canada, the United Kingdom, Austria, Finland, France, Germany, Italy, The Netherlands, Spain, Sweden and Switzerland and from sales to international distributors for certain markets and businesses, and (ii) from royalty income through a network of independent licensees and distributors. The Company's owned operations include Hush Puppies (UK) Ltd., Wolverine Europe B.V. (formerly known as Merrell Europe B.V.), Merrell (Europe) Limited, Wolverine Europe Limited and Wolverine World Wide Corporation, Inc. (formerly known as +8 +Hush Puppies Canada Footwear, Ltd.). 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 military footwear and work, casual and dress casual footwear in its owned facilities. +The Company sources a majority of its footwear from a variety of foreign manufacturing facilities in the Asia-Pacific region, South America and India. 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. +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, +9 +(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 the 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. The Company and its licensees receive a majority of their pigskin leather 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, tariffs and duties, 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 TM , Wolverine Compressor TM , Hidden Tracks ®, iTechnology TM , Bounce ®, Comfort Curve ®, HyTest ®, Merrell ®, Continuum ®, Sebago ®, Q-Form TM and Track'N Trail ®. Pigskin leather produced by the Company's Wolverine Leathers Division is sold under the trademarks Wolverine Leathers ®, Wolverine Warrior Leather ®, Weather Tight ® and All Season Weather Leathers ™. The Company has obtained license rights to manufacture, market and distribute footwear throughout the world under the Cat ®, Harley-Davidson ® and Patagonia ® 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 Company's license agreement for Stanley ® footgear will terminate effective June 30, 2008. The Cat ® footwear license has a current term extending through December 2011. The Harley-Davidson ® footwear license is long term and extends for more than five years. The Patagonia ® footwear license extends for more than five years and also includes conditional renewal options. All of these license agreements are subject to early termination provisions. +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 +10 +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 February 17, 2007, the Company had an order backlog of approximately $354 million compared with an order backlog of approximately $317 million at February 18, 2006, determined on a basis consistent with the current year. Substantially all of the backlog relates to demand for products expected to be shipped in 2007. 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 ability to control costs, 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 and sourcing efficiencies, 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 December 30, 2006, the Company had approximately 4,532 domestic and foreign production, office and sales employees. Approximately 457 employees were covered by four union contracts expiring at various dates through April 30, 2009. 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, www.wolverineworldwide.com. Printed copies of the documents listed above are available, without charge, by writing to the Company at 9341 Courtland Drive, N.E., Rockford, Michigan 49351, Attention: General Counsel. +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 1A. Risk Factors . +Impact of Consumer Spending Patterns. +The success of the Company's operations depends to a significant extent upon a number of factors affecting disposable consumer income, both domestic and foreign, including economic conditions and factors such as employment, business conditions, interest rates and taxation. In addition, consumer spending patterns may be affected by changes in the amount or severity of inclement weather, the acceptability of U.S. brands in international markets and the growth or decline of global footwear markets. The Company's business, results of operations and financial condition may be adversely affected by changes in consumer spending or economic conditions. +Competition and Changes in Consumer Preferences. +The Company competes with numerous other marketers of footwear, some of which are larger and have greater resources than the Company. Product performance and quality, including technological +12 +improvements, product identity, competitive pricing and the ability to adapt to style changes are all important elements of competition in the footwear industry. The footwear industry in general is subject to changes in consumer preferences with respect to the popularity of particular designs and categories of footwear. The Company strives to maintain and improve its competitive position through promotion of brand awareness, sourcing efficiencies, 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. If the Company is unable to respond effectively to competitive pressures and changes in consumer spending, the Company's business, results of operations and financial condition will be adversely affected. +Inventory Management. +The Company's ability to manage its inventories properly is an important factor in its operations. Inventory shortages can impede the Company's ability to meet at-once orders and can adversely affect the timing of shipments to customers and diminish brand loyalty. Conversely, excess inventories can result in increased interest costs as well as lower gross margins due to the necessity of lowering prices in order to liquidate excess inventories. If the Company is unable to effectively manage its inventory, its business, results of operations and financial condition will be adversely affected. +Dependence on Foreign Manufacturers. +The Company currently sources most of its footwear from third party manufacturers in foreign countries, predominantly China. As is common in the industry, the Company does not have long-term contracts with its foreign footwear manufacturers. The Company is a major customer of many of the third party manufacturers from which it sources products. There can be no assurance, however, that the Company will not experience difficulties with such manufacturers, including reduction in the availability of production capacity, failure to meet production deadlines or increases in manufacturing costs. The Company's future results will depend partly on its ability to maintain positive working relationships with its third party manufacturers. +Foreign manufacturing is subject to a number of risks, including work stoppages, transportation delays and interruptions, political instability, foreign currency fluctuations, changing economic conditions, expropriation, nationalization, the imposition of tariffs, import and export controls and other non-tariff barriers and changes in governmental policies. The possibility exists that trade relations with China and other countries where the Company sources its products will worsen or that China will shift its manufacturing capacity away from footwear to other industries. Any of these events could have an adverse effect on the Company's business, results of operations and financial condition. +Changes in monetary controls and valuations of the Chinese yuan renminbi and the currencies of other countries from which the Company sources, and their relative value to the U.S. Dollar could have an adverse effect on the Company's business, results of operations and financial condition. +The Company cannot predict whether additional United States or foreign customs quotas, duties, taxes or other changes or restrictions will be imposed upon the importation of non-domestically produced products in the future or what effect such actions could have on the Company's business, financial condition or results of operations. +13 +Suppliers and Service Providers. +The Company's ability to competitively price its products depends on the cost of footwear components, services, labor, equipment and raw materials, including leather and materials used in the production of outsoles. The cost of services and materials is subject to change based on the availability and market conditions that are difficult to predict. Conditions such as diseases affecting the availability of leather affect the cost of the footwear marketed by the Company. In addition, the Company's shipping costs are affected by fuel prices and numerous other factors such as the possibility of service interruptions at shipping and receiving ports. +The Company purchases pigskins for its tannery operations from a single domestic source pursuant to short-term contracts. Although this source has been a reliable and consistent supplier for over 30 years, there are no assurances that it will continue as a supplier. Failure of this source to continue to supply the Company with pigskin or to supply the Company with pigskin on less favorable terms could have a negative impact on the Company's business, results of operations and financial condition. +Customers. +The Company's financial success is directly related to the willingness of its customers to continue to purchase its products. The Company does not typically have long-term contracts with its customers. Sales to the Company's customers are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by the customers. Failure to fill customers' orders in a timely manner could harm the Company's relationships with its customers. Furthermore, if any of the Company's major customers experience a significant downturn in its business, or fails to remain committed to the Company's products or brands, then these customers may reduce or discontinue purchases from the Company, which could have an adverse effect on the Company's business, results of operations and financial condition. +The Company sells its products to wholesale customers and extends credit based on an evaluation of each customer's financial condition, usually without requiring collateral. The financial difficulties of a customer could cause the Company to stop doing business with that customer or reduce its business with that customer. The Company's inability to collect from its customers or a cessation or reduction of sales to certain customers because of credit concerns could have an adverse effect on the Company's business, results of operations and financial condition. +The recent trend toward consolidation in the retail industry could lead to customers seeking more favorable terms of purchase from the Company and could lead to a decrease in the number of stores that carry the Company's products. +The Company has been awarded a number of U.S. Department of Defense contracts that include future purchase options for Bates ® footwear. Failure to exercise these purchase options by the Department of Defense or the failure of the Company to secure future U.S. Department of Defense contracts could have an adverse effect on the Company's business, results of operations and financial condition. +The Company's products are sold in many international markets through independent licensees or distributors. Failure by the Company's licensees or distributors to meet planned annual sales goals could have an adverse effect on the Company's business, results of operations and financial condition, and it may be difficult and costly to locate an acceptable substitute distributor or licensee. If a change in distributors becomes necessary, the Company may experience increased costs, as well as substantial disruption and a resulting loss of sales and brand equity in that market. +14 +In addition, changes in the channels of distribution such as the growth of Internet commerce and the trend toward the sale of private label products by major retailers could have an adverse effect on the Company's business, results of operations and financial condition. +Implementation of Growth Strategy. +As part of its growth strategy, the Company seeks to enhance the positioning of its brands and to extend its brands into complementary product categories and consumer groups, to expand geographically, and to improve operational performance. There can be no assurance that we will be able to successfully implement any or all of these growth strategies, which could have an adverse effect on the Company's business, results of operations and financial condition. There is no assurance that the Patagonia® footwear launch and the Company's expected Merrell® brand expansion into apparel in Fall 2007 will be successful. The Company is investing substantial resources into these two product launches in 2007 and the failure of either or both could have an adverse effect on the Company's business, results of operations and financial condition. +Reputational Risks. +The Company requires its independent contract manufacturers, distributors, licensees and others with which it does business to comply with the Company's standards relating to working conditions and other matters. If a party with which the Company does business is found to have violated the Company's standards, the Company could receive negative publicity that could damage its reputation and negatively affect the value of its brands. +Information Technology. +The Company's technology systems are critical to the operations of its business. Any interruption, impairment or loss of data integrity or malfunction of these systems could severely impact the Company's business, including delays in product fulfillment and reduced efficiency in operations. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations. +Government/Regulation. +The Company's business is affected by changes in government and regulatory policies in the United States and on a global basis. Changes in interest rates, tax laws, duties, tariffs and quotas could have a negative impact on the Company's ability to produce and market footwear at competitive prices. +Global Political and Economic Uncertainty. +Concerns 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. The Company is subject to risks in doing business in developing countries and economically volatile areas. +15 +Currency. +Foreign currency fluctuation in valuations compared to the U.S. Dollar, changes in monetary controls and valuations, and the relative value to the U.S. dollar affect the Company's profitability. For a more detailed discussion of risk relating to foreign currency fluctuation, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk. +Protection of Intellectual Property; Continuation of Licensing Agreements. +The Company invests significant resources to develop and protect its intellectual property. The Company's ability to remain competitive is dependent upon its continued ability to secure and protect trademarks, patents and other intellectual property rights. In addition, some of the Company's branded footwear operations are operated pursuant to licensing agreements with third party trademark owners. These agreements are subject to early termination for breach. Early termination of any of these license agreements by the licensor could have a material adverse effect on the Company's business, results of operations and financial condition. +Integration of Newly Acquired Businesses. +The Company may make strategic acquisitions in the future and cannot assure that it will be able to successfully integrate the operations of newly-acquired businesses into the Company's current operations. The failure to integrate newly acquired businesses or the inability to make suitable strategic acquisitions in the future could have an adverse effect on the Company's business, results of operations and financial condition. +Litigation and Regulatory Proceedings. +The Company is a defendant from time to time in lawsuits and regulatory actions relating to its business. Due to the inherent uncertainties of litigation and regulatory proceedings, the Company cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have an adverse impact on the Company's business, financial condition and results of operations. In addition, regardless of the outcome of any litigation or regulatory proceedings, such proceedings are expensive and may require that the Company devote substantial resources and executive time to defend the Company. +Anti-Takeover Provisions. +Provisions of the Company's certificate of incorporation, bylaws, and the Company's Rights Plan, as well as provisions of Delaware law, could discourage, delay or prevent a merger, acquisition or other change in control of the Company. These provisions are intended to protect stockholders' interests by providing the Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a board of directors that is classified so that only one-third of directors stand for election each year, the authorization of "blank check" preferred stock, which the Company's Board of Directors could issue with provisions designed to prevent or delay a takeover attempt, and provisions of the Company's Rights Plan that make it more difficult to acquire the Company without negotiating with the Board of Directors. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. +16 +Attraction and Retention of Qualified Personnel. +The Company is dependent on the efforts and abilities of its senior executive officers. While the Company believes that its senior management team has significant depth and that appropriate senior management succession plans are in place; the loss of one or more members of senior executive management or the failure to successfully implement succession planning could have an adverse effect on the Company, its results of operations and financial condition. The Company's future success also depends on its ability to identify, attract and retain additional qualified personnel. While the Company has historically been successful in attracting and retaining key employees, competition for such employees in the footwear industry is intense and failure to retain or attract key employees could adversely impact the Company. +Item 1B. Unresolved Staff Comments . +None. +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 356,000 square feet and a leased warehouse in Howard City, Michigan, of approximately 460,000 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 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 and the positions presently held with the Company. The information provided below the table lists the business +17 +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 +Kenneth A. Grady +50 +General Counsel and Secretary +Stephen L. Gulis, Jr. +49 +Executive Vice President, Chief Financial +Officer and Treasurer +Cheryl L. Johnson +45 +Vice President, Human Resources +Blake W. Krueger +53 +Chief Operating Officer and President +Timothy J. O'Donovan +61 +Chief Executive Officer and Chairman +Nicholas P. Ottenwess +44 +Vice President of Finance and Corporate +Controller +Kenneth A. Grady has served the Company as General Counsel and Secretary since October 2006. During 2006, he was President and shareholder of the law firm K.A. Grady PC. During 2005, he served as Vice President, General Counsel and Secretary of PC Connection, Inc., a direct marketer of information technology products and solutions. From 2004 to 2005, Mr. Grady served as Executive Vice President of Administration, General Counsel and Secretary of KB Toys, Inc., a specialty toy retailer. From 2001 to 2004, he served as Vice President, General Counsel and Secretary of KB Toys, Inc. +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. +Cheryl L. Johnson has served the Company as Vice President of Human Resources since January 2006. From 2004 to 2006 she served as Human Resources Director for Whirlpool Corporation, a manufacturer and marketer of major home appliances. From 2002 to 2004 she served as Vice President of Global Human Resources, Fluid Handling Products Division for Textron, Inc., a manufacturer of centrifugal, axial flow, power, direct acting and gear pumps. During 2002 she served as Global Human Resources Director, Flooring Division, for E.I. du Pont de Nemours and Company, a chemical company, and from 1991 to 2002, she served as Global Human Resources Manager for that company. +Blake W. Krueger has served the Company as Chief Operating Officer and President since October 2005. From August 2004 to October 2005, he served as Executive Vice President and Secretary of the Company and President of the Heritage Brands Group. 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 Chairman of the Board since April 2005. From April 2000 to April 2005 he served as Chief Executive Officer and President. From 1996 to April 2000 he served as Chief Operating Officer and President. From 1982 to April 1996 he served as Executive Vice President. +18 +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. +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 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 2006 and 2005. The number of stockholders of record on February 21, 2007, was 1,388. +2006 +2005 +Stock Price +High +Low +High +Low +First quarter +$ +24.21 +$ +20.96 +$ +23.65 +$ +20.04 +Second quarter +25.18 +20.26 +25.70 +18.90 +Third quarter +26.46 +22.27 +25.02 +20.48 +Fourth quarter +30.20 +25.41 +22.95 +19.35 +Cash Dividends Declared Per Share +2006 +2005 +First quarter +$ +.075 +$ +.065 +Second quarter +.075 +.065 +Third quarter +.075 +.065 +Fourth quarter +.075 +.065 +A quarterly dividend of $0.09 per share was declared during the first quarter of fiscal 2007. +All prices and dividends are adjusted for the Company's three-for-two stock split distribution on February 1, 2005. +See Item 12 for information with respect to the Company's equity compensation plans. +19 +The following table relates information regarding the Company's purchases of its own common stock during the fourth quarter: +Issuer Purchases of Equity Securities +Period +Total +Number of +Shares +Purchased +Average +Price Paid +per Share +Total Number +of Shares +Purchased +as Part of +Publicly +Announced +Plans or +Programs +Maximum +Number +of Shares that +May Yet +Be Purchased +Under the Plans +or Programs +Period 1 (September 10, 2006 to October 7, 2006) +Common Stock Repurchase Program (1) +- +$ +- +- +1,492,682 +Employee Transactions (2) +7,218 +28.26 +N/A +N/A +Period 2 (October 8, 2006 to November 4, 2006) +Common Stock Repurchase Program (1) +114,300 +$ +27.49 +114,300 +1,378,382 +Employee Transactions (2) +3,237 +27.76 +N/A +N/A +Period 3 (November 5, 2006 to December 2, 2006) +Common Stock Repurchase Program (1) +186,500 +$ +- +186,500 +1,191,882 +Employee Transactions (2) +- +- +N/A +N/A +Period 4 (December 3, 2006 to December 30, 2006) +Common Stock Repurchase Program (1) +- +- +- +1,191,882 +Employee Transactions (2) +28,370 +$ +29.04 +N/A +N/A +Total for Fourth Quarter ended December 30, 2006 +Common Stock Repurchase Program (1) +300,800 +$ +27.57 +300,800 +1,191,882 +Employee Transactions (2) +38,825 +28.79 +N/A +N/A +(1) +The Company's Board of Directors approved common stock repurchase programs on December 13, 2005, and on October 5, 2004. 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. +(2) +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 options and (2) restricted shares withheld to offset tax withholding that occurs upon vesting of restricted shares. The Company's employee stock compensation plans currently provide that the value of the shares delivered or attested to, or withheld, shall be the closing price of the Company's common stock on the date the relevant transaction occurs. +20 +Item 6. Selected Financial Data . +Five-Year Operating and Financial Summary (1) +2006 +2005 +2004 +2003 +2002 +(Thousands of Dollars, Except Per Share Data) +Summary of Operations +Revenue +$ +1,141,887 +$ +1,060,999 +$ +991,909 +$ +888,926 +$ +827,106 +Net earnings +83,647 +74,467 +65,938 +51,716 +47,912 +Per share of common stock: +Basic net earnings (2)(3) +$ +1.52 +$ +1.33 +$ +1.15 +$ +.88 +$ +.79 +Diluted net earnings (2)(3) +1.47 +1.27 +1.09 +.85 +.77 +Cash dividends declared (2) +.30 +.26 +.19 +.15 +.12 +Financial Position at Year End +Total assets +$ +671,092 +$ +626,580 +$ +639,571 +$ +593,762 +$ +531,994 +Long-term debt +21,471 +32,411 +43,904 +59,923 +72,915 +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. +(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 that was 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 restricted 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 +Wolverine World Wide, Inc. (the "Company") has a strategic vision - "To Excite Consumers Around the World with Innovative Footwear and Apparel that Bring Style to Purpose." To reach this vision, the Company continues to focus on the tenets of product innovation, global expansion, brand development, service excellence and community service with the end goal of delivering superior shareholder returns. There is also continued focus on the financial growth initiatives of achieving mid-to-upper single digit average annual revenue growth, annual double-digit EPS increases and improved asset utilization and strong cash generation. +The following financial performance highlights of 2006 are a result of the execution of these strategies: +• +Seventh consecutive year of revenue growth with revenue increasing 7.6% to an all-time record level of $1.142 billion +• +Earnings per share achieved an all-time record level of $1.47 per share, an increase of 15.7% over the $1.27 reported in the prior year, which marks the fourth consecutive year of double-digit growth +• +Continued focus on improved cash collections resulted in a 2.9% decrease in accounts receivable on a revenue increase of 7.6% +21 +• +Inventory increased 14.2% primarily to support the growth of the global Merrell ® Footwear business and the initial launch of Patagonia ® Footwear +• +Investment spending to support the development of the Merrell ® Apparel and Patagonia ® Footwear initiatives totaled $6.8 million in 2006 +• +Cash provided from operating activities for 2006 reached $108.3 million, marking the fourth consecutive year of cash generation in excess of $100.0 million +• +The Company's cash position remained strong at the end of 2006 with $124.7 million of cash on hand and debt outstanding of $21.5 million +The following is a discussion of the Company's results of operations and liquidity and capital resources. This section should be read in conjunction with the consolidated financial statements and notes. All share and per share amounts in Management's Discussion and Analysis of Financial Condition and Results of Operations have been adjusted for all periods to reflect the three-for-two stock split distributed on February 1, 2005. +RESULTS OF OPERATIONS - FISCAL 2006 COMPARED TO FISCAL 2005 +FINANCIAL SUMMARY - 2006 VERSUS 2005 +2006 +2005 +Change +$ +% +$ +% +$ +% +(Millions of Dollars, Except Per Share Data) +Revenue +Branded footwear and licensing +$ +1,036.9 +90.8% +$ +964.5 +90.9% +$ +72.4 +7.5% +Other business units +105.0 +9.2% +96.5 +9.1% +8.5 +8.8% +Total revenue +$ +1,141.9 +100.0% +$ +1,061.0 +100.0% +80.9 +7.6% +Gross margin +Branded footwear and licensing +$ +402.3 +38.8% +$ +369.6 +38.3% +$ +32.7 +8.9% +Other business units +39.2 +37.4% +35.6 +36.9% +3.6 +10.1% +Total gross margin +441.5 +38.7% +$ +405.2 +38.2% +$ +36.3 +9.0% +Selling and administrative +expenses +$ +318.2 +27.9% +$ +291.9 +27.5% +$ +26.3 +9.0% +Interest (income) expense - net +(.2 +) +0.0% +1.9 +0.2% +(2.1 +) +(110.6% +) +Other expense - net +1.2 +0.1% +.2 +0.0% +1.0 +698.7% +Earnings before income taxes +and minority interest +122.3 +10.7% +111.2 +10.5% +11.1 +9.9% +Net earnings +83.6 +7.3% +74.5 +7.0% +9.1 +12.3% +Diluted earnings per share +$ +1.47 +- +$ +1.27 +- +$ +.20 +15.7% +The Company has one reportable segment that is engaged in manufacturing, sourcing, marketing, licensing and distributing branded footwear, apparel and accessories. Within the branded footwear and licensing segment, the Company has identified five operating units, consisting of the Outdoor Group (comprised of the Merrell ®, Sebago ® and Patagonia ® Footwear brands), the Wolverine Footwear Group (comprised of the Wolverine ®, HYTEST ®, Bates ® Footwear and Stanley ® Footgear brands and certain +22 +private label branded products), the Heritage Brands Group (comprised of Cat ® Footwear and Harley-Davidson ® Footwear), The Hush Puppies Company, and Other Branded Footwear. The Company's other business units consist of Wolverine Retail and Wolverine Leathers (comprised of the tannery and procurement operations). The following is supplemental information on total revenue: +TOTAL REVENUE +2006 +2005 +Change +$ +% +$ +% +$ +% +(Millions of Dollars) +Outdoor Group +$ +393.3 +34.4% +$ +337.8 +31.8% +$ +55.5 +16.5% +Wolverine Footwear Group +275.8 +24.2% +285.5 +26.9% +(9.7 +) +(3.4% +) +Heritage Brands Group +192.3 +16.8% +174.2 +16.4% +18.1 +10.4% +The Hush Puppies Company +169.9 +14.9% +163.4 +15.4% +6.5 +4.0% +Other Branded Footwear +5.6 +0.5% +3.6 +0.4% +2.0 +57.8% +Total branded footwear +and licensing revenue +$ +1,036.9 +90.8% +$ +964.5 +90.9% +$ +72.4 +7.5% +Other business units +105.0 +9.2% +96.5 +9.1% +8.5 +8.8% +Total revenue +$ +1,141.9 +100.0% +$ +1,061.0 +100.0% +$ +80.9 +7.6% +REVENUE +Revenue for 2006 increased $80.9 million over 2005. 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 $66.8 million of the revenue increase. Of the $66.8 million revenue increase, $19.2 million was attributed to increased shipments to an international distributor and the conversion of this distributor from a royalty arrangement to a wholesale operation, which required recognition of sales and cost of products sold. The impact of translating foreign denominated revenue to U.S. dollars improved revenue by $5.6 million. The other business units contributed $8.5 million to the increase. Both domestic and international revenue increased, with international revenue accounting for 33.4% of total revenue in 2006 compared to 30.2% in 2005. +The Outdoor Group reported an increase in revenue of $55.5 million over 2005, its ninth year of double-digit growth. The Merrell ® business realized a $54.8 million increase over the prior year as revenue increases were achieved across all geographic locations. The brand also continued to experience growth with its network of international distributors. Strong sales in the multi-sport, after-sport and sports fashion categories drove the majority of the increase. The Sebago ® brand experienced a slight decrease in revenue from the prior year. The decrease was primarily a result of lower than anticipated shipments in the U.S. The growth and change in the international distributor arrangement mentioned above contributed $11.8 million to the increase for the Outdoor Group. The first shipments of the Patagonia ® product contributed approximately $.8 million to the increase. +The Wolverine Footwear Group recorded a $9.7 million decrease in revenue for 2006, as compared to 2005. The Wolverine ® boot business experienced an increase of $3.8 million during 2006 due to strong customer demand and reorder activity on the Wolverine ® MultiShox TM comfort technology product. A decrease of $6.0 million in the Bates ® division was primarily the result of a planned reduction of Department of Defense contract shipments. The Stanley ® Footgear and private label businesses realized $3.6 million and $3.9 million revenue decreases, respectively, due to reduced customer demand. +The Heritage Brands Group experienced an $18.1 million revenue increase in 2006 as compared to 2005. Cat ® Footwear's revenue increased $16.1 million driven by strong revenue growth in the U.S., Canada, continental Europe and globally through the international distribution network. Improved sell-through +23 +results have been experienced through the introduction of expanded product campaigns including the Legendary RAW ™ and iTechnology ™ collections. Increased shipments to the Harley-Davidson ® dealer network resulted in a $2.0 million revenue increase for the Harley-Davidson ® Footwear brand in 2006. The growth and change in the international distributor arrangement mentioned above contributed $7.4 million to the increase for the Heritage Brands Group. +The Hush Puppies Company's revenue increased $6.5 million in 2006. The majority of the revenue growth was driven by increased wholesale shipments in the Canadian and European markets, as well as higher royalty income generated by international licensees. Strong response to the Hush Puppies ® product fueled a revenue increase of $4.6 million in Canada, an increase of $2.6 million in Europe and a slight increase in the U.S. A $2.1 million revenue decrease in the slipper product was experienced as the Company has decided to phase out of the slipper business. International licensing revenue increased $1.2 million in 2006 as global demand for Hush Puppies ® product continued to grow. +Within the Company's other business units, Wolverine Retail reported a $4.5 million increase in revenue as a result of a mid-single digit same-store revenue increase, as well as the net addition of six stores as compared to 2005. The Wolverine Leathers operation reported a $4.0 million increase primarily due to increased demand for the Company's proprietary sueded products. +The Company ended 2006 with an increase in order backlog of over 10% above 2005 year-end levels. This backlog principally reflects demand for the first half of 2007. +GROSS MARGIN +The gross margin level for 2006 of 38.7% was a 50 basis point increase over the prior year. A change in business mix contributed an increase of 40 basis points, favorable product costs increased margin by 30 basis points and benefits from favorable foreign exchange contract rates associated with the Company's foreign entity inventory purchases added 10 basis points. These improvements were partially offset by a reduction of 30 basis points due to increased product costs on the European operations related to the levying of dumping duties on products sourced from China and Vietnam. +SELLING AND ADMINISTRATIVE EXPENSES +Selling and administrative expenses increased $26.3 million during 2006 to $318.2 million. The Company invested approximately $6.1 million in product development and selling and administrative costs on the Merrell ® Apparel and Patagonia ® Footwear initiatives in 2006. Incremental stock-based compensation costs increased the selling and administrative expenses by $2.7 million as a result of the adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R). The remaining increases related primarily to selling and distribution costs that vary with the increase in revenue. +INTEREST, OTHER & TAXES +The change in net interest reflected increased interest income from invested cash balances, as well as lower average outstanding amounts on senior notes and minimal borrowing under the Company's revolving credit facility. +The increase in other expense primarily related to the change in realized gains or losses on foreign denominated assets and liabilities. +The Company's effective income tax rate for 2006 was 31.6%, compared to 33.1% in 2005. In the fourth quarter of 2006, the Company recognized a one-time net income tax benefit of $1.5 million resulting from the closure of prior year income tax audits. The 2005 income tax rate reflected additional income tax expense of $1.4 million due to the Company's repatriation of earnings of foreign subsidiaries of $41.5 +24 +million as provided under the American Jobs Creation Act of 2004. The annualized effective tax rate for fiscal 2007 is estimated to range from 33.0% to 33.5%. +NET EARNINGS +As a result of the revenue, gross margin and expense changes discussed above, the Company achieved net earnings of $83.6 million compared to $74.5 million in 2005, an increase of $9.1 million. +RESULTS OF OPERATIONS - FISCAL 2005 COMPARED TO FISCAL 2004 +FINANCIAL SUMMARY - 2005 VERSUS 2004 +2005 +2004 +Change +$ +% +$ +% +$ +% +(Millions of Dollars, Except Per Share Data) +Revenue +Branded footwear and licensing +$ +964.5 +90.9% +$ +903.6 +91.1% +$ +60.9 +6.7% +Other business units +96.5 +9.1% +88.3 +8.9% +8.2 +9.2% +Total revenue +$ +1,061.0 +100.0% +$ +991.9 +100.0% +69.1 +7.0% +Gross margin +Branded footwear and licensing +$ +369.6 +38.3% +$ +343.1 +38.0% +$ +26.5 +7.7% +Other business units +35.6 +36.9% +31.0 +35.2% +4.6 +14.7% +Total gross margin +$ +405.2 +38.2% +$ +374.1 +37.7% +$ +31.1 +8.3% +Selling and administrative +expenses +$ +291.9 +27.5% +$ +274.1 +27.6% +$ +17.8 +6.5% +Interest expense - net +1.9 +0.2% +3.2 +0.3% +(1.3 +) +(41.1% +) +Other (income) expense - net +.2 +0.0% +(.3 +) +0.0% +.5 +(149.2% +) +Earnings before income taxes +and minority interest +111.2 +10.5% +97.1 +9.8% +14.2 +14.6% +Net earnings +74.5 +7.0% +65.9 +6.6% +8.6 +12.9% +Diluted earnings per share +$ +1.27 +- +$ +1.09 +- +$ +.18 +16.5% +The following is supplemental information on total revenue: +TOTAL REVENUE +2005 +2004 +Change +$ +% +$ +% +$ +% +(Millions of Dollars) +Outdoor Group +$ +337.8 +31.8% +$ +286.6 +28.9% +$ +51.2 +17.8% +Wolverine Footwear Group +285.5 +26.9% +293.8 +29.6% +(8.3 +) +(2.8% +) +Heritage Brands Group +174.2 +16.4% +164.4 +16.6% +9.8 +5.9% +The Hush Puppies Company +163.4 +15.4% +152.8 +15.4% +10.6 +7.0% +Other Branded Footwear +3.6 +0.4% +6.0 +0.6% +(2.4 +) +(40.9% +) +Total branded footwear +and licensing revenue +$ +964.5 +90.9% +$ +903.6 +91.1% +$ +60.9 +6.7% +Other business units +96.5 +9.1% +88.3 +8.9% +8.2 +9.2% +Total revenue +$ +1,061.0 +100.0% +$ +991.9 +100.0% +$ +69.1 +7.0% +25 +REVENUE +Revenue for 2005 increased $69.1 million over 2004. The addition of the Cat ® and Wolverine ® wholesale operations in Canada, as well as the transition of the Merrell ® businesses in Sweden and Finland and the Sebago ® operations in the U.K. and Germany from distributor-based businesses to Company-owned wholesale businesses represented $20.6 million of the revenue 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 $45.0 million of the revenue increase. The impact of translating foreign denominated revenue to U.S. dollars improved revenue by $3.5 million. Both domestic and international revenue increased with international revenue accounting for 30.2% of total revenue in 2005 compared to 27.5% in 2004. +The Outdoor Group reported a 17.8% increase in revenue over 2004, its eighth year of double-digit growth. The Merrell ® business achieved double-digit growth in the U.S., Canada and Europe. The brand also experienced growth with its network of international distributors. Strong sales in the multi-sport, after-sport and sports fashion categories drove the increase. The Sebago ® brand experienced a 17.6% increase in revenue over the prior year. The increase was driven by sales in the international markets where distribution arrangements have been converted to Company-owned wholesale operations. +The Wolverine Footwear Group experienced a 2.8% decline in revenue for 2005. The Wolverine ® and Stanley ® Footgear boot businesses experienced an increase of $5.7 million during 2005 as new product and marketing initiatives drove strong retail performance. The conversion of a Canadian distributorship to a Company-owned wholesale operation accounted for approximately half of the increase. The decrease of $12.2 million in the Bates ® division was primarily the result of a planned reduction in combat boot shipments. A reduction in demand for private label product contributed $1.8 million to the decrease in revenue for 2005. +The Heritage Brands Group experienced a 5.9% revenue increase in 2005. The Cat ® Footwear increase was driven by revenue growth in Europe and with the Company's global trading partners. Positive consumer response to new product initiatives such as iTechnology ™ and expanded retail distribution helped to drive the increase. The conversion of the business in Canada from a distributorship to a Company-owned wholesale operation also contributed to the increase. Revenue for the Harley-Davidson ® Footwear brand remained even with the prior year. +The Hush Puppies Company's revenue increased 7.0% in 2005. The revenue growth was broad-based as increases were achieved in the U.S., Canada and Europe. Strong response to the new contemporary-styled Hush Puppies ® product fueled growth both in the Company-owned wholesale operations and with the Company's global licensing partners. +Within the Company's other business units, Wolverine Retail reported an upper-single-digit same-store sales increase as consumers responded favorably to the Company's products. Wolverine Leathers recorded a revenue increase driven by greater demand for sueded leather footwear. +The Company ended 2005 with an order backlog approximately 11% above 2004 year-end levels. +GROSS MARGIN +The gross margin level for 2005 of 38.2% was a 50 basis point improvement over the prior year. Benefits from favorable foreign exchange contract rates associated with the Company's foreign entity inventory purchases resulted in lower product costs which added 60 basis points to the margin. An increase in shipments of higher margin products improved margin by 40 basis points. Unfavorable manufacturing +26 +variances and increased product costs totaling 50 basis points partially offset the gross margin improvement. +SELLING AND ADMINISTRATIVE EXPENSES +Selling and administrative expenses increased $17.8 million during 2005 to $291.9 million. The addition of the Cat ® and Wolverine ® operations in Canada, as well as the transition of the Merrell ® businesses in Sweden and Finland and the Sebago ® operations in the U.K. and Germany from distributor-based businesses to Company-owned wholesale businesses, accounted for $7.3 million of the increase. The Company continued to invest in marketing and new business development which accounted for $2.7 million of the increase. The remaining increases related primarily to selling and distribution costs that vary with the increase in revenue. +INTEREST, OTHER & TAXES +The decrease in net interest expense reflected lower average outstanding amounts on senior notes and minimal borrowing under the Company's revolving credit facility, as well as increased interest income from invested cash balances. +The decrease in other income primarily related to the change in realized gains or losses on foreign denominated assets and liabilities. +The Company's effective income tax rate for 2005 was 33.1% compared to 31.8% in 2004. During the fourth quarter of 2005, the Company elected to repatriate earnings of foreign subsidiaries as provided under the American Jobs Creation Act of 2004. The Company repatriated $41.5 million of eligible earnings and, as a result, recorded a related tax expense of $1.4 million. +NET EARNINGS +As a result of the revenue, gross margin and expense changes discussed above, the Company achieved net earnings of $74.5 million compared to $65.9 million in 2004, an increase of $8.6 million. +LIQUIDITY AND CAPITAL RESOURCES +December 30, +December 31, +Change +2006 +2005 +$ +% +(Millions of Dollars) +Cash and cash equivalents +$ 124.7 +$ 85.3 +$39.4 +46.2% +Accounts receivable +152.6 +157.1 +(4.5 +) +(2.9% +) +Inventories +184.3 +161.3 +23.0 +14.2% +Accounts payable +47.4 +41.1 +6.3 +15.4% +Accrued salaries and wages +19.3 +17.5 +1.8 +10.0% +Other accrued liabilities +43.5 +34.4 +9.1 +26.3% +Debt +21.5 +32.4 +(10.9 +) +(33.8% +) +Cash provided by operating activities +108.3 +117.3 +(9.0 +) +(7.7% +) +Additions to property, plant and equipment +17.1 +19.2 +(2.1 +) +(10.9% +) +Depreciation and amortization +20.6 +20.0 +.6 +2.9% +The Company continued to strengthen its balance sheet in 2006. Cash of $108.3 million was generated from operating activities in 2006. Accounts receivable decreased 2.9% on a 7.6% revenue gain, while reducing the accounts receivable days' sales outstanding from the prior year by 2.0%. Inventory levels were up 14.2% at year end and inventory turns increased by 5.9% in comparison to the prior year. +27 +The increase in accounts payable was attributed to the timing of inventory purchases from contract suppliers. The increase in other accrued liabilities was primarily attributable to adjustments made for foreign currency forward exchange contracts, an increase in employee benefit accruals, an increase in profit-sharing accruals, timing of royalty payments and an increase in taxes payable. +The majority of capital expenditures were for information system enhancements, consumer-direct initiatives, distribution equipment and building improvements. The Company leases machinery, equipment and certain warehouse, office and retail store space under operating lease agreements that expire at various dates through 2023. +The Company has a long-term revolving credit agreement that expires in July 2010 and allows for borrowings up to $150.0 million. The revolving credit facility is used to support working capital requirements. No amounts were outstanding under the revolving credit facility at December 30, 2006 or December 31, 2005. The Company was in compliance with all debt covenant requirements at December 30, 2006 and December 31, 2005. Proceeds from the existing credit facility 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 $2.8 million and $2.9 million at the end of 2006 and 2005, respectively. The total debt to total capital ratio for the Company was 4.1% in 2006 and 6.6% in 2005. +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 increased $.8 million for 2006 when compared to 2005 primarily due to the change in actuarial assumptions for purposes of estimating participant mortality. For 2006, the Company adopted the provision of SFAS No. 158 requiring the recognition of the funded status of pension plans on its balance sheet. As a result, the Company recorded a net reduction of $13.1 million within the accumulated other comprehensive income component of stockholders' equity, a reduction to net assets of $12.3 million and an increase to net liabilities of $1.6 million. 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 decrease in 2007 as compared to 2006 by approximately $4.1 million primarily as a result of the reduction in the amortization of prior market value losses and a discount rate increase. This estimate is based on the expected early adoption of the measurement date provision of SFAS No. 158 in 2007, which requires the use of the Company's year end as its pension plan measurement date beginning for the 2008 expense determination. The Company previously used September 30 as its measurement date. +Applying the provisions of SFAS No. 87 and SFAS No. 132, the Company's qualified defined benefit pension plans (the "Plans") were overfunded by $9.6 million in 2006 and $11.1 million in 2005. Under the Employee Retirement Income Security Act of 1974, the Plans had no minimum funding requirements for 2006 and 2005. Discretionary cash contributions were made to the Plans totaling $3.0 million in 2006 and $3.1 million in 2005 to provide long-term stability to the Plans. The Company expects to contribute approximately $3.0 million to its qualified defined benefit pension plans and approximately $.9 million to the Supplemental Executive Retirement Plan (SERP) in 2007. +28 +In the fourth quarter and full year 2006 results, the Company recognized a one-time net income tax benefit of $1.5 million resulting from the closure of prior year income tax audits. In 2005, the Company elected to repatriate earnings of foreign subsidiaries as provided under the American Jobs Creation Act of 2004 (the "Act"), which provided for a tax deduction of 85% of certain foreign earnings that were repatriated in 2005. During the fourth quarter of fiscal 2005, the Company repatriated foreign earnings of $41.5 million and, as a result, recorded a related tax expense of $1.4 million. 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 of foreign subsidiaries of $125.3 million at December 30, 2006 ($89.2 million at December 31, 2005) as the Company expects such earnings will remain invested overseas indefinitely. +The Company's Board of Directors has approved common stock repurchase programs each authorizing the repurchase of 3.0 million shares of common stock over a 24-month period. The primary purpose of these stock repurchase programs is to increase shareholder value. The Company intends to continue repurchasing shares of its common stock in open market or privately negotiated transactions, from time-to-time, depending upon market conditions and other factors. +2006 +2005 +Cumulative +Authorization +effective date +Shares +repurchased +Market price +of shares +repurchased +Shares +repurchased +Market price +of shares +repurchased +Shares +repurchased +Market price +of shares +repurchased +December 13, 2005 +1,808,118 +$ +42,039,000 +- +$ +- +1,808,118 +$ +42,039,000 +October 5, 2004 +18,882 +407,000 +2,942,400 +63,682,000 +3,000,000 +64,862,000 +The Company declared dividends of $16.5 million in 2006, or $.30 per share, which was a 15.4% increase on a per share basis over the $14.5 million, or $.26 per share, declared in 2005. On February 8, 2007, the Company declared a quarterly cash dividend of $.09 per share of common stock, an increase of 20.0% as compared to the same period of 2006. The quarterly dividend is payable on May 1, 2007, to shareholders of record on April 2, 2007. +On June 6, 2005, the Company announced an exclusive global footwear licensing agreement for Patagonia ® Footwear, with the initial product introduction debuting in Spring 2007. +During the second quarter of 2005, the Company purchased the remaining 5% ownership from the minority stockholder of Wolverine Europe Limited for a purchase price of $2.3 million, making it a wholly-owned subsidiary. The transaction eliminated the minority interest of $.6 million and resulted in goodwill of $1.8 million. +On January 3, 2005, the Company expanded its owned Cat ® and Wolverine ® Footwear operations in Canada. This expansion allowed the Company to directly wholesale all of its major brands in Canada. Assets consisting primarily of inventory, fixed assets and amortizable intangible assets totaling $2.1 million and assumed liabilities of $.8 million were acquired from a former Wolverine ® and Cat ® Footwear distributor for $2.3 million in cash and resulted in goodwill and intangible assets of approximately $1.0 million. Consolidated pro forma revenue and net earnings, assuming the transaction occurred at the beginning of 2005, were not materially different from reported amounts. 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 amortizable intangible assets have a weighted average useful life of approximately ten years. +29 +On January 3, 2005, the Company expanded its owned Merrell ® operations into Sweden and Finland and its Sebago ® operations into the U.K. and Germany. Assets consisting primarily of inventory totaling approximately $.5 million were acquired from former distributors for cash. +These acquisitions are discussed further in Note 11 to the consolidated financial statements. +In early October 2006, the European Commission announced definitive anti-dumping duties at rates of 16.5% and 10.0% on imports from China and Vietnam, respectively. These definitive measures became effective October 7, 2006 and will remain in effect until October 6, 2008. The imposition of these anti-dumping measures could have a material impact on the Company's business, results of operations and financial condition. +NEW ACCOUNTING STANDARDS +In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. This Interpretation is effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is in process of calculating the effects and expects that the adoption of FIN 48 will not have a material impact on its consolidated financial statements. +In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). This new standard establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS No. 157 also expands financial statement disclosure requirements about a company's use of fair value measurements, including the effect of such measures on earnings. The Company is required to adopt this new accounting guidance at the beginning of the fiscal year ending January 3, 2009. While the Company is currently evaluating the provisions of SFAS No. 157, the adoption is not expected to have a material impact on its consolidated financial statements. +In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS No. 158). SFAS No. 158 amends SFAS No. 87, Employers' Accounting for Pensions , SFAS No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits , SFAS No. 106 , Employers' Accounting for Postretirement Benefits Other than Pensions and SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits . The amendments retain most of the existing measurement and disclosure guidance and will not change the amounts recognized in the Company's statements of operations. SFAS No. 158 requires companies to recognize a net asset or liability with an offset to equity, by which the defined benefit postretirement obligation is over- or under-funded. This aspect of SFAS No. 158 became effective for the Company's current fiscal year ended December 30, 2006 and has been included in the accompanying consolidated financial statements. SFAS No. 158 did not have an effect on the Company's consolidated financial condition at December 31, 2005 or January 1, 2005. SFAS No. 158 also requires that employers measure plan assets and obligations as of the date of their year-end financial statements beginning with the Company's fiscal year ending January 3, 2009. The Company expects to early adopt this requirement of SFAS No. 158 in the fiscal year ending December 29, 2007. See Note 6 +30 +for further discussion of the effect of adopting SFAS No. 158 on the Company's consolidated financial statements. +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 +Revenue is recognized on the sale of products manufactured or sourced by the Company when the related goods have been shipped, legal title has passed to the customer and collectibility is reasonably assured. 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 licensees and distributors. +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 December 30, 2006 and December 31, 2005, 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 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 good inventories in foreign countries. The FIFO method is also used for all finished goods inventories of the Company's retail +31 +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 in 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. At December 30, 2006 and December 31, 2005, management believes that it has provided sufficient reserves for excess or obsolete inventories. +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 expected 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-amortizable 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 the years ended December 30, 2006 or December 31, 2005. +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 2006 or 2005. +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. +32 +STOCK-BASED COMPENSATION +The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment . The Company utilizes the Black-Scholes model, which requires the input of subjective assumptions. These assumptions include estimating (a) the length of time employees will retain their vested stock options before exercising them ("expected term"), (b) the volatility of the Company's common stock price over the expected term and (c) the number of options that will ultimately not complete their vesting requirements ("forfeitures"). Changes in the subjective assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related amounts recognized on the consolidated condensed statements of operations. +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 income 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 December 30, 2006 and December 31, 2005, the Company had outstanding forward currency exchange contracts to purchase $56.4 million and $61.4 million, respectively, of various currencies (principally U.S. dollars) with maturities ranging up to 252 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 2007 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 year ended December 30, 2006, the strengthening of foreign currencies increased the value of these investments in net assets by $9.5 million. For the year ended December 31, 2005, the strengthening of the U.S. dollar decreased the value of these investments in net assets by $11.5 million. These changes resulted in cumulative foreign currency translation adjustments at December 30, 2006 and +33 +December 31, 2005 of $21.8 million and $12.2 million, respectively, that are deferred and recorded as a component of accumulated other comprehensive income 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 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 remaining unamortized balance at December 30, 2006 was $.5 million. 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. +2006 +2005 +2007 +2008 +2009 +2010 +2011 +There- +after +Total +Fair +Value +Total +Fair +Value +(Millions of Dollars, Except Percentages) +Denominated in U.S. Dollars: +Fixed rate +$10.7 +$10.7 +- +- +- +- +$21.4 +$21.7 +$32.4 +$33.0 +Average interest rate +6.5 +% +6.5 +% +- +- +- +- +6.5 +% +- +6.5 +% +- +The Company has the following payments under contractual obligations due by period: +Total +Less than +1 year +1-3 years +3-5 years +More than +5 years +(Thousands of Dollars) +Long-term debt +$ +21,429 +$ +10,715 +$ +10,714 +$ +- +$ +- +Estimated interest on long-term debt +1,393 +697 +696 +- +- +Capital leases +42 +15 +20 +7 +- +Operating leases +81,059 +13,020 +22,435 +15,275 +30,329 +Purchase obligations(1) +218,000 +218,000 +- +- +- +Deferred compensation +1,747 +314 +544 +369 +520 +Pension(2) +3,000 +3,000 +- +- +- +SERP +16,048 +938 +2,702 +3,058 +9,350 +Dividends declared +9,121 +9,121 +- +- +- +Minimum royalties +6,858 +1,152 +2,390 +3,316 +- +Minimum advertising +6,605 +1,579 +3,301 +1,725 +- +Total +$ +365,302 +$ +258,551 +$ +42,802 +$ +23,750 +$ +40,199 +34 +(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. +The Company had $153.5 million of additional borrowing capacity available under all of its existing credit facilities at December 30, 2006. The Company's additional borrowing capacity is summarized as follows: +Expiration of availability +Total commitments +available +Less than +1 year +1 year or +greater +(Millions of Dollars) +Revolving credit +$150.0 +$ - +$150.0 +Standby letters of credit +3.5 +3.5 +- +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. There have been no changes during the year ended December 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. +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 +35 +financial reporting as of December 30, 2006, 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 December 30, 2006. +Management's assessment of the effectiveness of our internal control over financial reporting as of December 30, 2006 has been audited by Ernst & Young LLP, an independent registered public accounting 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 December 30, 2006 that has materially affected, or that is reasonably likely to materially affect, the Company's internal control over financial reporting. +Item 9B. Other Information . +None. +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 with respect to the Annual Meeting of Stockholders to be held on April 19, 2007, 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 and has adopted a Code of Conduct & Compliance that applies to the Company's directors and employees. The Accounting and Finance Code of Ethics and the Code of Conduct & Compliance are available on the Company's website, www.wolverineworldwide.com. Any waiver from the Accounting and Finance Code of Ethics or the Code of Conduct & Compliance with respect to the Company's executive officers and directors will be disclosed on the Company's website. Any 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 subheading "Nominees for Terms Expiring in 2010," "Continuing Directors - Terms Expiring in 2009," and "Continuing Directors - Terms Expiring in 2008" in the definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 19, 2007, is incorporated herein by reference. +36 +In addition to the directors discussed in the definitive Proxy Statement, the Company's Board of Directors currently includes Paul D. Schrage (age 72), who will retire at this year's annual meeting. His term was scheduled to expire at the annual meeting in 2008. Mr. Schrage is retiring after ten years of service as a director. Mr. Schrage has been a director since 1997. Mr. Schrage was Senior Executive Vice President and Chief Marketing Officer of McDonald's Corporation, a worldwide restaurant franchisor and operation and was employed at that company from 1967 until his retirement in 1997. +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 with respect to the Annual Meeting of Stockholders to be held on April 19, 2007, is incorporated herein by 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 captions "Executive Compensation" and "Compensation Committee Report" in the definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 19, 2007, 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" contained in the definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 19, 2007, is incorporated herein by reference. +The following table provides information about Wolverine's equity compensation plans as of December 30, 2006: +Equity Compensation Plan Information +Plan Category (1) +Number of +Securities to be +Issued Upon +Exercise of +Outstanding +Options, Warrants +and Rights +(a) +Weighted Average +Exercise Price of +Outstanding +Options, +Warrants and +Rights +(b) +Number of Securities +Remaining Available for +Future Issuance Under +Equity Compensation +Plans (Excluding +Securities Reflected in +Column (a)) +(c) +Equity compensation +plans approved by +security holders +4,574,945 +(2)(3) +$ +16.53 +4,986,486 +(4) +Equity compensation +plans not approved by +security holders +- +N/A +- +Total +4,574,945 +$ +16.53 +4,986,486 +37 +Notes to Equity Compensation Plan Information +(1) +Each plan for which aggregated information is provided contains customary anti-dilution provisions that are applicable in the event of a stock split, stock dividend or certain other changes in the Company's capitalization. +(2) +Includes 4,161,516 stock options awarded to employees under the 1993 Stock Incentive Plan, the 1995 Stock Incentive Plan, the 1997 Stock Incentive Plan, the Stock Incentive Plan of 1999, the Stock Incentive Plan of 2001, the Stock Incentive Plan of 2003 and the Stock Incentive Plan of 2005 and 413,429 stock options awarded to non-employee directors under the Stock Incentive Plan of 2005 and the Amended and Restated Directors' Stock Option Plan approved by stockholders in 2002 and the previous Amended and Restated Directors' Stock Option Plan initially adopted in 1988. Column (a) does not include stock units credited to outside directors' fee accounts or retirement accounts under the Outside Directors' Deferred Compensation Plan. Stock units do not have an exercise price. Each stock unit credited to a director's fee account and retirement account under the Outside Directors' Deferred Compensation Plan will be converted into one share of common stock upon distribution. Column (a) also does not include shares of restricted or unrestricted common stock previously issued under the Company's equity compensation plans. +(3) +Of this amount, 677,800 options were not exercisable as of December 30, 2006, due to vesting restrictions. +(4) +Comprised of: (i) 544,726 shares available for issuance under the Outside Directors' Deferred Compensation Plan upon the retirement of the current directors or upon a change in control; and (ii) 4,441,760 shares issuable under the various employee stock incentive plans. Of these total amounts available, the number of shares with respect to the following plans may be issued other than upon the exercise of an option, warrant or right as of December 30, 2006: +• +Outside Directors' Deferred Compensation Plan: 544,726 +• +1997 Stock Incentive Plan: 22,339 +• +Stock Incentive Plan of 1999: 56,056 +• +Stock Incentive Plan of 2001: 412,926 +• +Stock Incentive Plan of 2003: 28,961 +• +Stock Incentive Plan of 2005: 1,954,091 +The Outside Directors' Deferred Compensation Plan is a supplemental, unfunded, nonqualified deferred compensation plan for non-employee directors. Beginning in 2006, the Company began paying an annual equity retainer to non-management directors in the form of a contribution under the Outside Directors' Deferred Compensation Plan. Participation in the plan beyond the annual equity retainer is voluntary. The plan allows participating directors to receive, in lieu of some or all directors' fees, a number of stock units equal to the amount of the deferred directors' fees divided by the fair market value of the Company's common stock on the date of payment of the next cash dividend on the Company's common stock. These stock units are increased by a dividend equivalent based on dividends paid by the Company and the amount of stock units credited to the participating director's fee account and retirement account. Upon distribution, the participating directors receive a number of shares of the Company's common stock equal to the number of stock units to be distributed at that time. Distribution is triggered by termination of service as a director or by a change in control of the Company and can occur in a lump sum, in installments or on another deferred basis. Of the 544,726 shares issuable under the Outside +38 +Directors' Deferred Compensation Plan, 217,672 shares have been issued to a trust to satisfy the Company's obligations and are included in shares reported as issued and outstanding as of the record date. +The employee stock incentive plans listed above are equity-based incentive plans for officers, key employees, and, under the Stock Incentive Plan of 2005, directors. Those plans authorize awards of stock options, restricted common stock, common stock and, under certain plans, tax benefit rights, restricted stock units, deferred stock units, and/or stock appreciation rights. The Stock Incentive Plans of 2001 and 2003 specifically limit the number of shares that can be awarded as restricted or unrestricted common stock to 40% and 15%, respectively, of the shares authorized under the plan. The Stock Incentive Plan of 2005 provides that each share of restricted or unrestricted common stock, each restricted stock unit and each stock appreciation right is counted as two shares against the total number of shares authorized under the Stock Incentive Plan of 2005. The number of securities listed as remaining available in column (c) of the table assumes the grant of all stock options, which count as only one share against the total number of shares authorized under the Stock Incentive Plan of 2005. Actual shares available under the Stock Incentive Plan of 2005 will be less to the extent that awards of restricted or unrestricted common stock, restricted stock units or stock appreciation rights are issued from that plan. The numbers provided in this footnote and in column (c) will increase to the extent that options relating to the number of shares listed in column (a) of the table or other outstanding awards (e.g., shares of restricted or unrestricted stock, restricted stock units or stock appreciation rights) previously issued under a plan are canceled, surrendered, modified, exchanged for substitutes or expire or terminate prior to exercise or vesting because the number of shares underlying any such awards will again become available for issuance under the plan under which the award was granted. +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 with respect to the Annual Meeting of Stockholders to be held on April 19, 2007, is incorporated herein by reference. The information contained under the caption "Corporate Governance Principles" under the subheading "Independence" contained in the definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 19, 2007, is 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 with respect to the Annual Meeting of Stockholders to be held on April 19, 2007, 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 December 30, 2006 and December 31, 2005. +39 +• +Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Fiscal Years Ended December 30, 2006, December 31, 2005 and January 1, 2005. +• +Consolidated Statements of Operations for the Fiscal Years Ended December 30, 2006, December 31, 2005 and January 1, 2005. +• +Consolidated Statements of Cash Flows for the Fiscal Years Ended December 30, 2006, December 31, 2005 and January 1, 2005. +• +Notes to the Consolidated Financial Statements as of December 30, 2006. +• +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 +Restated Certificate of Incorporation. +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 +Restated Certificate of Incorporation. 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. +40 +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. Previously filed as Exhibit 4.7 to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2005. Here incorporated by reference. +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 July 22, 2005, among Wolverine World Wide, Inc. and certain of its subsidiaries, JPMorgan Chase Bank, N.A., as Administrative Agent, Harris, N.A., as Syndication Agent, Comerica Bank, Standard Federal Bank N.A. and National City Bank of the Midwest, as Documentation Agents, and certain other Banks that are parties to the Credit Agreement. Previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated July 28, 2005. Here incorporated by reference. +10.1 +Amended and Restated 1993 Stock Incentive Plan.* +10.2 +Amended and Restated 1995 Stock Incentive Plan.* +10.3 +Amended and Restated 1997 Stock Incentive Plan.* +10.4 +Amended and Restated Stock Incentive Plan of 1999.* +10.5 +Amended and Restated Stock Incentive Plan of 2001.* +10.6 +Amended and Restated Stock Incentive Plan of 2003.* +10.7 +Amended and Restated Stock Incentive Plan of 2005.* +10.8 +Amended and Restated Directors' Stock Option Plan.* +10.9 +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. +10.10 +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. +41 +10.11 +Amended and Restated Executive Long-Term Incentive Plan (3-Year Bonus Plan) (Restated as amended through February 10, 2005).* Previously filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Here incorporated by reference. +10.12 +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. +10.13 +Executive Severance Agreement.* Previously filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2005. Here incorporated by reference. An updated participant schedule of current executive officers who are parties to the agreement is attached as Exhibit 10.13. +10.14 +Form of Indemnification Agreement.* A participant schedule of current executive officers and directors who are parties to the agreement is attached to the agreement. +10.15 +Benefit Trust Agreement dated May 19, 1987, and Amendments Number 1, 2, 3 and 4 thereto.* +10.16 +Amended and Restated Supplemental Executive Retirement Plan.* An updated participant schedule is attached to the Plan. +10.17 +Employees' Pension Plan (Restated as amended through March 28, 2005).* Previously filed as Exhibit 10.19 to the Company Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Here incorporated by reference. +10.18 +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. Here incorporated by reference. +10.19 +Form of Non-Qualified Stock Option Agreement for 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. Here incorporated by reference. +10.20 +Form of Non-Qualified Stock Option Agreement for employees other than those to whom Exhibit 10.19 applies.* Previously filed as Exhibit 10.3 to the Company's Current Report on Form 8-K dated February 9, 2005. Here incorporated by reference. +10.21 +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. Here incorporated by reference. +10.22 +Form of Incentive Stock Option Agreement.* Previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated February 15, 2006. Here incorporated by reference. +10.23 +Form of Non-Qualified Stock Option Agreement for Stephen L. Gulis, Blake W. Krueger and Timothy J. O'Donovan.* Previously filed as Exhibit 10.2 to the Company's Current Report of Form 8-K dated February 15, 2006. Here incorporated by reference. +42 +10.24 +Form of Non-Qualified Stock Option Agreement for employees other than those to whom Exhibit 10.23 applies.* Previously filed as Exhibit 10.3 to the Company's Current Report on Form 8-K dated February 15, 2006. Here incorporated by reference. +10.25 +Form of Restricted Stock Agreement.* Previously filed as Exhibit 10.4 to the Company's Current Report on Form 8-K dated February 15, 2006. Here incorporated by reference. +10.26 +Form of Stock Option Agreement for non-employee directors.* Previously filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2005. Here incorporated by reference. +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. Kenneth A. Grady, General Counsel and Secretary, 9341 Courtland Drive, Rockford, Michigan 49351. +43 +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. +WOLVERINE WORLD WIDE, INC. +Dated: February 27, 2007 +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/ Timothy J. O'Donovan +Timothy J. O'Donovan +Chief Executive Officer and Chairman +of the Board of Directors +(Principal Executive Officer) +February 27, 2007 +/s/ Stephen L. Gulis, Jr. +Stephen L. Gulis, Jr. +Executive Vice President, Chief +Financial Officer and Treasurer +(Principal Financial Officer) +February 27, 2007 +/s/ Nicholas P. Ottenwess +Nicholas P. Ottenwess +Vice President of Finance and +Corporate Controller +(Principal Accounting Officer) +February 27, 2007 +*/s/ Jeffrey M. Boromisa +Jeffrey M. Boromisa +Director +February 27, 2007 +*/s/ Alberto L. Grimoldi +Alberto L. Grimoldi +Director +February 27, 2007 +*/s/ David T. Kollat +David T. Kollat +Director +February 27, 2007 +44 +*/s/ Brenda J. Lauderback +Brenda J. Lauderback +Director +February 27, 2007 +/s/ Blake W. Krueger +Blake W. Krueger +Director +February 27, 2007 +*/s/ Phillip D. Matthews +Phillip D. Matthews +Director +February 27, 2007 +*/s/ David P. Mehney +David P. Mehney +Director +February 27, 2007 +*/s/ Shirley D. Peterson +Shirley D. Peterson +Director +February 27, 2007 +*/s/ Paul D. Schrage +Paul D. Schrage +Director +February 27, 2007 +*/s/ Michael A. Volkema +Michael A. Volkema +Director +February 27, 2007 +*By +/s/ Blake W. Krueger +President and Chief +Operating Officer +February 27, 2007 +Blake W. Krueger +Attorney-in-Fact +45 +APPENDIX A +Financial Statements +CONSOLIDATED BALANCE SHEETS +As of Fiscal Year End +2006 +2005 +(Thousands of Dollars) +ASSETS +Current assets: +Cash and cash equivalents +$ +124,663 +$ +85,258 +Accounts receivable, less allowances (2006 - $13,320; 2005 - $8,729) +152,608 +157,119 +Inventories +Finished products +168,603 +140,729 +Raw materials and work-in-process +15,656 +20,618 +184,259 +161,347 +Deferred income taxes +8,346 +5,411 +Prepaid expenses and other current assets +15,437 +11,613 +Total current assets +485,313 +420,748 +Property, plant and equipment: +Land +882 +882 +Buildings and improvements +71,687 +68,235 +Machinery and equipment +146,967 +140,909 +Software +58,187 +54,605 +277,723 +264,631 +Less accumulated depreciation +189,771 +171,429 +87,952 +93,202 +Other assets: +Goodwill +38,776 +35,624 +Other non-amortizable intangibles +8,506 +8,347 +Cash surrender value of life insurance +31,739 +29,257 +Pension assets +10,233 +33,735 +Deferred income taxes +3,736 +- +Other +4,837 +5,667 +97,827 +112,630 +Total assets +$ +671,092 +$ +626,580 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current liabilities: +Accounts payable +$ +47,420 +$ +41,107 +Salaries, wages and other compensation +19,254 +17,510 +Income taxes +6,435 +4,231 +Taxes, other than income taxes +4,414 +3,560 +Other accrued expenses +32,662 +26,657 +Current maturities of long-term debt +10,730 +10,972 +Total current liabilities +120,915 +104,037 +Long-term debt, less current maturities +10,741 +21,439 +Deferred compensation +11,026 +9,227 +Accrued pension liabilities +22,744 +19,367 +Deferred income taxes +- +9,658 +Other liabilities +1,107 +531 +Stockholders' equity: +Common stock, $1 par value: authorized 160,000,000 shares; shares +issued, including treasury shares: 2006 - 60,468,000; 2005 - 59,211,814 +60,468 +59,212 +Additional paid-in capital +31,341 +13,203 +Retained earnings +519,815 +452,672 +Accumulated other comprehensive income +3,923 +9,398 +Unearned compensation +- +(5,873 +) +Cost of shares in treasury: 2006 - 5,005,487 shares; 2005 - 3,082,548 shares +(110,988 +) +(66,291 +) +Total stockholders' equity +504,559 +462,321 +Total liabilities and stockholders' equity +$ +671,092 +$ +626,580 +( ) Denotes deduction. +See accompanying notes to consolidated financial statements. +A-1 +CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY +AND COMPREHENSIVE INCOME +Fiscal Year +2006 +2005 +2004 +(Thousands of Dollars, Except Per Share Data) +COMMON STOCK +Balance at beginning of the year +$ +59,212 +$ +67,350 +$ +66,389 +Common stock issued under stock incentive plans +(2006 - 1,255,286 shares; 2005 - 1,214,857 shares; +2004 - 2,081,586 shares) +1,256 +1,214 +2,082 +Impact of stock split on treasury shares +- +(9,352 +) +(1,121 +) +Balance at end of the year +60,468 +59,212 +67,350 +ADDITIONAL PAID-IN CAPITAL +Balance at beginning of the year +13,203 +99,518 +81,980 +Stock-based compensation expense +7,155 +- +- +Reclassification of unearned compensation upon +adoption of SFAS No. 123(R) +(5,873 +) +- +- +Amounts associated with common stock issued +under stock incentive plans: +Proceeds over par value +12,254 +14,609 +8,878 +Income tax benefits +4,672 +3,720 +7,782 +Impact of stock split on treasury shares +- +(104,726 +) +1,121 +Issuance of treasury shares (2006 - 14,511 shares; +2005 - 11,662 shares; 2004 - 8,924 shares) +55 +12 +87 +Net change in employee notes receivable +(125 +) +70 +(330 +) +Balance at end of the year +31,341 +13,203 +99,518 +RETAINED EARNINGS +Balance at beginning of the year +452,672 +437,406 +382,603 +Impact of stock split on treasury shares +- +(44,725 +) +- +Net earnings +83,647 +74,467 +65,938 +Cash dividends (2006 - $.30 per share; +2005 - $.26 per share; 2004 - $.19 per share) +(16,504 +) +(14,476 +) +(11,135 +) +Balance at end of the year +519,815 +452,672 +437,406 +ACCUMULATED OTHER COMPREHENSIVE +INCOME +Balance at beginning of the year +9,398 +19,446 +8,540 +Foreign currency translation adjustments +9,548 +(11,544 +) +9,727 +Change in fair value of foreign exchange contracts, +net of taxes (2006 - $901; 2005 - $1,280; 2004 - +$174) +(1,657 +) +2,085 +160 +Pension adjustments, net of taxes +(2006 - $6,885; 2005 - $303; 2004 - $524) +(13,366 +) +(589 +) +1,019 +Balance at end of the year +3,923 +9,398 +19,446 +UNEARNED COMPENSATION +Balance at beginning of the year +(5,873 +) +(4,955 +) +(4,138 +) +Awards under restricted stock incentive plans +- +(4,190 +) +(4,165 +) +Compensation expense +- +3,272 +3,348 +Reclassification of unearned compensation upon +adoption of SFAS No. 123(R) +5,873 +- +- +Balance at end of the year +- +(5,873 +) +(4,955 +) +COST OF SHARES IN TREASURY +Balance at beginning of the year +(66,291 +) +(160,474 +) +(105,280 +) +Common stock purchased for treasury (2006 - 1,937,450 +shares; 2005 - 2,994,210 shares; 2004 - 2,251,972 shares) +(45,009 +) +(64,856 +) +(55,331 +) +Issuance of treasury shares (2006 - 14,511 shares; +2005 - 11,662 shares; 2004 - 8,924 shares) +312 +236 +137 +Impact of stock split on treasury shares +- +158,803 +- +Balance at end of the year +(110,988 +) +(66,291 +) +(160,474 +) +Total stockholders' equity at end of the year +$ +504,559 +$ +462,321 +$ +458,291 +COMPREHENSIVE INCOME +Net earnings +$ +83,647 +74,467 +$ +65,938 +Foreign currency translation adjustments +9,548 +(11,544 +) +9,727 +Change in fair value of foreign exchange contracts, net +of taxes +(1,657 +) +2,085 +160 +Minimum pension liability adjustment, net of taxes +(306 +) +(589 +) +1,019 +Total comprehensive income +$ +91,232 +$ +64,419 +$ +76,844 +( ) Denotes deduction. +See accompanying notes to consolidated financial statements. +A-2 +CONSOLIDATED STATEMENTS OF OPERATIONS +Fiscal Year +2006 +2005 +2004 +(Thousands of Dollars, Except Per Share Data) +Revenue +$ +1,141,887 +$ +1,060,999 +$ +991,909 +Cost and expenses: +Cost of products sold +700,349 +655,800 +617,774 +Selling and administrative expenses +318,243 +291,891 +274,125 +Interest expense +2,973 +3,647 +4,185 +Interest income +(3,175 +) +(1,736 +) +(940 +) +Other (income) expense +1,205 +150 +(305 +) +1,019,595 +949,752 +894,839 +Earnings before income taxes and minority interest +122,292 +111,247 +97,070 +Income taxes +38,645 +36,780 +30,879 +Earnings before minority interest +83,647 +74,467 +66,191 +Minority interest +- +- +253 +Net earnings +$ +83,647 +$ +74,467 +$ +65,938 +Net earnings per share: +Basic +$ +1.52 +$ +1.33 +$ +1.15 +Diluted +1.47 +1.27 +1.09 +See accompanying notes to consolidated financial statements. +A-3 +CONSOLIDATED STATEMENTS OF CASH FLOWS +Fiscal Year +2006 +2005 +2004 +(Thousands of Dollars) +OPERATING ACTIVITIES +Net earnings +$ +83,647 +$ +74,467 +$ +65,938 +Adjustments necessary to reconcile net earnings +to net cash provided by operating activities: +Depreciation +19,641 +19,470 +18,683 +Amortization +981 +570 +388 +Deferred income taxes (credit) +(8,543 +) +(4,908 +) +1,179 +Stock-based compensation expense +7,155 +3,272 +3,348 +Excess tax benefits from stock-based compensation +(3,599 +) +- +- +Pension +7,254 +6,221 +1,025 +Other +3,498 +2,378 +1,452 +Changes in operating assets and liabilities: +Accounts receivable +6,409 +(7,739 +) +(2,332 +) +Inventories +(18,764 +) +19,375 +(15,833 +) +Other operating assets +(3,382 +) +11,221 +(2,776 +) +Accounts payable +5,434 +(4,862 +) +21,229 +Other operating liabilities +8,588 +(2,153 +) +11,912 +Net cash provided by operating activities +108,319 +117,312 +104,213 +INVESTING ACTIVITIES +Business acquisitions, net of cash acquired +- +(4,602 +) +- +Additions to property, plant and equipment +(17,067 +) +(19,160 +) +(18,080 +) +Other +(1,115 +) +3,146 +1,820 +Net cash used in investing activities +(18,182 +) +(20,616 +) +(16,260 +) +FINANCING ACTIVITIES +Proceeds from long-term borrowings +61,685 +69,972 +44,385 +Payments of long-term debt +(72,624 +) +(81,465 +) +(60,404 +) +Cash dividends paid +(16,079 +) +(14,814 +) +(11,135 +) +Purchase of common stock for treasury +(45,009 +) +(64,856 +) +(55,331 +) +Proceeds from shares issued under stock incentive plans +13,752 +11,951 +6,688 +Excess tax benefits from stock-based compensation +3,599 +- +- +Net cash used in financing activities +(54,676 +) +(79,212 +) +(75,797 +) +Effect of foreign exchange rate changes +3,944 +(4,398 +) +4,660 +Increase in cash and cash equivalents +39,405 +13,086 +16,816 +Cash and cash equivalents at beginning of the year +85,258 +72,172 +55,356 +Cash and cash equivalents at end of the year +$ +124,663 +$ +85,258 +$ +72,172 +OTHER CASH FLOW INFORMATION +Interest paid +$ +2,545 +$ +3,171 +$ +4,056 +Net income taxes paid +35,784 +27,207 +23,868 +( ) Denotes reduction in cash and cash equivalents. +See accompanying notes to consolidated financial statements. +A-4 +NOTES TO 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, and uniform shoes and boots. The Company's global portfolio of owned and licensed brands includes: Bates ®, Cat ® Footwear, Harley-Davidson ® Footwear, Hush Puppies ®, HYTEST ®, Merrell ®, Patagonia ® Footwear, Sebago ®, Stanley ® Footgear 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 periods ended December 30, 2006, December 31, 2005 and January 1, 2005. +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, legal title has passed to the customer and collectibility is reasonably assured. 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 licensees and distributors. +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, sourcing, inspection and receiving 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. +A-5 +CASH EQUIVALENTS +All short-term investments with a maturity of three months or less when purchased are considered cash equivalents. +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 U.S. 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. 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 U.S. 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. Leasehold improvements are depreciated at the lesser of the estimated useful life or lease term, including reasonably assured lease renewals as determined at lease inception. +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 relationships. 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 by reporting unit 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). Other amortizable intangible assets are included in other assets on the consolidated balance sheets and have net carrying amounts of $3,019,000 and $2,318,000 for 2006 and 2005, respectively, and accumulated amortization of $2,457,000 and $1,610,000 for 2006 and 2005, respectively. Estimated aggregate amortization expense for such intangibles for each of the five fiscal years subsequent to 2006 is as follows: 2007 - $1,065,000; 2008 - $929,000; 2009 - $726,000; 2010 - $362,000; 2011 - $87,000. +The Company has performed the required annual impairment tests and has determined that there was no impairment indicated for recorded goodwill and other non-amortizable intangibles. +The changes in the carrying amount of goodwill and other non-amortizable intangibles for the years ended December 30, 2006 and December 31, 2005 are as follows: +A-6 +Goodwill +Trademarks +Total +(Thousands of Dollars) +Balance at January 1, 2005 +$ +35,552 +$ +8,090 +$ +43,642 +Intangibles acquired +2,489 +257 +2,746 +Purchase accounting adjustments +313 +- +313 +Foreign currency translation effects +(2,730 +) +- +(2,730 +) +Balance at December 31, 2005 +$ +35,624 +$ +8,347 +$ +43,971 +Intangibles acquired +- +277 +277 +Trademark disposals +- +(118 +) +(118 +) +Foreign currency translation effects +3,152 +- +3,152 +Balance at December 30, 2006 +$ +38,776 +$ +8,506 +$ +47,282 +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 asset or asset group to the future undiscounted net cash flows expected to be generated by the assets. 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 +Prior to January 1, 2006, the Company followed Accounting Principles Board (APB) Opinion No. 25 , Accounting for Stock Issued to Employees , and related Interpretations, in accounting for its stock incentive plans. The Company did not recognize stock-based compensation expense related to employee stock options in its statements of operations for periods prior to the adoption of SFAS No. 123(R), Share-Based Payment , as options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R) using the modified prospective transition method. Under that transition method, compensation cost recognized in the year ended December 30, 2006 includes: (a) compensation cost for all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimate in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation , and (b) compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results of prior periods have not been restated. +As a result of adopting SFAS No. 123(R) on January 1, 2006, the Company's earnings before income taxes for the year ended December 30, 2006 is $3,214,000 lower than if it had continued to account for stock-based compensation under APB Opinion No. 25. The Company's net earnings for the year ended December 30, 2006 are lower by $2,511,000, or $.05 per basic share and $.04 per diluted share. +The Company recognized compensation costs of $7,155,000 and related income tax benefits of $1,967,000 for its stock-based compensation plans in the statements of operations for the year ended December 30, 2006. Compensation costs capitalized as part of inventory and property, plant and equipment were not material. +Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the statements of cash flows. SFAS No. 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The $3,599,000 excess tax benefit classified as a financing cash inflow would have been classified as an operating cash inflow if the Company had not adopted SFAS No. 123(R). +Effective December 13, 2005, the Board of Directors accelerated the vesting of nonvested stock options previously granted to employees and officers of the Company under its various stock-based incentive plans. As a result of this action, options to purchase approximately 1,003,000 shares of common stock +A-7 +that otherwise would have vested in 2006, 2007 and 2008 became fully vested and an additional $4,407,000 of pro forma stock-based compensation expense was recognized in the quarter ended December 31, 2005. Accordingly, compensation costs of $2,185,000, $1,495,000 and $727,000 in 2006, 2007 and 2008, respectively, that would have been recognized in each year after the adoption of SFAS No. 123(R) will not be recognized due to the modification. The decision to accelerate the vesting of these options, which the Company believes to be in the best interests of its stockholders, was made primarily to reduce non-cash compensation expense that would have been recorded in future periods following the Company's adoption of SFAS No. 123(R). +Pro forma information regarding net earnings and earnings per share has been determined as if the Company had applied the fair value recognition provisions of SFAS No. 123 to its stock awards for all periods presented. For purposes of pro forma disclosures, the estimated fair values of stock options are amortized to expense over the related vesting periods and awards subject to acceleration of vesting upon retirement are recognized over the explicit service period up to the date of actual retirement. The Company's pro forma information under SFAS No. 123 is as follows: +2005 +2004 +(Thousands of Dollars, Except Per Share Data) +Net earnings, as reported +$ +74,467 +$ +65,938 +Add: +Total stock-based employee compensation expense +included in reported net income, net of related tax effects +3,272 +3,374 +Deduct: +Total stock-based employee compensation expense +determined under fair value method for all awards, +net of related tax effects +7,266 +8,330 +Pro forma net earnings +$ +70,473 +$ +60,982 +Net earnings per share: +Basic-as reported +$ +1.33 +$ +1.15 +Basic-pro forma +1.26 +1.06 +Diluted-as reported +1.27 +1.09 +Diluted-pro forma +1.20 +1.01 +The Company estimated the fair value of employee stock options on the date of grant using the Black-Scholes model. The estimated weighted-average fair value for each option granted was $5.29, $5.10 and $4.68 per share in 2006, 2005 and 2004, respectively, with the following weighted-average assumptions: +2006 +2005 +2004 +Expected market price volatility (1) +24.5% +23.9% +31.7% +Risk-free interest rate (2) +4.6% +3.7% +3.4% +Dividend yield (3) +1.4% +1.1% +1.0% +Expected term (4) +4 years +4 years +4 years +(1) +Based on historical volatility of the Company's common stock. The expected volatility is based on the daily percentage change in the price of the stock over four years. +(2) +Represents the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. +(3) +Represents the Company's cash dividend yield for the expected term. +(4) +Represents the period of time that options granted are expected to be outstanding. The Company determined that all employee groups exhibit similar exercise and post-vesting termination behavior to determine the expected term. +Stock-based compensation expense recognized in the consolidated condensed statements of operations for the year ended December 30, 2006 has been reduced for estimated forfeitures, as it is based on awards ultimately expected to vest. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures +A-8 +were estimated based on historical experience. In the Company's pro forma information required under SFAS No. 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred. The cumulative effect of the change in accounting for forfeitures was not material. +ADVERTISING COSTS +Advertising costs are expensed as incurred and customer specific advertising dollars are expensed when earned by customers. Total advertising expense was $42,037,000 in 2006, $40,059,000 in 2005 and $38,611,000 in 2004, and includes customer specific advertising dollars of $9,327,000 in 2006, $6,445,000 in 2005 and $9,689,000 in 2004. 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 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: +2006 +2005 +2004 +Weighted average shares outstanding during the year +55,655,822 +57,241,893 +58,498,042 +Adjustment for nonvested restricted common stock +(802,624 +) +(1,098,177 +) +(1,099,677 +) +Denominator for basic earnings per share +54,853,198 +56,143,716 +57,398,365 +Effect of dilutive stock options +1,622,103 +1,742,344 +2,265,984 +Adjustment for nonvested common stock - treasury method +455,806 +789,065 +809,708 +Denominator for diluted earnings per share +56,931,107 +58,675,125 +60,474,057 +Options to purchase 507,775 shares of common stock in 2006, 516,335 shares in 2005 and 588,978 shares in 2004 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 that was distributed to stockholders 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 not split in the transaction however, in conjunction with the stock split, 9,352,361 shares of treasury stock were issued to fund a portion of the transaction. +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 +A-9 +component of accumulated other comprehensive income in stockholders' equity. Transaction gains and losses are included in the consolidated statements of operations and were not material. +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 $21,429,000 and a fair value of $21,723,000 at December 30, 2006 and a carrying value of $32,385,000 and a fair value of $32,975,000 at December 31, 2005, 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 December 30, 2006 and December 31, 2005, foreign exchange contracts with a notional value of $56,399,000 and $61,404,000, respectively, were outstanding to purchase various currencies (principally U.S. dollars) with maturities ranging up to 252 days. These contracts have been designated as cash flow hedges. As of December 30, 2006 and December 31, 2005, a liability of $1,352,000 and an asset of $715,000, respectively, have been recognized for the fair value of the foreign currency forward exchange contracts. +The fair value of the foreign currency forward exchange contracts represents the estimated receipts or payments necessary to terminate the contracts. Hedge effectiveness is evaluated by the hypothetical derivative method. Any hedge ineffectiveness is reported within the cost of products sold caption of the consolidated statements of operations. Hedge ineffectiveness was not material in 2006 or 2005. If, in the future, the foreign exchange contracts are determined to be ineffective hedges or terminated before their contractual termination dates, the Company would be required to reclassify into earnings all or a portion of the unrealized amounts related to the cash flow hedges that are currently included in accumulated other comprehensive income within stockholders' equity. +COMPREHENSIVE INCOME +Comprehensive income represents net earnings and any revenue, expenses, gains and losses that, under accounting principles generally accepted in the United States, are excluded from net earnings and recognized directly as a component of stockholders' equity. +Ending accumulated other comprehensive income is as follows: +2006 +2005 +(Thousands of Dollars) +Foreign currency translation adjustments +$ +21,790 +$ +12,243 +Foreign currency cash flow hedge adjustments, net of taxes +(2006 - $614; 2005 - $287) +(1,048 +) +608 +Pension adjustments, net of taxes +(2006 - $8,664; 2005 - $1,779) +(16,819 +) +(3,453 +) +Accumulated other comprehensive income +$ +3,923 +$ +9,398 +RECLASSIFICATIONS +Certain amounts previously reported in 2005 and 2004 have been reclassified to conform with the presentation used in 2006. +A-10 +2. Inventories +Inventories of $71,420,000 at December 30, 2006 and $72,546,000 at December 31, 2005 have been valued using the LIFO method. If the FIFO method had been used, inventories would have been $8,191,000 and $8,858,000 higher than reported at December 30, 2006 and December 31, 2005, respectively. +3. Debt +Long-term debt consists of the following obligations: +2006 +2005 +(Thousands of Dollars) +6.5% senior notes payable +$ +21,429 +$ +32,385 +Other +42 +26 +21,471 +32,411 +Less current maturities +10,730 +10,972 +$ +10,741 +$ +21,439 +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 remaining unamortized balance at December 30, 2006 was $480,000. +The Company has an unsecured revolving credit agreement that allows for borrowings up to $150,000,000, subject to increase or decrease as specified in the credit agreement. This agreement, which expires in July 2010, requires that interest be paid at a variable rate based on one of the following options elected by the Company: prime, LIBOR or money market rate plus applicable spread. No amounts were outstanding under revolving credit facilities at December 30, 2006 or December 31, 2005. +The Company had commercial letters of credit outstanding of $2,813,000 and $2,936,000 at December 30, 2006 and December 31, 2005, 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 December 30, 2006, the Company was in compliance with all restrictive covenants. 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 2007 are as follows: 2008 - $10,726,000; 2009 - $8,000; 2010 - $7,000. +Interest costs of $170,000 in 2006, $208,000 in 2005 and $408,000 in 2004 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 2023. Certain leases contain renewal provisions and generally require the Company to pay utilities, insurance, taxes and other operating expenses. At December 30, 2006, minimum rental payments due under all noncancelable leases were as follows: 2007 - $13,020,000; 2008 - $11,979,000; 2009 - $10,456,000; 2010 - $8,366,000; 2011 - $6,909,000; thereafter - $30,329,000. +Rental expense under all operating leases consisted primarily of minimum rentals and totaled $13,934,000 in 2006, $12,403,000 in 2005 and $11,542,000 in 2004. +A-11 +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-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. +As of December 30, 2006, the Company had stock options outstanding or available for grant under stock incentive plans adopted in 1993, 1995, 1997, 1999, 2001, 2003 and 2005. Shares of restricted stock may also be granted under each of these plans, with the exception of the 1993 plan. As of December 30, 2006, the Company had approximately 3,908,000 stock incentive units available for issuance under the Stock Incentive Plan of 2005. Under the provisions of the Stock Incentive Plan of 2005, each option granted counts as one stock incentive unit and each share of restricted stock granted counts as two stock incentive units. In addition, as of December 30, 2006, the Company had approximately 534,000 stock incentive units available for grant under the balance of its other plans. Options granted under each plan have an exercise price equal to the fair market value of the underlying stock on the grant date, expire no later than ten years from the grant date and generally vest over three years. 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 during the vesting period (except for certain transfers for estate planning purposes for certain officers) and a requirement to forfeit all or a certain portion of the award upon certain terminations of employment or upon failure to achieve performance criteria in certain instances. These restrictions lapse over a three- to five-year period from the date of the award. The Company has elected to recognize expense for these stock-based incentive plans ratably over the vesting term on a straight-line basis. Certain option and restricted share awards provide for accelerated vesting under various scenarios, including retirement and upon a change in control of the Company. With regard to acceleration of vesting upon retirement, employees of eligible retirement age are vested in accordance with plan provisions and applicable stock option and restricted stock agreements. The Company issues shares to plan participants upon exercise or vesting of stock-based incentive awards from either authorized, but unissued, shares or treasury shares. +A-12 +A summary of the transactions under the stock option plans is as follows: +Shares +Under +Option +Weighted- +Average +Exercise +Price +Average +Remaining +Contractual +Term +(Years) +Aggregate +Intrinsic +Value +Outstanding at January 3, 2004 +6,632,964 +$10.41 +Granted +1,938,069 +17.75 +Exercised +(2,880,498 +) +9.90 +Cancelled +(108,186 +) +13.60 +Outstanding at January 1, 2005 +5,582,349 +$13.14 +5.8 +$43,531,000 +Granted +643,695 +22.89 +Exercised +(1,166,838 +) +11.62 +Cancelled +(18,494 +) +16.30 +Outstanding at December 31, 2005 +5,040,712 +$14.72 +5.6 +$39,201,000 +Granted +735,210 +22.71 +Exercised +(1,168,639 +) +12.51 +Cancelled +(32,338 +) +20.46 +Outstanding at December 30, 2006 +4,574,945 +$16.53 +5.6 +$54,873,000 +Estimated forfeitures +(7,796 +) +Vested or expected to vest at +December 30, 2006 +4,567,149 +$16.52 +5.6 +$54,828,000 +Nonvested at December 30, 2006 +and expected to vest +(670,004 +) +Exercisable at December 30, 2006 +3,897,145 +$15.46 +5.0 +$50,890,000 +The total pre-tax intrinsic value of options exercised during the year ended December 30, 2006 was $14,375,000. As of December 30, 2006, there was $1,639,000 of unrecognized compensation cost related to stock option awards that is expected to be recognized over a weighted-average period of 0.7 years. +The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company's closing stock price of $28.52 as of December 30, 2006, which would have been received by the option holders had all option holders exercised in-the-money options as of that date. The total number of in-the-money options exercisable as of December 30, 2006 was 3,897,145. As of December 31, 2005, 5,040,712 outstanding options were exercisable, and the weighted-average exercise price was $14.72. +A summary of the nonvested restricted shares issued under stock award plans is as follows: +Shares +Weighted- +Average +Grant Date +Fair Value +Nonvested at January 3, 2004 +985,877 +$ 9.32 +Granted +300,861 +15.48 +Vested +(367,442 +) +8.00 +Forfeited +(13,734 +) +12.37 +Nonvested at January 1, 2005 +905,562 +$ 11.85 +Granted +188,150 +23.03 +Vested +(159,821 +) +10.80 +Forfeited +- +- +Nonvested at December 31, 2005 +933,891 +$ 14.28 +Granted +178,950 +22.59 +Vested +(324,735 +) +12.06 +Forfeited +(12,296 +) +17.09 +Nonvested at December 30, 2006 +775,810 +$ 17.09 +A-13 +As of December 30, 2006, there was $5,001,000 of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under restricted stock award plans. That cost is expected to be recognized over a weighted-average period of 1.3 years. The total fair value of shares vested during the year ended December 30, 2006 was $7,283,000. +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 $31,025,000 at December 30, 2006 and $28,557,000 at December 31, 2005 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 $2,100,000 in 2006, $2,031,000 in 2005 and $1,788,000 in 2004. The Company has certain defined contribution plans at foreign subsidiaries. Contributions to these plans were $978,000 in 2006, $962,000 in 2005 and $832,000 in 2004. The Company also has a defined benefit plan at a foreign location that provides for retirement benefits based on years of service. At December 30, 2006, the obligation recorded under this plan was $2,500,000 with the majority recognized in the deferred compensation liability on the accompanying balance sheet. +On December 30, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans . SFAS No. 158 requires the Company to recognize the funded status of its pension plans in the December 30, 2006 consolidated balance sheets, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at adoption represents the net unrecognized actuarial losses and unrecognized prior service costs, which were previously netted against the plan's funded status in the Company's consolidated balance sheets pursuant to the provisions of SFAS No. 87, Employers' Accounting for Pensions . These amounts will be subsequently recognized as a component of net periodic pension cost on the same basis as the amounts recognized in accumulated other comprehensive income at adoption of SFAS No. 158. +The incremental effects of adopting the provisions of SFAS No. 158 on the Company's consolidated balance sheets at December 30, 2006 are presented in the following table. There was no effect on the Company's consolidated statements of operations for the year ended December 30, 2006, or for any prior period presented, and it will not affect the Company's operating results in future periods. +A-14 +Before +Implementation +of SFAS No. 158 +Change +Due to +SFAS No. 158 +After +Implementation +of SFAS No. 158 +(Thousands of Dollars) +Assets: +Prepaid pension cost +$ +28,443 +$ +(18,210 +) +$ +10,233 +Deferred income taxes +1,936 +6,728 +8,664 +Intangible asset - pension +854 +(854 +) +- +Total assets +$ +31,233 +$ +(12,336 +) +$ +18,897 +Liabilities and Stockholders' Equity: +Accrued pension liabilities +$ +21,166 +$ +1,578 +$ +22,744 +Accumulated other comprehensive income +(3,759 +) +(13,060 +) +(16,819 +) +Total liabilities and stockholders' equity +$ +17,407 +$ +(11,482 +) +$ +5,925 +The Company currently 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 +2006 +2005 +(Thousands of Dollars) +Change in projected benefit obligations: +Projected benefit obligations at beginning of the year +$ +167,631 +$ +156,868 +Service cost pertaining to benefits earned during the year +4,940 +4,272 +Interest cost on projected benefit obligations +10,342 +9,444 +Actuarial losses +1,124 +4,108 +Benefits paid to plan participants +(7,775 +) +(7,061 +) +Projected benefit obligations at end of the year +$ +176,262 +$ +167,631 +Change in fair value of pension assets: +Fair value of pension assets at beginning of the year +$ +158,407 +$ +144,272 +Actual return on plan assets +8,991 +17,442 +Company contributions +3,875 +3,754 +Benefits paid to plan participants +(7,775 +) +(7,061 +) +Fair value of pension assets at end of the year +$ +163,498 +$ +158,407 +Funded status +$ +(12,764 +) +$ +(9,224 +) +Amounts recognized in the consolidated balance sheets: +Non current assets +10,233 +34,809 +Non current liabilities +(22,997 +) +(20,016 +) +Net amount recognized +$ +(12,764 +) +$ +14,793 +Amounts recognized in accumulated other comprehensive income, net of tax: +Unrecognized net actuarial loss +3,759 +3,453 +Effect of adoption of SFAS No. 158: +Unrecognized net actuarial loss +11,770 +- +Unrecognized prior service cost +1,290 +- +Net amount recognized +$ +16,819 +$ +3,453 +Funded status of pension plans and SERP (supplemental): +Funded status of qualified defined benefit plans and SERP +$ +(12,764 +) +$ +(9,224 +) +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 +29,020 +26,212 +Net funded status of pension plans and SERP (supplemental) +$ +16,256 +$ +16,988 +A-15 +The Company made contributions of $253,000 and $178,000 subsequent to the measurement date and before the fiscal years ended 2006 and 2005, respectively. +Information for pension plans with an accumulated benefit obligation in excess of plan assets: +September 30 +2006 +2005 +(Thousands of Dollars) +Projected benefit obligations +$ +32,847 +$ +24,216 +Accumulated benefit obligations +31,268 +22,815 +Fair value of plan assets +9,463 +2,799 +The accumulated benefit obligations for all defined benefit pension plans and the SERP were $165,935,000 and $157,931,000 at September 30, 2006 and 2005, respectively. +The following is a summary of net pension and SERP cost recognized by the Company: +2006 +2005 +2004 +(Thousands of Dollars) +Service cost pertaining to benefits earned during the year +$ +(4,940 +) +$ +(4,272 +) +$ +(3,983 +) +Interest cost on projected benefit obligations +(10,342 +) +(9,444 +) +(8,991 +) +Expected return on pension assets +12,844 +12,013 +11,906 +Net amortization loss +(8,743 +) +(7,800 +) +(5,548 +) +Net pension cost +$ +(11,181 +) +$ +(9,503 +) +$ +(6,616 +) +The prior service cost and actuarial loss included in accumulated other comprehensive income and expected to be recognized in net periodic pension cost during 2007 is $427,000 ($282,000, net of tax) and $4,952,000 ($3,268,000, net of tax), respectively. Expense for qualified defined benefit pension plans was $8,759,000 in 2006, $7,916,000 in 2005 and $4,825,000 in 2004. +2006 +2005 +Weighted average assumptions used to determine benefit obligations at September 30: +Discount rate +6.25% +6.00% +Rate of compensation increase +3.50% +3.50% +Weighted average assumptions used to determine net periodic benefit cost for the years ended: +Discount rate +6.00% +5.98% +Expected long-term rate of return on plan assets +8.75% +8.75% +Rate of compensation increase +3.50% +3.50% +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. +2006 +2005 +Weighted average asset allocations at September 30 by asset category are as follows: +Equity securities +72.6% +74.4% +Fixed income investments +20.0% +19.7% +Cash and money market investments +7.4% +5.9% +100.0% +100.0% +A-16 +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. +The Company expects to contribute $3,000,000 to its qualified defined benefit pension plans and $938,000 to the SERP in 2007. +Expected benefit payments for the five years subsequent to 2006 and the sum of the five years following those are as follows: 2007 - $8,061,000; 2008 - $8,632,000; 2009 - $9,092,000; 2010 - $9,430,000; 2011 - $9,878,000; and 2012 through 2016 - $58,874,000. +7. Income Taxes +The provisions for income taxes consist of the following: +2006 +2005 +2004 +(Thousands of Dollars) +Currently payable: +Federal +$ +35,442 +$ +30,458 +$ +23,096 +State and foreign +11,746 +11,230 +6,604 +Deferred (credit) expense +(8,543 +) +(4,908 +) +1,179 +$ +38,645 +$ +36,780 +$ +30,879 +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: +2006 +2005 +2004 +(Thousands of Dollars) +Income taxes at statutory rate +$ +42,850 +$ +38,937 +$ +33,975 +State income taxes, net of federal income tax reduction +349 +314 +343 +Nontaxable earnings of foreign affiliates +(2,123 +) +(1,625 +) +(2,186 +) +Research and development credits +(481 +) +(740 +) +(550 +) +Repatriation of earnings of foreign subsidiaries +- +1,400 +- +Foreign earnings taxed at rates differing from +the U.S. statutory rate +(93 +) +(853 +) +(313 +) +Tax reserve adjustments +(1,535 +) +- +- +Other +(322 +) +(653 +) +(390 +) +$ +38,645 +$ +36,780 +$ +30,879 +Significant components of the Company's deferred income tax assets and liabilities as of the end of 2006 and 2005 are as follows: +2006 +2005 +(Thousands of Dollars) +Deferred income tax assets: +Accounts receivable and inventory valuation allowances +$ +4,570 +$ +2,541 +Deferred compensation accruals +2,140 +2,019 +Future benefit of foreign net operating losses +254 +254 +Accrued pension costs +8,664 +1,779 +Other amounts not deductible until paid +8,422 +5,623 +Total deferred income tax assets +24,050 +12,216 +Deferred income tax liabilities: +Tax over book depreciation +(6,388 +) +(8,131 +) +Prepaid pension costs +(3,983 +) +(6,821 +) +Other +(1,597 +) +(1,511 +) +Total deferred income tax liabilities +(11,968 +) +(16,463 +) +Net deferred income tax assets (liabilities) +$ +12,082 +$ +(4,247 +) +A-17 +In 2005, the Company elected to repatriate earnings of foreign subsidiaries as provided under the American Jobs Creation Act of 2004 (the "Act"), which was enacted on October 22, 2004. The Act provides for a tax deduction of 85% of certain foreign earnings that were repatriated in 2005. During the fourth quarter of fiscal 2005, the Company repatriated $41,547,000 of eligible foreign earnings for this deduction and as a result recorded tax expense of $1,400,000. +No provision has been made for U.S. federal and state income taxes or foreign taxes that may result from future remittances of the remaining undistributed earnings of foreign subsidiaries of $125,293,000 at December 30, 2006 as the Company expects such earnings will remain invested overseas indefinitely. (At December 31, 2005, undistributed foreign earnings were $89,239,000). +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, 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: +2007 +2008 +2009 +2010 +2011 +(Thousands of Dollars) +Minimum royalties +$1,152 +$1,062 +$1,328 +$1,544 +$1,772 +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 $3,159,000, $3,145,000 and $3,100,000 for 2006, 2005 and 2004, 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 $2,331,000, $1,906,000 and $1,982,000 for 2006, 2005 and 2004, respectively. +9. Business Segments +The Company has one reportable segment that is engaged in manufacturing, sourcing, marketing, licensing and distributing branded footwear, apparel and accessories to the retail sector, including casual shoes, dress shoes, performance outdoor footwear, boots, uniform shoes, work shoes, slippers, moccasins and apparel and accessories. Revenue of this segment is derived from the sale of branded footwear to external customers as well as royalty income from the licensing of the Company's trademarks and brand names to licensees and distributors. The business units comprising the branded footwear and licensing segment manufacture or source, market and distribute products in a similar manner. Branded footwear +A-18 +and licensed products are distributed through wholesale channels and under licensing and distributor arrangements. +The other business units in the following tables consist of the Company's retail, tannery and pigskin procurement operations. The Company operated 82 domestic retail stores and 14 consumer-direct internet sites at December 30, 2006 that sell Company-manufactured and sourced products, as well as footwear manufactured by unaffiliated companies. The other business units distribute products through retail and wholesale channels. +The Company measures segment profits as earnings before income taxes and minority interest. The accounting policies used to determine profitability and total assets of the branded products and other business segments are the same as disclosed in Note 1. +Business segment information is as follows: +2006 +Branded +Footwear +and Licensing +Other +Businesses +Corporate +Consolidated +(Thousands of Dollars) +Revenue +$ +1,036,929 +$ +104,958 +$ +- +$ +1,141,887 +Intersegment sales +38,712 +2,798 +- +41,510 +Interest (income) expense - net +9,862 +1,050 +(11,114 +) +(202 +) +Depreciation expense +7,339 +3,859 +8,443 +19,641 +Earnings (loss) before income taxes +133,463 +6,976 +(18,147 +) +122,292 +Total assets +439,248 +50,040 +181,804 +671,092 +Additions to property, plant and equipment +6,943 +3,205 +6,919 +17,067 +2005 +Branded +Footwear +and Licensing +Other +Businesses +Corporate +Consolidated +(Thousands of Dollars) +Revenue +$ +964,522 +$ +96,477 +$ +- +$ +1,060,999 +Intersegment sales +36,232 +3,437 +- +39,669 +Interest (income) expense - net +9,706 +1,009 +(8,804 +) +1,911 +Depreciation expense +7,845 +3,735 +7,890 +19,470 +Earnings (loss) before income taxes +120,668 +5,847 +(15,268 +) +111,247 +Total assets +406,024 +41,600 +178,956 +626,580 +Additions to property, plant and equipment +7,975 +4,721 +6,464 +19,160 +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 +A-19 +Geographic information, based on shipping destination, related to revenue from external customers included in the consolidated statements of operations is as follows: +2006 +2005 +2004 +(Thousands of Dollars) +United States +$ +721,548 +$ +740,442 +$ +718,674 +Foreign countries: +Europe and Russia +266,522 +219,085 +193,461 +Canada +80,225 +66,955 +49,797 +Central and South America +20,725 +12,131 +9,084 +Asia +44,845 +13,960 +11,990 +Middle East/Africa +8,022 +8,426 +8,903 +Total foreign countries revenue +420,339 +320,557 +273,235 +$ +1,141,887 +$ +1,060,999 +$ +991,909 +The Company's long-lived assets (primarily property, plant and equipment and intangible assets) are as follows: +2006 +2005 +2004 +(Thousands of Dollars) +United States +$ +141,543 +$ +131,820 +$ +132,651 +Foreign countries +34,003 +40,277 +40,776 +The Company does not believe that it is dependent upon any single customer, since no customer 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. +Revenue derived from the branded footwear and licensing segment accounted for approximately 91% of revenue in 2006, 2005 and 2004. No other product groups account for more than 10% of consolidated revenue. +Approximately 10% of the Company's employees are subject to bargaining unit contracts extending through various dates ranging from 2007 through 2009. +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 quarters of 2006 and 2005 include 16 weeks. +A-20 +The Company's unaudited quarterly results of operations are as follows: +2006 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +(Thousands of Dollars, Except Per Share Data) +Revenue +$ +262,839 +$ +238,457 +$ +298,856 +$ +341,735 +Gross margin +105,875 +90,405 +117,542 +127,716 +Net earnings +19,629 +14,234 +26,140 +23,644 +Net earnings per share: +Basic +$ +.36 +$ +.26 +$ +.48 +$ +.42 +Diluted +.34 +.25 +.46 +.42 +2005 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +(Thousands of Dollars, Except Per Share Data) +Revenue +$ +245,175 +$ +215,706 +$ +279,116 +$ +321,002 +Gross margin +96,406 +84,454 +108,661 +115,678 +Net earnings +16,133 +13,257 +24,634 +20,443 +Net earnings per share: +Basic +$ +.28 +$ +.23 +$ +.44 +$ +.37 +Diluted +.27 +.22 +.42 +.36 +Adjustments in the fourth quarter resulted in an increase in net earnings of $743,000 ($.01 per share) in 2006 and a decrease in net earnings of $890,000 ($.02 per share) in 2005. These adjustments related primarily to inventories. +11. Business Acquisitions +During the second quarter of 2005, the Company purchased the remaining 5% ownership from the minority stockholder of Wolverine Europe Limited, making it a wholly-owned subsidiary. The purchase price was $2,322,000. The transaction eliminated the minority interest of $566,000 and resulted in goodwill of $1,756,000. +On January 3, 2005, the Company converted its Cat ® and Wolverine ® businesses in Canada from a non-affiliated distributor-based operation to a Company-owned wholesale operation. This expansion allowed the Company to directly wholesale all major brands in Canada. Assets consisting primarily of inventory, fixed assets and amortizable intangible assets totaling $2,117,000 and assumed liabilities of $883,000 were acquired from a former Wolverine ® and Cat ® Footwear distributor for cash of $2,280,000 and resulted in goodwill and intangible assets of $1,046,000. Consolidated pro forma revenue and net earnings, assuming the transaction occurred at the beginning of 2005, were not materially different from reported amounts. 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 amortizable intangible assets have a weighted average useful life of approximately ten years. +On January 3, 2005, the Company converted its Merrell ® operations in Sweden and Finland and its Sebago ® operations in the United Kingdom and Germany from a non-affiliated distributor-based operation to a Company-owned wholesale operation. Assets consisting primarily of inventory totaling $544,000 were acquired from former distributors for cash. +A-21 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +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 December 30, 2006 and December 31, 2005, 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 December 30, 2006. 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 December 30, 2006 and December 31, 2005, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 30, 2006, 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. +As discussed in Note 1 and Note 6 to the consolidated financial statements, in 2006 the Company changed its method of accounting for share-based payments and defined benefit plans in connection with the required adoption of Statement of Financial Accounting Standards Nos. 123(R) and 158, respectively. +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 December 30, 2006, 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 8, 2007 expressed an unqualified opinion thereon. +/s/ Ernst & Young LLP +Grand Rapids, Michigan +February 8, 2007 +A-22 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON +INTERNAL CONTROL OVER FINANCIAL REPORTING +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. and subsidiaries maintained effective internal control over financial reporting as of December 30, 2006, 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 December 30, 2006, 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 December 30, 2006, based on the COSO criteria. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2006 consolidated financial statements of Wolverine World Wide, Inc. and subsidiaries and our report dated February 8, 2007 expressed an unqualified opinion thereon. +/s/ Ernst & Young LLP +Grand Rapids, Michigan +February 8, 2007 +A-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 +(1) +(2) +Description +Balance at +Beginning of +Period +Charged to +Costs and +Expenses +Charged to +Other +Accounts +(Describe) +Deductions +(Describe) +Balance at +End of +Period +Fiscal year ended December 30, 2006 +Deducted from asset accounts: +Allowance for doubtful accounts +$ +4,656,000 +$ +3,106,000 +$ +1,438,000 +(A) +$ +6,324,000 +Allowance for sales returns +2,540,000 +29,675,000 +26,893,000 +(B) +5,322,000 +Allowance for cash discounts +1,533,000 +14,920,000 +14,779,000 +(C) +1,674,000 +Inventory valuation allowances +6,456,000 +9,954,000 +6,760,000 +(D) +9,650,000 +$ +15,185,000 +$ +57,655,000 +$ +49,871,000 +$ +22,970,000 +Fiscal year ended December 31, 2005 +Deducted from asset accounts: +Allowance for doubtful accounts +$ +4,834,000 +$ +1,706,000 +$ +1,884,000 +(A) +$ +4,656,000 +Allowance for sales returns +1,786,000 +28,405,000 +27,651,000 +(B) +2,540,000 +Allowance for cash discounts +1,580,000 +13,023,000 +13,070,000 +(C) +1,533,000 +Inventory valuation allowances +5,844,000 +10,941,000 +10,329,000 +(D) +6,456,000 +$ +14,044,000 +$ +54,075,000 +$ +52,934,000 +$ +15,185,000 +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 +8,385,000 +8,896,000 +(D) +5,844,000 +$ +16,817,000 +$ +49,173,000 +$ +51,946,000 +$ +14,044,000 +(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. 001-6024 +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +EXHIBITS +TO +FORM 10-K +For the Fiscal Year Ended +December 30, 2006 +Wolverine World Wide, Inc. +9341 Courtland Drive +Rockford, Michigan 49351 +EXHIBIT INDEX +Exhibit +Number +Document +3.1 +Restated Certificate of Incorporation. +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 +Restated Certificate of Incorporation. 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. +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. Previously filed as Exhibit 4.7 to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2005. Here incorporated by reference. +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 July 22, 2005, among Wolverine World Wide, Inc. and certain of its subsidiaries, JPMorgan Chase Bank, N.A., as Administrative Agent, Harris, N.A., as Syndication Agent, Comerica Bank, Standard Federal Bank N.A. and National City Bank of the Midwest, as Documentation Agents, and certain other Banks that are parties to the Credit Agreement. Previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated July 28, 2005. Here incorporated by reference. +10.1 +Amended and Restated 1993 Stock Incentive Plan.* +10.2 +Amended and Restated 1995 Stock Incentive Plan.* +10.3 +Amended and Restated 1997 Stock Incentive Plan.* +10.4 +Amended and Restated Stock Incentive Plan of 1999.* +10.5 +Amended and Restated Stock Incentive Plan of 2001.* +10.6 +Amended and Restated Stock Incentive Plan of 2003.* +10.7 +Amended and Restated Stock Incentive Plan of 2005.* +10.8 +Amended and Restated Directors' Stock Option Plan.* +10.9 +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. +10.10 +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. +10.11 +Amended and Restated Executive Long-Term Incentive Plan (3-Year Bonus Plan) (Restated as amended through February 10, 2005).* Previously filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Here incorporated by reference. +10.12 +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. +10.13 +Executive Severance Agreement.* Previously filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2005. Here incorporated by reference. An updated participant schedule of current executive officers who are parties to the agreement is attached as Exhibit 10.13. +10.14 +Form of Indemnification Agreement.* A participant schedule of current executive officers and directors who are parties to the agreement is attached to the agreement. +10.15 +Benefit Trust Agreement dated May 19, 1987, and Amendments Number 1, 2, 3 and 4 thereto.* +10.16 +Amended and Restated Supplemental Executive Retirement Plan.* An updated participant schedule is attached to the Plan. +10.17 +Employees' Pension Plan (Restated as amended through March 28, 2005).* Previously filed as Exhibit 10.19 to the Company Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Here incorporated by reference. +10.18 +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. Here incorporated by reference. +10.19 +Form of Non-Qualified Stock Option Agreement for 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. Here incorporated by reference. +ii +10.20 +Form of Non-Qualified Stock Option Agreement for employees other than those to whom Exhibit 10.19 applies.* Previously filed as Exhibit 10.3 to the Company's Current Report on Form 8-K dated February 9, 2005. Here incorporated by reference. +10.21 +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. Here incorporated by reference. +10.22 +Form of Incentive Stock Option Agreement.* Previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated February 15, 2006. Here incorporated by reference. +10.23 +Form of Non-Qualified Stock Option Agreement for Stephen L. Gulis, Blake W. Krueger and Timothy J. O'Donovan.* Previously filed as Exhibit 10.2 to the Company's Current Report of Form 8-K dated February 15, 2006. Here incorporated by reference. +10.24 +Form of Non-Qualified Stock Option Agreement for employees other than those to whom Exhibit 10.23 applies.* Previously filed as Exhibit 10.3 to the Company's Current Report on Form 8-K dated February 15, 2006. Here incorporated by reference. +10.25 +Form of Restricted Stock Agreement.* Previously filed as Exhibit 10.4 to the Company's Current Report on Form 8-K dated February 15, 2006. Here incorporated by reference. +10.26 +Form of Stock Option Agreement for non-employee directors.* Previously filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2005. Here incorporated by reference. +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 \ No newline at end of file diff --git a/raw/filings/0000110471/2006/0000905729-07-000103/filing_metadata.csv b/raw/filings/0000110471/2006/0000905729-07-000103/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..e45fb45aa2dafd4367d9f38a67481c1c6947b3b2 --- /dev/null +++ b/raw/filings/0000110471/2006/0000905729-07-000103/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000110471,WWW,WOLVERINE WORLD WIDE INC /DE/,10-K,2007-02-28,2006-12-30,2007-02-28T19:07:02.000Z,0000905729-07-000103,www10k_022807.htm,WOLVERINE WORLD WIDE FORM 10-K,1413839,0,0,https://www.sec.gov/Archives/edgar/data/110471/000090572907000103/www10k_022807.htm,https://www.sec.gov/Archives/edgar/data/110471/000090572907000103/,2006,2006,1 diff --git a/raw/filings/0000110471/2006/0000905729-07-000103/item1.txt b/raw/filings/0000110471/2006/0000905729-07-000103/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..62d6d14f248f1f15b026cd1a1660c28b097691ed --- /dev/null +++ b/raw/filings/0000110471/2006/0000905729-07-000103/item1.txt @@ -0,0 +1,88 @@ +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. 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. +Approximately 46.9 million pairs of Company branded footwear were sold during fiscal 2006, 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 ®, Patagonia ®, Sebago ® and Wolverine ® footwear. The Company believes that its primary competitive strengths are its well-recognized brand names, broad range of comfortable footwear, patented and proprietary designs and comfort technologies, numerous distribution channels and diversified manufacturing and sourcing base. Cat ® is a registered trademark of Caterpillar Inc., Harley-Davidson ® is a registered trademark of H-D Michigan, Inc. and Patagonia ® is a registered trademark of Patagonia, Inc. +The Company's footwear is sold under a variety of brand names designed to appeal to most consumers of casual, work and outdoor footwear at numerous price points. The Company's footwear products are organized under four operating units: (i) the Wolverine Footwear Group, focusing primarily on the Bates ®, HyTest ® and Wolverine ® product lines of work, outdoor, uniform and lifestyle boots and shoes, and Wolverine ® brand apparel, (ii) the Outdoor Group, currently focusing on the Sebago ®, Patagonia ® and Merrell ® product lines of performance and lifestyle footwear, and, beginning with the anticipated product launch in 2007, Merrell ® brand apparel, (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, and (iv) The Hush Puppies Company, focusing on the Hush Puppies ® brand of comfortable casual and dress 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 82 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 which Wolverine distributes operate multiple storefront locations. The Company's products are marketed worldwide in more than 170 countries through Company-owned wholesale operations, licensees and distributors. +3 +The Company, through its Wolverine Leathers Division, operates a tannery which tans pigskin leather for the shoe and leather goods industries. A significant portion of the pigskin leather tanned by the Company is used in 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 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 and apparel, including casual shoes and apparel, dress shoes, boots, uniform shoes, work shoes and rugged outdoor footwear and apparel. 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 and sandals under many recognizable brand names including Bates ®, Cat ®, Harley-Davidson ®, Hush Puppies ®, HyTest ®, Merrell ®, Patagonia ®, Sebago ® 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, socks, handbags and plush toys, and Wolverine ® brand gloves, eyewear, socks and headwear. +The Company's four branded footwear and licensing operating units are described below. +1. The Outdoor Group . The Outdoor Group consists of Merrell ®, Sebago ®, and Patagonia ® 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 addition to footwear, the Outdoor Group markets a line of Merrell ® packs, bags and luggage. The Outdoor Group also intends to launch a line of Merrell ® brand apparel in fiscal 2007. Merrell ® products are sold primarily through outdoor specialty retailers, department stores and catalogs. Merrell ® footwear is marketed in approximately 100 countries worldwide. +Sebago® Footwear. The Sebago ® product line consists primarily of performance nautical and American-inspired casual footwear for men and women such as boat shoes and handsewn loafers that have been manufactured and distributed since 1946. +4 +Highly recognized Sebago ® line extensions include Sebago Docksides ®, Drysides™ , Campsides™ and Athletic Marine. The Sebago ® product line is marketed in approximately 110 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. +Patagonia® Footwear. In 2005, the Company entered into a license agreement providing the Company with exclusive worldwide rights to manufacture, market, distribute and sell footwear under the Patagonia®, Water Girl® and other trademarks. The Outdoor Group has launched its Patagonia® Footwear line for Spring 2007. +2. Wolverine Footwear Group . The Wolverine Footwear Group encompasses footwear primarily under the Wolverine ®, Bates ®, and HyTest ® 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 124 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 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 trail 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 ® (a registered trademark of W.L. Gore & Associates, Inc.) and Thinsulate ® (a registered trademark of Minnesota Mining and Manufacturing Company) brand fabrics, the Company's performance leathers and patented DuraShocks ® technologies. The Wolverine Footwear Group has also launched a line of work and rugged casual Wolverine ® brand apparel. In addition, the Wolverine ® brand is licensed for use on eyewear, headwear, gloves and socks. +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 +5 +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. +3. The Heritage Brands Group . The Heritage Brands Group consists of Caterpillar ® Footwear and Harley-Davidson ® Footwear. +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 approximately 150 countries worldwide. Cat ®, Caterpillar ®, Cat & Design ®, Walking Machines ® and Marine Power ® are registered trademarks of Caterpillar Inc. +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. Harley-Davidson ® is a registered trademark of H-D Michigan, Inc. +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 marketed in approximately 130 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, socks, watches and plush toys. +6 +Other Businesses. +In addition to manufacturing, sourcing, marketing and distributing the Company's footwear and apparel 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 82 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 82 domestic retail shoe stores as of February 2007. These stores are under the Hush Puppies ®, Hush Puppies and Family SM , Track'N Trail® and Rockford Footwear Depot SM names. Both the Rockford Footwear Depot SM and Track'N Trail® retail formats carry a large selection of Company branded footwear featuring such brands as Wolverine® , Merrell® , Hush Puppies® , Cat® , Patagonia®, Sebago® and Harley-Davidson® . The Company also operates direct-to-customer retail websites, including www.upfootgear.com , www.trackandtrail.com , www.catfootwear.com , www.hushpuppies.com and www.sebago.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 +7 +believes its footwear brand names provide a competitive advantage and the Company makes significant 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 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. Such contracts typically contain future purchase options that are not required to be exercised. +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 2006. +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 (i) sales of branded footwear products generated from the Company's owned operations in Canada, the United Kingdom, Austria, Finland, France, Germany, Italy, The Netherlands, Spain, Sweden and Switzerland and from sales to international distributors for certain markets and businesses, and (ii) from royalty income through a network of independent licensees and distributors. The Company's owned operations include Hush Puppies (UK) Ltd., Wolverine Europe B.V. (formerly known as Merrell Europe B.V.), Merrell (Europe) Limited, Wolverine Europe Limited and Wolverine World Wide Corporation, Inc. (formerly known as +8 +Hush Puppies Canada Footwear, Ltd.). 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 military footwear and work, casual and dress casual footwear in its owned facilities. +The Company sources a majority of its footwear from a variety of foreign manufacturing facilities in the Asia-Pacific region, South America and India. 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. +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, +9 +(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 the 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. The Company and its licensees receive a majority of their pigskin leather 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, tariffs and duties, 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 TM , Wolverine Compressor TM , Hidden Tracks ®, iTechnology TM , Bounce ®, Comfort Curve ®, HyTest ®, Merrell ®, Continuum ®, Sebago ®, Q-Form TM and Track'N Trail ®. Pigskin leather produced by the Company's Wolverine Leathers Division is sold under the trademarks Wolverine Leathers ®, Wolverine Warrior Leather ®, Weather Tight ® and All Season Weather Leathers ™. The Company has obtained license rights to manufacture, market and distribute footwear throughout the world under the Cat ®, Harley-Davidson ® and Patagonia ® 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 Company's license agreement for Stanley ® footgear will terminate effective June 30, 2008. The Cat ® footwear license has a current term extending through December 2011. The Harley-Davidson ® footwear license is long term and extends for more than five years. The Patagonia ® footwear license extends for more than five years and also includes conditional renewal options. All of these license agreements are subject to early termination provisions. +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 +10 +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 February 17, 2007, the Company had an order backlog of approximately $354 million compared with an order backlog of approximately $317 million at February 18, 2006, determined on a basis consistent with the current year. Substantially all of the backlog relates to demand for products expected to be shipped in 2007. 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 ability to control costs, 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 and sourcing efficiencies, 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 December 30, 2006, the Company had approximately 4,532 domestic and foreign production, office and sales employees. Approximately 457 employees were covered by four union contracts expiring at various dates through April 30, 2009. 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, www.wolverineworldwide.com. Printed copies of the documents listed above are available, without charge, by writing to the Company at 9341 Courtland Drive, N.E., Rockford, Michigan 49351, Attention: General Counsel. +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. \ No newline at end of file diff --git a/raw/filings/0000110471/2006/0000905729-07-000103/item13.txt b/raw/filings/0000110471/2006/0000905729-07-000103/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..9cac6a368e9bcea3c963dae4865553bf345d2260 --- /dev/null +++ b/raw/filings/0000110471/2006/0000905729-07-000103/item13.txt @@ -0,0 +1,2 @@ +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 with respect to the Annual Meeting of Stockholders to be held on April 19, 2007, is incorporated herein by reference. The information contained under the caption "Corporate Governance Principles" under the subheading "Independence" contained in the definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 19, 2007, is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000110471/2006/0000905729-07-000103/item9a.txt b/raw/filings/0000110471/2006/0000905729-07-000103/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..755bc2d78723475062df70fb60397ceab9d07c3c --- /dev/null +++ b/raw/filings/0000110471/2006/0000905729-07-000103/item9a.txt @@ -0,0 +1,10 @@ +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. There have been no changes during the year ended December 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. +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 +35 +financial reporting as of December 30, 2006, 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 December 30, 2006. +Management's assessment of the effectiveness of our internal control over financial reporting as of December 30, 2006 has been audited by Ernst & Young LLP, an independent registered public accounting 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 December 30, 2006 that has materially affected, or that is reasonably likely to materially affect, the Company's internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000110471/2006/0000905729-07-000103/rp_note.txt b/raw/filings/0000110471/2006/0000905729-07-000103/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000110471/2006/0000905729-07-000103/rpt_disclosure.txt b/raw/filings/0000110471/2006/0000905729-07-000103/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..8611eefca6475e751d1909e7f320f64b06f1cfd1 --- /dev/null +++ b/raw/filings/0000110471/2006/0000905729-07-000103/rpt_disclosure.txt @@ -0,0 +1,348 @@ +“Certain Relationships and Related Transactions.” +7 +Table of Contents +Stock +Ownership Requirements for Directors and Executive +Officers +For many years, the Board has believed that directors and +management should have a significant financial stake in +Wolverine to align their interests with those of the +stockholders. For that reason, several years ago the Board +adopted formal requirements that directors and executive +management own specified amounts of Wolverine stock (including +ownership credit for stock units allocated to non-employee +directors under the Deferred Compensation Plan) within five +years of their respective election to the Board or appointment +as a member of executive management. The ownership requirements +are as follows: (i) for directors, five times the current +Board retainer, (ii) for the Chief Executive Officer, five +times base salary, (iii) for other executive officers, +between two and three times base salaries, and (iv) for +other executive management, between one and two times base +salaries. +Code of +Conduct & Compliance +For years, Wolverine and its employees and directors have +followed an extensive Code of Conduct & Compliance +(“Code”). This comprehensive Code establishes basic +guidelines to help employees and directors comply with +applicable legal requirements and sets forth Wolverine’s +expectations regarding business ethics, integrity, honesty, +fairness and keeping commitments. The Code contains +Wolverine’s principles and procedures regarding conflicts +of interest, corporate opportunities, confidentiality, fair +dealing, protection and proper use of Wolverine’s assets, +compliance with laws, rules and regulations, engagement criteria +for Wolverine’s trading partners, “whistle +blower” protection provisions, expectations regarding the +integrity of books and records, and guidelines and procedures +for many other subjects. Employees are surveyed annually to +identify any areas of noncompliance with the Code, and the +results of this survey are reported to the Board. +Accounting +and Finance Code of Ethics +The Board has adopted an Accounting and Finance Code of Ethics +(“Finance Ethics Code”). This is an ethics code +focused on the financial reporting process and is intended to +protect the interests of all of Wolverine’s constituents, +including stockholders, employees, customers and the communities +in which Wolverine conducts business. Many of the basic tenets +of the Finance Ethics Code have been incorporated for many years +in the Code. The Finance Ethics Code is applicable to +Wolverine’s Chief Executive Officer, Chief Financial +Officer and Corporate Controller and sets forth specific rules +of conduct and expectations regarding the financial reporting +process, protection of Wolverine’s assets, compliance with +rules and regulations and honest and ethical conduct in +connection with the financial reporting process and related +disclosures. The Finance Ethics Code and the Code are available +on the Corporate Governance section of the Investors section of +Wolverine’s website at www.wolverineworldwide.com , +where Wolverine will post any waiver of these codes for +directors or executive officers. +Board +Committee Charters +The Board has organized and formed three committees, the Audit +Committee, the Compensation Committee and the Governance +Committee. The Board has approved a committee charter for each +committee that contains basic principles regarding the +committee’s organization, purpose, authority and +responsibilities. The performance of each committee is reviewed +annually by committee members and the Board. +Leadership +Since 1993, the Board has operated with an independent Lead +Director, who is selected by the independent directors. The +duties of the independent Lead Director include: +(a) working closely with the Chairman regarding the agenda +and scheduling for Board and committee meetings; +(b) overseeing information sent to the Board; +(c) presiding over executive sessions; (d) serving as +a liaison between the Chairman and the independent Directors; +(e) presiding over Board meetings in the absence of the +Chairman; and (f) being available for consultation and +communications with stockholders as appropriate. +Attendance +The Board prides itself on its ability to recruit and retain +directors who have a diversity of experience, who have the +highest personal and professional integrity, who have +demonstrated exceptional ability and judgment and who are +effective (in conjunction with the other members of the Board) +in collectively serving the long-term interests of the +stockholders. Board and committee attendance is central to the +proper functioning of the Board of Directors and is a priority. +Directors are expected to make every effort to attend every +Board meeting. Directors are also expected to attend the Annual +Meeting of Stockholders in person. All 11 then-current directors +attended the 2007 annual meeting. +8 +Table of Contents +Communication +with the Board +Stockholders and interested parties may communicate with members +of Wolverine’s Board of Directors through various links +provided on the Corporate Governance section of the Investors +section of Wolverine’s website at +www.wolverineworldwide.com or by sending correspondence +to the Board, a specific Board committee or a Board member +c/o General +Counsel, Wolverine World Wide, Inc., 9341 Courtland Drive, N.E., +Rockford, Michigan 49351. Any communications submitted by any of +the above means (or the means described below) are received by +Wolverine’s General Counsel and forwarded to the +appropriate person or persons. Complaints or concerns regarding +Wolverine’s financial statements and accounting, auditing, +internal control and reporting practices can be reported to the +audit committee (including anonymous and confidential +submissions) by sending an +e-mail to +financialconcerns@wwwinc.com or by writing to the audit +committee +c/o the +General Counsel at the above address. +Board and +Company Culture +Wolverine’s comprehensive governance guidelines and +principles are coupled with a robust, open and effective Board +environment that promotes respect, trust and candor, fosters a +culture of open dissent and permits each director to express +opinions and contribute to the Board process. Directors are +expected to have unrestricted access to management and any +company information they desire. The participation of Board +members and the open exchange of opinions is further encouraged +at the Board committee level through the periodic rotation of +Board members among its standing committees. This open and +candid operating environment is shared by management and the +Board and is essential to fully realize the benefits of +Wolverine’s formal governance guidelines, principles, +charters and policies. +9 +Table of Contents +Ownership +of Wolverine Stock +Five +Percent Stockholders +The following table sets forth information concerning the number +of shares of Wolverine stock held by each entity known to +Wolverine to be the beneficial owner of more than five percent +of Wolverine’s outstanding shares of common stock: +Five Percent Stockholders +Amount and Nature of Beneficial +Ownership of Common Stock +Shared Voting +Total +Name and Address +Sole Voting +Sole Dispositive +or Dispositive +Beneficial +Percent +of Beneficial Owner +Power +Power +Power +Ownership +of Class +Barclays Global Investors, NA(1) +2,326,764 +3,034,322 +0 +3,034,322 +5.8 +45 Fremont Street +San Francisco, CA 94105 +Franklin Resources, Inc.(2) +3,092,239 +3,092,239 +0 +3,092,239 +5.9 +One Franklin Parkway +San Mateo, CA 94403 +(1) +Based on information set forth in Schedule 13G filed +February 5, 2008. The Schedule 13G indicates that +Barclays Global Investors, NA and other related entities (some +of which are investment advisors or banks) beneficially own, in +the aggregate, 3,034,322 shares of Wolverine common stock. +(2) +Based on information set forth in Schedule 13G filed +February 8, 2008. The Schedule 13G indicates that +Franklin Resources, Inc. and one or more open- or close-end +investment companies and other managed accounts that are +investment management clients of investment managers that are +direct and indirect subsidiaries of Franklin Resources, Inc. +beneficially own, in the aggregate, 3,092,239. +10 +Table of Contents +Stock +Ownership By Management +The following table sets forth the number of shares of common +stock beneficially owned as of March 3, 2008, by each of +Wolverine’s directors and nominees for director, each of +the named executive officers and all of Wolverine’s +directors, nominees for director and executive officers as a +group. An asterisk in the column for “Percent of +Class” means the individual beneficially owns less than one +percent of the common stock: +Stock Ownership By Management +Amount and Nature of Beneficial +Ownership of Common Stock(1) +Sole Voting +Shared Voting +Total +Name of +and Dispositive +or Dispositive +Stock +Beneficial +Percent +Beneficial Owner +Power +Power(2) +Options(3) +Ownership(3) +of Class +Jeffrey M. Boromisa +— +— +10,736 +10,736 +* +Kenneth A. Grady +6,800 +— +3,034 +9,834 +* +William K. Gerber +500 +— +6,891 +7,391 +* +Alberto L. Grimoldi +10,168 +— +42,784 +52,952 +* +Stephen L. Gulis, Jr. +158,632 +1,890 +254,529 +415,051 +* +David T. Kollat +83,934 +— +56,665 +140,599 +* +Blake W. Krueger +234,899 +— +283,037 +517,936 +1.01 +Brenda J. Lauderback +5,100 +— +11,040 +16,140 +* +Phillip D. Matthews(4) +34,238 +— +56,665 +90,903 +* +David P. Mehney +50,520 +49,250 +56,665 +156,435 +* +Timothy J. O’Donovan +309,510 +125,821 +502,351 +937,682 +1.83 +Nicholas P. Ottenwess +33,291 +190 +85,961 +119,442 +* +Shirley D. Peterson +3,000 +— +19,603 +22,603 +* +Michael A. Volkema +5,000 +— +14,903 +19,903 +* +James D. Zwiers +37,641 +— +32,842 +70,483 +* +All directors and executive officers as a group +980,233 +177,151 +1,437,706 +2,595,090 +5.07 +(1) +The numbers of shares stated are based on information provided +by each person listed and include shares personally owned of +record and shares that, under applicable regulations, are +considered to be otherwise beneficially owned. +(2) +These numbers include shares over which the listed person is +legally entitled to share voting or dispositive power by reason +of joint ownership, trust or other contract or property right, +and shares held by spouses, children or other relatives over +whom the listed person may have influence by reason of +relationship. +(3) +The numbers in the Stock Options column represent shares that +may be acquired within 60 days after March 3, 2008, by +the exercise of stock options granted under Wolverine’s +various stock option plans. These numbers are also included in +the Total Beneficial Ownership column. +(4) +Mr. Matthews pledged 34,238 shares of Wolverine common +stock in connection with a post-paid variable forward sale +contact entered into on February 15, 2007 with an +unaffiliated third party buyer. +11 +Table of Contents +Executive +Compensation +COMPENSATION \ No newline at end of file diff --git a/raw/filings/0000110471/2008/0001362310-09-003153/filing.txt b/raw/filings/0000110471/2008/0001362310-09-003153/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..b2b6c384017d043d4c269c2d0744e82c5a6752f2 --- /dev/null +++ b/raw/filings/0000110471/2008/0001362310-09-003153/filing.txt @@ -0,0 +1,6158 @@ +10-K +1 +c81880e10vk.htm +FORM 10-K +Filed by Bowne Pure Compliance +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +þ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE +ACT OF 1934 +For the fiscal year ended January 3, 2009 +o +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: 001-6024 +WOLVERINE WORLD WIDE, INC. +(Exact name of registrant as specified in its charter) +Delaware +38-1185150 +(State or other jurisdiction of +(I.R.S. Employer Identification No.) +incorporation or organization) +9341 Courtland Drive, Rockford, Michigan +49351 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: (616) 866-5500 +Securities registered pursuant to Section 12(b) of the Securities Exchange Act: +Title of each class +Name of each exchange on which registered +Common Stock, $1 Par Value +New York Stock Exchange +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule +405 of the Securities Act. Yes þ No o +Indicate by check mark whether the registrant is not required to file reports pursuant to Section +13 or Section 15(d) of the Act. Yes o No þ +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 þ No o +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. o +Indicate +by check mark whether the registrant is a large accelerated filer, an accelerated +filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large +accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the +Exchange Act. +Large accelerated filer þ +Accelerated filer o +Non-Accelerated filer o +Smaller reporting company o +(do not check if a smaller reporting company) +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the +Act). Yes o No þ +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 14, 2008, the last +business day of the registrant’s most recently completed second fiscal quarter: $1,333,734,754. +Number of shares outstanding of the registrant’s Common Stock, $1 par value (excluding shares of +treasury stock) as of February 23, 2009: 49,516,160. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the definitive proxy statement for the registrant’s annual stockholders’ meeting to be +held April 23, 2009 are incorporated by reference into Part III of this report. +Table of Contents +Part I +Item 1. Business +5 +Item 1A. Risk Factors +14 +Item 1B. Unresolved Staff Comments +22 +Item 2. Properties +22 +Item 3. Legal Proceedings +22 +Item 4. Submission of Matters to a Vote of Security Holders +23 +Supplemental Item. Executive Officers of the Registrant +23 +Part II +Item 5. Market for Registrants’ Comment Equity, Related Stockholder Matters and Issuer +Purchases of Securities +25 +Item 6. Selected Financial Data +28 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +28 +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +46 +Item 8. Financial Statements and Supplementary Data +46 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +46 +Item 9A. Controls and Procedures +46 +Item 9B. Other Information +46 +Part III +Item 10. Directors, Executive Officers and Corporate Governance +47 +Item 11. Executive Compensation +47 +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related +Stockholder Matters +48 +Item 13. Certain Relationships and Related Transactions, and Director Independence +50 +Item 14. Principal Accounting Fees +50 +Item 15. Exhibits, Financial Statement Schedules +50 +Signatures +54 +Exhibit 10.1 +Exhibit 10.2 +Exhibit 10.3 +Exhibit 10.4 +Exhibit 10.5 +Exhibit 10.6 +Exhibit 10.7 +Exhibit 10.8 +Exhibit 10.10 +Exhibit 10.11 +Exhibit 10.13 +Exhibit 10.26 +Exhibit 10.27 +Exhibit 10.28 +Exhibit 10.30 +Exhibit 10.31 +Exhibit 10.32 +Exhibit 21 +Exhibit 23 +Exhibit 24 +Exhibit 31.1 +Exhibit 31.2 +Exhibit 32 +2 +Table of Contents +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. Forward-looking statements include, without limitation, +those related to: +• +future revenue, earnings, margins, growth, cash flows, operating measurements, tax rates +and tax benefits; +• +expected economic returns; +• +projected 2009 operating results and dividend rates; +• +future share repurchase activity; +• +the effect of new accounting rules and guidance; +• +future strength of the Company; +• +future brand positioning; +• +seasonal sales patterns and capital requirements; +• +ability to arrange adequate alternative sources of supply; +• +the outcome of litigation; +• +achievement of the Company vision; +• +future pension expenses, contributions and costs; +• +future marketing investments; +• +the ability to successfully extend into new lines or categories of products, including +the extension into Merrell ® Apparel; +• +the ability to integrate the acquired Chaco ® Footwear and Cushe ® Footwear businesses; +• +future growth or success in specific countries, categories or market sectors; +• +liquidity; +• +capital resources; and +• +market risk. +In addition, words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” +“intends,” “is likely,” “plans,” “predicts,” “projects,” “should,” “will,” variations 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; +• +changes in local, domestic or international economic and market conditions; +• +the impact of competition and pricing by the Company’s competitors; +• +the cost and availability of inventories, services, labor and equipment furnished to the +Company; +• +the ability of the Company to manage and forecast its growth and inventories; +• +increased costs of future pension funding requirements; +• +changes in duty structures in countries of import and export; +• +changes in interest rates, tax laws, duties, tariffs, quotas or applicable assessments; +3 +Table of Contents +• +foreign currency fluctuation in valuations compared to the U.S. dollar; +• +changes in monetary controls and valuations of the Chinese yuan and the relative value +to the U.S. dollar; +• +the risk of doing business in developing countries and economically volatile areas; +• +the cost and availability of contract manufacturers; +• +the cost and availability of raw materials, including leather and petroleum based +materials; +• +changes in planned consumer demand or at-once orders; +• +loss of significant customers; +• +customer order cancellations; +• +the exercise of future purchase options by the U.S. Department of Defense on previously +awarded contracts; +• +the impact of a global recession on demand for the Company’s products; +• +the impact of the global credit crisis on the Company’s suppliers, distributor and +customers; +• +the success of new business initiatives, including and Merrell ® Apparel; +• +changes in business strategy or development plans; +• +integration of operations of newly acquired businesses; +• +relationships with international distributors and licensees; +• +the ability to secure and protect trademarks, patents and other intellectual property; +• +technological developments; +• +the ability to attract and retain qualified personnel; +• +the size and growth of footwear markets; +• +service interruptions at shipping and receiving ports; +• +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 Company’s ability to adapt and compete in global apparel and accessory markets; +• +the ability to retain rights to brands licensed by the Company; +• +the impact of the Company’s 2009 restructuring plan; +• +the Company’s ability to meet at-once orders; +• +changes in government and regulatory policies; +• +retail buying patterns; +• +consolidation in the retail sector; and +• +the acceptance of U.S. brands in international markets. +Additionally, concerns regarding acts of terrorism, the war in the Middle East, 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, investors should not place undue reliance on forward-looking statements as +a prediction of actual results. Furthermore, the Company undertakes no obligation to update, amend +or clarify forward-looking statements, whether as a result of new information, future events or +otherwise. +4 +Table of Contents +PART I +Item 1. Business . +General. +Wolverine World Wide, Inc. (the “Company”) is a leading designer, manufacturer and marketer of +a broad range of quality casual shoes, rugged outdoor and work footwear. 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. +Approximately 46.6 million pairs of the Company’s branded footwear were sold during fiscal +2008, 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 ® +Footwear, Chaco ® , Cushe ® , Harley-Davidson ® Footwear, Hush Puppies ® , HyTest ® , Merrell ® , Patagonia ® +Footwear, Sebago ® and Wolverine ® . The Company believes that its primary competitive strengths are +its well-recognized brand names, broad range of comfortable footwear, patented and proprietary +designs and comfort technologies, numerous distribution channels and diversified manufacturing and +sourcing base. Cat ® is a registered trademark of Caterpillar Inc., Harley-Davidson ® is a +registered trademark of H-D Michigan, Inc. and Patagonia ® is a registered trademark of Patagonia, +Inc. +The Company’s footwear is sold under a variety of brand names designed to appeal to most +consumers of casual, work and outdoor footwear at numerous price points. The Company’s footwear +products are organized under four operating units: (i) the Wolverine Footwear Group, consisting of +the Bates ® , HyTest ® and Wolverine ® boots and shoes, and Wolverine ® brand apparel, (ii) the Outdoor +Group, consisting of Merrell ® , Patagonia ® and Chaco ® footwear, and Merrell ® brand apparel, (iii) +the Heritage Brands Group, consisting of Cat ® footwear, Harley-Davidson ® footwear and Sebago ® +footwear, and (iv) The Hush Puppies Company, consisting of Hush Puppies ® footwear and Cushe ® +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 Company-owned retail stores, to governments and municipalities and to numerous +accounts, including department stores, footwear chains, catalogs, specialty retailers, mass +merchants and Internet retailers. Many of the retailers to which Wolverine distributes operate +multiple storefront locations. The Company’s products are marketed worldwide in approximately 180 +countries and territories through Company-owned wholesale operations, licensees and distributors. +The Company, through its Wolverine Leathers Division, operates a pigskin leather business +supplying pigskin leather for the shoe and leather goods industries. A significant portion of the +Wolverine Leathers Division’s pigskin leather is used in the footwear marketed by the Company, and +is also sold to Company licensees and other domestic and foreign manufacturers of footwear. The +Company currently operates a tanning facility to support the Wolverine Leathers Division business. +The Company has announced that it will likely close its tanning facility and outsource leather +processing in 2009. In addition, Wolverine Procurement, Inc., a Company-owned subsidiary, performs +skinning operations and purchases raw pigskins, which it then cures and sells to outside customers +for processing into pigskin leather products. +5 +Table of Contents +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, Apparel, and Licensing. The Branded Footwear, +Apparel, and Licensing segment is engaged in manufacturing, sourcing, licensing, marketing and +distributing branded footwear and apparel, including casual shoes and apparel, dress shoes, boots, +uniform shoes, work shoes and rugged outdoor footwear and apparel. The Company’s Other Business +units consist of its retail stores, leathers 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, Apparel and Licensing. +The Company sources and markets a broad range of footwear styles, including shoes, boots and +sandals under many recognizable brand names, including Bates ® , Cat ® , Chaco ® , Cushe +® , +Harley-Davidson ® , Hush Puppies ® , HyTest ® , Merrell ® , Patagonia ® , Sebago ® +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 third-party manufacturing +facilities. The Company also markets Merrell ® , Sebago ® , and Wolverine ® brand apparel and licenses +its brands for use on non-footwear products, including apparel, eyewear, watches, socks, handbags, +gloves and plush toys. Current significant licensing programs include Hush Puppies ® apparel, +eyewear, watches, socks, handbags and plush toys, and Wolverine ® brand gloves, eyewear, socks and +headwear. +The Company’s four branded footwear, apparel, and licensing operating units are described +below. +1. The Outdoor Group . The Outdoor Group consists of Merrell ® Footwear, +Patagonia ® Footwear, Chaco ® Footwear and Merrell ® Apparel. Outdoor Group products include +performance outdoor and hiking footwear, casual and after-sport footwear and performance and +casual Merrell ® Apparel. +Merrell ® Footwear. The Merrell ® Footwear line consists primarily of running, +technical hiking, rugged outdoor and outdoor-inspired casual footwear designed for +backpacking, day hiking and everyday use. The Merrell ® Footwear 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. Merrell ® +Footwear products are sold primarily through outdoor specialty retailers, department +stores and catalogs. Merrell ® Footwear is marketed in approximately 150 countries +and territories worldwide. +Merrell ® Apparel. The Merrell ® Apparel line consists primarily of technical +outdoor and outdoor-inspired casual apparel and performance socks. In addition to +Merrell ® Apparel, the Outdoor Group markets Merrell ® packs, bags and luggage. +Patagonia ® Footwear. The Company entered into a license agreement providing +the Company with exclusive worldwide rights to manufacture, market, distribute and +sell footwear under the Patagonia ® , Water Girl ® and other trademarks. The Patagonia ® +Footwear line focuses primarily on casual and outdoor performance footwear. +Chaco ® Footwear and ULU ® Footwear . The Company acquired the Chaco ® and ULU ® +Footwear businesses in January 2009. The Chaco ® line is focused primarily on +performance sandals and ULU ® is focused primarily on fashionable, performance winter +boots. +6 +Table of Contents +2. Wolverine Footwear Group . The Wolverine Footwear Group encompasses footwear +primarily under the Wolverine ® , Bates ® , and HyTest ® brands and markets footwear designed +with performance and comfort features to serve a variety of work, outdoor and lifestyle +functions. The Wolverine Footwear Group also markets Wolverine ® brand apparel. +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 126 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 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 MultiShox ® +Individual Comfort System and the Contour Welt ™ product line. The Wolverine ® +work product line features work boots and shoes, including steel toe boots and +shoes, targeting 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 trail shoes, rugged casuals and outdoor +sandals. The outdoor sport line is designed to meet the demands of hunters, +fishermen and other active outdoor sports enthusiasts. Warmth, waterproofing and +comfort are achieved through the use of Gore-Tex ® (a registered trademark of W.L. +Gore & Associates, Inc.) and Thinsulate ® (a registered trademark of Minnesota Mining +and Manufacturing Company) brand fabrics, the Company’s performance leathers and +patented DuraShocks ® technologies. +Wolverine ® Apparel and Licensing . The Wolverine Footwear Group markets a line +of work and rugged casual Wolverine ® brand apparel. In addition, the Wolverine ® +brand is licensed for use on eyewear, headwear, gloves and socks. +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 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. +7 +Table of Contents +3. The Heritage Brands Group . The Heritage Brands Group consists of +Caterpillar ® Footwear, Harley-Davidson ® Footwear and the Sebago ® product line. +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 +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 +approximately 140 countries and territories worldwide. Cat ® , Caterpillar ® , Cat & +Design ® , Walking Machines ® and Marine Power ® are registered trademarks of +Caterpillar Inc. +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 ® branded footwear throughout the world. +Harley-Davidson ® branded 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. Harley-Davidson ® is a registered +trademark of H-D Michigan, Inc. +Sebago ® . The Sebago ® product line consists primarily of performance nautical +and American-inspired casual footwear for men and women, such as boat shoes and +handsewn loafers, that have been manufactured and distributed since 1946. Highly +recognized Sebago ® line extensions include Sebago Docksides ® , Sebago Drysides ™, +Sebago Campsides ™ and Athletic Marine. The Sebago ® product line is marketed in +approximately 115 countries and territories 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. The Company expects to +launch a classic and marine Sebago ® apparel line in 2009. +8 +Table of Contents +4. The Hush Puppies Company . +Hush Puppies . 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 marketed in approximately 140 countries and territories. 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, socks, watches and plush +toys. +Cushe . The Company acquired the Cushe ® Footwear business in January 2009. The +Cushe business focuses on relaxed, design-led footwear for active men and women. +Other Businesses. +In addition to manufacturing, sourcing, marketing and distributing the Company’s footwear and +apparel products as reported in the Branded Footwear, Apparel, and Licensing segment, the Company +also (i) operates 90 North American and 2 U.K.-based retail footwear stores, (ii) operates a +performance leathers business through its Wolverine Leathers Division, and (iii) purchases and +cures raw pigskins for sale to various customers through its wholly-owned subsidiary Wolverine +Procurement, Inc. +1. Wolverine Retail . The Company operates 90 North American and 2 U.K.-based +retail shoe stores as of February 2009. These stores are operated under the Hush Puppies ® , +Hush Puppies and Family SM , Track’N Trail ® , Rockford Footwear Depot ® and Merrell ® +names. Both the Rockford Footwear Depot ® and Track’N Trail ® retail formats carry a large +selection of Company-branded footwear, featuring such brands as Wolverine ® , Merrell ® , Hush +Puppies ® , Cat ® , Patagonia ® , Sebago ® and Harley-Davidson ® . The Company also operates +direct-to-customer retail websites, including www.upfootgear.com , www.trackandtrail.com , +www.catfootwear.com , www.hushpuppies.com, www.sebago.com and www.merrell.com . +2. The Wolverine Leathers Division . The Wolverine Leathers Division produces +and markets pigskin leathers primarily for use in the footwear industry. The Company +believes pigskin leathers offer superior performance and advantages over cowhide leathers. +The Company’s waterproof and stain resistant leathers are featured in some 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. +3. 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. +Marketing. +The Company’s overall marketing strategy is to develop brand-specific plans and related +promotional materials for U.S. and international markets to foster a differentiated and consistent +image for each of the Company’s core brands. Each 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 products. 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. +9 +Table of Contents +The Company’s 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 brand names provide a competitive advantage and the +Company makes significant 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 domestic 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 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. Such +contracts typically contain future purchase options that are not +required to be exercised. +In addition to its +wholesale activities, the Company also operates a 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 2008. +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. +The Company expects current seasonal sales patterns to continue in future years. +10 +Table of Contents +International Operations and Global Licensing. +The Company records revenue from foreign sources through a combination of (i) sales of branded +footwear products generated from the Company’s owned operations in Canada, the United Kingdom, +Austria, Finland, France, Germany, Italy, the Netherlands, Spain, Sweden and Switzerland and from +sales to international distributors for certain markets and businesses and (ii) from royalty income +through a network of third-party licensees and distributors. The Company’s owned operations are +located in markets where the Company believes it can gain a strategic advantage by more directly +controlling the sale into retail accounts. +The Company derives royalty income from sales of products (primarily Company footwear) bearing +the Hush Puppies ® , Wolverine ® , Bates ® , 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 its 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/or manufacture of approximately 81% of the pairs of +footwear marketed globally under the Company’s brand names. The balance is controlled directly by +the Company’s licensees. Of the pairs purchased by the Company, approximately 93% are purchased or +sourced from third parties, with the remainder produced at Company-operated facilities. The +Company sources a majority of its footwear from a variety of foreign manufacturing facilities in +the Asia-Pacific region, South America and India. 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. Footwear +produced by the Company is manufactured at Company-operated facilities located in Michigan, +Arkansas, and the Dominican Republic. +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 military footwear as well as work, +casual and dress casual footwear in its owned facilities. 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 +facilities in Michigan and the Dominican Republic. +11 +Table of Contents +The Company’s owned 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 (a) benefit from lower manufacturing costs and +state-of-the-art manufacturing facilities, (b) source the highest quality raw materials from around +the world, and (c) avoid additional capital expenditures necessary for owned factories and +equipment. The Company believes that its overall global manufacturing strategy gives the Company +the 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. The +Company and its licensees receive a majority of their pigskin leather requirements from this +tannery. During 2009, the Company will evaluate strategic alternatives for the Company-owned +leather business. The Company’s management currently expects that this evaluation will result in +the closure of the Company’s pigskin tannery and outsourcing of the Company’s pigskin leather +processing. +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 Wolverine Leathers Business from one domestic source. +This source has been a reliable and consistent supplier for over 30 years. Alternative sources of +raw 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, tariffs and duties, 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 and apparel products. The owned trademarks that are most widely used +by the Company include Hush Puppies ® , Wolverine ® , Bates ® , Cushe ® , Chaco ® , Soft Style ® , Wolverine +Fusion ® , DuraShocks ® , MultiShox ® , Wolverine Compressor ® , Hidden Tracks ® , iTechnology TM , +Bounce ® , Comfort Curve ® , HyTest ® , Merrell ® , Continuum ® , Sebago ® , Q-Form ® and Track ‘N Trail ® . +Pigskin leather marketed by the Company’s Wolverine Leathers Division is sold under the trademarks +Wolverine Leathers & Design ® , Wolverine Warrior Leather ® , Weather Tight ® and All Season Weather +Leathers ™. As of the date of this Annual Report, the Company has obtained license rights to +manufacture, market and distribute footwear throughout the world under the Cat ® , Harley-Davidson ® +and Patagonia ® trademarks pursuant to license arrangements with the respective trademark owners. +The Cat ® , Harley-Davidson ® , and Patagonia ® licenses extend for five or more years and are subject +to early termination for breach. +12 +Table of Contents +The Company believes that its products are identified by consumers by its trademarks and that +its trademarks are valuable assets. The Company is not aware of any infringing uses or any prior +claims of ownership of its trademarks that could materially affect its current business. It is the +policy of the Company to pursue registration of its primary trademarks whenever practicable and to +vigorously defend its trademarks against infringement or other threats. The Company also holds +many design and utility patents, copyrights and various other proprietary rights. The Company +vigorously protects its proprietary rights under applicable laws. +Order Backlog. +At February 21, 2009, the Company had an order backlog of approximately $357 million compared +to an order backlog of approximately $389 million at February 16, 2008, determined on a basis +consistent with the current year. Substantially all of the backlog relates to demand for products +expected to be shipped in 2009. Orders in the 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 thirty major competitors in connection with the sale of its casual, work +and outdoor footwear. Product performance and quality, including technological improvements, +product identity, competitive pricing and ability to control costs, 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 and sourcing efficiencies, 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 helped validate and refine 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 expects to continue to be a leading +developer of footwear innovations, research and development costs do not represent a material +portion of operating expenses. +13 +Table of Contents +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 3, 2009, the Company had approximately 4,578 domestic and foreign production, +office and sales employees. Approximately 528 employees were covered by four union contracts +expiring at various dates through January 21, 2010. 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, and Governance Committee Charter, is +available at its website, www.wolverineworldwide.com. Printed copies of the documents listed above +are available, without charge, by writing to the Company at 9341 Courtland Drive, N.E., Rockford, +Michigan 49351, Attention: General Counsel. +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 1A. Risk Factors . +The Company’s sales, operating results and financial condition are dependant on general economic +conditions and other factors affecting consumer spending. +The success of the Company’s operations depends to a significant extent upon a number of factors +affecting disposable consumer income and consumer spending patterns, both nationally and +internationally, including general economic conditions and factors such as employment, business +conditions, interest rates and taxation. Uncertainty about current and future global economic +conditions may cause the Company’s customers to defer or cancel purchases of the Company’s +products. In addition, recessionary economic cycles, higher interest borrowing rates, restricted +credit availability, inflation, higher levels of unemployment and consumer debt, higher tax rates +or other economic factors may cause consumer confidence to decline, which could adversely affect +the demand for the Company’s products. Consumer spending patterns may be affected by changes in +the amount or severity of inclement weather, the acceptability of U.S. brands in international +markets and the growth or decline of global footwear markets. If demand for the Company’s products +declines, the Company’s sales and profit margins may also decline. +14 +Table of Contents +General economic conditions and regulatory factors such as those listed above, as well as increased +costs of fuel, labor, commodities, insurance and healthcare, may increase the Company’s cost of +sales and operating expenses, which may adversely affect the Company’s financial condition and +results of operations. +The Company’s business will be adversely affected if the Company is not able to maintain its +competitive position in the footwear industry, or compete effectively in retail and apparel +markets. +The Company competes with numerous other marketers of footwear, some of which are larger and +have greater resources than the Company. 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 industry. The footwear industry in general +is subject to changes in consumer preferences with respect to the popularity of particular designs +and categories of footwear. The Company strives to maintain and improve its competitive position +through promotion of brand awareness, sourcing efficiencies, 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. If the Company is +unable to respond effectively to competitive pressures and changes in consumer spending, the +Company’s business, results of operations and financial condition may be adversely affected. +In addition, the Company has only recently begun to expand into apparel and has increased its +focus on competing in the retail sector. Many of its current or future competitors in these areas +have greater experience, a more developed consumer and customer base in these sectors, lower +prices, or greater financial, technical or marketing resources than the Company. The Company’s +competitors in these sectors may be able to undertake more effective marketing campaigns; adopt +more aggressive pricing policies; make more attractive offers to potential employees, distribution +partners and manufacturers; or may be able to respond more quickly to changes in consumer +preferences, than the Company. If the Company’s retail operations and expansion into apparel are +not successful, the Company’s business, results of operations and financial condition may be +adversely affected. +If the Company is not able to manage its inventories effectively, its costs could increase and/or +its sales could decrease, each of which could adversely affect its operating results. +The Company’s ability to manage its inventories properly is an important factor in its +operations. Inventory shortages can impede the Company’s ability to meet at-once orders and can +adversely affect the timing of shipments to customers and diminish brand loyalty. Conversely, +excess inventories can result in increased interest costs as well as lower gross margins due to the +necessity of lowering prices in order to liquidate excess inventories. If the Company is unable to +effectively manage its inventory, its business, results of operations and financial condition may +be adversely affected. +The potential imposition of additional duties, quotas, tariffs and other trade restrictions could +have an adverse impact on the Company’s sales and profitability. +All of the Company’s products manufactured overseas and imported into the United States, the +European Union and other countries are subject to customs duties collected by customs authorities. +Customs information submitted by the Company is routinely subject to review by customs authorities. +Additional U.S. or foreign customs duties, quotas, tariffs, anti-dumping duties, safeguard +measures, cargo restrictions to prevent terrorism or other trade restrictions may be imposed on the +importation of the Company’s products in the future. The imposition of such costs or restrictions +in foreign countries where +the Company operates, as well as in countries where the Company’s third party distributors and +licensees operate, could result in increases in the cost of the Company’s products generally and +could adversely affect the sales and profitability of the Company. +15 +Table of Contents +In October 2006, the European Union imposed anti-dumping duties on specific types of leather +upper footwear originating in China and Vietnam and imported into member states of the European +Union. In October 2008, the European Union initiated an expiry review of the duties to determine +whether they should be extended beyond the original expiration date. The duties remain in effect +while this review is conducted. Because the Company sources a substantial portion of its products +from suppliers located in China and Vietnam, the imposition of these anti-dumping duties has +negatively affected, and, for as long as such anti-dumping duties remain in effect, will continue +to negatively affect, the Company’s sales and gross margin in the European Union. +The Company’s business could be adversely affected by changes in currency values. +Foreign currency fluctuation in valuations compared to the U.S. dollar, changes in monetary +controls and valuations, and the relative value to the U.S. dollar affect the Company’s +profitability. Changes in the relative values of currencies may significantly affect the Company’s +results of operations, financial condition and cash flows. In addition, because currency +valuations fluctuate and the Company may employ hedging strategies over time, changes in currency +exchange rates may impact the Company’s financial results positively or negatively in one period +and not another, which may also make it difficult to compare the Company’s operating results from +different periods. Currency exchange rate fluctuations may also adversely impact the third parties +that manufacture the Company’s products by making their purchases of raw materials or other +production costs more expensive and harder to finance and thereby raising prices for the Company, +its distributors and licensees. For a more detailed discussion of risk relating to foreign +currency fluctuation, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk. +A majority of the Company’s products are produced outside the United States where the Company is +subject to the risks of international commerce. +The Company currently sources most of its footwear from third-party manufacturers in foreign +countries, predominantly China. As is common in the industry, the Company does not have long-term +contracts with its third-party footwear suppliers. There can be no assurance, however, that the +Company will not experience difficulties with such suppliers, including reduction in the +availability of production capacity, failure to meet production deadlines or increases in +manufacturing costs. The Company’s future results will depend partly on its ability to maintain +positive working relationships with its third-party suppliers. +Foreign manufacturing is subject to a number of risks, including work stoppages, +transportation delays and interruptions, political instability, foreign currency fluctuations, +changing economic conditions, expropriation, nationalization, the imposition of tariffs, import and +export controls and other non-tariff barriers and changes in governmental policies. Various +factors could significantly interfere with the Company’s ability to manufacture its products, +including adverse developments in trade or political relations with China or other countries where +the Company sources its products, or China shifting its manufacturing capacity away from footwear +to other industries. Any of these events could have an adverse effect on the Company’s business, +results of operations and financial condition and in particular on the Company’s ability to meet +customer demands and produce its products in a cost-effective manner. +16 +Table of Contents +Currency exchange rate fluctuations in China could result in higher costs and decreased margins. +The Company sources a substantial portion of its products from China. The official exchange +rate for conversion of the Chinese yuan was pegged to the U.S. dollar from 1994 to 2005. In 2005, +the exchange rate for the yuan was linked to a trade-weighted basket of foreign currencies of +China’s primary trading partners, and permitted to float each day up to 0.5% in either direction +from the previous day’s close. As a result, the value of the yuan may increase incrementally over +time. Such increases could significantly increase production costs of products the Company sources +from China. Additional revaluations in the yuan could impact the prices the Company pays its +Chinese manufacturers if they adjust their selling prices accordingly. Increases in the Company’s +production costs will decrease its gross margin unless the Company is able to increase prices to +offset such increased costs. +The Company depends on a limited number of suppliers for key production materials, and any +disruption in the supply of such materials could interrupt product manufacturing and increase +product costs. +The Company’s ability to competitively price its products depends on the cost of footwear +components, services, labor, equipment and raw materials, including leather and materials used in +the production of outsoles. The cost of services and materials is subject to change based on +availability and market conditions that are difficult to predict. Conditions such as diseases +affecting the availability of leather affect the cost of the footwear marketed by the Company. In +addition, the Company’s shipping costs are affected by fuel prices and numerous other factors, such +as the possibility of service interruptions at shipping and receiving ports. +The Company purchases raw pigskins for its leathers operations from a single domestic source +pursuant to short-term contracts. Although this source has been a reliable and consistent supplier +for over 30 years, there are no assurances that it will continue as a supplier. Failure of this +source to continue to supply the Company with raw pigskin or to supply the Company with raw pigskin +on less favorable terms could have a negative impact on the Company’s business, results of +operations and financial condition, including increasing the Company’s cost of raw materials and as +a result, decreasing the Company’s profits. +If the Company’s customers significantly reduce their purchases from the Company or are not able to +pay for its products in a timely manner, the Company’s business, results of operations and +financial condition may be adversely affected. +The Company’s financial success is directly related to the willingness of its customers to +continue to purchase its products. The Company does not typically have long-term contracts with its +customers. Sales to the Company’s customers are generally on an order-by-order basis and are +subject to rights of cancellation and rescheduling by the customers. Failure to fill customers’ +orders in a timely manner could harm the Company’s relationships with its customers. Furthermore, +if any of the Company’s major customers experience a significant downturn in its business, or fail +to remain committed to the Company’s products or brands, then these customers may reduce or +discontinue purchases from the Company, which could have an adverse effect on the Company’s +business, results of operations and financial condition. +The Company sells its products to wholesale customers and extends credit based on an +evaluation of each customer’s financial condition, usually without requiring collateral. The +financial difficulties of a customer could cause the Company to stop doing business with that +customer or reduce its business with that customer. The Company’s inability to collect from its +customers or a cessation or reduction of sales +to certain customers because of credit concerns could have an adverse effect on the Company’s +business, results of operations and financial condition. +17 +Table of Contents +The recent trend toward consolidation in the retail industry could lead to customers seeking +more favorable terms of purchase from the Company and could lead to a decrease in the number of +stores that carry the Company’s products. In addition, changes in the channels of distribution, +such as the growth of Internet commerce and the trend toward the sale of private label products by +major retailers, could have an adverse effect on the Company’s business, results of operations and +financial condition. +The Company has been awarded a number of U.S. Department of Defense contracts that include +future purchase options for Bates ® footwear. Failure to exercise these purchase options by the +Department of Defense or the failure of the Company to secure future U.S. Department of Defense +contracts could have an adverse effect on the Company’s business, results of operations and +financial condition. +The Company’s financial success may be adversely affected by the current crisis in the credit +markets. +Difficulties in the mortgage and broader credit markets have led to a substantial decrease in +the availability of credit. Commercial banks are demanding borrowers pay higher interest rates and +agree to more onerous terms, and in other cases are refusing to provide financing. If these +conditions continue or worsen, they could adversely impact the Company’s future results of +operations and financial condition. If the Company’s third-party distributors, suppliers and +retailers are not able to obtain financing on favorable terms, or at all, they may delay or cancel +orders for the Company’s products, or fail to meet their obligations to the Company in a timely +manner, either of which could adversely impact the Company’s sales, cash flow and operating +results. In addition, the lack of available credit and/or the increased cost of credit may +significantly impair the Company’s ability to obtain additional credit to finance future expansion +plans, or refinance existing credit, on favorable terms, or at all. Market disruption may also +contribute to extreme price and volume fluctuations in the stock market. This volatility could +affect the market price of Company’s common stock for reasons unrelated to its operating +performance. The extent and duration of any future continued weakening of the credit markets is +unknown. In addition, there can be no assurance that any of the governmental or private sector +initiatives designed to strengthen the condition of the credit markets will be successful. +Unfavorable findings resulting from a government audit could subject the Company to a variety of +penalties and sanctions, and could negatively impact the Company’s future revenues. +The federal government has the right to audit the Company’s performance under its government +contracts. If a government audit uncovers improper or illegal activities, the Company could be +subject to civil and criminal penalties and administrative sanctions, including termination of +contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from +doing business with U.S. federal government agencies. The Company could also suffer serious harm to +its reputation if the government alleges that the Company acted in an improper or illegal manner, +whether or not these allegations have merit. If, as the result of an audit or for any other +reason, the Company is suspended or barred from contracting with the federal government generally, +or any specific agency, if the Company’s reputation or relationship with government agencies is +impaired, or if the government otherwise ceases doing business with the Company or significantly +decreases the amount of business it does with the Company, the Company’s revenue and profitability +could decrease. +18 +Table of Contents +Failure of the Company’s international licensees and distributors to meet sales goals could have an +adverse effect on the Company. +The Company’s products are sold in many international markets through independent licensees or +distributors. Failure by the Company’s licensees or distributors to meet planned annual sales goals +could have an adverse effect on the Company’s business, results of operations and financial +condition, and it may be difficult and costly to locate an acceptable substitute distributor or +licensee. If a change in distributors becomes necessary, the Company may experience increased +costs, as well as substantial disruption and a resulting loss of sales and brand equity in the +market where such distributors operate. +The Company’s reputation and competitive position could suffer if its third-party manufacturers, +distributors, licensees and others violate laws or fail to conform to the Company’s ethical +standards. +The Company requires its independent contract manufacturers, distributors, licensees and +others with which it does business to comply with the Company’s standards relating to working +conditions and other matters. If a party with which the Company does business is found to have +violated the Company’s standards, the Company could receive negative publicity that could damage +its reputation and negatively affect the value of its brands. +The Company’s business could be adversely affected by global political and economic uncertainty. +Concerns regarding acts of terrorism, the war in the Middle East 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, any of which could adversely +affect the Company’s ability to manufacture, distribute and sell its products. The Company is +subject to risks of doing business in developing countries and economically volatile areas. These +risks include social, political and economic instability; nationalization of the Company’s assets +and operations in a developing country by local government authorities; slower payment of invoices; +and restrictions on the Company’s ability to repatriate foreign currency. In addition, commercial +laws in these areas may not be well-developed or consistently administered, and new laws may be +retroactively applied. Any of these risks could have an adverse impact on the Company’s prospects +and results of operations in these areas. +If the Company’s efforts to establish and protect its intellectual property are unsuccessful, the +value of its brands could suffer. +The Company invests significant resources to develop and protect its intellectual property, +and believes that its trademarks and other intellectual property rights are important to its +success. The Company’s ability to remain competitive is dependent upon its continued ability to +secure and protect trademarks, patents and other intellectual property rights in the United States +and internationally for all of its lines of business. The Company relies on a combination of trade +secret, patent, copyright and other laws, license agreements and other contractual provisions and +technical measures to protect its intellectual property rights; however, some countries’ laws do +not protect intellectual property rights to the same extent as do U.S. laws. The Company’s business +could be significantly harmed if it is not able to protect its intellectual property, or if a court +found that the Company was infringing on other persons’ intellectual property rights. Any +intellectual property lawsuits or threatened lawsuits in which the Company is involved, either as a +plaintiff or as a defendant, could cost the Company a significant amount of time and money and +distract management’s attention from operating the Company’s business. In addition, if the Company +does not prevail on any intellectual property claims, the Company may have to change its +manufacturing processes, products or trade names, any of which could reduce its profitability. +In addition, some of the Company’s branded footwear operations are operated pursuant to licensing +agreements with third-party trademark owners. These agreements are subject to early termination +for breach. Expiration or early termination of any of these license agreements by the licensor +could have a material adverse effect on the Company’s revenues and profits. +19 +Table of Contents +Loss of services of the Company’s key personnel could adversely affect its business. +The Company is dependent on the efforts and abilities of its senior executive officers. While +the Company believes that its senior management team has significant depth and that appropriate +senior management succession plans are in place, the loss of one or more members of senior +executive management or the failure to successfully implement succession planning could have an +adverse effect on the Company, its results of operations and financial condition. The Company’s +future success also depends on its ability to identify, attract and retain additional qualified +personnel. Competition for such employees in the footwear industry is intense and failure to retain +or attract key employees could adversely impact the Company. +Inflationary and other pressures may lead to higher employment costs for the Company. +General inflationary pressures, changes in employment laws and regulations, and other factors could +increase the Company’s overall employment costs. The Company’s employment costs include costs +relating to health care benefits and benefits under the Company’s retirement plans, including a +U.S.-based defined benefit plan. The annual cost of benefits can vary significantly depending on a +number of factors, including changes in the assumed or actual rate of return on plan assets, a +change in the discount rate used to measure obligations, a change in method or timing of meeting +funding obligations, and the rate of health care cost inflation. Increases in the Company’s +overall employment costs could have an adverse effect on the Company’s business, results of +operations and financial condition. +Disruption to the Company’s information technology systems could adversely affect the Company’s +business. +The Company’s technology systems are critical to the operations of its business. Any +interruption, impairment or loss of data integrity or malfunction of these systems could severely +impact the Company’s business, including delays in product fulfillment and reduced efficiency in +operations. In addition, costs and potential problems and interruptions associated with the +implementation of new or upgraded systems or with maintenance or adequate support of existing +systems could also disrupt or reduce the efficiency of our operations. +The Company is subject to risks associated with its growth strategy and acquiring other businesses. +The Company acquired Chaco ® Footwear and Cushe ® Footwear in 2009. The Company may make other +strategic acquisitions in the future and cannot provide assurance that it will be able to +successfully integrate the operations of Chaco, Cushe or other newly-acquired businesses into the +Company’s operations. Acquisitions involve numerous risks, including risks inherent in entering +new markets in which the Company may not have prior experience; potential loss of significant +customers or key personnel of the acquired business; managing geographically-remote operations; and +potential diversion of management’s attention from other aspects of the Company’s business +operations. Acquisitions may also result in incurrence of debt, dilutive issuances of the +Company’s equity securities and write-offs of goodwill and substantial amortization expenses of +other intangible assets. The failure to +integrate newly acquired businesses or the inability to make suitable strategic acquisitions in the +future could have an adverse effect on the Company’s business, results of operations and financial +condition. +20 +Table of Contents +The maintenance and growth of the Company’s business will be dependent upon the availability of +adequate capital. +The maintenance and growth of the Company’s business will depend on the availability of +adequate capital, which in turn will depend in large part on cash flow generated by its business +and the availability of equity and debt financing. The Company cannot provide assurance that its +operations will generate positive cash flow or that it will be able to obtain equity or debt +financing on acceptable terms or at all. Recent distress in the financial markets has had an +adverse impact on the availability of credit and liquidity resources. The Company’s current +revolving credit agreement expires in July 2010. The Company’s ability to replace the revolving +credit agreement on similar terms may be limited if market and general economic conditions continue +to deteriorate. As a result, the Company cannot provide assurance that it will be able to finance +any expansion plans. +Expanding the Company’s brands into new markets may be difficult and costly, and if the Company is +unable to successfully continue such expansion, its brands may be adversely affected. +As part of its growth strategy, the Company seeks to enhance the positioning of its brands and +to extend its brands into complementary product categories and consumer groups, to expand +geographically, and to improve operational performance. There can be no assurance that the Company +will be able to successfully implement any or all of these growth strategies, which could have an +adverse effect on the Company’s business, results of operations and financial condition. The +Company has invested substantial resources into these strategies and the failure of one or more of +these strategies could have an adverse effect on the Company’s business, results of operations and +financial condition. +Counterfeiting of the Company’s brands can divert sales and damage its brand image. +The Company periodically discovers products that are counterfeit reproductions of its products +or that otherwise infringe on its intellectual property rights in its markets. The Company has not +always been able to successfully stop production and sales of counterfeit products and infringement +of the Company’s intellectual property rights. The actions the Company takes to establish and +protect trademarks, patents and other intellectual property rights both inside and outside of the +United States may not be adequate to prevent imitation of its products by others. If the Company is +unsuccessful in challenging a party’s products on the basis of trademark or design or utility +patent infringement, continued sales of these products could adversely affect the Company’s sales, +devalue its brands and result in the shift of consumer preference away from the Company’s products. +Changes in government regulation may increase the costs of compliance. +The Company’s business is affected by changes in government and regulatory policies in the +United States and on a global basis. New requirements relating to product safety and testing and +new environmental requirements, as well as changes in interest rates, tax laws, duties, tariffs and +quotas could have a negative impact on the Company’s ability to produce and market footwear at +competitive prices. +21 +Table of Contents +The disruption, expense, and potential liability associated with existing and future litigation +against the Company could have a material adverse effect on its reputation, financial condition and +results of operations. +The Company is a defendant from time to time in lawsuits and regulatory actions relating to +its business. Due to the inherent uncertainties of litigation and regulatory proceedings, the +Company cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable +outcome could have an adverse impact on the Company’s business, financial condition and results of +operations. In addition, regardless of the outcome of any litigation or regulatory proceedings, +such proceedings are expensive and may require that the Company devote substantial resources and +executive time to defend the Company. +Provisions of Delaware law and the Company’s certificate of incorporation and bylaws could prevent +or delay a change in control or change in management that could be beneficial to the Company’s +stockholders. +Provisions of the Company’s certificate of incorporation and bylaws, as well as provisions of +Delaware law, could discourage, delay or prevent a merger, acquisition or other change in control +of the Company. These provisions are intended to protect stockholders’ interests by providing the +Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a +potential acquirer in order to obtain more favorable terms. Such provisions include a board of +directors that is classified so that only one-third of directors stand for election each year. +These provisions could also discourage proxy contests and make it more difficult for stockholders +to elect directors and take other corporate actions. +Item 1B. Unresolved Staff Comments . +None. +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 356,000 square feet +and a leased warehouse in Howard City, Michigan, of approximately 460,000 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 operates retail stores through leases +with various third-party landlords. International operations are conducted in Canada, the United +Kingdom, China, Hong Kong and Europe through leased warehouses, offices and/or 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, results of operations, or cash flows. +22 +Table of Contents +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 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 +Kenneth A. Grady +52 +General Counsel and Secretary +Donald T. Grimes +46 +Senior Vice President, Chief Financial Officer and Treasurer +Blake W. Krueger +55 +Chief Executive Officer and President +Pamela L. Linton +59 +Senior Vice President, Human Resources +Michael F. McBreen +43 +President, Global Operations Group +Michael D. Stornant +42 +Corporate Controller +James D. Zwiers +41 +Senior Vice President +Kenneth A. Grady has served the Company as General Counsel and Secretary since October 2006. +During 2006, he was President and shareholder of the law firm K.A. Grady PC. During 2005, he +served as Vice President, General Counsel and Secretary of PC Connection, Inc., a direct marketer +of information technology products and solutions. From 2004 to 2005, Mr. Grady served as Executive +Vice President of Administration, General Counsel and Secretary of KB Toys, Inc., a specialty toy +retailer. From 2001 to 2004, he served as Vice President, General Counsel and Secretary of KB +Toys, Inc. +Donald T. Grimes has served the Company as Senior Vice President, Chief Financial Officer and +Treasurer since May 2008. From 2007 to 2008, he was the Executive Vice President and Chief +Financial Officer for Keystone Automotive Operations, Inc., a distributor of automotive accessories +and equipment. Prior to Keystone, Mr. Grimes held a series of senior corporate and divisional +finance roles at Brown-Forman Corporation, a manufacturer and marketer of premium wines and +spirits. During his employment at Brown-Forman, Mr. Grimes was Vice President, Director of +Beverage Finance from 2006 to 2007; Vice President, Director of Corporate Planning and Analysis +from 2003 to 2006; and Chief Financial Officer of Brown-Forman Spirits America from 1999 to 2003. +Blake W. Krueger has served the Company as Chief Executive Officer and President since April +2007. From October 2005 to April 2007 he served as Chief Operating Officer and President. From +August 2004 to October 2005, he served as Executive Vice President and Secretary of the Company and +President of the Heritage Brands Group. 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. +23 +Table of Contents +Pamela L. Linton has served the Company as Senior Vice President, Human Resources since +December 2007. From 2005 to 2007 she was an independent consultant. From 2001 to 2005 she was +Senior Vice President, Global Human Resources of American Greetings Corporation, a greeting card +and gift wrap company. +Michael F. McBreen has served the Company as President, Global Operations Group of Wolverine +since June 2008. From 2007 to 2008, he was Vice President, Supply Chain & Logistics for Furniture +Brands International, a home furnishings company. Prior to Furniture Brands International, Mr. +McBreen held a series of senior supply chain roles with Nike, Inc., a marketer of athletic footwear +and apparel. During his employment at Nike, Mr. McBreen was Director, Global Apparel Operations +from 2004 to 2007; Director, Global Apparel Operations & Corporate Responsibility from 2002 to +2004; and Director, Global Supply Chain Operations from 2000 to 2002. +Michael D. Stornant has served the Company as Corporate Controller since May 2008. From 2007 +to 2008, he served as Senior Vice President of Owned Operations for the Global Operations Group at +Wolverine. From 2006 to 2007, he was Wolverine’s Vice President of Finance for the Global +Operations Group. From 2003 to 2006, he served the Company as the Director of Internal Audit. From +1996 to 2003, he held various finance-related positions at the Company. +James D. Zwiers has served the Company as Senior Vice President since January 2008. From +October 2006 to December 2007 he served as President of the Company’s Hush Puppies U.S. Division. +From October 2005 to October 2006 he served as the Company’s General Counsel and Secretary. From +December 2003 to October 2005 he served as General Counsel and Assistant Secretary. 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. +24 +Table of Contents +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 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 2008 and 2007. The number of stockholders of record on +February 23, 2009, was 1,257. +2008 +2007 +High +Low +High +Low +Stock Price +First quarter +$ +29.17 +$ +19.85 +$ +31.08 +$ +26.78 +Second quarter +31.21 +26.59 +30.80 +27.30 +Third quarter +28.66 +22.23 +29.22 +24.55 +Fourth quarter +29.45 +16.24 +29.60 +23.38 +2008 +2007 +Cash Dividends Declared Per Share +First quarter +$ +0.11 +$ +0.09 +Second quarter +0.11 +0.09 +Third quarter +0.11 +0.09 +Fourth quarter +0.11 +0.09 +A quarterly dividend of $0.11 per share was declared during the first quarter of fiscal 2009. See Item 12 for information with respect to the Company’s equity compensation plans. +25 +Table of Contents +Stock Performance Graph +The following graph compares the cumulative total stockholder return on Wolverine common stock +to the Standard & Poor’s Small Cap 600 Index and the Standard & Poor’s 600 Footwear Index, assuming +an investment of $100.00 at the beginning of the period indicated. Wolverine is part of the +Standard & Poor’s Small Cap 600 Index and the Standard & Poor’s Footwear Index. This Stock +Performance Graph shall not be deemed to be incorporated by reference into the Company’s SEC +filings and shall not constitute soliciting material or otherwise be considered filed under the +Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. +26 +Table of Contents +The following table provides information regarding the Company’s purchases of its own common +stock during the fourth quarter of fiscal 2008: +Issuer Purchases of Equity Securities +Total Number +of Shares +Maximum +Purchased +Number +as Part of +of Shares that +Total +Publicly +May Yet +Number of +Average +Announced +Be Purchased +Shares +Price Paid +Plans or +Under the Plans +Period +Purchased +per Share +Programs +or Programs +Period 1 (September 7, 2008 to October 4, 2008) +Common Stock Repurchase Program (1) +— +$ +— +— +678,196 +Employee Transactions (2) +1,051 +26.65 +N/A +N/A +Period 2 (October 5, 2008 to November 1, 2008) +Common Stock Repurchase Program (1) +1,600 +$ +20.99 +1,600 +676,596 +Employee Transactions (2) +— +— +N/A +N/A +Period 3 (November 2, 2008 to November 29, +2008) +Common Stock Repurchase Program (1) +70,400 +$ +19.98 +70,400 +606,196 +Employee Transactions (2) +— +— +N/A +N/A +Period 4 (November 30, 2008 to January 3, 2009) +Common Stock Repurchase Program (1) +— +$ +— +— +606,196 +Employee Transactions (2) +— +— +N/A +N/A +Total for Fourth Quarter ended January 3, 2009 +Common Stock Repurchase Program (1) +72,000 +$ +20.00 +72,000 +606,196 +Employee Transactions (2) +1,051 +26.65 +N/A +N/A +(1) +The Company’s Board of Directors approved a common stock repurchase +program on April 19, 2007. This program authorizes the repurchase of +7.0 million shares of common stock over a 36-month period, commencing +on the effective date of the program. All shares repurchased during +the period covered by this report were purchased under this +publicly-announced program. +(2) +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 options, and (2) +restricted shares withheld to offset tax withholding that occurs upon +vesting of restricted shares. The Company’s employee stock +compensation plans currently provide that the value of the shares +delivered or attested to, or withheld, shall be the closing price of +the Company’s common stock on the date the relevant transaction +occurs. +27 +Table of Contents +Item 6. Selected Financial Data. +Five-Year Operating and Financial Summary (1) +(Thousands of Dollars, Except Per Share Data) +2008 +2007 +2006 +2005 +2004 +Summary of Operations +Revenue +$ +1,220,568 +$ +1,198,972 +$ +1,141,887 +$ +1,060,999 +$ +991,909 +Net earnings +95,821 +92,886 +83,647 +74,467 +65,938 +Per share of common stock: +Basic net earnings (2)(3) +$ +1.96 +$ +1.77 +$ +1.52 +$ +1.33 +$ +1.15 +Diluted net earnings (2)(3) +1.90 +1.70 +1.47 +1.27 +1.09 +Cash dividends declared (2) +0.44 +0.36 +0.30 +0.26 +0.19 +Financial Position at Year End +Total assets +$ +664,780 +$ +638,378 +$ +671,092 +$ +626,580 +$ +639,571 +Long-term debt +5 +10,731 +21,471 +32,411 +43,904 +Notes to Five-Year Operating and Financial Summary +(1) +This summary should be read in conjunction with the consolidated +financial statements and the related notes, which are attached as +Appendix A to this Annual Report on Form 10-K. +(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 that was distributed to stockholders on +February 1, 2005. All per share data has been retroactively adjusted +for the increased shares resulting from this 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 restricted 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 +BUSINESS OVERVIEW +Wolverine World Wide, Inc. (the “Company”) continues to evolve from a leading global marketer of +branded footwear into a multi-brand global marketer of footwear, apparel, and accessories. The +Company’s business strategy is to market a portfolio of lifestyle brands that will: “Excite +Consumers Around the World with Innovative Footwear and Apparel that Bring Style to Purpose.” The +Company intends to continue to execute this strategy by offering innovative products to achieve +product/brand excellence, delivering supply-chain excellence and operating efficiency, +complementing its footwear brands with strong apparel and accessories offerings, and building a +more substantial global consumer-direct footprint. +28 +Table of Contents +FINANCIAL HIGHLIGHTS +The following represent the financial performance highlights of fiscal year 2008 compared to 2007: +• +Record revenue and earnings per share for the eighth consecutive year. +• +Revenue for 2008 of $1.221 billion, a 1.8% increase over 2007 revenue of $1.199 billion. +• +Diluted earnings per share grew to $1.90 per share for 2008 compared to $1.70 per share +for 2007, an increase of 11.8%. +• +Accounts receivable decreased 6.7% in 2008 compared to 2007 on a reported 3.2% decrease +in fourth quarter revenue. +• +Inventory turnover increased to 3.8 turns in 2008 from 3.7 turns in the prior year. +• +Solid operating results generated $93.5 million of cash from operating activities for +2008, compared to $123.3 million for 2007. +• +The Company ended 2008 with $89.5 million of cash on hand and interest-bearing debt of +$59.5 million, for a net cash position of $30.0 million. +• +During 2008, the Company repurchased 2.8 million shares of its stock for $74.1 million. +• +The Company declared cash dividends of $0.44 per share in 2008, a 22.2% increase over +the $0.36 per share declared in 2007. +RECENT DEVELOPMENTS +Strategic Restructuring Plan +On January 7, 2009, the Company’s Board of Directors approved management’s request to implement a +strategic restructuring plan. This plan will allow the Company to create significant operating +efficiencies, improve its supply chain, and create a stronger global brand platform. +The Company has provided preliminary estimated ranges for expected costs and benefits of the +restructuring plan and will provide further disclosure as appropriate. +In 2009, the implementation costs to consolidate key manufacturing, distribution and global +operations functions are estimated to range from $31.0 million to $36.0 million. Approximately +$9.0 million to $10.0 million of this estimate represents non-cash charges. Continuing annualized +pretax benefits once all initiatives are fully implemented are estimated to be $17.0 million to +$19.0 million. The strategic restructuring plan is expected to be completed in 2009. +Cushe ® Footwear Brand +On January 8, 2009, the Company announced the acquisition of the Cushe ® footwear brand, an +acquisition that is expected to drive new global opportunities and leverage the strength of the +Company’s business model and operating infrastructure. Cushe ® is a part of The Hush Puppies +Company. +Chaco ® Footwear Brand +On January 22, 2009, the Company announced the acquisition of Chaco ® , a performance outdoor +footwear brand based in Colorado with a unique heritage and strong consumer following. This +acquisition represents an excellent opportunity for the Company to leverage its world-class +sourcing and logistics infrastructure, building upon Chaco ® ’s leadership in the U.S. market while +expanding its business internationally. Chaco ® is a part of the Outdoor Group. +29 +Table of Contents +OUTLOOK FOR 2009 +Looking ahead, the Company expects that 2009 will be a difficult economic environment, with +unpredictable consumer spending. +The Company’s backlog of future orders is lower than the prior year as retailers remain cautious in +the face of global economic uncertainty. Future orders are not necessarily indicative of the +Company’s expected revenue growth for 2009, as the mix of orders can shift between future and +at-once orders. As economic turmoil continues, the Company anticipates that retailers will +increasingly expect wholesalers to maintain sufficient inventory balances to meet near-term +consumer demand. In addition, foreign exchange rate fluctuations, variable order cancellations and +discounts can cause differences between future orders for a given period and actual revenues +ultimately recorded in that period. As such, the Company views backlog as an increasingly less +relevant predictor of future sales. +The Company expects that the U.S. dollar will continue to strengthen against the British pound, +euro, and Canadian dollar in 2009. As a result, the Company anticipates that foreign exchange will +negatively impact revenue by approximately $90.0 million and earnings per share by approximately +$0.15 per share in 2009 compared to 2008. +The Company’s defined benefit pension plans, which were more than fully funded at the beginning of +2008, experienced a significant decline in the value of pension assets during the year. As a +result, the Company will record approximately $9.0 million of additional pension expense in 2009. +In light of these current challenging economic conditions, the Company is taking actions through +its strategic restructuring plan, its recent acquisitions, and a thorough examination of all +sources of profit growth. While 2009 will likely present some challenges, the Company believes it +has a strong competitive position and views the current environment as an opportunity to emerge as +an even stronger player in its industry. +30 +Table of Contents +The following is a discussion of the Company’s results of operations and liquidity and capital +resources. This section should be read in conjunction with the Company’s consolidated financial +statements and related notes included elsewhere in this Annual Report. +RESULTS OF OPERATIONS — FISCAL 2008 COMPARED TO FISCAL 2007 +FINANCIAL SUMMARY — 2008 VERSUS 2007 +2008 +2007 +Change +(Millions of Dollars, Except Per Share Data) +$ +% of +Total +$ +% of +Total +$ +% of +Total +Revenue +Branded footwear, apparel, and +licensing +$ +1,106.1 +90.6 +% +$ +1,099.2 +91.7 +% +$ +6.9 +0.6 +% +Other business units +114.5 +9.4 +% +99.8 +8.3 +% +14.7 +14.8 +% +Total Revenue +$ +1,220.6 +100.0 +% +$ +1,199.0 +100.0 +% +$ +21.6 +1.8 +% +% of +% of +% of +$ +Revenue +$ +Revenue +$ +Revenue +Gross Profit +Branded footwear, apparel, and +licensing +$ +444.7 +40.2 +% +$ +434.6 +39.5 +% +$ +10.1 +2.3 +% +Other business units +41.3 +36.1 +% +37.3 +37.4 +% +4.0 +10.7 +% +Total Gross Profit +$ +486.0 +39.8 +% +$ +471.9 +39.4 +% +$ +14.1 +3.0 +% +Selling, General, and +Administrative expenses +$ +345.2 +28.3 +% +$ +333.2 +27.8 +% +$ +12.0 +3.6 +% +Interest (income) expense — net +1.1 +0.1 +% +(0.7 +) +(0.1 +%) +1.8 +264.6 +% +Other (income) expense — net +(0.9 +) +(0.1 +%) +0.8 +0.1 +% +(1.7 +) +(196.2 +%) +Earnings before income taxes +$ +140.6 +11.5 +% +$ +138.6 +11.6 +% +$ +2.0 +1.5 +% +Net Earnings +$ +95.8 +7.9 +% +$ +92.9 +7.7 +% +$ +2.9 +3.2 +% +Diluted earnings per share +$ +1.90 +— +$ +1.70 +— +$ +0.20 +11.8 +% +31 +Table of Contents +The Company has one reportable segment that is engaged in manufacturing, sourcing, marketing, +licensing, and distributing branded footwear, apparel, and accessories. Within the branded +footwear, apparel, and licensing segment, the Company has identified four primary operating units, +consisting of the Outdoor Group (consisting of the Merrell ® and Patagonia ® Footwear brands), the +Wolverine Footwear Group (consisting of the Wolverine ® , HyTest ® , Bates ® Footwear and Stanley ® +Footgear brands and certain private label branded products), the Heritage Brands Group (consisting +of the Cat ® Footwear, Harley-Davidson ® Footwear and Sebago ® brands), The Hush Puppies Company, and +Other. The Company’s other business units, which do not collectively comprise a second reportable +segment, consist of Wolverine Retail and Wolverine Leathers (comprised of the tannery and +procurement operations). The following is supplemental information on total revenue: +TOTAL REVENUE +2008 +2007 +Change +(Millions of Dollars) +$ +% +$ +% +$ +% +Outdoor Group +$ +428.4 +35.1 +% +$ +416.7 +34.8 +% +$ +11.7 +2.8 +% +Wolverine Footwear Group +261.9 +21.5 +% +256.6 +21.4 +% +5.3 +2.1 +% +Heritage Brands Group +242.3 +19.8 +% +241.0 +20.1 +% +1.3 +0.5 +% +The Hush Puppies Company +160.9 +13.2 +% +174.1 +14.5 +% +(13.2 +) +(7.6 +%) +Other +12.6 +1.0 +% +10.8 +0.9 +% +1.8 +17.2 +% +Total branded footwear, +apparel, and licensing +revenue +$ +1,106.1 +90.6 +% +$ +1,099.2 +91.7 +% +$ +6.9 +0.6 +% +Other business units +114.5 +9.4 +% +99.8 +8.3 +% +14.7 +14.8 +% +Total Revenue +$ +1,220.6 +100.0 +% +$ +1,199.0 +100.0 +% +$ +21.6 +1.8 +% +REVENUE +Revenue for 2008 exceeded revenue for 2007 by $21.6 million. Changes in product mix and changes in +selling price for the branded footwear, apparel, and licensing operations, as discussed below, +contributed $16.7 million of the revenue increase. The impact of translating foreign-denominated +revenue to U.S. dollars increased revenue by $3.2 million. These increases were partially offset +by a decrease of $13.0 million due to the planned phase-out of the Hush Puppies ® slippers, Stanley ® +Footgear, and private label businesses. The other business units contributed $14.7 million to the +revenue increase. International revenue represented 40.2% of total revenue in 2008 compared to +39.0% in 2007. +The Outdoor Group earned revenue of $428.4 million for 2008, an $11.7 million increase over 2007. +The Merrell ® brand grew revenue at a low single-digit rate over the prior year, due primarily to +the inclusion of a full year of sales of Merrell ® Apparel, which was introduced in the second half +of 2007. Patagonia ® Footwear grew its revenue at a rate in the low teens in 2008, its second full +year of operation. The solid revenue growth, which is primarily attributable to increased sales of +Patagonia ® Footwear products in the performance category, demonstrates the brand’s appeal for +outdoor enthusiasts. +The Wolverine Footwear Group recorded revenue of $261.9 million for 2008, a $5.3 million increase +from 2007. Despite the challenging retail environment in the United States, revenue from the +Wolverine ® brand increased at a low single-digit rate for 2008 compared to 2007 due primarily to +the success of the premium-priced Contour Welt TM collection. The Bates ® military and +civilian uniform footwear business delivered a strong performance in 2008, growing its revenue at a +rate in the mid teens due to increased civilian business and U.S. Department of Defense contract +shipments compared to 2007. HyTest ® grew revenue at a high single-digit rate over the prior year +due primarily to a successful contract bid for one of its distributors. Revenue from the Stanley ® +Footgear and private label businesses decreased by $11.4 million in 2008 compared to 2007 as a +result of the planned phase-out of these businesses. The Stanley ® Footgear license expired on June +30, 2008. +The Heritage Brands Group generated revenue of $242.3 million during 2008, a $1.3 million increase +over 2007. Cat ® Footwear’s revenue increased at a low single-digit rate in 2008 as a result of +solid revenue growth in the United States, Canada, and globally through the international +distribution network, partially offset by a decrease in Europe as a result of the challenging +retail climate. Harley-Davidson ® Footwear revenue decreased at a mid single-digit rate in 2008 due +primarily to the planned repositioning of the brand in the United States market and resulting +distribution channel modifications. Revenue for the Sebago ® brand increased slightly from 2007, as +strong revenue growth in the United States was offset by lower sales in international markets. +32 +Table of Contents +The Hush Puppies Company recorded revenue of $160.9 million in 2008, a $13.2 million decrease from +2007. Revenue earned by the international licensing business grew at a rate in the mid teens +during 2008 due to positive response to Hush Puppies ® product offerings. Decreases in the United +States, Europe, and Canada more than offset this increase, driven by bankruptcies of key retailers +in the United States and United Kingdom, soft retail conditions, production delays resulting from +factory closures, and a planned exit of a highly-promotional department store customer in Canada. +Hush Puppies ® 2008 revenue also declined by $1.6 million from 2007 as a result of the planned +phase-out of the slipper business. +Within the Company’s other business units, Wolverine Retail reported a high single-digit sales +increase in comparison to 2007 as a result of growth from the Company’s e-commerce channel. +Wolverine Retail operated 90 retail stores in North America at the end of both 2008 and 2007. The +Wolverine ® Leathers operation reported a revenue growth rate in the mid twenties for 2008, +primarily due to an increase in orders placed by key customers and increased demand for its +proprietary products. +The Company’s ending backlog for 2008 decreased at a high single-digit rate on a pair basis in +comparison to 2007. +GROSS MARGIN +Gross margin for 2008 of 39.8% was 40 basis points higher than the prior year. Benefits from +foreign exchange were partially offset by higher freight and product costs from third-party +manufacturers and service providers and the variation in the business mix. +SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES +Selling, general, and administrative expenses of $345.2 million for 2008 increased $12.0 million +from $333.2 million in 2007. Continued investment in brand development through product, marketing, +and retail placement initiatives increased costs in 2008 by $4.7 million in comparison to 2007. +The remaining increase related primarily to increased selling costs due to the increase in revenue +and an increase in corporate general and administrative expenses, partially driven by costs +associated with the consolidation of the Company’s European operations in new London-based offices. +INTEREST, OTHER, AND TAXES +The change in net interest (income) expense reflected increased borrowings to fund the repurchase +of the Company’s stock throughout 2008. +The change in other (income) expense primarily related to the change in realized gains or losses on +foreign denominated assets and liabilities. +The Company’s effective tax rate for 2008 was 31.8% compared to 33.0% in 2007. In the fourth +quarter of 2008, the research and development tax credit was extended by the U.S. Congress and as a +result the Company recognized an income tax benefit in the fourth quarter. In addition, the +reduced rate reflects a higher portion of earnings from lower-taxed foreign jurisdictions. The +annualized effective tax rate for fiscal 2009 is projected in the range of 31.5% to 32.5%. +NET EARNINGS +As a result of the revenue, gross margin, and expense changes discussed above, the Company achieved +net earnings of $95.8 million in 2008 compared to $92.9 million in 2007, an increase of $2.9 +million. Basic net earnings per share increased 10.7% in 2008 to $1.96 from $1.77 in 2007, and +diluted net earnings per share increased 11.8% in 2008 to $1.90 from $1.70 in 2007. In addition to +the increase in net earnings, +the increase in earnings per share is attributable to fewer shares outstanding throughout 2008 as a +result of the repurchase of the Company’s common stock. +Inflation has not had a significant impact on revenue or net earnings. +33 +Table of Contents +RESULTS OF OPERATIONS — FISCAL 2007 COMPARED TO FISCAL 2006 +FINANCIAL SUMMARY — 2007 VERSUS 2006 +2007 +2006 +Change +% of +% of +% of +(Millions of Dollars, Except Per Share Data) +$ +Total +$ +Total +$ +Total +Revenue +Branded footwear, apparel, and +licensing +$ +1,099.2 +91.7 +% +$ +1,036.9 +90.8 +% +$ +62.3 +6.0 +% +Other business units +99.8 +8.3 +% +105.0 +9.2 +% +(5.2 +) +(4.9 +%) +Total Revenue +$ +1,199.0 +100.0 +% +$ +1,141.9 +100.0 +% +$ +57.1 +5.0 +% +% of +% of +% of +$ +Revenue +$ +Revenue +$ +Revenue +Gross Profit +Branded footwear, apparel, and +licensing +$ +434.6 +39.5 +% +$ +402.3 +38.8 +% +$ +32.3 +8.0 +% +Other business units +37.3 +37.4 +% +39.2 +37.4 +% +(1.9 +) +(4.9 +%) +Total Gross Profit +$ +471.9 +39.4 +% +$ +441.5 +38.7 +% +$ +30.4 +6.9 +% +Selling, General, and +Administrative expenses +$ +333.2 +27.8 +% +$ +318.2 +27.9 +% +$ +15.0 +4.7 +% +Interest income — net +(0.7 +) +(0.1 +%) +(0.2 +) +0.0 +% +(0.5 +) +(227.1 +% ) +Other expense — net +0.8 +0.1 +% +1.2 +0.1 +% +(0.4 +) +(27.6 +%) +Earnings before income taxes +$ +138.6 +11.6 +% +$ +122.3 +10.7 +% +$ +16.3 +13.3 +% +Net Earnings +$ +92.9 +7.7 +% +$ +83.6 +7.3 +% +$ +9.3 +11.0 +% +Diluted earnings per share +$ +1.70 +— +$ +1.47 +— +$ +0.23 +15.6 +% +34 +Table of Contents +The following is supplemental information on total revenue: +TOTAL REVENUE +2007 +2006 +Change +(Millions of Dollars) +$ +% +$ +% +$ +% +Outdoor Group +$ +416.7 +34.8 +% +$ +358.8 +31.4 +% +$ +57.9 +16.1 +% +Wolverine Footwear Group +256.6 +21.4 +% +275.8 +24.2 +% +(19.2 +) +(6.9 +%) +Heritage Brands Group +241.0 +20.1 +% +226.8 +19.8 +% +14.2 +6.3 +% +The Hush Puppies Company +174.1 +14.5 +% +169.9 +14.9 +% +4.2 +2.4 +% +Other +10.8 +0.9 +% +5.6 +0.5 +% +5.2 +92.5 +% +Total branded footwear, +apparel, and licensing +revenue +$ +1,099.2 +91.7 +% +$ +1,036.9 +90.8 +% +$ +62.3 +6.0 +% +Other business units +99.8 +8.3 +% +105.0 +9.2 +% +(5.2 +) +(4.9 +%) +Total Revenue +$ +1,199.0 +100.0 +% +$ +1,141.9 +100.0 +% +$ +57.1 +5.0 +% +REVENUE +Revenue for 2007 increased $57.1 million over 2006. Increases in unit volume, changes in product +mix, and changes in selling price for the branded footwear, apparel, and licensing segment +operations, as discussed below, contributed $39.5 million of the revenue increase. The impact of +translating foreign-denominated revenue to U.S. dollars improved revenue by $22.8 million. The +other business units’ revenue decreased $5.2 million. Both domestic and international revenue +increased, with international revenue accounting for 39.0% of total revenue in 2007 compared to +36.8% in 2006. +The Outdoor Group reported an increase in revenue of $57.9 million over 2006. The Merrell ® +footwear business realized a $41.8 million increase over the prior year, as revenue increases were +achieved across substantially all geographies. Strong sales in the multi-sport and trail running +categories, along with strong performance from women’s casual product, drove the majority of the +increase. The brand also continued to experience growth with its network of international +distributors. The Merrell ® Apparel division, which launched in the second half of 2007, +contributed $4.6 million in revenue. In the first full year of business, Patagonia ® experienced +strong sell-through, especially in men’s product, and contributed approximately $11.5 million to +the increase. +The Wolverine Footwear Group recorded a $19.2 million decrease in revenue for 2007, compared to +2006. The Wolverine ® business, which includes the HyTest ® brand, experienced an increase of $5.2 +million during 2007 due to higher demand in the mobile distribution channel, strong reorder +activity on the MultiShox ® comfort technology product, the successful introduction of the Contour +Welt TM technology, and the launch of the Wolverine ® Apparel business. The Bates ® +division recognized a decrease in revenue from 2006 of $7.2 million due to a planned reduction in +demand from the U.S. Department of Defense. Lower sales due to the planned phase out of Stanley ® +Footgear and private label businesses decreased revenue by $5.2 million and $12.0 million, +respectively. +The Heritage Brands Group experienced a $14.2 million revenue increase in 2007, compared to 2006. +Cat ® Footwear’s revenue increased $7.4 million, driven by strong revenue growth in the United +States and through its international distribution network. Positive momentum has been driven +through continued focus on strong integrated product marketing concepts including the Legendary Raw +Collection and iTechnology ™ collection. The Harley-Davidson ® Footwear brand experienced a $0.3 +million revenue decrease in 2007 as the brand refocused its distribution in the United States. The +Sebago ® brand +experienced an increase in revenue of $7.1 million during 2007 due to strong consumer and retail +response across all categories including marine, dress casual, sandals, and kids. +35 +Table of Contents +The Hush Puppies Company’s revenue increased $4.2 million in 2007. The majority of the revenue +growth was driven by increased wholesale shipments in the Canadian and European markets, as well as +higher royalty income generated by international licensees. Strong response to the Hush Puppies ® +product fueled a revenue increase of $2.3 million in Canada and an increase of $8.7 million in +Europe. Revenue for the brand in the U.S. market decreased $6.5 million from 2006 due to the +internal reorganization of the SoftStyle ® business, a weak spring sandal season, and the decision +to reduce inventories to limit retail risk. A $3.9 million revenue decrease in the slipper +operations was experienced as the Company decided to phase out of this business. International +licensing revenue increased $3.6 million in 2007 as global demand for Hush Puppies ® product +continued to grow. +Within the Company’s other business units, Wolverine Retail reported a $4.8 million increase in +revenue as a result of a mid-single digit same-store sales increases and the net addition of eight +stores compared to 2006. The Wolverine Leathers operation reported a $10.0 million revenue +decrease, primarily due to decreased demand for the Company’s proprietary suede products. +The Company ended 2007 with an increase in order backlog of nearly 10% above 2006 year-end levels. +This backlog principally reflected demand for the first half of 2008. +GROSS MARGIN +Gross margin in 2007 of 39.4% was a 70 basis point increase over the prior year. Higher initial +margins, strong inventory reduction programs, and improvements in sourcing and manufacturing +operations increased margin by 110 basis points. Offsetting a portion of this improvement were +inventory reserve increases associated with apparel inventory and domestically produced footwear. +Benefits from favorable foreign exchange contract rates associated with the Company’s foreign +entity inventory purchases added 60 basis points. These improvements were partially offset by a +reduction of 20 basis points due to increased product costs sold into Europe related to new +anti-dumping duties imposed on products sourced from China and Vietnam and a reduction of 80 basis +points due to increased shipments to lower gross margin international distributors. +SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES +Selling, general, and administrative expenses of $333.2 million for 2007 increased $15.0 million +from $318.2 million in 2006. Selling, general, and administrative expenses as a percentage of +revenue decreased 10 basis points compared to the prior year reflecting improvements in overall +distribution costs and reductions in employee benefit expenses of $7.0 million. The Company +invested an incremental $9.4 million in product development, selling, advertising, and +administrative costs on the new Merrell ® Apparel and Patagonia ® Footwear initiatives in 2007 +compared to 2006. Additional brand development initiatives during the year increased selling and +advertising costs by $9.5 million. The remaining increases related primarily to selling and +distribution costs that vary with the increase in revenue. +INTEREST, OTHER, AND TAXES +The change in net interest reflected lower average outstanding amounts on senior notes. +The decrease in other expense primarily related to the change in realized gains or losses on +foreign denominated assets and liabilities. +The Company’s effective income tax rate for 2007 was 33.0% compared to 31.6% in 2006. In the +fourth quarter of 2006, the Company recognized a one-time net income tax benefit of $1.5 million +resulting from the closure of prior year income tax audits. +36 +Table of Contents +NET EARNINGS +As a result of the revenue, gross margin, and expense changes discussed above, the Company achieved +net earnings of $92.9 million compared to $83.6 million in 2006, an increase of $9.3 million. +LIQUIDITY AND CAPITAL RESOURCES +January 3, +December 29, +Change +(Millions of Dollars) +2009 +2007 +$ +% +Cash and cash equivalents +$ +89.5 +$ +76.1 +$ +13.4 +17.6 +% +Accounts receivable +167.9 +179.9 +(12.0 +) +(6.7 +%) +Inventories +196.8 +165.9 +30.9 +18.6 +% +Accounts payable +45.3 +51.6 +(6.3 +) +(12.1 +%) +Accrued salaries and wages +22.7 +20.7 +2.0 +9.8 +% +Accrued pension liabilities +28.1 +4.8 +23.3 +489.8 +% +Other accrued liabilities +35.7 +41.9 +(6.2 +) +(14.8 +%) +Interest-bearing debt +59.5 +10.7 +48.8 +454.5 +% +Cash provided by operating activities +93.5 +123.3 +(29.8 +) +(24.2 +%) +Additions to property, plant, and equipment +24.1 +17.9 +6.2 +34.9 +% +Depreciation and amortization +20.7 +22.8 +(2.1 +) +(9.2 +%) +Earnings before interest, taxes, and +depreciation +162.4 +160.7 +1.7 +1.0 +% +Cash of $44.8 million was used to fund working capital investments in 2008 compared to $0.4 million +used in 2007. Inventory levels increased 18.6% from 2007 while inventory turns increased from 3.7 +turns to 3.8 turns. The increase in inventory levels was primarily driven by the strategic +decision to make inventory pre-buys of core product in the fourth quarter prior to 2009 cost +increases, higher product costs, and the timing of spring inventory receipts, which fell into +fiscal 2008 due to the 53 rd week in the fiscal year. Accounts receivable decreased 6.7% +compared to a 1.8% increase in full-year revenue over 2007. No single customer accounted for more +than 10% of the outstanding accounts receivable balance at January 3, 2009. +The decrease in accounts payable as compared to 2007 was primarily attributable to the timing of +inventory purchases from contract suppliers. The decrease in other accrued liabilities was +primarily attributable to foreign currency forward exchange contracts and a decrease in taxes +payable. +The Company has a revolving credit agreement that expires in July 2010 and allows for borrowings up +to $150.0 million. The revolving credit facility is used to support working capital and general +business requirements. The amount outstanding under the revolving credit facility at January 3, +2009 was $59.5 million which the Company considers short-term in nature. No amount was outstanding +at December 29, 2007. The Company was in compliance with all debt covenant requirements at January +3, 2009 and December 29, 2007. Proceeds from the existing credit facility 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. +37 +Table of Contents +The increase in debt at January 3, 2009 compared to December 29, 2007 was the result of the +outstanding balance under the revolving credit agreement, primarily due to the repurchase of the +Company’s stock throughout 2008. The increase in debt at January 3, 2009 was partially offset by +annual principal payments on the Company’s senior notes, which were paid off in 2008. The Company +had outstanding commercial letter-of-credit facilities of $2.5 million and $2.1 million at the end +of 2008 and 2007, respectively. The total debt-to-capital ratio for the Company was 12.2% in 2008 +and 2.2% in 2007, reflecting higher borrowings under the revolving credit agreement compared to the +prior year. +The majority of capital expenditures were for information system enhancements, consumer-direct +initiatives, manufacturing equipment, and building improvements. The Company leases machinery, +equipment, and certain warehouse, office, and retail store space under operating lease agreements +that expire at various dates through 2023. +The Company’s pension benefit results are based upon actuarial valuations. These valuations are +based on key assumptions, including assumptions about 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 $1.1 million for 2008 when compared to 2007, primarily due +to a decrease in the amortization of prior losses in the market value of pension assets and a +discount rate increase. The Company estimates that pre-tax expense related to qualified defined +benefit pension plans will increase in 2009 as compared to 2008 by approximately $9.0 million +primarily as a result of losses in market value of pension assets in 2008. +Applying the provisions of SFAS No. 87 and SFAS No. 158, the Company’s qualified defined benefit +pension plans (the “Plans”) were underfunded by $36.4 million at January 3, 2009 and were +overfunded by $17.2 million at December 29, 2007. Under the Employee Retirement Income Security +Act of 1974, the Plans had no minimum funding requirements for 2008 and 2007. Discretionary cash +contributions were made to the Plans totaling $3.0 million in both 2008 and in 2007 to provide +long-term stability to the Plans. The Company expects to contribute approximately $26.1 million to +its qualified defined benefit pension plans and approximately $2.0 million to the Supplemental +Executive Retirement Plan (SERP) in 2009. +In the fourth quarter of 2006 and full year 2006 results, the Company recognized a one-time net +income tax benefit of $1.5 million resulting from the closure of prior year income tax audits. 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 of foreign subsidiaries of $235.2 million at +January 3, 2009 ($177.2 million at December 29, 2007), as the Company expects such earnings will +remain invested overseas indefinitely. +The Company’s Board of Directors approved common stock repurchase programs on April 19, 2007 and +December 13, 2005. These programs authorize the repurchase of 7.0 million and 3.0 million shares +of common stock over a 36-month and 24-month period, respectively, commencing on the effective date +of the program. The primary purpose of these stock repurchase programs is to increase shareholder +value. The Company intends to continue repurchasing shares of its common stock in open market or +privately negotiated transactions, from time-to-time, depending upon market conditions and other +factors. +38 +Table of Contents +2008 +2007 +Cumulative +Market price +Market price +Market price +Shares +of shares +Shares +of shares +Shares +of shares +repurchased +repurchased +repurchased +repurchased +repurchased +repurchased +Authorization +effective date +April 19, 2007 +2,844,269 +$ +73,948,000 +3,549,535 +$ +95,945,000 +6,393,804 +$ +169,893,000 +December 13, 2005 +— +— +1,191,882 +33,864,000 +3,000,000 +75,950,000 +The Company declared dividends of $21.5 million, or $0.44 per share, in 2008, a 22.2% increase on a +per share basis over the dividends of $0.36 per share, or $18.8 million, declared in 2007. On +February 11, 2009, the Company declared a quarterly cash dividend of $0.11 per share of common +stock. The quarterly dividend is payable on May 1, 2009, to shareholders of record on April 1, +2009. +In October 2006, the European Commission announced definitive anti-dumping duties at rates of 16.5% +and 10.0% on imports from China and Vietnam, respectively. These definitive measures became +effective October 7, 2006, and were in effect until October 6, 2008. In October 2008, the European +Commission announced a review of the anti-dumping duties to determine whether the duties should +continue or expire. During the expiry review, the anti-dumping duties imposed in October 2006 +remain in effect. The continued imposition of these anti-dumping measures could have a material +impact on the Company’s business, results of operations, financial condition, and cash flows. +NEW ACCOUNTING STANDARDS +In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value +Measurements (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring the fair value +of assets and liabilities. This framework is intended to provide increased consistency in how fair +value determinations are made under various existing accounting standards that permit, or in some +cases require, estimates of fair market value. SFAS No. 157 also expands financial statement +disclosure requirements about a company’s use of fair value measurements, including the effect of +such measures on earnings. For financial assets and liabilities, SFAS No. 157 was effective for +fiscal years beginning after November 15, 2007 (fiscal year 2008 for the Company). In February +2008, the FASB issued FASB Staff Position (FSP) 157-2, Partial Deferral of the Effective Date of +Statement 157 (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS No. 157, for all +nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at +fair value in the financial statements on a recurring basis (at least annually), to fiscal years +beginning after November 15, 2008 (fiscal year 2009 for the Company). The adoption is not expected +to have a material impact on the Company’s consolidated financial statements. +In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS No. 141(R)”). SFAS +No. 141(R) establishes principles and requirements for how the acquirer of a business recognizes +and measures in its financial statements the identifiable assets acquired, the liabilities assumed, +and any noncontrolling interest in the acquiree. The statement also provides guidance for +recognizing and measuring the goodwill acquired in the business combination and determines what +information to disclose to enable users of the financial statements to evaluate the nature and +financial effects of the business combination. SFAS No. 141(R) is to be applied prospectively to +business combinations for which the acquisition date is on or after an entity’s fiscal year +beginning after December 15, 2008 (fiscal year 2009 for the Company). The Company expects the +adoption will have an impact on the consolidated financial statements when effective, but the +nature and magnitude of the specific effects will depend upon the nature, terms, and size of the +acquisitions consummated after the effective date. The Company will apply this standard when +future acquisitions occur. +39 +Table of Contents +In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial +Statements — an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 establishes new accounting +and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation +of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling +interest (minority interest) as equity in the consolidated financial statements and separate from +the parent’s equity. The amount of net income attributable to the noncontrolling interest will be +included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies +that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation +are equity transactions if the parent retains its controlling financial interest. In addition, +this statement requires that a parent recognize a gain or loss in net income when a subsidiary is +deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling +equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure +requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 +is effective for fiscal years, and interim periods within those fiscal years, beginning on or after +December 15, 2008 (fiscal year 2009 for the Company). Earlier adoption is prohibited. The Company +currently does not have any noncontrolling interests and will apply this standard when future +acquisitions occur. +In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging +Activities—an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 changes the +disclosure requirements for derivative instruments and hedging activities. Entities are required +to provide enhanced disclosures about how and why an entity uses derivative instruments, how the +instruments are accounted for under SFAS No. 133 and its related interpretations, and how the +instruments and related hedged items affect an entity’s financial position, financial performance, +and cash flows. The guidance in SFAS No. 161 is effective for financial statements issued for +fiscal years and interim periods beginning after November 15, 2008 (fiscal year 2009 for the +Company). Since SFAS No. 161 requires only additional disclosures concerning derivatives and +hedging activities, adoption of SFAS No. 161 will not affect the Company’s financial condition, +results of operations, or cash flows. +In June 2008, the FASB issued Staff Position (“FSP”) Emerging Issue Task Force (“EITF”) Issue +No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are +Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that unvested share-based +payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether +paid or unpaid) are participating securities and shall be included in the computation of earnings +per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years +beginning after December 15, 2008 (fiscal year 2009 for the Company). Upon adoption, a company is +required to retrospectively adjust its earnings per share data, including any amounts related to +interim periods, summaries of earnings, and selected financial data, to conform to the provisions +of FSP EITF 03-6-1. The adoption of FSP EITF 03-6-1 will reduce basic earnings per share by $0.02 +for fiscal 2008, 2007, and 2006, and have no impact on diluted earnings per share for fiscal 2008 +and 2007 and reduce diluted earnings per share by $0.01 for fiscal 2006. +On December 30, 2008, the FASB issued FSP SFAS No. 132(R)-1, Employer’s Disclosures about +Postretirement Benefit Plan Assets (“FSP SFAS No. 132(R)-1”). This FSP amends FASB Statement No. +132 (Revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits (“SFAS +No. 132(R)”), to provide guidance on an employer’s disclosures about plan assets of a defined +benefit pension or other postretirement plan. The disclosures about plan assets required by FSP +SFAS No. 132(R)-1 shall be provided for fiscal years ending after December 15, 2009 (fiscal 2009 +for the Company). Upon initial application, the provisions of FSP SFAS No. 132(R)-1 are not +required for earlier periods that are presented for comparative purposes. Earlier application of +the provisions of FSP SFAS No. 132(R)-1 is permitted. Since FSP SFAS No. 132(R)-1 requires only +additional disclosures +concerning plan assets, adoption of FSP SFAS No. 132(R)-1 will not affect the Company’s financial +condition, results of operations, or cash flows. +40 +Table of Contents +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 materially 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 Company’s consolidated financial +statements. +REVENUE RECOGNITION +Revenue is recognized on the sale of products manufactured or sourced by the Company when the +related goods have been shipped, legal title has passed to the customer, and collectibility is +reasonably assured. 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 licensees and distributors. +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 may differ from +the Company’s estimates. The Company records either an increase or decrease to net sales in the +period in which it determines 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 in which the Company made +such a determination. At January 3, 2009 and December 29, 2007, management believed that it had +provided sufficient reserves to address future collection uncertainties. +41 +Table of Contents +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 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 good inventories in foreign countries. 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. 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 in 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 is recorded in the period in which such +determination was made. At January 3, 2009 and December 29, 2007, management believed that it had +provided sufficient reserves for excess or obsolete inventories. +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 expected 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-amortizable 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 determined that there was no impairment indicated for the +years ended January 3, 2009 or December 29, 2007. +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 cause the Company to record additional income tax +expense in the Company’s consolidated statements of operations. Management evaluates the potential +the Company will be able to realize its gross deferred tax assets and assesses the need for +valuation allowances on a quarterly basis. The Company did not record a valuation allowance in +2008 or 2007. +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 in +each 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 revised +expected annual rate. +42 +Table of Contents +RETIREMENT BENEFITS +The determination of the obligation and expense for retirement benefits is dependent on the +selection of certain actuarial assumptions used in calculating such amounts. These assumptions +include, among others, the discount rate, expected long-term rate of return on plan assets, and +rates of increase in compensation. These assumptions are reviewed with the Company’s actuaries and +updated annually based on relevant external and internal factors and information, including but not +limited to, long-term expected asset returns, rates of termination, regulatory requirements, and +plan changes. +The Company utilizes a bond matching calculation to determine the discount rate. A hypothetical +bond portfolio is created based on a presumed purchase of bonds with maturities that match the +plan’s expected future cash outflows. The discount rate is the resulting yield of the hypothetical +bond portfolio. The bonds selected are rated AA- or higher by a recognized ratings agency, and are +noncallable, currently purchasable, and nonprepayable. The discount rate is used in the +calculation of the year end pension liability and pension expense for the subsequent year. The +discount rate at year end 2008 was 7.25%. With all other assumptions and values held constant, +every 10 basis point decrease in the discount rate would increase net pension liabilities at year +end 2008 by approximately $2.0 million and would increase 2009 pension expense by approximately +$0.4 million. Pension expense is also impacted by the expected long-term rate of return on plan +assets, which the Company has determined to be 8.5%. This determination is based on both actual +historical rates of return experienced by the pension assets and the long-term rate of return of a +composite portfolio of equity and fixed income securities that approximately reflects the +diversification of the pension assets. Every 10 basis point decrease in the expected long-term +rate of return on plan assets would increase 2009 pension expense by approximately $0.1 million. +STOCK-BASED COMPENSATION +The Company accounts for stock-based compensation in accordance with the fair value recognition +provisions of SFAS No. 123(R), Share-Based Payment . The Company utilizes the Black-Scholes model, +which requires the input of subjective assumptions. These assumptions include estimating (a) the +length of time employees will retain their vested stock options before exercising them (“expected +term”), (b) the volatility of the Company’s common stock price over the expected term, and (c) the +number of options that will be forfeited. Changes in these assumptions can materially affect the +estimate of fair value of stock-based compensation and, consequently, the related expense amounts +recognized on the consolidated statements of operations. +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. The Company does not believe that there has been a material change during 2008 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 on Form 10-K, 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 qualifying hedges must be adjusted to fair +value through earnings. If a derivative is a qualifying 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 +income until the hedged item is recognized in earnings. +43 +Table of Contents +The Company conducts wholesale operations outside of the United States in the United Kingdom, +continental Europe, and Canada where the functional currencies are primarily the British pound, +euro, and Canadian dollar, respectively. The Company utilizes foreign currency forward exchange +contracts to manage the volatility associated with inventory purchases made by non-U.S. wholesale +operations in U.S. dollars in the normal course of business. At January 3, 2009 and December 29, +2007, the Company had outstanding forward currency exchange contracts to purchase $63.1 million and +$70.4 million, respectively, of U.S. dollars with maturities ranging up to 287 days. +The Company also has production facilities in the Dominican Republic and sourcing locations in +Asia, 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 is subject to related foreign currency remeasurement gains and +losses in 2009 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 year ended January 3, 2009, the strengthening of the +U.S. dollar compared to foreign currencies decreased the value of these investments in net assets +by $36.3 million. For the year ended December 29, 2007, the weakening of the U.S. dollar compared +to foreign currencies increased the value of these investments in net assets by $13.6 million. +These changes resulted in cumulative foreign currency translation adjustments at January 3, 2009 +and December 29, 2007 of $0.9 million and $35.4 million, respectively, that are deferred and +recorded as a component of accumulated other comprehensive income 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 revolving credit +agreement. 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 $2.2 million +that was amortized over the term of the senior notes. These notes were fully repaid during 2008 +and, as such, there was no remaining unamortized balance at January 3, 2009. The amortization of +the prepayment created an effective interest rate of 6.78% on the senior notes. +The Company does not enter into contracts for speculative or trading purposes, nor is it a party to +any leveraged derivative instruments. +44 +Table of Contents +OFF-BALANCE SHEET ARRANGEMENTS +The Company has no off-balance sheet arrangements as of January 3, 2009. +CONTRACTUAL OBLIGATIONS +The following table lists required principal payments and related interest rates for the Company’s +short- and long-term debt by fiscal year of maturity. +2008 +2007 +(Millions of Dollars, Except Percentages) +2009 +2010 +2011 +2012 +2013 +There- +after +Total +Fair +Value +Total +Fair +Value +Denominated in U.S. dollars: +Fixed rate +$ +— +— +— +— +— +— +$ +— +$ +— +$ +10.7 +$ +11.0 +Average interest rate +— +— +— +— +— +— +— +— +6.5 +% +— +The Company has the following payments under contractual obligations due by period: +(Thousands of Dollars) +Total +Less than +1 year +1-3 years +3-5 years +More than +5 years +Capital leases +$ +5 +$ +5 +$ +— +$ +— +$ +— +Operating leases +125,672 +16,551 +28,135 +21,245 +59,741 +Purchase obligations (1) +134,986 +134,986 +— +— +— +Deferred compensation +1,156 +249 +369 +324 +214 +Pension (2) +26,156 +26,156 +— +— +— +SERP +21,103 +1,988 +3,847 +3,870 +11,398 +Dividends declared +5,416 +5,416 +— +— +— +Minimum royalties +11,152 +1,328 +3,316 +3,705 +2,803 +Minimum advertising +10,425 +2,121 +4,483 +2,696 +1,125 +Total (3) +$ +336,071 +$ +188,800 +$ +40,150 +$ +31,840 +$ +75,281 +(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. +(3) +The Company adopted Financial Interpretation No. 48, Accounting for Uncertainty in +Income Taxes, (“FIN 48”) on December 31, 2006. The total amount of unrecognized tax +benefits on the Consolidated Balance Sheet at January 3, 2009 is $3.2 million. At +this time, the Company is unable to make a reasonably reliable estimate of the timing +of payments in individual years beyond 12 months due to uncertainties in the timing of +tax audit outcomes. As a result, this amount is not included in the table above. +The Company had $93.4 million of additional borrowing capacity available under all of its existing +credit facilities at January 3, 2009. The Company’s additional borrowing capacity is summarized as +follows: +Expiration of availability +Total commitments +Less than +1 year or +(Millions of Dollars) +available +1 year +greater +Revolving credit +$ +90.5 +$ +— +$ +90.5 +Standby letters of credit +2.9 +2.9 +— +45 +Table of Contents +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. +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 3, 2009, 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 3, 2009. +The effectiveness of the Company’s internal control over financial reporting as of January 3, +2009, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as +stated in its 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 seventeen-week period ended January 3, 2009 that has materially affected, or that is +reasonably likely to materially affect, the Company’s internal control over financial reporting. +Item 9B. Other Information . +None. +46 +Table of Contents +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 SEC Regulations and New York Stock +Exchange standards (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 Jeffrey M. Boromisa and William K. +Gerber 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 with +respect to the Annual Meeting of Stockholders to be held on April 23, 2009, 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, and has +adopted a Code of Conduct & Compliance that applies to the Company’s directors and employees. The +Accounting and Finance Code of Ethics and the Code of Conduct & Compliance are available on the +Company’s website, www.wolverineworldwide.com. Any waiver from the Accounting and Finance Code of +Ethics or the Code of Conduct & Compliance with respect to the Company’s executive officers and +directors will be disclosed on the Company’s website. Any 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 subheading “Nominees +for Terms Expiring in 2012,” “Continuing Directors — Terms Expiring in 2011,” and “Continuing +Directors — Terms Expiring in 2010” in the definitive Proxy Statement of the Company with respect +to the Annual Meeting of Stockholders to be held on April 23, 2009, is incorporated herein by +reference. +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 with respect to the Annual Meeting of Stockholders to +be held on April 23, 2009, is incorporated herein by reference. +Item 11. Executive Compensation . +The information contained under the captions “Executive Compensation,” “Potential Payments +Upon Termination or Change in Control,” “Compensation Committee Interlocks and Insider +Participation” and “Compensation Committee Report” in the definitive Proxy Statement of the Company +with respect to the Annual Meeting of Stockholders to be held on April 23, 2009, is incorporated +herein by reference. +47 +Table of Contents +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder +Matters . +The information contained under the caption “Ownership of Wolverine Stock” contained in the +definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be +held on April 23, 2009, is incorporated herein by reference. +The following table provides information about Wolverine’s equity compensation plans as of +January 3, 2009: +Equity Compensation Plan Information +Number of +Number of Securities +Securities to be +Weighted Average +Remaining Available for +Issued Upon +Exercise Price of +Future Issuance Under +Exercise of +Outstanding +Equity Compensation +Outstanding +Options, +Plans (Excluding +Options, Warrants +Warrants and +Securities Reflected in +and Rights +Rights +Column (a)) +Plan Category (1) +(a) +(b) +(c) +Equity compensation plans approved by +security holders +4,572,384 +(2)(3) +$ +17.87 +3,706,008 +(4) +Equity compensation +plans not approved by +security holders +— +N/A +— +Total +4,572,384 +$ +17.87 +3,706,008 +Notes to Equity Compensation Plan Information +(1) +Each plan for which aggregated information is provided contains +customary anti-dilution provisions that are applicable in the event of +a stock split, stock dividend or certain other changes in the +Company’s capitalization. +(2) +Includes: (i) 4,088,561 stock options awarded to employees under the +1993 Stock Incentive Plan, the 1995 Stock Incentive Plan, the 1997 +Stock Incentive Plan, the Stock Incentive Plan of 1999, the Stock +Incentive Plan of 2001, the Stock Incentive Plan of 2003 and the Stock +Incentive Plan of 2005; and (ii) and 483,823 stock options awarded to +non-employee directors under the Stock Incentive Plan of 2005, the +Amended and Restated Directors’ Stock Option Plan approved by +stockholders in 2002 and the previous Amended and Restated Directors’ +Stock Option Plan initially adopted in 1988. Column (a) does not +include stock units credited to outside directors’ fee accounts or +retirement accounts under the Outside Directors’ Deferred Compensation +Plan. Stock units do not have an exercise price. Each stock unit +credited to a director’s fee account and retirement account under the +Outside Directors’ Deferred Compensation Plan will be converted into +one share of common stock upon distribution. Column (a) also does not +include shares of restricted or unrestricted common stock previously +issued under the Company’s equity compensation plans. +48 +Table of Contents +(3) +Of this amount, 1,169,160 options were not exercisable as of January +3, 2009, due to vesting restrictions. +(4) +Comprised of: (i) 485,550 shares available for issuance under the +Outside Directors’ Deferred Compensation Plan upon the retirement of +the current directors or upon a change in control; and (ii) 3,220,458 +shares issuable under the various employee stock incentive plans. Of +these total amounts available, the number of shares with respect to +the following plans may be issued other than upon the exercise of an +option, warrant or right outstanding as of January 3, 2009: +• Outside Directors’ Deferred Compensation Plan: +485,550 +• Stock Incentive Plan of 1999: +72,198 +• Stock Incentive Plan of 2001: +378,255 +• Stock Incentive Plan of 2003: +88,148 +• Stock Incentive Plan of 2005: +1,340,929 +The Outside Directors’ Deferred Compensation Plan is a supplemental, unfunded, +nonqualified deferred compensation plan for non-employee directors. Beginning +in 2006, the Company began paying an annual equity retainer to non-management +directors in the form of a contribution under the Outside Directors’ Deferred +Compensation Plan. Participation in the plan in addition to the annual equity +retainer is voluntary. The plan allows participating directors to receive, in +lieu of some or all directors’ fees, a number of stock units equal to the +amount of the deferred directors’ fees divided by the fair market value of the +Company’s common stock on the date of payment of the next cash dividend on the +Company’s common stock. These stock units are increased by a dividend +equivalent based on dividends paid by the Company and the amount of stock units +credited to the participating director’s fee account and retirement account. +Upon distribution, the participating directors receive a number of shares of +the Company’s common stock equal to the number of stock units to be distributed +at that time. Distribution is triggered by termination of service as a +director or by a change in control of the Company and can occur in a lump sum, +in installments or on another deferred basis. Of the 485,550 shares issuable +under the Outside Directors’ Deferred Compensation Plan, 179,867 shares have +been issued to a trust to satisfy the Company’s obligations when distribution +is triggered and are included in shares reported as issued and outstanding as +of the record date. +The employee stock incentive plans listed above are equity-based incentive +plans for officers, key employees, and, under the Stock Incentive Plan of 2005, +directors. Those plans authorize awards of stock options, restricted common +stock, common stock and, under certain plans, tax benefit rights, restricted +stock units, deferred stock units, and/or stock appreciation rights. The Stock +Incentive Plans of 2001 and 2003 specifically limit the number of shares that +can be awarded as restricted or unrestricted common stock to 40% and 15%, +respectively, of the shares authorized for issuance under the applicable plan. +The Stock Incentive Plan of 2005 provides that each share of restricted or +unrestricted common stock, each restricted stock unit and each stock +appreciation right is counted as two shares against the total number of shares +authorized for issuance under the plan. The number of securities listed as +remaining available in column (c) of the table assumes the grant of all stock +options, which count as only one share against the total number of shares +authorized for issuance under the Stock Incentive Plan of 2005. Actual shares +available under the Stock Incentive Plan of 2005 will be less to the extent +that awards of restricted or unrestricted common stock, restricted stock units +or stock appreciation rights are issued from that plan. The numbers provided +in this footnote and in column (c) will increase to the extent that options +relating to the number of shares listed in column (a) of the table or other +outstanding awards (e.g., shares of restricted or unrestricted stock, +restricted stock units or stock appreciation rights) previously issued under a +plan are canceled, surrendered, modified, exchanged for substitutes or expire +or terminate prior to exercise or vesting because the number of shares +underlying any such awards will again become available for issuance under the +plan under which the award was granted. +49 +Table of Contents +Item 13. Certain Relationships and Related Transactions, and Director Independence . +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 +with respect to the Annual Meeting of Stockholders to be held on April 23, 2009, is incorporated +herein by reference. The information contained under the caption “Corporate Governance Principles” +under the subheading “Independence” contained in the definitive Proxy Statement of the Company with +respect to the Annual Meeting of Stockholders to be held on April 23, 2009, is 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 with respect to the Annual Meeting of Stockholders to be held on April 23, +2009, 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 3, 2009 and December 29, 2007. +• +Consolidated Statements of Stockholders’ Equity and Comprehensive +Income for the Fiscal Years Ended January 3, 2009, December 29, 2007, +and December 30, 2006. +• +Consolidated Statements of Operations for the Fiscal Years Ended +January 3, 2009, December 29, 2007, and December 30, 2006. +• +Consolidated Statements of Cash Flows for the Fiscal Years Ended +January 3, 2009, December 29, 2007, and December 30, 2006. +• +Notes to the Consolidated Financial Statements as of January 3, 2009. +• +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. +50 +Table of Contents +Item 15(a)(3) . Exhibits . +The following exhibits are filed as part of this report: +Exhibit +Number +Document +3.1 +Restated Certificate of Incorporation. Previously filed as Exhibit 3.1 to +the Company’s Annual Report on Form 10-K for the period ended December 30, +2006. Here incorporated by reference. +3.2 +Amended and Restated By-laws. Previously filed as Exhibit 3.1 to the +Company’s Current Report on Form 8-K filed on October 15, 2008. Here +incorporated by reference. +4.1 +The +Registrant has other long-term debt instruments outstanding +in addition to those described in Exhibit 4.2. 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. +4.2 +Credit Agreement dated as of July 22, 2005, among Wolverine World Wide, Inc. +and certain of its subsidiaries, JPMorgan Chase Bank, N.A., as Administrative +Agent, Harris, N.A., as Syndication Agent, Comerica Bank, Standard Federal +Bank N.A. and National City Bank of the Midwest, as Documentation Agents, and +certain other Banks that are parties to the Credit Agreement. Previously +filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on +July 28, 2005. Here incorporated by reference. +10.1 +1993 Stock Incentive Plan, as amended and restated.* +10.2 +Amended and Restated 1995 Stock Incentive Plan.* +10.3 +Amended and Restated 1997 Stock Incentive Plan.* +10.4 +Amended and Restated Stock Incentive Plan of 1999.* +10.5 +Amended and Restated Stock Incentive Plan of 2001.* +10.6 +Amended and Restated Stock Incentive Plan of 2003.* +10.7 +Amended and Restated Stock Incentive Plan of 2005.* +10.8 +Amended and Restated Directors’ Stock Option Plan.* +10.9 +Amended and Restated Outside Directors’ Deferred Compensation Plan.* +Previously filed as Exhibit 10.9 to the Company’s Annual Report on Form 10-K +for the fiscal year ended December 29, 2007. Here incorporated by reference. +51 +Table of Contents +Exhibit +Number +Document +10.10 +Amended and Restated Executive Short-Term Incentive Plan (Annual Bonus Plan).* +10.11 +Amended and Restated Executive Long-Term Incentive Plan (3-Year Bonus Plan).* +10.12 +Amended and Restated Stock Option Loan Program.* Previously filed as Exhibit +10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended +December 29, 2007. Here incorporated by reference. +10.13 +Executive Severance Agreement.* Previously filed as Exhibit 10.3 to the +Company’s Current Report on Form 8-K filed on December 17, 2008. Here +incorporated by reference. A participant schedule of current executive +officers who are parties to the agreement is attached as Exhibit 10.13. +10.14 +Form of Indemnification Agreement.* The Company has entered into an +Indemnification Agreement with each director and executive officer. +Previously filed as Exhibit 10.3 to the Company’s Quarterly Report on Form +10-Q for the period ended March 22, 2008. Here incorporated by reference. +10.15 +Amended and Restated Benefit Trust Agreement dated April 25, 2007.* +Previously filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K +filed on April 25, 2007. Here incorporated by reference. +10.16 +Employees’ Pension Plan (Restated as amended through November 30, 2007).* +Previously filed as Exhibit 10.17 to the Company’s Annual Report on Form 10-K +for the fiscal year ended December 29, 2007. Here incorporated by reference. +10.17 +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. Here +incorporated by reference. +10.18 +Form of Non-Qualified Stock Option Agreement for 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. Here +incorporated by reference. +10.19 +Form +of Non-Qualified Stock Option Agreement for executive officers other than those +to whom Exhibit 10.18 applies.* Previously filed as Exhibit 10.3 to the +Company’s Current Report on Form 8-K dated February 9, 2005. Here +incorporated by reference. +10.20 +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. Here +incorporated by reference. +10.21 +Form of Incentive Stock Option Agreement.* Previously filed as Exhibit 10.1 +to the Company’s Current Report on Form 8-K dated February 15, 2006. Here +incorporated by reference. +10.22 +Form of Non-Qualified Stock Option Agreement for Stephen L. Gulis, Blake W. +Krueger and Timothy J. O’Donovan.* Previously filed as Exhibit 10.2 to the +Company’s Current Report of Form 8-K dated February 15, 2006. Here +incorporated by reference. +52 +Table of Contents +Exhibit +Number +Document +10.23 +Form +of Non-Qualified Stock Option Agreement for executive officers other than those +to whom Exhibit 10.22 applies.* Previously filed as Exhibit 10.3 to the +Company’s Current Report on Form 8-K dated February 15, 2006. Here +incorporated by reference. +10.24 +Form of Restricted Stock Agreement.* Previously filed as Exhibit 10.4 to the +Company’s Current Report on Form 8-K dated February 15, 2006. Here +incorporated by reference. +10.25 +Form of Stock Option Agreement for non-employee directors.* Previously filed +as Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal +year ended January 1, 2005. Here incorporated by reference. +10.26 +2009 +Form of Non-Qualified Stock Option Agreement for Donald T. +Grimes, Blake W. Krueger, Pamela L. Linton, Michael F. McBreen +and James D. Zwiers.* +10.27 +2009 +Form of Non-Qualified Stock Option Agreement for executive officers +other than those to whom Exhibit 10.26 applies.* +10.28 +Form +of Performance Share Award Agreement.* +10.29 +Separation Agreement between Wolverine World Wide, Inc. and Blake W. Krueger, +dated as of March 13, 2008, as amended.* Previously filed as +Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q +for the period ended March 22, 2008. Here incorporated by +reference. +10.30 +First +Amendment to Separation Agreement between Wolverine World Wide, Inc. +and Blake W. Krueger, dated as of December 11, 2008.* +10.31 +409A Supplemental Executive Retirement Plan.* Previously filed as Exhibit +10.1 to the Company’s Current Report on Form 8-K filed on December 17, 2008. +Here incorporated by reference. A participant schedule of current executive +officers who participate in this plan is attached as +Exhibit 10.31. +10.32 +Form +of 409A Supplemental Retirement Plan Participation Agreement with Mr. Krueger.* +10.33 +Outside +Directors Deferred Compensation Plan.* Previously filed as Exhibit +10.2 to the Company’s Current Report on Form 8-K filed on December 17, 2008. +Here incorporated by reference. +10.34 +Separation and Release Agreement between Wolverine World Wide, Inc. and +Cheryl L. Johnson.* Previously filed as Exhibit 10.27 to the Company’s Annual +Report on Form 10-K for the fiscal year ended December 29, 2007. Here +incorporated by reference. +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 Senior 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. Kenneth A. Grady, General Counsel and Secretary, 9341 Courtland Drive, +Rockford, Michigan 49351. +53 +Table of Contents +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 4, 2009 +By: +/s/ +Blake W. Krueger +Blake W. Krueger +Chief Executive Officer and President +(Principal Executive 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/ Blake W. Krueger +Blake W. Krueger +Chief Executive Officer and President +(Principal Executive Officer) +March 4, 2009 +/s/ Donald T. Grimes +Donald T. Grimes +Senior Vice President, Chief +Financial Officer +and Treasurer +(Principal Financial and Accounting Officer) +March 4, 2009 +*/s/ Jeffrey M. Boromisa +Jeffrey M. Boromisa +Director +March 4, 2009 +*/s/ William K. Gerber +William K. Gerber +Director +March 4, 2009 +*/s/ Alberto L. Grimoldi +Alberto L. Grimoldi +Director +March 4, 2009 +*/s/ Joseph R. Gromek +Joseph R. Gromek +Director +March 4, 2009 +*/s/ David T. Kollat +David T. Kollat +Director +March 4, 2009 +54 +Table of Contents +Signature +Title +Date +/s/ Blake W. Krueger +Blake W. Krueger +Director +March 4, 2009 +*/s/ Brenda J. Lauderback +Brenda J. Lauderback +Director +March 4, 2009 +*/s/ David P. Mehney +David P. Mehney +Director +March 4, 2009 +*/s/ Timothy J. O’Donovan +Timothy J. O’Donovan +Director and Chairman +March 4, 2009 +*/s/ Shirley D. Peterson +Shirley D. Peterson +Director +March 4, 2009 +*/s/ Michael A. Volkema +Michael A. Volkema +Director +March 4, 2009 +*By /s/ Blake W. Krueger +Blake W. Krueger +Attorney-in-Fact +Chief Executive Officer and +President +March 4, 2009 +55 +Table of Contents +APPENDIX A +Financial Statements +Table of Contents +CONSOLIDATED BALANCE SHEETS +As of Fiscal Year End +(Thousands of Dollars) +2008 +2007 +ASSETS +Current assets: +Cash and cash equivalents +$ +89,502 +$ +76,087 +Accounts receivable, less allowances (2008 - $15,161; 2007 - $13,643) +167,949 +179,934 +Inventories +Finished products +177,801 +148,925 +Raw materials and work-in-process +18,976 +16,927 +196,777 +165,852 +Deferred income taxes +8,127 +11,909 +Prepaid expenses and other current assets +11,487 +11,859 +Total current assets +473,842 +445,641 +Property, plant, and equipment: +Land +882 +882 +Buildings and improvements +81,875 +76,678 +Machinery and equipment +143,203 +149,944 +Software +72,478 +60,702 +298,438 +288,206 +Less accumulated depreciation +212,681 +202,789 +85,757 +85,417 +Other assets: +Goodwill +32,310 +39,573 +Other non-amortizable intangibles +9,257 +8,936 +Cash surrender value of life insurance +35,531 +32,886 +Pension assets +— +17,752 +Deferred income taxes +23,314 +3,877 +Other +4,769 +4,296 +105,181 +107,320 +Total assets +$ +664,780 +$ +638,378 +LIABILITIES AND STOCKHOLDERS’ EQUITY +Current liabilities: +Accounts payable +$ +45,320 +$ +51,551 +Accrued salaries and wages +22,702 +20,668 +Income taxes +1,817 +3,911 +Taxes, other than income taxes +4,308 +5,855 +Other accrued liabilities +29,533 +32,109 +Accrued pension liabilities +28,144 +4,772 +Current maturities of long-term debt +5 +10,731 +Revolving credit agreement +59,500 +— +Total current liabilities +191,329 +129,597 +Deferred compensation +7,714 +8,011 +Accrued pension liabilities +34,777 +20,912 +Other liabilities +1,038 +1,079 +Stockholders’ equity: +Common stock, $1 par value: authorized 160,000,000 shares; shares +issued, including treasury shares: 2008 - 61,655,814; 2007 - 61,085,123 +61,656 +61,085 +Additional paid-in capital +64,696 +47,786 +Retained earnings +666,027 +591,706 +Accumulated other comprehensive income (loss) +(42,834 +) +22,268 +Cost of shares in treasury: 2008 - 12,748,721 shares; 2007 - 9,850,299 +shares +(319,623 +) +(244,066 +) +Total stockholders’ equity +429,922 +478,779 +Total liabilities and stockholders’ equity +$ +664,780 +$ +638,378 +( ) +Denotes deduction. +See accompanying notes to consolidated financial statements. +A-1 +Table of Contents +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +AND COMPREHENSIVE INCOME +Fiscal Year +(Thousands of Dollars, Except Per Share Data) +2008 +2007 +2006 +COMMON STOCK +Balance at beginning of the year +$ +61,085 +$ +60,468 +$ +59,212 +Common stock issued under stock incentive plans +(2008 - 570,691 shares; 2007 - 618,123 shares; +2006 - 1,255,286 shares) +571 +617 +1,256 +Balance at end of the year +61,656 +61,085 +60,468 +ADDITIONAL PAID-IN CAPITAL +Balance at beginning of the year +47,786 +31,341 +13,203 +Stock-based compensation expense +8,164 +8,316 +7,155 +Reclassification of unearned compensation upon +adoption of SFAS No. 123(R) +— +— +(5,873 +) +Amounts associated with common stock issued +under stock incentive plans: +Proceeds over par value +5,859 +4,603 +12,254 +Income tax benefits +2,842 +3,572 +4,672 +Issuance of treasury shares (2008 - 22,842 shares; +2007 - 12,661 shares; 2006 - 14,511 shares) +54 +47 +55 +Net change in employee notes receivable +(9 +) +(93 +) +(125 +) +Balance at end of the year +64,696 +47,786 +31,341 +RETAINED EARNINGS +Balance at beginning of the year +591,706 +519,815 +452,672 +Net earnings +95,821 +92,886 +83,647 +Cash dividends declared (2008 - $0.44 per share; +2007 - $0.36 per share; 2006 - $0.30 per share) +(21,500 +) +(18,844 +) +(16,504 +) +Cumulative effect of adopting FIN 48 (See Note 7) +— +(509 +) +— +Pension adjustments (See Note 6) +— +(1,642 +) +— +Balance at end of the year +666,027 +591,706 +519,815 +ACCUMULATED OTHER COMPREHENSIVE +INCOME (LOSS) +Balance at beginning of the year +22,268 +3,923 +9,398 +Foreign currency translation adjustments +(36,305 +) +13,643 +9,548 +Change in fair value of foreign exchange contracts, +net of taxes (2008 - ($3,447); 2007 - $929; 2006 - +$901) +5,978 +(1,007 +) +(1,657 +) +Pension adjustments, net of taxes +(2008 - $18,963; 2007 - ($3,396); 2006 - $6,885) +(34,775 +) +5,709 +(13,366 +) +Balance at end of the year +(42,834 +) +22,268 +3,923 +UNEARNED COMPENSATION +Balance at beginning of the year +— +— +(5,873 +) +Reclassification of unearned compensation upon +adoption of SFAS No. 123(R) +— +— +5,873 +Balance at end of the year +— +— +— +COST OF SHARES IN TREASURY +Balance at beginning of the year +(244,066 +) +(110,988 +) +(66,291 +) +Common stock purchased for treasury (2008 - 2,921,264 +shares; 2007 - 4,587,473 shares; 2006 - 1,937,450 +shares) +(76,129 +) +(133,379 +) +(45,009 +) +Issuance of treasury shares (2008 - 22,842 shares; +2007 - 12,661 shares; 2006 - 14,511 shares) +572 +301 +312 +Balance at end of the year +(319,623 +) +(244,066 +) +(110,988 +) +Total stockholders’ equity at end of the year +$ +429,922 +$ +478,779 +$ +504,559 +COMPREHENSIVE INCOME +Net earnings +$ +95,821 +$ +92,886 +$ +83,647 +Foreign currency translation adjustments +(36,305 +) +13,643 +9,548 +Change in fair value of foreign exchange contracts, net +of taxes +5,978 +(1,007 +) +(1,657 +) +Pension adjustments, net of taxes +(34,775 +) +5,709 +(306 +) +Total comprehensive income +$ +30,719 +$ +111,231 +$ +91,232 +( ) +Denotes deduction. +See accompanying notes to consolidated financial statements. +A-2 +Table of Contents +CONSOLIDATED STATEMENTS OF OPERATIONS +Fiscal Year +(Thousands of Dollars, Except Per Share Data) +2008 +2007 +2006 +Revenue +$ +1,220,568 +$ +1,198,972 +$ +1,141,887 +Cost of products sold +734,547 +727,041 +700,349 +Gross profit +486,021 +471,931 +441,538 +Selling, general, and administrative expenses +345,183 +333,151 +318,243 +Operating profit +140,838 +138,780 +123,295 +Other expenses (income): +Interest expense +2,850 +2,470 +2,973 +Interest income +(1,757 +) +(3,134 +) +(3,175 +) +Other (income) expense +(839 +) +873 +1,205 +254 +209 +1,003 +Earnings before income taxes +140,584 +138,571 +122,292 +Income taxes +44,763 +45,685 +38,645 +Net earnings +$ +95,821 +$ +92,886 +$ +83,647 +Net earnings per share: +Basic +$ +1.96 +$ +1.77 +$ +1.52 +Diluted +1.90 +1.70 +1.47 +See accompanying notes to consolidated financial statements. +A-3 +Table of Contents +CONSOLIDATED STATEMENTS OF CASH FLOWS +Fiscal Year +(Thousands of Dollars) +2008 +2007 +2006 +OPERATING ACTIVITIES +Net earnings +$ +95,821 +$ +92,886 +$ +83,647 +Adjustments necessary to reconcile net earnings +to net cash provided by operating activities: +Depreciation +18,460 +20,223 +21,024 +Amortization +2,236 +2,568 +968 +Deferred income taxes +(43 +) +(5,660 +) +(8,543 +) +Stock-based compensation expense +8,164 +8,316 +7,155 +Excess tax benefits from stock-based compensation +(1,610 +) +(2,620 +) +(3,599 +) +Pension +1,252 +2,884 +7,254 +Other +13,966 +4,339 +3,498 +Changes in operating assets and liabilities: +Accounts receivable +3,419 +(21,530 +) +6,409 +Inventories +(39,201 +) +22,450 +(18,764 +) +Other operating assets +(386 +) +3,141 +(3,382 +) +Accounts payable +(5,064 +) +3,140 +5,434 +Other operating liabilities +(3,544 +) +(6,849 +) +8,588 +Net cash provided by operating activities +93,470 +123,288 +109,689 +INVESTING ACTIVITIES +Additions to property, plant, and equipment +(24,126 +) +(17,879 +) +(17,067 +) +Other +(4,133 +) +(4,441 +) +(2,039 +) +Net cash used in investing activities +(28,259 +) +(22,320 +) +(19,106 +) +FINANCING ACTIVITIES +Net borrowings under revolver +59,500 +— +— +Payments of long-term debt +(10,714 +) +(10,713 +) +(10,916 +) +Payments of capital lease obligations +(12 +) +(26 +) +(23 +) +Cash dividends paid +(20,758 +) +(18,391 +) +(16,079 +) +Purchase of common stock for treasury +(76,129 +) +(133,379 +) +(45,009 +) +Proceeds from shares issued under stock incentive plans +7,047 +5,662 +13,752 +Excess tax benefits from stock-based compensation +1,610 +2,620 +3,599 +Net cash used in financing activities +(39,456 +) +(154,227 +) +(54,676 +) +Effect of foreign exchange rate changes +(12,340 +) +4,683 +3,498 +Increase (decrease) in cash and cash equivalents +13,415 +(48,576 +) +39,405 +Cash and cash equivalents at beginning of the year +76,087 +124,663 +85,258 +Cash and cash equivalents at end of the year +$ +89,502 +$ +76,087 +$ +124,663 +OTHER CASH FLOW INFORMATION +Interest paid +$ +2,365 +$ +1,916 +$ +2,545 +Net income taxes paid +35,995 +48,336 +35,784 +( ) +Denotes reduction in cash and cash equivalents. +See accompanying notes to consolidated financial statements. +A-4 +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1. Summary of Significant Accounting Policies +NATURE OF OPERATIONS +Wolverine World Wide, Inc. is a leading designer, manufacturer and marketer of a broad range of +quality casual shoes, performance outdoor footwear, apparel, work shoes and boots, and uniform +shoes and boots. The Company’s global portfolio of owned and licensed brands includes: Bates ® , Cat ® +Footwear, Harley-Davidson ® Footwear, Hush Puppies ® , HyTest ® , Merrell ® , Patagonia ® Footwear, +Sebago ® , Stanley ® Footgear, and Wolverine ® . Licensing programs are utilized to extend the global +reach of the Company’s owned brands. The Company also operates a retail division to market its +brands and branded footwear and apparel 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-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 53-week period ended January 3, +2009 and the 52-week periods ended December 29, 2007 and December 30, 2006. +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, legal title has passed to the customer, and collectibility is +reasonably assured. 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 licensees and distributors. +The Company records provisions against gross revenue for estimated sales 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 sales returns, historical cash discounts taken, and +analysis of credit memorandum activity. +COST OF PRODUCTS SOLD +Cost of products sold includes the actual product costs, including inbound freight charges, +purchasing, sourcing, inspection, and receiving costs. Warehousing costs are included in selling, +general, 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. +A-5 +Table of Contents +CASH EQUIVALENTS +Cash equivalents include highly liquid investments with a maturity of three months or less when +purchased. Cash equivalents are stated at cost, which approximates market. +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 for the majority of its customers. +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 +U.S. 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. 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 U.S. +finished goods inventories. 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. Leasehold improvements are depreciated at the +lesser of the estimated useful life or lease term, including reasonably assured lease renewals as +determined at lease inception. +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 relationships. 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 by reporting unit 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 ten years). Other amortizable +intangible assets are included in other assets on the consolidated balance sheets and have net +carrying amounts of $4,390,000 and $3,487,000 for 2008 and 2007, respectively, and accumulated +amortization of $4,433,000 and $4,986,000 for 2008 and 2007, respectively. Estimated aggregate +amortization expense for such intangibles for each of the five fiscal years subsequent to 2008 is +as follows: 2009 — $1,668,000; 2010 — $1,554,000; 2011 — $925,000; 2012 — $98,000; 2013 — $65,000. +The Company has performed the required annual impairment tests and has determined that goodwill and +other non-amortizable intangibles were not impaired at January 3, 2009 and December 29, 2007. +A-6 +Table of Contents +The changes in the carrying amount of goodwill and other non-amortizable intangibles for the years +ended January 3, 2009 and December 29, 2007 are as follows: +(Thousands of Dollars) +Goodwill +Trademarks +Total +Balance at December 31, 2006 +$ +38,776 +$ +8,506 +$ +47,282 +Intangibles acquired +— +430 +430 +Foreign currency translation effects +797 +— +797 +Balance at December 29, 2007 +$ +39,573 +$ +8,936 +$ +48,509 +Intangibles acquired +— +338 +338 +Intangibles disposed +— +(17 +) +(17 +) +Foreign currency translation effects +(7,263 +) +— +(7,263 +) +Balance at January 3, 2009 +$ +32,310 +$ +9,257 +$ +41,567 +IMPAIRMENT 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 asset or asset group to the +future undiscounted net cash flows expected to be generated by the asset 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. +RETIREMENT BENEFITS +The determination of the obligation and expense for retirement benefits is dependent on the +selection of certain actuarial assumptions used in calculating such amounts. These assumptions +include, among others, the discount rate, expected long-term rate of return on plan assets, and +rates of increase in compensation. These assumptions are reviewed with the Company’s actuaries and +updated annually based on relevant external and internal factors and information, including but not +limited to, long-term expected asset returns, rates of termination, regulatory requirements, and +plan changes. See Note 6 to the consolidated financial statements for additional information. +STOCK-BASED COMPENSATION +Prior to January 1, 2006, the Company followed Accounting Principles Board (APB) Opinion No. 25 , +Accounting for Stock Issued to Employees , and related Interpretations, in accounting for awards +under its stock incentive plans. The Company did not recognize stock-based compensation expense +related to employee stock options in its statements of operations for periods prior to the adoption +of SFAS No. 123(R), Share-Based Payment , as options granted had an exercise price equal to the +market value of the underlying common stock on the date of grant. Effective January 1, 2006, the +Company adopted the fair value recognition provisions of SFAS No. 123(R) using the modified +prospective transition method. Under that transition method, compensation cost recognized in the +years ended January 3, 2009, December 29, 2007 and December 30, 2006 includes: (a) compensation +cost for all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based +on the grant date fair value estimate in accordance with the original provisions of SFAS No. 123, +Accounting for Stock-Based Compensation , and (b) compensation cost for all stock-based payments +granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance +with the provisions of SFAS No. 123(R). +The Company recognized compensation costs of $8,164,000, $8,316,000, and $7,155,000 and related +income tax benefits of $1,699,000, $2,092,000, and $1,967,000 for awards under its stock-based +compensation plans in the statements of operations for the years ended January 3, 2009, December +29, 2007, and December 30, 2006, respectively. Compensation costs capitalized as part of inventory +and property, plant and equipment were not material. +A-7 +Table of Contents +The Company estimated the fair value of employee stock options on the date of grant using the +Black-Scholes model. The estimated weighted-average fair value for each option granted was $5.68, +$6.87 and $5.29 per share in 2008, 2007 and 2006, respectively, with the following weighted-average +assumptions: +2008 +2007 +2006 +Expected market price volatility (1) +28.9 +% +23.3 +% +24.5 +% +Risk-free interest rate (2) +2.5 +% +4.8 +% +4.6 +% +Dividend yield (3) +1.6 +% +1.4 +% +1.4 +% +Expected term (4) +4 years +4 years +4 years +(1) +Based on historical volatility of the Company’s common stock. The +expected volatility is based on the daily percentage change in the +price of the stock over the four years prior to the grant. +(2) +Represents the U.S. Treasury yield curve in effect for the expected +term of the option (average of three- and five-year Treasury bonds) at +the time of grant. +(3) +Represents the Company’s cash dividend yield for the expected term. +(4) +Represents the period of time that options granted are expected to be +outstanding. The Company determined that all employee groups exhibit +similar exercise and post-vesting termination behavior to determine +the expected term. +Stock-based compensation expense recognized in the consolidated condensed statements of operations +for the years ended January 3, 2009, December 29, 2007 and December 30, 2006 has been reduced for +estimated forfeitures, as it is based on awards ultimately expected to vest. SFAS No. 123(R) +requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent +periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on +historical experience. +ADVERTISING COSTS +Advertising costs are expensed as incurred and customer-specific advertising dollars are expensed +when earned by customers. Total advertising expense was $47,436,000 in 2008, $45,982,000 in 2007 +and $42,037,000 in 2006, and includes customer-specific advertising dollars of $10,752,000 in 2008, +$12,160,000 in 2007 and $9,327,000 in 2006. The Company provides sales incentives to certain +retail customers in the form of a cooperative advertising program and accounts for costs under this +program 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. The Company recognizes interest +and penalties related to unrecognized tax benefits through interest expense and income tax expense, +respectively. +EARNINGS PER SHARE +Basic earnings per share is computed based on weighted-average shares of common stock outstanding +during each year after adjustment for nonvested common stock issued under 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. +A-8 +Table of Contents +The following table sets forth the reconciliation of weighted average shares used in the +computation of basic and diluted earnings per share: +2008 +2007 +2006 +Weighted average shares outstanding during the year +49,381,789 +53,140,581 +55,655,822 +Adjustment for nonvested restricted common stock +(513,063 +) +(641,088 +) +(802,624 +) +Denominator for basic earnings per share +48,868,726 +52,499,493 +54,853,198 +Effect of dilutive stock options +1,151,567 +1,586,804 +1,622,103 +Adjustment for nonvested common stock — treasury +method +337,424 +401,369 +455,806 +Denominator for diluted earnings per share +50,357,717 +54,487,666 +56,931,107 +Options to purchase 1,273,676 shares of common stock in 2008, 546,247 shares in 2007, and 507,775 +shares in 2006 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. +FOREIGN CURRENCY +For most of 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 in 2008, 2007, and 2006. +FINANCIAL INSTRUMENTS AND RISK MANAGEMENT +The Company’s financial instruments consist of cash and cash equivalents, accounts and notes +receivable, accounts payable, borrowings under the revolving credit agreement, and long-term debt. +There was no long-term debt outstanding at January 3, 2009. At December 29, 2007, fixed rate +long-term debt with a carrying value of $10,714,000 and a fair value of $10,976,000 was +outstanding. Excluding the fixed rate long-term debt, the Company’s estimate of the fair values of +the aforementioned 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. +Effective December 30, 2007 (fiscal year 2008), the Company adopted the provisions of SFAS No. 157, +Fair Value Measurements (“SFAS No. 157”), for financial assets and liabilities measured on a +recurring basis. SFAS No. 157 applies to all financial assets and liabilities that are being +measured and reported on a fair value basis and establishes a framework for measuring fair value of +assets and liabilities and expands disclosures about fair value measurements. There was no impact +to the Company’s consolidated financial statements as a result of the adoption of SFAS No. 157. As +of January 3, 2009 and December 29, 2007, an asset of $3,246,000 and a liability of $1,918,000, +respectively, have been recognized for the fair value of the foreign currency forward exchange +contracts. In accordance with SFAS No. 157, these assets and liabilities fall within Level 2 of +the fair value hierarchy. Level 2 represents financial instruments lacking quoted prices +(unadjusted) from active market exchanges, including over-the-counter exchange-traded financial +instruments. The prices for the financial instruments are determined using prices for +recently-traded financial instruments with similar underlying terms as well as directly or +indirectly observable inputs. The Company did not have any additional assets or liabilities that +were measured at fair value on a recurring basis at January 3, 2009. +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 inventory purchases made by non-U.S. wholesale +operations in U.S. dollars in +the normal course of business. At January 3, 2009 and December 29, 2007, foreign exchange +contracts with a notional value of $63,129,000 and $70,357,000, respectively, were outstanding to +purchase U.S. dollars with maturities ranging up to 287 days. These contracts have been designated +as cash flow hedges. +A-9 +Table of Contents +The fair value of the foreign currency forward exchange contracts represents the estimated receipts +or payments necessary to terminate the contracts. Hedge effectiveness is evaluated by the +hypothetical derivative method. Any hedge ineffectiveness is reported within cost of products +sold. Hedge ineffectiveness was not material in 2008, 2007, or 2006. If, in the future, the +foreign exchange contracts are determined to be ineffective hedges or terminated before their +contractual termination dates, the Company would be required to reclassify into earnings all or a +portion of the unrealized amounts related to the cash flow hedges that are currently included in +accumulated other comprehensive income (loss) within stockholders’ equity. +COMPREHENSIVE INCOME +Comprehensive income represents net earnings and any revenue, expenses, gains, and losses that, +under accounting principles generally accepted in the United States, are excluded from net earnings +and recognized directly as a component of stockholders’ equity. +Ending accumulated other comprehensive income (loss) is as follows: +(Thousands of Dollars) +2008 +2007 +Foreign currency translation adjustments +$ +(872 +) +$ +35,433 +Foreign currency cash flow hedge adjustments, net of taxes +(2008 - ($1,904); 2007 - $1,543) +3,923 +(2,055 +) +Pension adjustments, net of taxes +(2008 - $24,231; 2007 - $5,268) +(45,885 +) +(11,110 +) +Accumulated other comprehensive income (loss) +$ +(42,834 +) +$ +22,268 +RECLASSIFICATIONS +Certain amounts previously reported in 2007 and 2006 have been reclassified to conform with the +presentation used in 2008. +2. Inventories +Inventories of $65,000,000 at January 3, 2009 and $61,070,000 at December 29, 2007 have been valued +using the LIFO method. If the FIFO method had been used, inventories would have been $11,854,000 +and $8,983,000 higher than reported at January 3, 2009 and December 29, 2007, respectively. +3. Debt +Long-term debt consists of the following obligations: +(Thousands of Dollars) +2008 +2007 +6.5% senior notes payable +$ +— +$ +10,714 +Other +5 +17 +5 +10,731 +Less current maturities +5 +10,731 +$ +— +$ +— +The 6.5% unsecured senior notes payable were paid in 2008. Required annual principal payments of +$10,714,000 were 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 was amortized over the +remaining term of the senior notes using the effective interest method. The prepayment was fully +amortized at January 3, 2009. +A-10 +Table of Contents +The Company has an unsecured revolving credit agreement that allows for borrowings up to +$150,000,000, subject to increase or decrease as specified in the credit agreement. This +agreement, which expires in July 2010, contains restrictive covenants that, among other things, +require the Company to maintain certain financial ratios related to debt to total capital and +minimum fixed charge coverage. At January 3, 2009, the Company was in compliance with all +restrictive covenants. Interest is paid at a variable rate based on one of the following options +elected by the Company: prime, LIBOR, or money market rate plus applicable spread. At January 3, +2009, $59,500,000 was outstanding under a revolving credit agreement which the Company considers +short-term in nature. No amount was outstanding at December 29, 2007. +The Company had commercial letters of credit outstanding of $2,466,000 and $2,060,000 at January 3, +2009 and December 29, 2007, respectively. +Interest costs of $227,000 in 2008, $237,000 in 2007, and $170,000 in 2006 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 2023. Certain leases contain +renewal provisions and generally require the Company to pay utilities, insurance, taxes, and other +operating expenses. At January 3, 2009, minimum rental payments due under all noncancelable leases +were as follows: 2009 — $16,551,000; 2010 — $14,824,000; 2011 — $13,311,000; 2012 — $11,020,000; +2013 — $10,225,000; thereafter — $59,741,000. +Rental expense under all operating leases, consisting primarily of minimum rentals, totaled +$18,255,000 in 2008, $14,681,000 in 2007, and $13,934,000 in 2006. +5. Capital Stock +The Company has 2,000,000 authorized shares of $1 par value preferred stock, of which none was +issued or outstanding as of January 3, 2009 or December 29, 2007. The Company has designated +500,000 shares of preferred stock as Series B junior participating preferred stock for possible +future issuance under a preferred stock rights plan. +As of January 3, 2009, the Company had stock options outstanding or available for grant under stock +incentive plans adopted in 1993, 1995, 1997, 1999, 2001, 2003, and 2005. Shares of restricted +stock may also be granted under each of these plans, with the exception of the 1993, 1995, and 1997 +plans. As of January 3, 2009, the Company had approximately 2,681,324 stock incentive units +available for issuance under the Stock Incentive Plan of 2005. Under the provisions of the Stock +Incentive Plan of 2005, each option granted counts as one stock incentive unit and each share of +restricted stock granted counts as two stock incentive units. In addition, as of January 3, 2009, +the Company had approximately 536,911 stock incentive units available for grant under the balance +of its other plans. Options granted under each plan have an exercise price equal to the fair +market value of the underlying stock on the grant date, expire no later than ten years from the +grant date, and generally vest over three years. 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 during the vesting period (except for certain transfers for estate +planning purposes for certain officers), and a requirement to forfeit all or a certain portion of +the award upon certain terminations of employment or upon failure to achieve performance criteria +in certain instances. These restrictions typically lapse over a three- to five-year period from the +date of the award. The Company has elected to recognize expense for these stock-based incentive +plans ratably over the vesting term on a straight-line basis. Certain option and restricted share +awards provide for accelerated vesting under various scenarios, including retirement and upon a +change in control of the Company. With regard to acceleration of vesting upon retirement, +employees of eligible retirement age are vested in +accordance with plan provisions and applicable stock option and restricted stock agreements. The +Company issues shares to plan participants upon exercise or vesting of stock-based incentive awards +from either authorized, but unissued, shares or treasury shares. +A-11 +Table of Contents +A summary of the transactions under the stock option plans is as follows: +Average +Weighted- +Remaining +Shares +Average +Contractual +Aggregate +Under +Exercise +Term +Intrinsic +Option +Price +(Years) +Value +Outstanding at December 31, 2005 +5,040,712 +$ +14.72 +5.6 +$ +39,201,000 +Granted +735,210 +22.71 +Exercised +(1,168,639 +) +12.51 +Cancelled +(32,338 +) +20.46 +Outstanding at December 30, 2006 +4,574,945 +$ +16.53 +5.6 +$ +54,873,000 +Granted +623,577 +30.16 +Exercised +(551,020 +) +14.67 +Cancelled +(59,257 +) +27.73 +Outstanding at December 29, 2007 +4,588,245 +$ +18.46 +5.4 +$ +31,096,000 +Granted +845,843 +25.21 +Exercised +(713,048 +) +15.46 +Cancelled +(148,656 +) +25.36 +Outstanding at January 3, 2009 +4,572,384 +$ +19.95 +5.6 +$ +16,155,438 +Estimated forfeitures +(12,917 +) +Vested or expected to vest at +January 3, 2009 +4,559,467 +$ +19.93 +5.5 +$ +16,155,320 +Nonvested at January 3, 2009 +and expected to vest +(1,156,243 +) +Exercisable at January 3, 2009 +3,403,224 +$ +17.87 +4.5 +$ +16,152,334 +The total pre-tax intrinsic value of options exercised during the year ended January 3, 2009 was +$8,593,000. As of January 3, 2009, there was $2,851,000 of unrecognized compensation cost related +to stock option awards that is expected to be recognized over a weighted-average period of 1.2 +years. +The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, +based on the Company’s closing stock price of $21.52 as of January 2, 2009, which would have been +received by the option holders had all option holders exercised in-the-money options as of that +date. The total number of in-the-money options exercisable as of January 3, 2009 was 2,183,319. +As of December 29, 2007, 3,635,095 outstanding options were exercisable, and the weighted-average +exercise price was $16.22. +A-12 +Table of Contents +A summary of the nonvested restricted shares issued under stock award plans is as follows: +Weighted- +Average +Grant Date +Shares +Fair Value +Nonvested at December 31, 2005 +933,891 +$ +14.28 +Granted +178,950 +22.59 +Vested +(324,735 +) +12.06 +Forfeited +(12,296 +) +17.09 +Nonvested at December 30, 2006 +775,810 +$ +17.09 +Granted +146,950 +30.17 +Vested +(335,695 +) +14.81 +Forfeited +(13,684 +) +27.64 +Nonvested at December 29, 2007 +573,381 +$ +21.52 +Granted +179,755 +24.85 +Vested +(234,581 +) +18.36 +Forfeited +(46,063 +) +24.08 +Nonvested at January 3, 2009 +472,492 +$ +24.11 +As of January 3, 2009, there was $4,072,000 of unrecognized compensation cost related to nonvested +share-based compensation arrangements granted under restricted stock award plans. That cost is +expected to be recognized over a weighted-average period of 1.8 years. The total fair value of +shares vested during the year ended January 3, 2009 was $6,300,000. +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 +$35,531,000 at January 3, 2009 and $32,886,000 at December 29, 2007 that are intended to fund +deferred compensation benefits under the SERP and deferred compensation agreements. +The Company has a defined contribution money accumulation plan (“MAP”) covering substantially all +domestic employees that provides for Company contributions based on earnings. Prior to January 1, +2007, this plan was combined with the principal defined benefit pension plan for funding purposes +under Section 414(k) of the Internal Revenue Code (“IRC”). On January 1, 2007, the assets and +projected benefit obligation attributable to the Section 414(k) arrangement were split off from the +defined benefit pension plan and merged with the MAP. The Company recognized expense for the MAP +of $2,245,000 in 2008, $2,078,000 in 2007, and $2,100,000 in 2006. +The Company has certain defined contribution plans at foreign subsidiaries. Contributions to these +plans were $1,194,000 in 2008, $1,327,000 in 2007, and $978,000 in 2006. The Company also has a +defined benefit plan at a foreign location that provides for retirement benefits based on years of +service. The obligation recorded under this plan was $2,620,000 at January 3, 2009 and $2,466,000 +at December 29, 2007 which is recognized as a deferred compensation liability on the accompanying +balance sheet. +A-13 +Table of Contents +Effective in 2007, the Company adopted the measurement date provisions of SFAS No. 158 requiring +the measurement date of the defined benefit pension plans to correspond with the Company’s fiscal +year end. As a result, the Company recognized a reduction of $1,642,000 in retained earnings and a +reduction in accumulated other comprehensive income of $6,338,000. The previous measurement date +was September 30. The following summarizes the status of and changes in the Company’s pension +assets and related obligations for its pension plans (which include the Company’s defined benefit +pension plans and the SERP) as of: +(Thousands of Dollars) +2008 +2007 +Change in projected benefit obligations: +Projected benefit obligations at beginning of the year +$ +175,091 +$ +176,262 +Service cost pertaining to benefits earned during the year +4,859 +6,061 +Interest cost on projected benefit obligations +11,413 +13,701 +Actuarial (gains) losses +(5,309 +) +141 +Plan amendment +220 +717 +IRC Section 414(k) split-off +— +(10,785 +) +Benefits paid to plan participants +(11,304 +) +(11,006 +) +Projected benefit obligations at end of the year +$ +174,970 +$ +175,091 +Change in fair value of pension assets: +Fair value of pension assets at beginning of the year +$ +167,159 +$ +163,498 +Actual return (loss) on plan assets +(48,879 +) +20,682 +Company contributions +5,073 +4,770 +IRC Section 414(k) split-off +— +(10,785 +) +Benefits paid to plan participants +(11,304 +) +(11,006 +) +Fair value of pension assets at end of the year +$ +112,049 +$ +167,159 +Funded status +$ +(62,921 +) +$ +(7,932 +) +Amounts recognized in the consolidated balance sheets: +Current liabilities +$ +(28,144 +) +$ +(4,772 +) +Non current assets +— +17,752 +Non current liabilities +(34,777 +) +(20,912 +) +Net amount recognized +$ +(62,921 +) +$ +(7,932 +) +Amounts recognized in accumulated other comprehensive income (loss), +net of tax: +Unrecognized net actuarial loss +$ +(44,707 +) +$ +(9,757 +) +Unrecognized prior service cost +(1,178 +) +(1,353 +) +Net amount recognized +$ +(45,885 +) +$ +(11,110 +) +Funded status of pension plans and SERP (supplemental): +Funded status of qualified defined benefit plans and SERP +$ +(62,921 +) +$ +(7,932 +) +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 +33,633 +30,715 +Net funded status of pension plans and SERP (supplemental) +$ +(29,288 +) +$ +22,783 +A-14 +Table of Contents +Information for pension plans with an accumulated benefit obligation in excess of plan assets: +(Thousands of Dollars) +2008 +2007 +Projected benefit obligations +$ +174,970 +$ +28,729 +Accumulated benefit obligations +165,432 +26,910 +Fair value of plan assets +112,049 +2,886 +The accumulated benefit obligations for all defined benefit pension plans and the SERP were +$165,432,000 at January 3, 2009 and $164,094,000 at December 29, 2007. +The following is a summary of net pension and SERP cost recognized by the Company: +(Thousands of Dollars) +2008 +2007 +2006 +Service cost pertaining to benefits earned during the year +$ +(4,859 +) +$ +(4,849 +) +$ +(4,940 +) +Interest cost on projected benefit obligations +(11,413 +) +(11,011 +) +(10,342 +) +Expected return on pension assets +13,914 +14,024 +12,844 +Net amortization loss +(3,967 +) +(5,569 +) +(8,743 +) +Net pension cost +$ +(6,325 +) +$ +(7,405 +) +$ +(11,181 +) +The prior service cost and actuarial loss included in accumulated other comprehensive income (loss) +and expected to be recognized in net periodic pension cost during 2009 is $441,000 ($287,000, net +of tax) and $9,154,000 ($5,950,000, net of tax), respectively. Expense for qualified defined +benefit pension plans was $3,601,000 in 2008, $4,707,000 in 2007, and $8,759,000 in 2006. +2008 +2007 +Weighted-average assumptions used to determine +benefit obligations at fiscal year end: +Discount rate +7.25 +% +6.70 +% +Rate of compensation increase +3.50 +% +3.50 +% +Weighted average assumptions +used to determine net periodic benefit +cost for the years ended: +Discount rate +6.70 +% +6.25 +% +Expected long-term rate of return on plan assets +8.50 +% +8.75 +% +Rate of compensation increase +3.50 +% +3.50 +% +Unrecognized net actuarial 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 Company utilizes a bond matching calculation to determine the discount +rate. A hypothetical bond portfolio is created based on a presumed purchase of bonds with +maturities that match the plan’s expected future cash outflows. The discount rate is the resulting +yield of the hypothetical bond portfolio. The discount rate is used in the calculation of the year +end pension liability and pension expense for the subsequent year. +A-15 +Table of Contents +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. +2008 +2007 +Weighted average asset allocations at fiscal year end +by asset category are as follows: +Equity securities +65.8 +% +75.4 +% +Fixed income investments +31.8 +% +20.0 +% +Cash and money market investments +2.4 +% +4.6 +% +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. +The Company expects to contribute $26,156,000 to its qualified defined benefit pension plans and +$1,988,000 to the SERP in 2009. +Expected benefit payments for the five years subsequent to 2008 and the sum of the five years +following those are as follows: 2009 — $10,591,000; 2010 — $10,746,000; 2011 — $11,056,000; 2012 - +$11,230,000; 2013 — $11,728,000; and 2014 through 2018 — $66,029,000. +7. Income Taxes +Earnings before income taxes consist of the following: +(Thousands of Dollars) +2008 +2007 +2006 +United States +$ +82,604 +$ +87,648 +$ +84,379 +Foreign +57,980 +50,923 +37,913 +$ +140,584 +$ +138,571 +$ +122,292 +The provisions for income taxes consist of the following: +(Thousands of Dollars) +2008 +2007 +2006 +Currently payable: +Federal +$ +31,221 +$ +37,404 +$ +35,442 +State +483 +977 +784 +Foreign +13,102 +12,964 +10,962 +Deferred credit +(43 +) +(5,660 +) +(8,543 +) +$ +44,763 +$ +45,685 +$ +38,645 +A reconciliation of the Company’s total income tax expense and the amount computed by applying the +statutory federal income tax rate of 35% to earnings before income taxes is as follows: +(Thousands of Dollars) +2008 +2007 +2006 +Income taxes at statutory rate +$ +49,204 +$ +48,500 +$ +42,850 +State income taxes, net of federal income tax +375 +302 +349 +Nontaxable earnings of foreign affiliates +(1,555 +) +(2,026 +) +(2,123 +) +Research and development credits +(875 +) +(877 +) +(481 +) +Foreign earnings taxed at rates differing from +the U.S. statutory rate +(3,352 +) +(1,439 +) +(93 +) +Tax reserve adjustments +244 +670 +(1,535 +) +Other +722 +555 +(322 +) +$ +44,763 +$ +45,685 +$ +38,645 +A-16 +Table of Contents +Significant components of the Company’s deferred income tax assets and liabilities as of the end of +2008 and 2007 are as follows: +(Thousands of Dollars) +2008 +2007 +Deferred income tax assets: +Accounts receivable and inventory valuation allowances +$ +5,631 +$ +6,486 +Deferred compensation accruals +2,825 +1,916 +Future benefit of foreign net operating losses +— +254 +Accrued pension costs +24,231 +5,268 +Other amounts not deductible until paid +7,153 +10,370 +Total deferred income tax assets +39,840 +24,294 +Deferred income tax liabilities: +Tax depreciation in excess of book depreciation +(4,484 +) +(4,164 +) +Prepaid pension costs +(2,173 +) +(2,670 +) +Other +(1,742 +) +(1,674 +) +Total deferred income tax liabilities +(8,399 +) +(8,508 +) +Net deferred income tax assets +$ +31,441 +$ +15,786 +The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for +Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 , on the first day of +fiscal year 2007, December 31, 2006. Prior to adoption of FIN 48, the Company had unrecognized tax +benefits of $1,599,000, net of tax. As a result of the implementation of FIN 48, the Company +recognized an increase in the liability for unrecognized tax benefits of $369,000, and a +corresponding decrease to the December 31, 2006 balance of retained earnings. +The following table summarizes the activity related to the Company’s unrecognized tax benefits: +(Thousands of Dollars) +2008 +2007 +Beginning balance +$ +2,927 +$ +2,415 +Increases related to current year tax positions +244 +1,001 +Release due to settlements of audits +— +(489 +) +Ending balance +$ +3,171 +$ +2,927 +The Company had unrecognized tax benefits of $2,646,000 as of January 3, 2009, and $2,382,000 as of +December 29, 2007, that if recognized currently would reduce the annual effective tax rate. The +Company recognizes interest and penalties related to unrecognized tax benefits through interest +expense and income tax expense, respectively. The Company has accrued approximately $140,000 for +interest as part of the cumulative effect of implementing the provisions of FIN 48, which was +accounted for as a reduction to the December 31, 2006 balance of retained earnings. Net interest +accrued related to unrecognized tax benefits was $553,000 as of January 3, 2009 and $282,000 as of +December 29, 2007. +The Company is subject to periodic audits by domestic and foreign tax authorities. Currently, the +Company is undergoing routine periodic audits in both domestic and foreign tax jurisdictions. It +is reasonably possible that the amounts of unrecognized tax benefits could change in the next 12 +months as a result of the audits; however, any payment of tax is not expected to be significant to +the consolidated financial statements. +For the majority of tax jurisdictions, the Company is no longer subject to U.S. federal, state and +local, or non-U.S. income tax examinations by tax authorities for years before 2004. +No provision has been made for U.S. federal and state income taxes or foreign taxes that may result +from future remittances of the remaining undistributed earnings of foreign subsidiaries of +$235,151,000 at January 3, 2009, as the Company expects such earnings will remain invested overseas +indefinitely. At December 29, 2007, undistributed foreign earnings were $177,226,000. +A-17 +Table of Contents +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 U.S. 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 adverse effect on the Company’s consolidated financial position, results +of operations, or cash flows. +The Company is involved in routine litigation incidental to its business and is a party to legal +actions and claims, including, but not limited to, those related to employment and intellectual +property. Some of the legal proceedings include claims for compensatory as well as punitive +damages. While the final outcome of these matters cannot be predicted with certainty, considering, +among other things, the meritorious legal defenses available and liabilities that have been +recorded along with applicable insurance, it is currently the opinion of the Company’s management +that these items will not have a material adverse effect on the Company’s financial condition, +results of operations, or cash flows. +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 require +the Company to indemnify and reimburse the third parties for costs, including but not limited to +adverse judgments in lawsuits, 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: +(Thousands of Dollars) +2009 +2010 +2011 +2012 +2013 +Minimum royalties +$ +1,328 +$ +1,544 +$ +1,772 +$ +1,825 +$ +4,683 +Minimum advertising +2,121 +2,208 +2,275 +2,343 +353 +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 +and are not included in the above table. In accordance with these agreements, the Company incurred +royalty expense of $3,198,000, $3,456,000, and $3,159,000 for 2008, 2007, and 2006, respectively. +The terms of certain license agreements also require the Company to make advertising expenditures +based on the level of sales. In accordance with these agreements, the Company incurred advertising +expense of $3,018,000, $3,508,000, and $2,331,000 for 2008, 2007, and 2006, respectively. +9. Business Segments +The Company has one reportable segment that is engaged in manufacturing, sourcing, marketing, +licensing, and distributing branded footwear, 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 earned by operation of this +segment is derived from the sale of branded footwear and apparel 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, apparel, and licensing segment +manufacture or source, market, and distribute products in a similar manner. Branded footwear, +apparel, and licensed products are distributed through wholesale channels and under licensing and +distributor arrangements. +A-18 +Table of Contents +The other business units in the following tables consist of the Company’s retail, tannery, and +pigskin procurement operations. These other operations do not collectively form a reportable +segment because their respective operations are dissimilar. The Company operated 90 retail stores +in North America and 21 consumer-direct internet sites at January 3, 2009 that sell +Company-manufactured and sourced products, as well as footwear and apparel manufactured by +unaffiliated companies. The other business units distribute products through retail and wholesale +channels. +The Company measures segment profits as earnings before income taxes. The accounting policies used +to determine profitability and total assets of the branded footwear, apparel, and licensing segment +and other business units are the same as disclosed in Note 1. +Business segment information is as follows: +2008 +Branded +Footwear, +Apparel, +Other +(Thousands of Dollars) +and Licensing +Businesses +Corporate +Consolidated +Revenue +$ +1,106,081 +114,487 +— +1,220,568 +Intersegment sales +47,386 +3,542 +— +50,928 +Interest (income) expense — net +9,650 +1,102 +(9,659 +) +1,093 +Depreciation expense +6,823 +3,768 +7,869 +18,460 +Earnings (loss) before income taxes +158,615 +3,294 +(21,325 +) +140,584 +Total assets +483,041 +57,049 +124,690 +664,780 +Additions to property, plant, and +equipment +11,443 +4,654 +8,029 +24,126 +2007 +Branded +Footwear, +Apparel, +Other +(Thousands of Dollars) +and Licensing +Businesses +Corporate +Consolidated +Revenue +$ +1,099,205 +$ +99,767 +$ +— +$ +1,198,972 +Intersegment sales +45,603 +2,616 +— +48,219 +Interest (income) expense — net +9,578 +1,128 +(11,370 +) +(664 +) +Depreciation expense +9,660 +3,621 +6,942 +20,223 +Earnings (loss) before income taxes +145,686 +2,338 +(9,453 +) +138,571 +Total assets +491,926 +52,018 +94,434 +638,378 +Additions to property, plant, and +equipment +7,313 +3,380 +7,186 +17,879 +A-19 +Table of Contents +2006 +Branded +Footwear, +Apparel, +Other +(Thousands of Dollars) +and Licensing +Businesses +Corporate +Consolidated +Revenue +$ +1,036,929 +$ +104,958 +$ +— +$ +1,141,887 +Intersegment sales +38,712 +2,798 +— +41,510 +Interest (income) expense — net +9,862 +1,050 +(11,114 +) +(202 +) +Depreciation expense +9,800 +3,859 +7,365 +21,024 +Earnings (loss) before income taxes +133,463 +6,976 +(18,147 +) +122,292 +Total assets +439,248 +50,040 +181,804 +671,092 +Additions to property, plant, and +equipment +6,943 +3,205 +6,919 +17,067 +Geographic information, based on shipping destination, related to revenue from external customers +included in the consolidated statements of operations is as follows: +(Thousands of Dollars) +2008 +2007 +2006 +United States +$ +729,826 +$ +730,654 +$ +721,459 +Foreign countries: +Europe +243,701 +250,428 +220,370 +Canada +90,789 +86,339 +80,289 +Other +156,252 +131,551 +119,769 +Total foreign countries revenue +490,742 +468,318 +420,428 +$ +1,220,568 +$ +1,198,972 +$ +1,141,887 +The Company’s long-lived assets (primarily property, plant, and equipment and intangible assets) +are as follows: +(Thousands of Dollars) +2008 +2007 +United States +$ +139,101 +$ +135,756 +Foreign countries +28,523 +35,352 +$ +167,624 +$ +171,108 +The Company does not believe that it is dependent upon any single customer because no customer +accounts for more than 10% of consolidated revenue. +The Company sources approximately 93% (based on pairs) of its footwear products from unrelated +suppliers located primarily in Asia. The remainder is produced in Company-owned manufacturing +facilities in the United States and the Dominican Republic. All 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. +Revenue derived from the branded footwear, apparel, and licensing segment accounted for +approximately 91% of revenue in 2008, 92% in 2007, and 91% in 2006. No other product groups +account for more than 10% of consolidated revenue. +Approximately 11% of the Company’s employees are subject to bargaining unit contracts extending +through various dates through 2010. +A-20 +Table of Contents +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 +2008 includes 17 weeks and the fourth quarter of 2007 includes 16 weeks. +The Company’s unaudited quarterly results of operations are as follows: +2008 +First +Second +Third +Fourth +(Thousands of Dollars, Except Per Share Data) +Quarter +Quarter +Quarter +Quarter +Revenue +$ +288,238 +$ +267,362 +$ +318,852 +$ +346,116 +Gross profit +121,561 +102,399 +128,730 +133,331 +Net earnings +23,701 +16,812 +31,191 +24,117 +Net earnings per share: +Basic +$ +0.48 +$ +0.34 +$ +0.64 +$ +0.50 +Diluted +0.46 +0.33 +0.62 +0.49 +2007 +First +Second +Third +Fourth +(Thousands of Dollars, Except Per Share Data) +Quarter +Quarter +Quarter +Quarter +Revenue +$ +281,052 +$ +250,329 +$ +310,168 +$ +357,423 +Gross profit +114,001 +95,528 +124,952 +137,450 +Net earnings +22,289 +15,518 +29,483 +25,596 +Net earnings per share: +Basic +$ +0.41 +$ +0.29 +$ +0.56 +$ +0.51 +Diluted +0.39 +0.28 +0.54 +0.49 +11. Subsequent Events +On January 7, 2009, the Company’s Board of Directors approved management’s request to implement a +strategic restructuring plan. This plan will allow the Company to create significant operating +efficiencies, improve its supply chain, and create a stronger global brand platform. +The Company has provided preliminary estimated ranges for expected costs and benefits of the +restructuring plan and will provide further disclosure as appropriate. In 2009, the implementation +costs to consolidate key manufacturing, distribution and global operations functions are estimated +to range from $31,000,000 to $36,000,000. +On January 8, 2009, the Company announced the acquisition of the Cushe ® footwear brand, an +acquisition that is expected to drive new global opportunities and leverage the strength of the +Company’s business model and operating infrastructure. +On January 22, 2009, the Company announced the acquisition of Chaco ® , a performance outdoor +footwear brand with a unique heritage and strong consumer following. +A-21 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board +of Directors and Shareholders of +Wolverine World Wide, Inc. +We have audited the accompanying consolidated balance sheets of Wolverine World Wide, Inc. and +subsidiaries as of January 3, 2009 and December 29, 2007, 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 3, 2009. 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 3, 2009 and December 29, 2007, and the consolidated results of their operations and their +cash flows for each of the three fiscal years in the period ended January 3, 2009, 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. +As discussed in Note 6 to the consolidated financial statements, in 2006 and in 2007 the Company +changed its method of accounting for defined benefit plans in connection with the required adoption +of Statement of Financial Accounting Standards No. 158. As discussed in Note 7 to the +consolidated financial statements, in 2007 the Company changed its method of accounting for +uncertain tax positions in connection with the required adoption of Financial Accounting Standards +Board Interpretation No. 48. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight +Board (United States), Wolverine World Wide, Inc.’s internal control over financial reporting as of +January 3, 2009, 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 +20, 2009 expressed an unqualified opinion thereon. +/s/ Ernst & Young LLP +Grand Rapids, Michigan +February 20, 2009 +A-22 +Table of Contents +Report of Independent Registered Public Accounting Firm +The +Board of Directors and Shareholders of +Wolverine World Wide, Inc. +We have audited Wolverine World Wide, Inc. and subsidiaries’ internal control over financial +reporting as of January 3, 2009, 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 included in the accompanying Management’s Report on Internal +Control Over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and +evaluating the design and operating effectiveness of internal control based on the assessed risk, +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, Wolverine World Wide, Inc. maintained, in all material respects, effective internal +control over financial reporting as of January 3, 2009, based on the COSO criteria . +We also have audited, in accordance with the standards of the Public Company Accounting Oversight +Board (United States), the consolidated balance sheets of Wolverine World Wide, Inc. and +subsidiaries as of January 3, 2009 and December 29, 2007, 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 3, 2009, and our report dated February 20, 2009 expressed +an unqualified opinion thereon. +/s/ Ernst & Young LLP +Grand Rapids, Michigan +February 20, 2009 +A-23 +Table of Contents +APPENDIX B +Schedule II — Valuation and Qualifying Accounts +Wolverine World Wide, Inc. and Subsidiaries +Column C +Additions +(2) +Column B +(1) +Charged to +Column E +Balance at +Charged to +Other +Column D +Balance at +Column A +Beginning of +Costs and +Accounts +Deductions +End of +Description +Period +Expenses +(Describe) +(Describe) +Period +Fiscal year ended January 3, 2009 +Deducted from asset accounts: +Allowance for doubtful accounts +$ +6,866,000 +$ +2,266,000 +$ +749,000 +(A) +$ +8,383,000 +Allowance for sales returns +5,269,000 +31,994,000 +31,952,000 +(B) +5,311,000 +Allowance for cash discounts +1,508,000 +14,602,000 +14,643,000 +(C) +1,467,000 +Inventory valuation allowances +14,902,000 +9,806,000 +15,796,000 +(D) +8,912,000 +$ +28,545,000 +$ +58,668,000 +$ +63,140,000 +$ +24,073,000 +Fiscal year ended December 29, 2007 +Deducted from asset accounts: +Allowance for doubtful accounts +$ +6,324,000 +$ +2,169,000 +$ +1,627,000 +(A) +$ +6,866,000 +Allowance for sales returns +5,322,000 +30,363,000 +30,416,000 +(B) +5,269,000 +Allowance for cash discounts +1,674,000 +14,955,000 +15,121,000 +(C) +1,508,000 +Inventory valuation allowances +10,458,000 +6,831,000 +2,387,000 +(D) +14,902,000 +$ +23,778,000 +$ +54,318,000 +$ +49,551,000 +$ +28,545,000 +Fiscal year ended December 30, 2006 +Deducted from asset accounts: +Allowance for doubtful accounts +$ +4,656,000 +$ +3,106,000 +$ +1,438,000 +(A) +$ +6,324,000 +Allowance for sales returns +2,540,000 +29,675,000 +26,893,000 +(B) +5,322,000 +Allowance for cash discounts +1,533,000 +14,920,000 +14,779,000 +(C) +1,674,000 +Inventory valuation allowances +6,456,000 +9,954,000 +5,952,000 +(D) +10,458,000 +$ +15,185,000 +$ +57,655,000 +$ +49,062,000 +$ +23,778,000 +(A) +Accounts charged off, net of recoveries. +(B) +Actual customer returns. +(C) +Discounts given to customers. +(D) +Adjustment upon disposal of related inventories. +Table of Contents +EXHIBIT INDEX +Exhibit +Number +Document +3.1 +Restated Certificate of Incorporation. Previously filed as Exhibit 3.1 to +the Company’s Annual Report on Form 10-K for the period ended December 30, +2006. Here incorporated by reference. +3.2 +Amended and Restated By-laws. Previously filed as Exhibit 3.1 to the +Company’s Current Report on Form 8-K filed on October 15, 2008. Here +incorporated by reference. +4.1 +The +Registrant has other long-term debt instruments outstanding +in addition to those described in Exhibit 4.22. 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. +4.2 +Credit Agreement dated as of July 22, 2005, among Wolverine World Wide, Inc. +and certain of its subsidiaries, JPMorgan Chase Bank, N.A., as Administrative +Agent, Harris, N.A., as Syndication Agent, Comerica Bank, Standard Federal +Bank N.A. and National City Bank of the Midwest, as Documentation Agents, and +certain other Banks that are parties to the Credit Agreement. Previously +filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on +July 28, 2005. Here incorporated by reference. +10.1 +1993 Stock Incentive Plan, as amended and restated.* +10.2 +Amended and Restated 1995 Stock Incentive Plan.* +10.3 +Amended and Restated 1997 Stock Incentive Plan.* +10.4 +Amended and Restated Stock Incentive Plan of 1999.* +10.5 +Amended and Restated Stock Incentive Plan of 2001.* +10.6 +Amended and Restated Stock Incentive Plan of 2003.* +10.7 +Amended and Restated Stock Incentive Plan of 2005.* +10.8 +Amended and Restated Directors’ Stock Option Plan.* +10.9 +Amended and Restated Outside Directors’ Deferred Compensation Plan.* +Previously filed as Exhibit 10.9 to the Company’s Annual Report on Form 10-K +for the fiscal year ended December 29, 2007. Here incorporated by reference. +10.10 +Amended and Restated Executive Short-Term Incentive Plan (Annual Bonus Plan).* +10.11 +Amended and Restated Executive Long-Term Incentive Plan (3-Year Bonus Plan).* +10.12 +Amended and Restated Stock Option Loan Program.* Previously filed as Exhibit +10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended +December 29, 2007. Here incorporated by reference. +ii +Table of Contents +Exhibit +Number +Document +10.13 +Executive Severance Agreement.* Previously filed as Exhibit 10.3 to the +Company’s Current Report on Form 8-K filed on December 17, 2008. Here +incorporated by reference. A participant schedule of current executive +officers who are parties to the agreement is attached as Exhibit 10.13. +10.14 +Form of Indemnification Agreement.* The Company has entered into an +Indemnification Agreement with each director and executive officer. +Previously filed as Exhibit 10.3 to the Company’s Quarterly Report on Form +10-Q for the period ended March 22, 2008. Here incorporated by reference. +10.15 +Amended and Restated Benefit Trust Agreement dated April 25, 2007.* +Previously filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K +filed on April 25, 2007. Here incorporated by reference. +10.16 +Employees’ Pension Plan (Restated as amended through November 30, 2007).* +Previously filed as Exhibit 10.17 to the Company’s Annual Report on Form 10-K +for the fiscal year ended December 29, 2007. Here incorporated by reference. +10.17 +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. Here +incorporated by reference. +10.18 +Form of Non-Qualified Stock Option Agreement for 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. Here +incorporated by reference. +10.19 +Form +of Non-Qualified Stock Option Agreement for executive officers other than those +to whom Exhibit 10.18 applies.* Previously filed as Exhibit 10.3 to the +Company’s Current Report on Form 8-K dated February 9, 2005. Here +incorporated by reference. +10.20 +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. Here +incorporated by reference. +10.21 +Form of Incentive Stock Option Agreement.* Previously filed as Exhibit 10.1 +to the Company’s Current Report on Form 8-K dated February 15, 2006. Here +incorporated by reference. +10.22 +Form of Non-Qualified Stock Option Agreement for Stephen L. Gulis, Blake W. +Krueger and Timothy J. O’Donovan.* Previously filed as Exhibit 10.2 to the +Company’s Current Report of Form 8-K dated February 15, 2006. Here +incorporated by reference. +10.23 +Form +of Non-Qualified Stock Option Agreement for executive officers other than those +to whom Exhibit 10.22 applies.* Previously filed as Exhibit 10.3 to the +Company’s Current Report on Form 8-K dated February 15, 2006. Here +incorporated by reference. +10.24 +Form of Restricted Stock Agreement.* Previously filed as Exhibit 10.4 to the +Company’s Current Report on Form 8-K dated February 15, 2006. Here +incorporated by reference. +10.25 +Form of Stock Option Agreement for non-employee directors.* Previously filed +as Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal +year ended January 1, 2005. Here incorporated by reference. +10.26 +2009 +Form of Non-Qualified Stock Option Agreement for Donald T. +Grimes, Blake W. Krueger, Pamela L. Linton, Michael F. +McBreen and James D. Zwiers.* +10.27 +2009 +Form of Non-Qualified Stock Option Agreement for executive officers +other than those to whom Exhibit 10.26 applies.* +10.28 +Form +of Performance Share Award Agreement.* +10.29 +Separation Agreement between Wolverine World Wide, Inc. and Blake W. Krueger, +dated as of March 13, 2008.* Previously filed as +Exhibit 10.1 to the Company’s Quarterly Report on +Form 10-Q for the period ended March 22, 2008. Here +incorporated by reference. +iii +Table of Contents +Exhibit +Number +Document +10.30 +First +Amendment to Separation Agreement between Wolverine World Wide, Inc. +and Blake W. Krueger, dated as of December 11, 2008.* +10.31 +409A Supplemental Executive Retirement Plan.* Previously filed as Exhibit +10.1 to the Company’s Current Report on Form 8-K filed on December 17, 2008. +Here incorporated by reference. A participant schedule of current executive +officers who participate in this plan is attached as +Exhibit 10.31. +10.32 +Form +of 409A Supplemental Retirement Plan Participation Agreement with Mr. Krueger.* +10.33 +Outside Directors Deferred Compensation Plan.* Previously filed as Exhibit +10.2 to the Company’s Current Report on Form 8-K filed on December 17, 2008. +Here incorporated by reference. +10.34 +Separation and Release Agreement between Wolverine World Wide, Inc. and +Cheryl L. Johnson.* Previously filed as Exhibit 10.27 to the Company’s +Annual Report on Form 10-K for the fiscal year ended December 29, 2007. Here +incorporated by reference. +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 Senior 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. +iv \ No newline at end of file diff --git a/raw/filings/0000110471/2008/0001362310-09-003153/filing_metadata.csv b/raw/filings/0000110471/2008/0001362310-09-003153/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..50368fa07f469c50efaca8da0841abba1f85ddcd --- /dev/null +++ b/raw/filings/0000110471/2008/0001362310-09-003153/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000110471,WWW,WOLVERINE WORLD WIDE INC /DE/,10-K,2009-03-04,2009-01-03,2009-03-04T15:54:31.000Z,0001362310-09-003153,c81880e10vk.htm,FORM 10-K,1546511,0,0,https://www.sec.gov/Archives/edgar/data/110471/000136231009003153/c81880e10vk.htm,https://www.sec.gov/Archives/edgar/data/110471/000136231009003153/,2008,2008,1 diff --git a/raw/filings/0000110471/2008/0001362310-09-003153/item1.txt b/raw/filings/0000110471/2008/0001362310-09-003153/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..6611537755964de9e16992fb9adfa89c1d28e393 --- /dev/null +++ b/raw/filings/0000110471/2008/0001362310-09-003153/item1.txt @@ -0,0 +1,455 @@ +Item 1. Business . +General. +Wolverine World Wide, Inc. (the “Company”) is a leading designer, manufacturer and marketer of +a broad range of quality casual shoes, rugged outdoor and work footwear. 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. +Approximately 46.6 million pairs of the Company’s branded footwear were sold during fiscal +2008, 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 ® +Footwear, Chaco ® , Cushe ® , Harley-Davidson ® Footwear, Hush Puppies ® , HyTest ® , Merrell ® , Patagonia ® +Footwear, Sebago ® and Wolverine ® . The Company believes that its primary competitive strengths are +its well-recognized brand names, broad range of comfortable footwear, patented and proprietary +designs and comfort technologies, numerous distribution channels and diversified manufacturing and +sourcing base. Cat ® is a registered trademark of Caterpillar Inc., Harley-Davidson ® is a +registered trademark of H-D Michigan, Inc. and Patagonia ® is a registered trademark of Patagonia, +Inc. +The Company’s footwear is sold under a variety of brand names designed to appeal to most +consumers of casual, work and outdoor footwear at numerous price points. The Company’s footwear +products are organized under four operating units: (i) the Wolverine Footwear Group, consisting of +the Bates ® , HyTest ® and Wolverine ® boots and shoes, and Wolverine ® brand apparel, (ii) the Outdoor +Group, consisting of Merrell ® , Patagonia ® and Chaco ® footwear, and Merrell ® brand apparel, (iii) +the Heritage Brands Group, consisting of Cat ® footwear, Harley-Davidson ® footwear and Sebago ® +footwear, and (iv) The Hush Puppies Company, consisting of Hush Puppies ® footwear and Cushe ® +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 Company-owned retail stores, to governments and municipalities and to numerous +accounts, including department stores, footwear chains, catalogs, specialty retailers, mass +merchants and Internet retailers. Many of the retailers to which Wolverine distributes operate +multiple storefront locations. The Company’s products are marketed worldwide in approximately 180 +countries and territories through Company-owned wholesale operations, licensees and distributors. +The Company, through its Wolverine Leathers Division, operates a pigskin leather business +supplying pigskin leather for the shoe and leather goods industries. A significant portion of the +Wolverine Leathers Division’s pigskin leather is used in the footwear marketed by the Company, and +is also sold to Company licensees and other domestic and foreign manufacturers of footwear. The +Company currently operates a tanning facility to support the Wolverine Leathers Division business. +The Company has announced that it will likely close its tanning facility and outsource leather +processing in 2009. In addition, Wolverine Procurement, Inc., a Company-owned subsidiary, performs +skinning operations and purchases raw pigskins, which it then cures and sells to outside customers +for processing into pigskin leather products. +5 +Table of Contents +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, Apparel, and Licensing. The Branded Footwear, +Apparel, and Licensing segment is engaged in manufacturing, sourcing, licensing, marketing and +distributing branded footwear and apparel, including casual shoes and apparel, dress shoes, boots, +uniform shoes, work shoes and rugged outdoor footwear and apparel. The Company’s Other Business +units consist of its retail stores, leathers 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, Apparel and Licensing. +The Company sources and markets a broad range of footwear styles, including shoes, boots and +sandals under many recognizable brand names, including Bates ® , Cat ® , Chaco ® , Cushe +® , +Harley-Davidson ® , Hush Puppies ® , HyTest ® , Merrell ® , Patagonia ® , Sebago ® +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 third-party manufacturing +facilities. The Company also markets Merrell ® , Sebago ® , and Wolverine ® brand apparel and licenses +its brands for use on non-footwear products, including apparel, eyewear, watches, socks, handbags, +gloves and plush toys. Current significant licensing programs include Hush Puppies ® apparel, +eyewear, watches, socks, handbags and plush toys, and Wolverine ® brand gloves, eyewear, socks and +headwear. +The Company’s four branded footwear, apparel, and licensing operating units are described +below. +1. The Outdoor Group . The Outdoor Group consists of Merrell ® Footwear, +Patagonia ® Footwear, Chaco ® Footwear and Merrell ® Apparel. Outdoor Group products include +performance outdoor and hiking footwear, casual and after-sport footwear and performance and +casual Merrell ® Apparel. +Merrell ® Footwear. The Merrell ® Footwear line consists primarily of running, +technical hiking, rugged outdoor and outdoor-inspired casual footwear designed for +backpacking, day hiking and everyday use. The Merrell ® Footwear 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. Merrell ® +Footwear products are sold primarily through outdoor specialty retailers, department +stores and catalogs. Merrell ® Footwear is marketed in approximately 150 countries +and territories worldwide. +Merrell ® Apparel. The Merrell ® Apparel line consists primarily of technical +outdoor and outdoor-inspired casual apparel and performance socks. In addition to +Merrell ® Apparel, the Outdoor Group markets Merrell ® packs, bags and luggage. +Patagonia ® Footwear. The Company entered into a license agreement providing +the Company with exclusive worldwide rights to manufacture, market, distribute and +sell footwear under the Patagonia ® , Water Girl ® and other trademarks. The Patagonia ® +Footwear line focuses primarily on casual and outdoor performance footwear. +Chaco ® Footwear and ULU ® Footwear . The Company acquired the Chaco ® and ULU ® +Footwear businesses in January 2009. The Chaco ® line is focused primarily on +performance sandals and ULU ® is focused primarily on fashionable, performance winter +boots. +6 +Table of Contents +2. Wolverine Footwear Group . The Wolverine Footwear Group encompasses footwear +primarily under the Wolverine ® , Bates ® , and HyTest ® brands and markets footwear designed +with performance and comfort features to serve a variety of work, outdoor and lifestyle +functions. The Wolverine Footwear Group also markets Wolverine ® brand apparel. +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 126 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 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 MultiShox ® +Individual Comfort System and the Contour Welt ™ product line. The Wolverine ® +work product line features work boots and shoes, including steel toe boots and +shoes, targeting 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 trail shoes, rugged casuals and outdoor +sandals. The outdoor sport line is designed to meet the demands of hunters, +fishermen and other active outdoor sports enthusiasts. Warmth, waterproofing and +comfort are achieved through the use of Gore-Tex ® (a registered trademark of W.L. +Gore & Associates, Inc.) and Thinsulate ® (a registered trademark of Minnesota Mining +and Manufacturing Company) brand fabrics, the Company’s performance leathers and +patented DuraShocks ® technologies. +Wolverine ® Apparel and Licensing . The Wolverine Footwear Group markets a line +of work and rugged casual Wolverine ® brand apparel. In addition, the Wolverine ® +brand is licensed for use on eyewear, headwear, gloves and socks. +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 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. +7 +Table of Contents +3. The Heritage Brands Group . The Heritage Brands Group consists of +Caterpillar ® Footwear, Harley-Davidson ® Footwear and the Sebago ® product line. +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 +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 +approximately 140 countries and territories worldwide. Cat ® , Caterpillar ® , Cat & +Design ® , Walking Machines ® and Marine Power ® are registered trademarks of +Caterpillar Inc. +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 ® branded footwear throughout the world. +Harley-Davidson ® branded 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. Harley-Davidson ® is a registered +trademark of H-D Michigan, Inc. +Sebago ® . The Sebago ® product line consists primarily of performance nautical +and American-inspired casual footwear for men and women, such as boat shoes and +handsewn loafers, that have been manufactured and distributed since 1946. Highly +recognized Sebago ® line extensions include Sebago Docksides ® , Sebago Drysides ™, +Sebago Campsides ™ and Athletic Marine. The Sebago ® product line is marketed in +approximately 115 countries and territories 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. The Company expects to +launch a classic and marine Sebago ® apparel line in 2009. +8 +Table of Contents +4. The Hush Puppies Company . +Hush Puppies . 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 marketed in approximately 140 countries and territories. 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, socks, watches and plush +toys. +Cushe . The Company acquired the Cushe ® Footwear business in January 2009. The +Cushe business focuses on relaxed, design-led footwear for active men and women. +Other Businesses. +In addition to manufacturing, sourcing, marketing and distributing the Company’s footwear and +apparel products as reported in the Branded Footwear, Apparel, and Licensing segment, the Company +also (i) operates 90 North American and 2 U.K.-based retail footwear stores, (ii) operates a +performance leathers business through its Wolverine Leathers Division, and (iii) purchases and +cures raw pigskins for sale to various customers through its wholly-owned subsidiary Wolverine +Procurement, Inc. +1. Wolverine Retail . The Company operates 90 North American and 2 U.K.-based +retail shoe stores as of February 2009. These stores are operated under the Hush Puppies ® , +Hush Puppies and Family SM , Track’N Trail ® , Rockford Footwear Depot ® and Merrell ® +names. Both the Rockford Footwear Depot ® and Track’N Trail ® retail formats carry a large +selection of Company-branded footwear, featuring such brands as Wolverine ® , Merrell ® , Hush +Puppies ® , Cat ® , Patagonia ® , Sebago ® and Harley-Davidson ® . The Company also operates +direct-to-customer retail websites, including www.upfootgear.com , www.trackandtrail.com , +www.catfootwear.com , www.hushpuppies.com, www.sebago.com and www.merrell.com . +2. The Wolverine Leathers Division . The Wolverine Leathers Division produces +and markets pigskin leathers primarily for use in the footwear industry. The Company +believes pigskin leathers offer superior performance and advantages over cowhide leathers. +The Company’s waterproof and stain resistant leathers are featured in some 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. +3. 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. +Marketing. +The Company’s overall marketing strategy is to develop brand-specific plans and related +promotional materials for U.S. and international markets to foster a differentiated and consistent +image for each of the Company’s core brands. Each 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 products. 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. +9 +Table of Contents +The Company’s 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 brand names provide a competitive advantage and the +Company makes significant 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 domestic 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 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. Such +contracts typically contain future purchase options that are not +required to be exercised. +In addition to its +wholesale activities, the Company also operates a 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 2008. +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. +The Company expects current seasonal sales patterns to continue in future years. +10 +Table of Contents +International Operations and Global Licensing. +The Company records revenue from foreign sources through a combination of (i) sales of branded +footwear products generated from the Company’s owned operations in Canada, the United Kingdom, +Austria, Finland, France, Germany, Italy, the Netherlands, Spain, Sweden and Switzerland and from +sales to international distributors for certain markets and businesses and (ii) from royalty income +through a network of third-party licensees and distributors. The Company’s owned operations are +located in markets where the Company believes it can gain a strategic advantage by more directly +controlling the sale into retail accounts. +The Company derives royalty income from sales of products (primarily Company footwear) bearing +the Hush Puppies ® , Wolverine ® , Bates ® , 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 its 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/or manufacture of approximately 81% of the pairs of +footwear marketed globally under the Company’s brand names. The balance is controlled directly by +the Company’s licensees. Of the pairs purchased by the Company, approximately 93% are purchased or +sourced from third parties, with the remainder produced at Company-operated facilities. The +Company sources a majority of its footwear from a variety of foreign manufacturing facilities in +the Asia-Pacific region, South America and India. 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. Footwear +produced by the Company is manufactured at Company-operated facilities located in Michigan, +Arkansas, and the Dominican Republic. +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 military footwear as well as work, +casual and dress casual footwear in its owned facilities. 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 +facilities in Michigan and the Dominican Republic. +11 +Table of Contents +The Company’s owned 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 (a) benefit from lower manufacturing costs and +state-of-the-art manufacturing facilities, (b) source the highest quality raw materials from around +the world, and (c) avoid additional capital expenditures necessary for owned factories and +equipment. The Company believes that its overall global manufacturing strategy gives the Company +the 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. The +Company and its licensees receive a majority of their pigskin leather requirements from this +tannery. During 2009, the Company will evaluate strategic alternatives for the Company-owned +leather business. The Company’s management currently expects that this evaluation will result in +the closure of the Company’s pigskin tannery and outsourcing of the Company’s pigskin leather +processing. +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 Wolverine Leathers Business from one domestic source. +This source has been a reliable and consistent supplier for over 30 years. Alternative sources of +raw 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, tariffs and duties, 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 and apparel products. The owned trademarks that are most widely used +by the Company include Hush Puppies ® , Wolverine ® , Bates ® , Cushe ® , Chaco ® , Soft Style ® , Wolverine +Fusion ® , DuraShocks ® , MultiShox ® , Wolverine Compressor ® , Hidden Tracks ® , iTechnology TM , +Bounce ® , Comfort Curve ® , HyTest ® , Merrell ® , Continuum ® , Sebago ® , Q-Form ® and Track ‘N Trail ® . +Pigskin leather marketed by the Company’s Wolverine Leathers Division is sold under the trademarks +Wolverine Leathers & Design ® , Wolverine Warrior Leather ® , Weather Tight ® and All Season Weather +Leathers ™. As of the date of this Annual Report, the Company has obtained license rights to +manufacture, market and distribute footwear throughout the world under the Cat ® , Harley-Davidson ® +and Patagonia ® trademarks pursuant to license arrangements with the respective trademark owners. +The Cat ® , Harley-Davidson ® , and Patagonia ® licenses extend for five or more years and are subject +to early termination for breach. +12 +Table of Contents +The Company believes that its products are identified by consumers by its trademarks and that +its trademarks are valuable assets. The Company is not aware of any infringing uses or any prior +claims of ownership of its trademarks that could materially affect its current business. It is the +policy of the Company to pursue registration of its primary trademarks whenever practicable and to +vigorously defend its trademarks against infringement or other threats. The Company also holds +many design and utility patents, copyrights and various other proprietary rights. The Company +vigorously protects its proprietary rights under applicable laws. +Order Backlog. +At February 21, 2009, the Company had an order backlog of approximately $357 million compared +to an order backlog of approximately $389 million at February 16, 2008, determined on a basis +consistent with the current year. Substantially all of the backlog relates to demand for products +expected to be shipped in 2009. Orders in the 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 thirty major competitors in connection with the sale of its casual, work +and outdoor footwear. Product performance and quality, including technological improvements, +product identity, competitive pricing and ability to control costs, 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 and sourcing efficiencies, 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 helped validate and refine 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 expects to continue to be a leading +developer of footwear innovations, research and development costs do not represent a material +portion of operating expenses. +13 +Table of Contents +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 3, 2009, the Company had approximately 4,578 domestic and foreign production, +office and sales employees. Approximately 528 employees were covered by four union contracts +expiring at various dates through January 21, 2010. 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, and Governance Committee Charter, is +available at its website, www.wolverineworldwide.com. Printed copies of the documents listed above +are available, without charge, by writing to the Company at 9341 Courtland Drive, N.E., Rockford, +Michigan 49351, Attention: General Counsel. +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. \ No newline at end of file diff --git a/raw/filings/0000110471/2008/0001362310-09-003153/item13.txt b/raw/filings/0000110471/2008/0001362310-09-003153/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..8752925aaa3d67f8ed6bb68c211d79246358e326 --- /dev/null +++ b/raw/filings/0000110471/2008/0001362310-09-003153/item13.txt @@ -0,0 +1,8 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence . +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 +with respect to the Annual Meeting of Stockholders to be held on April 23, 2009, is incorporated +herein by reference. The information contained under the caption “Corporate Governance Principles” +under the subheading “Independence” contained in the definitive Proxy Statement of the Company with +respect to the Annual Meeting of Stockholders to be held on April 23, 2009, is incorporated herein +by reference. \ No newline at end of file diff --git a/raw/filings/0000110471/2008/0001362310-09-003153/item9a.txt b/raw/filings/0000110471/2008/0001362310-09-003153/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..a09f339edf85d89d30878c72edd78d81bd777f5c --- /dev/null +++ b/raw/filings/0000110471/2008/0001362310-09-003153/item9a.txt @@ -0,0 +1,25 @@ +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. +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 3, 2009, 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 3, 2009. +The effectiveness of the Company’s internal control over financial reporting as of January 3, +2009, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as +stated in its 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 seventeen-week period ended January 3, 2009 that has materially affected, or that is +reasonably likely to materially affect, the Company’s internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000110471/2008/0001362310-09-003153/rp_note.txt b/raw/filings/0000110471/2008/0001362310-09-003153/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000110471/2008/0001362310-09-003153/rpt_disclosure.txt b/raw/filings/0000110471/2008/0001362310-09-003153/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..a587e899a7914190f4a6a8bb4745e57d4d502f52 --- /dev/null +++ b/raw/filings/0000110471/2008/0001362310-09-003153/rpt_disclosure.txt @@ -0,0 +1,172 @@ +“Certain Relationships and Related Transactions.” +7 +Table of Contents +Mr. Phillip D. Matthews served as a director in 2008 until +his retirement as a director in April 2008, and was determined +to be independent by the Board of Directors in February 2008. +Our Board of Directors has adopted categorical Independence +Standards, which are attached as Appendix A to this Proxy +Statement and which are also available at our website. These +Independence Standards comply with and, in some areas, exceed +the director independence standards required by the NYSE. In +summary, under these standards a director is considered +independent only if the director and his or her immediate family +members do not have, and generally have not had in the most +recent three years, any material relationships with Wolverine, +its subsidiaries or affiliates (including certain relationships +with Wolverine’s independent auditors). The standards +establish thresholds at which such relationships are deemed to +be not material. In addition, the Board examines on a +case-by-case +basis transactions and relationships that are not of a nature +addressed by the categorical standards. +Corporate +Governance Guidelines +The Board has adopted Corporate Governance Guidelines that set +forth the primary framework of governance principles applicable +to Wolverine. The Corporate Governance Guidelines outline the +general duties and functions of the Board and management, and +set forth general principles regarding Board composition, +independence, Board meetings and responsibilities, Board +committees, expectations of directors, annual performance +evaluations, management succession and ethical expectations. +Stock +Ownership Requirements for Directors and Executive +Officers +For many years, the Board has believed that directors and +management should have a significant financial stake in +Wolverine to align their interests with those of the +stockholders. For that reason, several years ago the Board +adopted formal requirements that directors and executive +management own specified amounts of Wolverine stock (including +ownership credit for stock units allocated to non-employee +directors under the Deferred Compensation Plan) within five +years of their respective election to the Board or appointment +as a member of executive management. The ownership requirements +necessitate holdings of a number of shares (including ownership +credit for stock units allocated to non-employee directors under +the Deferred Compensation Plan) of Wolverine stock with a value +equal to at least (i) for directors, five times the current +Board retainer, (ii) for the Chief Executive Officer, five +times base salary, (iii) for other executive officers, +between two and three times base salaries, and (iv) for +other executive management, between one and two times base +salaries. +Code of +Conduct & Compliance +For years, Wolverine and its employees and directors have +followed an extensive Code of Conduct & Compliance +(“Code”). This comprehensive Code establishes basic +guidelines to help employees and directors comply with +applicable legal requirements and sets forth Wolverine’s +expectations regarding business ethics, integrity, honesty and +fairness. The Code contains Wolverine’s principles and +procedures regarding conflicts of interest, corporate +opportunities, confidentiality, fair dealing, protection and +proper use of Wolverine’s assets, compliance with laws, +rules and regulations, engagement criteria for Wolverine’s +trading partners, “whistle blower” protection +provisions, expectations regarding the integrity of books and +records, and guidelines and procedures for many other subjects. +Employees are surveyed annually to identify any areas of +noncompliance with the Code, and the results of this survey are +reported to the Board. +Accounting +and Finance Code of Ethics +The Board has adopted an Accounting and Finance Code of Ethics +(“Finance Ethics Code”). This is an ethics code +focused on the financial reporting process and is intended to +protect the interests of all of Wolverine’s constituents, +including stockholders, employees, customers and the communities +in which Wolverine conducts business. Many of the basic tenets +of the Finance Ethics Code have been incorporated for many years +in the Code. The Finance Ethics Code is applicable to +Wolverine’s Chief Executive Officer, Chief Financial +Officer and Corporate Controller and sets forth specific rules +of conduct and expectations regarding the financial reporting +process, protection of Wolverine’s assets, compliance with +rules and regulations and honest and ethical conduct in +connection with the financial reporting process and related +disclosures. The Finance Ethics Code and the Code are available +on the Corporate Governance section of the Investors section of +Wolverine’s website at www.wolverineworldwide.com , +where Wolverine will post any waiver of or amendment to these +codes for directors or executive officers. +Board +Committee Charters +The Board has organized and formed three committees, the Audit +Committee, the Compensation Committee and the Governance +Committee. The Board has approved a committee charter for each +committee that contains +8 +Table of Contents +basic principles regarding the committee’s organization, +purpose, authority and responsibilities. The performance of each +committee is reviewed annually by committee members and the +Board. +Leadership +Since 1993, the Board has operated with an independent Lead +Director, who is selected by the independent directors. The +duties of the independent Lead Director include: +(a) working closely with the Chairman regarding the agenda +and scheduling for Board and committee meetings; +(b) overseeing information sent to the Board; +(c) presiding over executive sessions; (d) serving as +a liaison between the Chairman and the independent Directors; +(e) presiding over Board meetings in the absence of the +Chairman; and (f) being available for consultation and +communications with stockholders as appropriate. +Attendance +The Board prides itself on its ability to recruit and retain +directors who have a diversity of experience, who have the +highest personal and professional integrity, who have +demonstrated exceptional ability and judgment and who are +effective (in conjunction with the other members of the Board) +in collectively serving the long-term interests of the +stockholders. Board and committee attendance is central to the +proper functioning of the Board of Directors and is a priority. +Directors are expected to make every effort to attend every +Board meeting. Directors are also expected to attend the Annual +Meeting of Stockholders in person. All then-current directors +attended the 2008 annual meeting. +Communication +with the Board +Stockholders and interested parties may communicate with members +of Wolverine’s Board of Directors through various links +provided on the Corporate Governance section of the Investors +section of Wolverine’s website at +www.wolverineworldwide.com or by sending correspondence +to the Board, a specific Board committee or a Board member +c/o General +Counsel, Wolverine World Wide, Inc., 9341 Courtland Drive, N.E., +Rockford, Michigan 49351. Any communications submitted by any of +the above means (or the means described below) are received by +Wolverine’s General Counsel and forwarded to the +appropriate person or persons. Any suggestions, concerns or +reports of misconduct at Wolverine or complaints or concerns +regarding Wolverine’s financial statements and accounting, +auditing, internal control and reporting practices can be +reported (including anonymous and confidential submissions) by +submitting a report on www.WolverineReportLine.com or by +writing to the audit committee +c/o the +General Counsel at the above address. +Board and +Company Culture +Wolverine’s comprehensive governance guidelines and +principles are coupled with a robust, open and effective Board +environment that promotes respect, trust and candor, fosters a +culture of open dissent and permits each director to express +opinions and contribute to the Board process. Directors are +expected to have unrestricted access to management and any +company information they desire. The participation of Board +members and the open exchange of opinions is further encouraged +at the Board committee level through the periodic rotation of +Board members among its standing committees. This open and +candid operating environment is shared by management and the +Board and is essential to fully realize the benefits of +Wolverine’s formal governance guidelines, principles, +charters and policies. +9 +Table of Contents +Non-Employee \ No newline at end of file diff --git a/raw/filings/0000110471/2009/0000950123-10-020483/filing.txt b/raw/filings/0000110471/2009/0000950123-10-020483/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..247ea583614a8df04bb9bf64017165fd7ab74c7d --- /dev/null +++ b/raw/filings/0000110471/2009/0000950123-10-020483/filing.txt @@ -0,0 +1,6346 @@ +10-K +1 +c97050e10vk.htm +FORM 10-K +Form 10-K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +þ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended January 2, 2010 +o +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: 001-6024 +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 N.E., Rockford, Michigan +49351 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: (616) 866-5500 +Securities registered pursuant to Section 12(b) of the Securities Exchange Act: +Title of each class +Name of each exchange on which registered +Common Stock, $1 Par Value +New York Stock Exchange +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in +Rule 405 of the Securities Act. Yes þ No o +Indicate by check mark whether the registrant is not required to file reports pursuant to Section +13 or Section 15(d) of the Act. Yes o No þ +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 þ No o +Indicate by check mark whether the registrant has submitted electronically and posted on its +corporate Web site, if any, every Interactive Data File required to be submitted and posted +pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months +(or for such shorter period that the registrant was required to submit and post such files). Yes +o No o +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. o +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, +a non-accelerated filer, or a smaller reporting company. See the definitions of “large +accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the +Exchange Act. +Large accelerated filer þ +Accelerated filer o +Non-Accelerated filer o +Smaller reporting company o +(do not check if a smaller reporting company) +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of +the Act). Yes o No þ +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, 2009, the last +business day of the registrant’s most recently completed second fiscal quarter: $1,061,976,492. +Number of shares outstanding of the registrant’s Common Stock, $1 par value (excluding shares of +treasury stock) as of February 26, 2010: 49,801,541. +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the definitive proxy statement for the registrant’s annual stockholders’ meeting +to be held April 22, 2010 are incorporated by reference into Part III of this report. +Table of Contents +PART I +4 +Item 1. Business +4 +Item 1A. Risk Factors +11 +Item 1B. Unresolved Staff Comments +18 +Item 2. Properties +18 +Item 3. Legal Proceedings +18 +Supplemental Item. Executive Officers of the Registrant +19 +Item 4. (Removed and Reserved) +20 +PART II +20 +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and +Issuer Purchases of Equity Securities +20 +Item 6. Selected Financial Data +23 +Item 7. Management’s Discussion and Analysis of Financial Condition and +Results of Operations +24 +Item 7A. Quantitative and Qualitative Disclosures About Market Risk +40 +Item 8. Financial Statements and Supplementary Data +40 +Item 9. Changes in and Disagreements with Accountants on Accounting and +Financial Disclosure +40 +Item 9A. Controls and Procedures +40 +Item 9B. Other Information +41 +PART III +41 +Item 10. Directors and Executive Officers of the Registrant +41 +Item 11. Executive Compensation +41 +Item 12. Security Ownership of Certain Beneficial Owners and Management and +Related Stockholder Matters +41 +Item 13. Certain Relationships and Related Transactions, and Director +Independence +42 +Item 14. Principal Accountant Fees and Services +42 +PART IV +42 +Item 15. Exhibits and Financial Statement Schedules +42 +SIGNATURES +46 +Exhibit 10.13 +Exhibit 10.29 +Exhibit 10.32 +Exhibit 21 +Exhibit 23 +Exhibit 24 +Exhibit 31.1 +Exhibit 31.2 +Exhibit 32 +2 +Table of Contents +FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K contains “forward-looking statements” — which are, statements +relating to future events. Forward-looking statements are based on management’s beliefs, +assumptions, current expectations, estimates and projections about the footwear business, worldwide +economics and the Company itself. Words such as “anticipates,” “believes,” “estimates,” “expects,” +“forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “should,” “will,” variations +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; +• +changes in local, domestic or international economic and market conditions; +• +the impact of competition and pricing by the Company’s competitors; +• +the cost and availability of inventories, services, labor and equipment furnished to the +Company; +• +the ability of the Company to manage and forecast its growth and inventories; +• +increased costs of future pension funding requirements; +• +changes in duty structures in countries of import and export; +• +changes in interest rates, tax laws, duties, tariffs, quotas or applicable assessments; +• +foreign currency fluctuations compared to the U.S. dollar; +• +changes in monetary controls and valuations of the Chinese yuan relative to the U.S. +dollar; +• +the risk of doing business in developing countries and economically volatile areas; +• +the cost and availability of contract manufacturers; +• +the cost and availability of raw materials, including leather and petroleum-based +materials; +• +changes in planned consumer demand or at-once orders; +• +loss of significant customers; +• +customer order cancellations; +• +the exercise of future purchase options by the U.S. Department of Defense on previously +awarded contracts; +• +the impact of a global recession on demand for the Company’s products; +• +the impact of limited credit availability on the Company’s suppliers, distributors and +customers; +• +the success of Merrell ® Apparel and consumer-direct business initiatives; +• +changes in business strategy or development plans; +• +integration of operations of newly acquired businesses; +• +relationships with international distributors and licensees; +• +the ability to secure and protect trademarks, patents and other intellectual property; +• +technological developments; +• +the ability to attract and retain qualified personnel; +• +the size and growth of footwear markets; +• +service interruptions at shipping and receiving ports; +• +changes in the amount or severity of inclement weather; +• +changes due to the growth of Internet commerce; +3 +Table of Contents +• +the popularity of particular designs and categories of footwear; +• +the Company’s ability to adapt and compete in global apparel and accessory markets; +• +the ability to retain rights to brands licensed by the Company; +• +the impact of the Company’s restructuring plan on future operating results; +• +the Company’s ability to implement and recognize benefits from tax planning strategies; +• +the Company’s ability to meet at-once orders; +• +changes in government and regulatory policies; +• +retail buying patterns; +• +consolidation in the retail sector; and +• +the acceptance of U.S. brands in international markets. +Additionally, concerns regarding acts of terrorism, international conflict, 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, investors should not place undue reliance on forward-looking statements as +a prediction of actual results. Furthermore, the Company undertakes no obligation to update, amend +or clarify forward-looking statements, whether as a result of new information, future events or +otherwise. +PART I +Item 1. +Business +General +Wolverine World Wide, Inc. (the “Company”) is a leading designer, manufacturer and marketer of a +broad range of quality casual, rugged outdoor and work footwear and over the last few years has +extended certain of its footwear brands into casual, outdoor and work apparel. 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. +Approximately 42.9 million pairs/units of the Company’s branded footwear and apparel were sold +during fiscal 2009 in approximately 180 countries and territories around the world. 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 ® Footwear, +Chaco ® , Cushe TM , Harley-Davidson ® +Footwear, Hush Puppies ® , HyTest ® , +Merrell ® , Patagonia ® Footwear, Sebago ® , Soft Style ® and Wolverine ® . The Company believes that +its primary competitive advantages are its well-recognized brand names, its patented proprietary +designs and comfort technologies, its wide range of distribution channels and its diversified +manufacturing and sourcing base. Cat ® is a registered trademark of Caterpillar +Inc., Harley-Davidson ® is a registered trademark of H-D Michigan, Inc. and +Patagonia ® is a registered trademark of Patagonia, Inc. +The Company’s products are sold at numerous price points under a variety of brand names designed to +appeal to most consumers of casual, work and outdoor footwear. The Company’s products are +organized under four operating units: (i) the Wolverine Footwear Group, consisting of the +Bates ® , HyTest ® and Wolverine ® boots +and shoes, and Wolverine ® brand apparel, (ii) the Outdoor Group, consisting of +Merrell ® , Patagonia ® and Chaco ® +footwear, and Merrell ® brand apparel, (iii) the Heritage Brands +Group, consisting of Cat ® footwear, Harley-Davidson ® +footwear and Sebago ® footwear and apparel, and (iv) The Hush Puppies +Company, consisting of Hush Puppies ® footwear, Soft Style ® footwear +and Cushe TM footwear. The Company also licenses some of its brands for use on +non-footwear products. +The Company’s Global Operations Group is responsible for manufacturing, sourcing, distribution and +customer support for the Company’s business. The Company wholesales products domestically to a +wide range of retail customers, including department stores, national chains, catalogs, specialty +retailers, mass merchants and Internet retailers and to governments and municipalities. Many of +the retailers carrying Wolverine products operate multiple storefront locations. The Company’s +products are marketed worldwide in approximately 180 countries and territories through +Company-owned wholesale operations, licensees and distributors. +4 +Table of Contents +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, Apparel, and Licensing. The Branded Footwear, Apparel, +and Licensing segment engages in manufacturing, sourcing, licensing, marketing and distributing +branded footwear and apparel, including casual shoes and apparel, dress shoes, boots, uniform +shoes, work shoes and rugged outdoor footwear and apparel. The Company’s Other Business units +consist of its retail operations and leather and pigskin procurement operations, which are +described below. Financial information regarding the Company’s business segments and financial +information by geographic area is found in Note 9 to the consolidated financial statements of the +Company that are attached as Appendix A to this Annual Report on Form 10-K. +Branded Footwear, Apparel and Licensing +The Company sources and markets a broad range of footwear styles, including shoes, boots and +sandals under many recognizable brand names, including Bates ® , +Cat ® , Chaco ® , Cushe TM , +Harley-Davidson ® , Hush Puppies ® , +HyTest ® , Merrell ® , Patagonia ® , +Sebago ® , Soft Style ® and Wolverine ® . +The Company combines quality materials and skilled workmanship to produce footwear according to its +specifications at both Company-owned and third-party manufacturing facilities. The Company also +markets Merrell ® , Sebago ® , and Wolverine ® +brand apparel and licenses some of its brands for use on non-footwear products, +including Hush Puppies ® apparel, eyewear, watches, socks, handbags and plush +toys and Wolverine ® brand eyewear and gloves. +The Company’s four branded footwear, apparel, and licensing operating units are described below. +1. +The Outdoor Group The Outdoor Group consists of +Merrell ® Footwear, Merrell ® Apparel and +accessories, Patagonia ® Footwear and Chaco ® +Footwear. Outdoor Group products include performance outdoor and hiking +footwear, casual and after-sport footwear and performance and casual Merrell ® +apparel. +Merrell ® Footwear The Merrell ® footwear +line consists primarily of running, technical hiking, rugged outdoor and +outdoor-inspired casual footwear designed for backpacking, day hiking and everyday +use. The Merrell ® footwear 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. +Merrell ® footwear products are sold primarily through outdoor +specialty retailers, department stores and catalogs. Merrell ® +footwear is marketed in approximately 150 countries and territories +worldwide. +Merrell ® Apparel and Accessories The +Merrell ® apparel line consists primarily of technical outdoor +and outdoor-inspired casual apparel and performance socks. In addition to +Merrell ® apparel, the Outdoor Group markets Merrell ® +accessories, including packs, bags and luggage. +Patagonia ® Footwear Pursuant to an agreement with Lost Arrow +Corporation, the Company has obtained the exclusive worldwide rights to manufacture, +market, distribute and sell footwear under Patagonia ® and other +trademarks. The Patagonia ® Footwear line focuses primarily on +casual and outdoor performance footwear. Patagonia ® is a registered +trademark of Patagonia, Inc. +Chaco ® Footwear The Company acquired Chaco ® +in January, 2009. The line is focused primarily on technical outdoor performance +sandals. The Chaco ® brand was launched in 1989 to meet the needs of the +whitewater enthusiast and continues to focus on performance sandals for the outdoor +enthusiast. Chaco ® footwear is sold primarily through specialty outdoor +retailers and department stores. +2. +Wolverine Footwear Group The Wolverine Footwear Group markets footwear +and apparel products under the Wolverine ® brand and footwear under +the Bates ® and HyTest ® brands. Wolverine +Footwear Group products feature performance and comfort features to serve a variety of +work, outdoor and lifestyle functions. +5 +Table of Contents +Wolverine ® Footwear The Wolverine ® brand +offers high quality work boots and shoes that incorporate innovative technologies to +deliver comfort and durability. The Wolverine ® brand, which has +been in existence for 127 years, markets work and outdoor footwear in three +categories: (i) work and industrial; (ii) outdoor sport; and (iii) rugged casual. +The development of DuraShocks ® , MultiShox ® , +Wolverine Fusion ® and Wolverine Compressor ® +technologies as well as the development of the Contour Welt ® +line have allowed the Wolverine ® brand to introduce a +broad line of work footwear with a focus on comfort. The Wolverine ® +work product line features work boots and shoes with protective features +such as toe caps, metatarsal guards and electrical hazard protection, targeting +industrial and farm workers. The Wolverine ® rugged casual and +outdoor sport product lines incorporate DuraShocks ® , Wolverine +iCS TM and other technologies and comfort features into products designed +for casual and outdoor sport use. The rugged casual line targets active lifestyles +and includes trail shoes and outdoor sandals. The outdoor sport line is designed to +meet the demands of hunters, fishermen and other active outdoor sports enthusiasts. +Wolverine ® Apparel and Licensing The Wolverine Footwear Group +markets a line of work and rugged casual Wolverine ® brand +apparel. In addition, the Company licenses its Wolverine ® brand +for use on eyewear 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 , Wolverine iCS TM and other proprietary comfort +technologies in the design of its military-style boots and oxfords. 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 that incorporate +various specialty safety features, including steel toe, composite toe, metatarsal +guards, electrical hazard, static dissipating and conductive footwear designed to +protect against hazards of the workplace. 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. +3. +The Heritage Brands Group The Heritage Brands Group consists of +Cat ® Footwear, Harley-Davidson ® Footwear and +the Sebago ® product line. +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 ® , 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 iTechnology ™ and +Hidden Tracks ® comfort features. Cat ® +footwear products target work and industrial users and active lifestyle +users. Cat ® footwear is marketed in approximately 140 countries +and territories worldwide. Cat ® , +Caterpillar ® , Cat & Design and Walking Machines ® +are registered trademarks of Caterpillar Inc. +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 ® +branded footwear throughout the world. Harley-Davidson ® +branded 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. Harley-Davidson ® is a +registered trademark of H-D Michigan, Inc. +6 +Table of Contents +Sebago ® The Sebago ® product line has been +marketed since 1946 and consists primarily of performance nautical and +American-inspired casual footwear for men and women, such as boat shoes and hand +sewn loafers. Highly recognized Sebago ® line extensions include +Sebago Docksides ® , Drysides ™ and Athletic Marine. The +Sebago ® product line is marketed in approximately 115 countries +and territories worldwide. The Sebago ® manufacturing and design +tradition of quality components, durability, comfort and “Americana” heritage is +further supported by targeted distribution to better-grade independent, marine and +department store retailers throughout the world. The Company also launched a +classic and marine Sebago ® apparel line in 2009. +4. +The Hush Puppies Company +Hush Puppies ® 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 marketed in approximately 140 countries and +territories. The modern styling is complemented by a variety of comfort features +and proprietary technologies that have earned the brand its reputation for comfort, +style and value. In addition, the Hush Puppies ® brand is +licensed for use on certain items, including apparel, eyewear, handbags, socks, +watches and plush toys. +Soft Style ® The Soft Style ® product line consists primarily +of women’s dress and casual footwear. +Cushe TM The Company acquired the Cushe TM +Footwear business in January 2009. The Cushe TM business focuses +on relaxed, design-led footwear for active men and women. The +Cushe TM Footwear business targets younger consumers and +better-grade retailers with products ranging from sport casuals to sandals. +Other Businesses +In addition to manufacturing, sourcing, marketing and distributing the Company’s footwear and +apparel products as reported in the branded footwear, apparel, and licensing segment, the Company +also (i) operates 83 North American and 5 U.K.-based retail stores featuring footwear and apparel, +(ii) operates a performance leathers business through its Wolverine Leathers Division, and (iii) +purchases and cures raw pigskins for sale to various customers through its wholly-owned subsidiary +Wolverine Procurement, Inc. +1. +Wolverine Retail . The Company operates 83 North American and 5 +U.K.-based retail stores as of February 2010. These stores are operated under the Hush +Puppies ® , Hush Puppies and Family SM , Track’N +Trail ® , Rockford Footwear Depot ® and +Merrell ® names. Both the Rockford Footwear Depot ® +and Track’N Trail ® retail formats carry a large +selection of Company-branded products, featuring such brands as +Wolverine ® , Merrell ® , Hush +Puppies ® , Cat ® , Chaco ® , +Cushe TM , Patagonia ® , Sebago ® +and Harley-Davidson ® . The Company also operates +Merrell ® concept stores and Hush Puppies ® concept stores, +providing a platform to showcase these brands exclusively. In addition, the Company +operates 23 direct-to-customer retail websites, including, www.merrell.com, +www.catfootwear.com , www.hushpuppies.com , www.sebago.com, www.wolverine.com, +www.chacousa.com, www.cushe.com and www.batesfootwear.com . +2. +The Wolverine Leathers Division . The Wolverine Leathers Division +markets pigskin leather primarily for use in the footwear industry. The Company +believes pigskin leather offers superior performance and advantages over cowhide +leather. The Company’s waterproof and stain resistant leathers are featured in some of +the Company’s domestic footwear lines and many products offered by the Company’s +international licensees and distributors. +3. +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. +7 +Table of Contents +Marketing +The Company’s marketing strategy is to develop brand-specific plans and related promotional +materials for U.S. and international markets to foster a consistent message for each of the +Company’s core brands. Each brand group has dedicated marketing personnel who develop the +marketing strategy for brands within that group. Marketing campaigns and strategies vary by brand +and may target accounts and/or end users as they strive to increase awareness of, and affinity 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 +products. Components of the brand-specific plans vary and may include print, radio and television +advertising, social networking sites, event sponsorships, in-store point of purchase displays, +promotional materials, and sales and technical assistance. +The Company’s brand groups provide its international licensees and distributors with creative +direction and materials to convey consistent messages and brand images, including (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 brand names provide a competitive advantage and the +Company makes significant 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 domestic distribution channels and strategies to distribute its +branded footwear products: +• +The Company uses a dedicated sales force and customer service team, advertising, point +of purchase support and in-stock inventories to service department stores, national chains, +specialty retailers, catalogs, independent retailers and uniform outlets. +• +Volume direct programs ship products directly to the retail customer without going +through a Company distribution center and provide products 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 distributes 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. Such contracts typically contain future +purchase options that are not required to be exercised. +In addition to its wholesale activities, the Company also operates a consumer-direct business as +described above. The Company continues to develop new 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 2009. +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. +The Company expects current seasonal sales patterns to continue in future years. +International Operations and Global Licensing +The Company’s foreign-sourced revenue is generated from a combination of (i) sales of branded +footwear and apparel through the Company’s owned operations in Canada, the United Kingdom, Austria, +Finland, France, +Germany, Italy, the Netherlands, Spain, Sweden and Switzerland; (ii) sales to international +distributors for certain markets and businesses; and (iii) royalty income from a network of +third-party licensees and distributors. The Company’s owned operations are located in markets +where the Company believes it can gain a strategic advantage by more directly controlling the sale +into retail accounts. 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. +8 +Table of Contents +The Company continues to develop its network of licensees and distributors to market its footwear +brands. The Company assists in designing products that are appropriate to each foreign market, but +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 marketing support from the +Company. +Manufacturing and Sourcing +The Company controls the majority of the units of footwear and apparel marketed globally under the +Company’s brand names. The balance is controlled directly by the Company’s licensees. Of the +units sourced and/or manufactured by the Company, approximately 93% are purchased or sourced from +third parties, with the remainder produced at Company-operated facilities. The Company sources a +majority of its footwear from a variety of foreign manufacturing facilities in the Asia-Pacific +region, South America and India. The Company maintains offices in the Asia-Pacific region to +facilitate and develop strategies for the sourcing and importation of quality footwear and apparel. +The Company has established guidelines for each of its third-party manufacturers in order to +monitor product quality, labor practices and financial viability. 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. Footwear produced by the Company is manufactured at Company-operated facilities +located in Michigan and the Dominican Republic. +The Company’s owned manufacturing operations allow the Company to (i) reduce its production lead +time, enabling it to more quickly respond to market demand and reduce inventory risk, (ii) lower +freight, shipping and duty costs for sales to certain markets, and (iii) more closely monitor +product quality. The Company’s third party sourcing 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 capital expenditures necessary +for additional owned factories. The Company believes that its overall global manufacturing +strategy provides the flexibility to properly balance the need for timely shipments, high quality +products and competitive pricing. +The Company’s principal required raw material is quality leather, which it purchases from a select +group of domestic and offshore suppliers. 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 for its Wolverine +Leathers Division from one domestic source, which has been a reliable and consistent supplier for +over 30 years. Alternative sources of raw pigskin are available, but with less advantageous +pricing, quality and compatibility with the Company’s processing method. The Company purchases all +of its other raw materials and component parts from a variety of sources and does not believe that +any of these sources are 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, tariffs and duties, 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, +but that a sustained disruption of such sources of supply could have an adverse impact on the +Company’s results of operations and financial position. +9 +Table of Contents +Trademarks, Licenses and Patents +The Company holds a significant portfolio of registered and common law trademarks that identify its +branded products. The Company’s owned trademarks include Hush Puppies ® , +Wolverine ® , Bates ® , Cushe TM , +Chaco ® , Soft Style ® , Wolverine Fusion ® , +DuraShocks ® , MultiShox ® , Wolverine +Compressor ® , Hidden Tracks ® , +iTechnology TM , Bounce ® , Comfort Curve ® , +HyTest ® , Merrell ® , M Circle Design (registered +design trademark), Continuum ® , Sebago ® , +Q-Form ® and Track ‘N Trail ® . The Company’s Wolverine +Leathers Division markets its pigskin leathers under the trademarks Wolverine Warrior +Leather ® , Weather Tight ® , All Season Weather Leathers ™ and +its registered Wolverine Leathers & Design trademark. The Company has the rights to manufacture, +market and distribute footwear throughout the world under the Cat ® , +Harley-Davidson ® and Patagonia ® trademarks pursuant to +license arrangements with the respective trademark owners. The Cat ® , +Harley-Davidson ® , and Patagonia ® licenses extend for five +or more years and are subject to early termination for breach. +The Company believes that consumers identify its products by the Company’s trademarks and that its +trademarks are valuable assets. The Company is not aware of any infringing uses or any prior +claims of ownership of its trademarks that could materially affect its current business. The +Company has a policy of pursuing registration of its primary trademarks whenever practicable and to +vigorously defend its trademarks against infringement or other threats. The Company also holds +many design and utility patents, copyrights and various other proprietary rights. The Company +vigorously protects its proprietary rights under applicable laws. +Order Backlog +At February 20, 2010, the Company had an order backlog of approximately $424 million compared to an +order backlog of approximately $357 million at February 21, 2009, determined on a consistent basis. +Substantially all of the backlog relates to orders for products expected to be shipped in 2010. +Orders in the 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 predictive of eventual actual +shipments. +Competition +The Company markets its footwear and apparel lines in a highly competitive and fragmented +environment. The Company competes with numerous domestic and international marketers and +importers, some of which are larger and have greater resources than the Company. The Company has +at least thirty major competitors for its brands of footwear and apparel. Product performance and +quality, including technological improvements, product identity, competitive pricing and ability to +control costs, and the ability to adapt to style changes are all important elements of competition +in the footwear and apparel markets served by the Company. The footwear and apparel industries in +general are subject to changes in consumer preferences. The Company strives to maintain its +competitive position through promotions designed to increase brand awareness, manufacturing and +sourcing efficiencies, 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 and apparel industries. Market shares in the non-athletic footwear +and apparel industry are highly fragmented and no one company has a dominant market position. +10 +Table of Contents +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 helped validate and refine 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 expects to continue to be a leading developer of footwear innovations, research and +development costs do not represent a material portion of operating expenses. +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 2, 2010, the Company had approximately 4,018 domestic and foreign production, office +and sales employees. Approximately 149 employees were covered by two union contracts expiring at +various dates through March 31, 2011. 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, and Governance Committee Charter, is +available at its website at www.wolverineworldwide.com/investors_governance.asp . Printed copies of +the documents listed above are available, without charge, by writing to the Company at 9341 +Courtland Drive, N.E., Rockford, Michigan 49351, Attention: General Counsel. +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 1A. +Risk Factors +The Company’s sales, operating results and financial position are dependent on general economic +conditions and other factors affecting consumer spending. +The success of the Company’s operations depends to a significant extent upon a number of factors +affecting disposable consumer income and consumer spending patterns, both nationally and +internationally, including general economic conditions and factors such as employment, business +conditions, interest rates and taxation. Uncertainty about current and future global economic +conditions may cause the Company’s customers to defer or cancel purchases of the Company’s +products. In addition, recessionary economic cycles, higher interest rates on consumer or business +borrowings, restricted credit availability, inflation, higher levels of unemployment and consumer +debt, higher tax rates or other economic factors may cause consumer confidence to decline, which +could adversely affect the demand for the Company’s products. Consumer spending patterns may be +affected by changes in the amount or severity of inclement weather, the acceptability of U.S. +brands in international markets and the growth or decline of global footwear markets. If demand +for the Company’s products declines, the Company’s sales and profit margins may also decline. +11 +Table of Contents +General economic conditions and regulatory factors such as those listed above, as well as increased +costs of fuel, labor, commodities, insurance and health care, may increase the Company’s cost of +sales and operating expenses, which may adversely affect the Company’s financial position and +results of operations. +The Company’s business will be adversely affected if the Company is not able to maintain its +competitive position in the footwear industry, or compete effectively in retail and apparel +markets. +The Company competes with numerous other marketers of footwear, some of which are larger and have +greater resources than the Company. 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 industry. The footwear industry in general +is subject to changes in consumer preferences with respect to the popularity of particular designs +and categories of footwear. The Company strives to maintain and improve its competitive position +through increasing brand awareness, gaining sourcing efficiencies, and enhancing 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. If the +Company is unable to respond effectively to competitive pressures and changes in consumer spending, +the Company’s business, results of operations and financial position may be adversely affected. +In addition, the Company has only recently begun to expand into apparel and has increased its focus +on its consumer-direct initiatives. Many of its competitors in these areas have greater +experience, a more developed consumer and customer base in these sectors, lower prices, or greater +financial, technical or marketing resources than the Company. The Company’s competitors in these +sectors may be able to undertake more effective marketing campaigns; adopt more aggressive pricing +policies; make more attractive offers to potential employees, distribution partners and +manufacturers; or may be able to respond more quickly to changes in consumer preferences, than the +Company. If the Company’s consumer-direct or apparel initiatives are not successful, the Company’s +business, results of operations and financial position may be adversely affected. +If the Company is not able to manage its inventories effectively, its costs could increase and/or +its sales could decrease, each of which could adversely affect its operating results. +The Company’s ability to manage its inventories properly is an important factor in its operations. +Inventory shortages can impede the Company’s ability to meet at-once orders and can adversely +affect the timing of shipments to customers and diminish brand loyalty. Conversely, excess +inventories can result in lower gross margins due to the necessity of lowering prices in order to +liquidate excess inventories, as well as increased interest costs. If the Company is unable to +effectively manage its inventory, its business, results of operations and financial position may be +adversely affected. +The potential imposition of additional duties, quotas, tariffs and other trade restrictions could +have an adverse impact on the Company’s sales and profitability. +All of the Company’s products manufactured overseas and imported into the United States, the +European Union and other countries are subject to customs duties collected by customs authorities. +Customs information submitted by the Company is routinely subject to review by customs authorities. +Additional U.S. or foreign customs duties, quotas, tariffs, anti-dumping duties, safeguard +measures, cargo restrictions to prevent terrorism or other trade restrictions may be imposed on the +importation of the Company’s products in the future. The imposition of such costs or restrictions +in foreign countries where the Company operates, as well as in countries where the Company’s +third-party distributors and licensees operate, could result in increases in the cost of the +Company’s products generally and could adversely affect the sales and profitability of the Company. +In December 2009, the European Union approved a 15-month extension of anti-dumping duties on +specific types of leather upper footwear originating in China and Vietnam and imported into member +states of the European Union. Because the Company sources a substantial portion of its products +from suppliers located in China and Vietnam, the imposition of these anti-dumping duties has +negatively affected, and, for as long as such anti-dumping duties remain in effect, will continue +to negatively affect, the Company’s sales and gross margin in the European Union. +12 +Table of Contents +The Company’s business could be adversely affected by changes in currency values. +Foreign currency fluctuations relative to the U.S. dollar affect the Company’s revenue and +profitability. In addition, because currency valuations fluctuate and the Company may employ +hedging strategies over time, changes in currency exchange rates may impact the Company’s financial +results positively or negatively in one period and not another, which may also make it difficult to +compare the Company’s operating results from different periods. Currency exchange rate +fluctuations may also adversely impact the third parties that manufacture the Company’s products by +making their purchases of raw materials or other production costs more expensive and harder to +finance and thereby raising prices for the Company, its distributors and licensees. For a more +detailed discussion of risk relating to foreign currency fluctuation, see Item 7A, Quantitative and +Qualitative Disclosures About Market Risk. +A majority of the Company’s products are produced outside the United States where the Company is +subject to the risks of international commerce. +The Company currently sources most of its products from third-party manufacturers in foreign +countries, predominantly China. As is common in the industry, the Company does not have long-term +contracts with its third-party suppliers. There can be no assurance that the Company will not +experience difficulties with such suppliers, including reduction in the availability of production +capacity, failure to meet production deadlines or increases in manufacturing costs. The Company’s +future results will depend partly on its ability to maintain positive working relationships with +its third-party suppliers. +Foreign manufacturing is subject to a number of risks, including work stoppages, transportation +delays and interruptions, political instability, foreign currency fluctuations, changing economic +conditions, expropriation, nationalization, the imposition of tariffs, import and export controls +and other non-tariff barriers and changes in governmental policies. Various factors could +significantly interfere with the Company’s ability to source its products, including adverse +developments in trade or political relations with China or other countries where the Company +sources its products, or China shifting its manufacturing capacity away from footwear and apparel +to other industries. Any of these events could have an adverse effect on the Company’s business, +results of operations and financial position and in particular on the Company’s ability to meet +customer demands and produce its products in a cost-effective manner. +Currency exchange rate fluctuations in China could result in higher costs and decreased margins. +The Company sources a substantial portion of its products from China. The official exchange rate +for conversion of the Chinese yuan was pegged to the U.S. dollar from 1994 to 2005. Beginning in +2005, the exchange rate for the yuan was linked to a trade-weighted basket of foreign currencies of +China’s primary trading partners. The exchange rate is permitted to float each day up to 0.5% in +either direction from the previous day’s close. As a result, the value of the yuan may increase +incrementally over time. Such increases could significantly increase production costs of products +the Company sources from China. Additional revaluations in the yuan could impact the prices the +Company pays its Chinese manufacturers if they adjust their selling prices accordingly. Increases +in the Company’s production costs will decrease its gross margin unless the Company is able to +increase prices to offset such increased costs. +Any disruption in the supply of key production materials could interrupt product manufacturing and +increase product costs. +The Company’s ability to competitively price its products depends on the cost of components, +services, labor, equipment and raw materials, including leather and materials used in the +production of footwear outsoles. The cost of services and materials is subject to change based on +availability and market conditions that are difficult to predict. Conditions such as diseases +affecting the availability of leather affect the cost of the footwear marketed by the Company. In +addition, fuel prices and numerous other factors, such as the possibility of service interruptions +at shipping and receiving ports, affect the Company’s shipping costs. Increases in cost for +services and materials used in production could have a negative impact on the Company’s business, +results of operations and financial position. +13 +Table of Contents +The Company purchases raw pigskins for its leathers operations from a single domestic source +pursuant to short-term contracts. Although this source has been a reliable and consistent supplier +for over 30 years, there are no assurances that it will continue as a supplier. Failure of this +source to continue to supply the Company with raw pigskin or to supply the Company with raw pigskin +on less favorable terms could have a negative impact on the Company’s business, results of +operations and financial position, including increasing the Company’s cost of raw materials for its +leathers business and as a result, decreasing the Company’s profits. +If the Company’s customers significantly reduce their purchases from the Company or are not able to +pay for its products in a timely manner, the Company’s business, results of operations and +financial position may be adversely affected. +The Company’s financial success is directly related to the willingness of its customers to continue +to purchase its products. The Company does not typically have long-term contracts with its +customers. Sales to the Company’s customers are generally on an order-by-order basis and are +subject to rights of cancellation and rescheduling by the customers. Failure to fill customers’ +orders in a timely manner could harm the Company’s relationships with its customers. Furthermore, +if any of the Company’s major customers experience a significant downturn in its business, or fail +to remain committed to the Company’s products or brands, then these customers may reduce or +discontinue purchases from the Company, which could have an adverse effect on the Company’s +business, results of operations and financial position. +The Company sells its products to wholesale customers and extends credit based on an evaluation of +each customer’s financial condition, usually without requiring collateral. The financial +difficulties of a customer could cause the Company to stop doing business with that customer or +reduce its business with that customer. The Company’s inability to collect from its customers or a +cessation or reduction of sales to certain customers because of credit concerns could have an +adverse effect on the Company’s business, results of operations and financial position. +The recent trend toward consolidation in the retail industry could lead to customers seeking more +favorable terms of purchase from the Company and could lead to a decrease in the number of stores +that carry the Company’s products. In addition, changes in the channels of distribution, such as +the growth of Internet commerce and the trend toward the sale of private label products by major +retailers, could have an adverse effect on the Company’s business, results of operations and +financial position. +The Company has been awarded a number of U.S. Department of Defense contracts that include future +purchase options for Bates ® footwear. Failure to exercise these purchase +options by the Department of Defense or the failure of the Company to secure future U.S. Department +of Defense contracts could have an adverse effect on the Company’s business, results of operations +and financial position. +The Company’s consolidation of its manufacturing facilities in North America could disrupt +manufacturing and supply of its products to customers, and any such disruption could adversely +affect the Company’s ability to obtain future business. +The Company has consolidated its manufacturing facilities in North America. The Company has ceased +its manufacturing operations in Arkansas and relocated those operations to the Company’s facilities +in Michigan. If the Company does not integrate the consolidation of its manufacturing facilities +in an efficient manner, the manufacture and supply of certain of the Company’s products, including +products intended for the U.S. Department of Defense, may be disrupted. Failure to fill orders in +a timely manner due to the consolidation or other factors could harm the Company’s relationships +with U.S. Department of Defense and other customers and adversely affect the Company’s ability to +obtain future contracts with the U.S. Department of Defense and other customers on favorable terms +or otherwise. +14 +Table of Contents +The Company’s financial success may be adversely affected by the ongoing effects of the recent +crisis in the credit markets. +Difficulties in the credit markets over the last 24 months have led to a substantial decrease in +the availability of both consumer and business credit. Commercial banks are demanding that +borrowers pay higher interest rates and agree +to more onerous terms, and in other cases are refusing to provide financing. If these conditions +continue or worsen, they could adversely impact the Company’s future results of operations and +financial position. If the Company’s third-party distributors, suppliers and retailers are not +able to obtain financing on favorable terms, or at all, they may delay or cancel orders for the +Company’s products, or fail to meet their obligations to the Company in a timely manner, either of +which could adversely impact the Company’s sales, cash flow and operating results. In addition, +the lack of available credit and/or the increased cost of credit may significantly impair the +Company’s ability to obtain additional credit to finance future expansion plans, or refinance +existing credit, on favorable terms, or at all. The extent and duration of any future weakening of +the credit markets is unknown. In addition, there can be no assurance regarding either the length +of time it will take for the credit markets to recover or how successful any such recovery will be. +The market price of the Company’s common stock may be adversely affected by market volatility. +Market disruption and volatile credit and financial markets may contribute to extreme price and +volume fluctuations in the stock market. This volatility could negatively affect the market price +of Company’s common stock for reasons unrelated to its operating performance. +Unfavorable findings resulting from a government audit could subject the Company to a variety of +penalties and sanctions, and could negatively impact the Company’s future revenues. +The federal government has the right to audit the Company’s performance under its government +contracts. If a government audit uncovers improper or illegal activities, the Company could be +subject to civil and criminal penalties and administrative sanctions, including termination of +contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from +doing business with U.S. federal government agencies. The Company could also suffer serious harm +to its reputation if the government alleges that the Company acted in an improper or illegal +manner, whether or not any such allegations have merit. If, as the result of an audit or for any +other reason, the Company is suspended or barred from contracting with the federal government +generally, or any specific agency, if the Company’s reputation or relationship with government +agencies is impaired, or if the government otherwise ceases doing business with the Company or +significantly decreases the amount of business it does with the Company, the Company’s revenue and +profitability could decrease. The Company is also subject to tax, customs and other audits in +various jurisdictions where it operates. Negative audit findings could have a negative effect on +the Company’s business, results of operations and financial position. +Failure of the Company’s international licensees and distributors to meet sales goals could have an +adverse effect on the Company. +The Company’s products are sold in many international markets through independent licensees or +distributors. Failure by the Company’s licensees or distributors to meet planned annual sales +goals could have an adverse effect on the Company’s business, results of operations and financial +position, and it may be difficult and costly to locate an acceptable substitute distributor or +licensee. If a change in distributors becomes necessary, the Company may experience increased +costs, as well as substantial disruption and a resulting loss of sales and brand equity in the +market where such distributors operate. +The Company’s reputation and competitive position could suffer if its third-party manufacturers, +distributors, licensees and others violate laws or fail to conform to the Company’s ethical +standards. +The Company requires its independent contract manufacturers, distributors, licensees and others +with which it does business to comply with the Company’s standards relating to working conditions +and other matters. If a party with which the Company does business is found to have violated the +Company’s standards, the Company could receive negative publicity that could damage its reputation +and negatively affect the value of its brands. +15 +Table of Contents +The Company’s business could be adversely affected by global political and economic uncertainty. +Concerns regarding acts of terrorism, international conflict 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, any of which could adversely affect the Company’s ability to source, +manufacture, distribute and sell its products. The Company is subject to risks of doing business +in developing countries and economically volatile areas. These risks include social, political and +economic instability; nationalization of the Company’s assets and operations in a developing +country by local government authorities; slower payment of invoices; and restrictions on the +Company’s ability to repatriate foreign currency. In addition, commercial laws in these areas may +not be well-developed or consistently administered, and new laws may be retroactively applied. Any +of these risks could have an adverse impact on the Company’s prospects and results of operations in +these areas. +If the Company’s efforts to establish and protect its intellectual property are unsuccessful, the +value of its brands could suffer. +The Company invests significant resources to develop and protect its intellectual property, and +believes that its trademarks and other intellectual property rights are important to its success. +The Company’s ability to remain competitive is dependent upon its continued ability to secure and +protect trademarks, patents and other intellectual property rights in the United States and +internationally for all of its lines of business. The Company relies on a combination of trade +secret, patent, trademark, copyright and other laws, license agreements and other contractual +provisions and technical measures to protect its intellectual property rights; however, some +countries’ laws do not protect intellectual property rights to the same extent as do U.S. laws. +The Company’s business could be significantly harmed if it is not able to protect its intellectual +property, or if a court found that the Company was infringing on other persons’ intellectual +property rights. Any intellectual property lawsuits or threatened lawsuits in which the Company is +involved, either as a plaintiff or as a defendant, could cost the Company a significant amount of +time and money and distract management’s attention from operating the Company’s business. In +addition, if the Company does not prevail on any intellectual property claims, the Company may have +to change its manufacturing processes, products or trade names, any of which could reduce its +profitability. +In addition, some of the Company’s branded footwear operations are operated pursuant to licensing +agreements with third-party trademark owners. These agreements are subject to early termination +for breach. Expiration or early termination of any of these license agreements by the licensor +could have a material adverse effect on the Company’s business, results of operations and financial +position. +Loss of services of the Company’s key personnel could adversely affect its business. +The Company is dependent on the efforts and abilities of its senior officers. While the Company +believes that its senior management team has significant depth and that appropriate senior +management succession plans are in place, the loss of one or more members of senior executive +management or the failure to successfully implement succession planning could have an adverse +effect on the Company, its results of operations and financial position. The Company’s future +success also depends on its ability to identify, attract and retain additional qualified personnel. +Competition for such employees in the footwear, apparel and retail industries is intense and +failure to retain or attract key employees could adversely impact the Company. +Inflationary and other pressures may lead to higher employment and pension costs for the Company. +General inflationary pressures, changes in employment laws and regulations, and other factors could +increase the Company’s overall employment costs. The Company’s employment costs include costs +relating to health care benefits and benefits under the Company’s retirement plans, including a +U.S.-based defined benefit plan. The annual cost of benefits can vary significantly depending on a +number of factors, including changes in the assumed or actual rate of return on pension plan +assets, a change in the discount rate used to measure pension obligations, a change in method or +timing of meeting pension funding obligations and the rate of health care cost inflation. +Increases in the Company’s overall employment and pension costs could have an adverse effect on the +Company’s business, results of operations and financial position. +16 +Table of Contents +Disruption to the Company’s information technology systems could adversely affect the Company’s +business. +The Company’s technology systems are critical to the operations of its business. Any interruption, +impairment or loss of data integrity or malfunction of these systems could severely impact the +Company’s business, including delays in product fulfillment and reduced efficiency in operations. +In addition, costs and potential problems and interruptions associated with the implementation of +new or upgraded systems or with maintenance or adequate support of existing systems could also +disrupt or reduce the efficiency of our operations. +The Company is subject to risks associated with its growth strategy and acquiring other businesses. +The Company completed two acquisitions in 2009 and may make other strategic acquisitions in the +future, and the Company cannot provide assurance that it will be able to successfully integrate the +operations of these newly-acquired businesses into the Company’s operations. Acquisitions involve +numerous risks, including risks inherent in entering new markets in which the Company may not have +prior experience; potential loss of significant customers or key personnel of the acquired +business; managing geographically-remote operations; and potential diversion of management’s +attention from other aspects of the Company’s business operations. Acquisitions may also result in +incurrence of debt, dilutive issuances of the Company’s equity securities and write-offs of +goodwill and substantial amortization expenses of other intangible assets. The failure to +integrate newly acquired businesses or the inability to make suitable strategic acquisitions in the +future could have an adverse effect on the Company’s business, results of operations and financial +position. +The maintenance and growth of the Company’s business depends upon the availability of adequate +capital. +The maintenance and growth of the Company’s business depends on the availability of adequate +capital, which in turn depends in large part on cash flow generated by its business and the +availability of equity and debt financing. The Company’s current revolving credit agreement +expires in July 2010, and the likelihood of replacing it on similar terms as favorable to the +Company is limited. Distress in the financial markets over the past 24 months has had an adverse +impact on the availability and cost of credit. The Company cannot provide assurance that its +operations will generate positive cash flow or that it will be able to obtain equity or debt +financing on acceptable terms or at all. Further, the Company cannot provide assurance that it +will be able to finance any expansion plans. +Expanding the Company’s brands into new markets may be difficult and costly, and if the Company is +unable to successfully continue such expansion, its brands may be adversely affected. +As part of its growth strategy, the Company seeks to enhance the positioning of its brands, to +extend its brands into complementary product categories such as apparel, to expand geographically, +to expand the Company’s owned retail operations and to improve operational performance. There can +be no assurance that the Company will be able to successfully implement any or all of these growth +strategies, which could have an adverse effect on the Company’s business, results of operations and +financial position. The Company has invested substantial resources into these strategies and the +failure of one or more of these strategies could have an adverse effect on the Company’s business, +results of operations and financial position. +Counterfeiting of the Company’s brands can divert sales and damage its brand image. +The Company periodically discovers products that are counterfeit reproductions of its products or +that otherwise infringe on its intellectual property rights in its markets. The Company has not +always been able to successfully stop production and sales of counterfeit products and infringement +of the Company’s intellectual property rights. The actions the Company takes to establish and +protect trademarks, patents and other intellectual property rights both inside and outside of the +United States may not be adequate to prevent imitation of its products by others. If the Company +is unsuccessful in challenging a party’s products on the basis of infringement of the Company’s +intellectual property rights, continued sales of these products could adversely affect the +Company’s sales, devalue its brands and result in the shift of consumer preference away from the +Company’s products. +17 +Table of Contents +Changes in government regulation may increase the costs of compliance. +The Company’s business is affected by changes in government and regulatory policies in the United +States and on a global basis. New requirements relating to product safety and testing and new +environmental requirements, as well as changes in interest rates, tax laws, duties, tariffs and +quotas could have a negative impact on the Company’s ability to produce and market footwear at +competitive prices. +The disruption, expense, and potential liability associated with existing and future litigation +against the Company could have a material adverse effect on its reputation, financial position and +results of operations. +The Company is a defendant from time to time in lawsuits and regulatory actions relating to its +business. Due to the inherent uncertainties of litigation and regulatory proceedings, the Company +cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome +could have an adverse impact on the Company’s business, financial position and results of +operations. In addition, regardless of the outcome of any litigation or regulatory proceedings, +such proceedings are expensive and may require that the Company devote substantial resources and +executive time to defend the Company. +Provisions of Delaware law and the Company’s certificate of incorporation and bylaws could prevent +or delay a change in control or change in management that could be beneficial to the Company’s +stockholders. +Provisions of the Company’s certificate of incorporation and bylaws, as well as provisions of +Delaware law, could discourage, delay or prevent a merger, acquisition or other change in control +of the Company. These provisions are intended to protect stockholders’ interests by providing the +Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a +potential acquirer in order to obtain more favorable terms. Such provisions include a board of +directors that is classified so that only one-third of directors stand for election each year. +These provisions could also discourage proxy contests and make it more difficult for stockholders +to elect directors and take other corporate actions. +Item 1B. +Unresolved Staff Comments +None. +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 operations are primarily conducted at a combination of leased and owned facilities in +Michigan and the Dominican Republic. The Company operates its U.S. distribution operations +primarily through an owned distribution center in Rockford, Michigan, totaling approximately +305,000 square feet, a leased distribution center in Cedar Springs, Michigan, of approximately +356,000 square feet and a leased distribution center in Howard City, Michigan, of approximately +460,000 square feet. +The Company also leases and owns various other offices and distribution centers to meet its +operational requirements. In addition, the Company operates retail stores through leases with +various third-party landlords. The Company conducts international operations in Canada, the United +Kingdom, China, Hong Kong and Europe through leased distribution centers, offices and/or 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 position, results of operations, or cash flows. +18 +Table of Contents +Supplemental Item. Executive Officers of the Registrant +The following table lists the names and ages of the Executive Officers of the Company and the +positions presently held with the Company. The information provided below the table lists the +business experience of each such Executive Officer for at least 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 +Kenneth A. Grady +53 +General Counsel and Secretary +Donald T. Grimes +47 +Senior Vice President, Chief Financial Officer and Treasurer +Robin J. Kleinjans-McKee +34 +Corporate Controller +Blake W. Krueger +56 +Chairman, Chief Executive Officer and President +Pamela L. Linton +60 +Senior Vice President, Human Resources +Michael F. McBreen +44 +President, Global Operations Group +Michael D. Stornant +43 +Vice President, Corporate Planning and Analysis +James D. Zwiers +42 +Senior Vice President and President, Outdoor Group +Kenneth A. Grady has served the Company as General Counsel and Secretary since October 2006. +During 2006, he was President and shareholder of the law firm K.A. Grady PC. During 2005, he +served as Vice President, General Counsel and Secretary of PC Connection, Inc., a direct marketer +of information technology products and solutions. From 2004 to 2005, Mr. Grady served as Executive +Vice President of Administration, General Counsel and Secretary of KB Toys, Inc., a specialty toy +retailer. From 2001 to 2004, he served as Vice President, General Counsel and Secretary of KB +Toys, Inc. +Donald T. Grimes has served the Company as Senior Vice President, Chief Financial Officer and +Treasurer since May 2008. From 2007 to 2008, he was the Executive Vice President and Chief +Financial Officer for Keystone Automotive Operations, Inc., a distributor of automotive accessories +and equipment. Prior to Keystone, Mr. Grimes held a series of senior corporate and divisional +finance roles at Brown-Forman Corporation, a manufacturer and marketer of premium wines and +spirits. During his employment at Brown-Forman, Mr. Grimes was Vice President, Director of +Beverage Finance from 2006 to 2007; Vice President, Director of Corporate Planning and Analysis +from 2003 to 2006; and Chief Financial Officer of Brown-Forman Spirits America from 1999 to 2003. +Robin J. Kleinjans-McKee has served the Company as Corporate Controller since February 2009. From +2006 to 2009, she was the Company’s Director of Financial Reporting. From 2004 to 2006, Ms. +Kleinjans-McKee served as Assurance Senior Manager at BDO Seidman, LLP, a professional services +firm. From 1997 to 2004, Ms. Kleinjans-McKee served in various audit positions at BDO Seidman, +LLP. +Blake W. Krueger has served the Company as Chairman since January 2010 and as Chief Executive +Officer and President since April 2007. From October 2005 to April 2007 he served as Chief +Operating Officer and President. From August 2004 to October 2005, he served as Executive Vice +President and Secretary of the Company and President of the Heritage Brands Group. 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. +Pamela L. Linton has served the Company as Senior Vice President, Human Resources since December +2007. From 2005 to 2007 she was an independent consultant. From 2001 to 2005 she was Senior Vice +President, Global Human Resources of American Greetings Corporation, a greeting card and gift wrap +company. +Michael F. McBreen has served the Company as President, Global Operations Group of Wolverine since +June 2008. From 2007 to 2008, he was Vice President, Supply Chain & Logistics for Furniture Brands +International, a home furnishings company. Prior to Furniture Brands International, Mr. McBreen +held a series of senior supply chain roles with Nike, Inc., a marketer of athletic footwear and +apparel. During his employment at Nike, Mr. McBreen +was Director, Global Apparel Operations from 2004 to 2007; Director, Global Apparel Operations & +Corporate Responsibility from 2002 to 2004; and Director, Global Supply Chain Operations from 2000 +to 2002. +19 +Table of Contents +Michael D. Stornant has served the Company as Vice President, Corporate Planning and Analysis since +February 2009. He served the Company as Corporate Controller from May 2008 until February 2009. +From 2007 to 2008, he served as Senior Vice President of Owned Operations for the Global Operations +Group at Wolverine. From 2006 to 2007, he was Wolverine’s Vice President of Finance for the Global +Operations Group. From 2003 to 2006, he served the Company as the Director of Internal Audit. +From 1996 to 2003, he held various finance-related positions at the Company. +James D. Zwiers has served the Company as Senior Vice President and President, Outdoor Group since +March 2009. From January 2008 until March 2009 he served as Senior Vice President of the Company. +From October 2006 to December 2007 he served as President of the Company’s Hush Puppies U.S. +Division. From October 2005 to October 2006 he served as the Company’s General Counsel and +Secretary. From December 2003 to October 2005 he served as General Counsel and Assistant +Secretary. 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. +Item 4. (Removed and Reserved) +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 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 2009 and 2008. The number of stockholders of record on February +19, 2010, was 1,622. +2009 +2008 +Stock Price +High +Low +High +Low +First quarter +$ +21.87 +$ +13.15 +$ +29.17 +$ +19.85 +Second quarter +23.90 +15.26 +31.21 +26.59 +Third quarter +27.25 +21.06 +28.66 +22.23 +Fourth quarter +28.31 +23.94 +29.45 +16.24 +Cash Dividends Declared Per Share +2009 +2008 +First quarter +$ +0.11 +$ +0.11 +Second quarter +0.11 +0.11 +Third quarter +0.11 +0.11 +Fourth quarter +0.11 +0.11 +A quarterly dividend of $0.11 per share was declared during the first quarter of fiscal 2010. See +Item 12 for information with respect to the Company’s equity compensation plans. The Company +currently expects that comparable cash dividends will be paid in future quarters in 2010. +20 +Table of Contents +Stock Performance Graph +The following graph compares the five year cumulative total stockholder return on Wolverine common +stock to the Standard & Poor’s Small Cap 600 Index and the Standard & Poor’s 600 Footwear Index, +assuming an investment of $100.00 at the beginning of the period indicated. Wolverine is part of +the Standard & Poor’s Small Cap 600 Index and the Standard & Poor’s Footwear Index. This Stock +Performance Graph shall not be deemed to be incorporated by reference into the Company’s SEC +filings and shall not constitute soliciting material or otherwise be considered filed under the +Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. +21 +Table of Contents +The following table provides information regarding the Company’s purchases of its own common stock +during the fourth quarter of fiscal 2009: +Issuer Purchases of Equity Securities +Total Number +of Shares +Maximum +Purchased +Number +as Part of +of Shares that +Total +Publicly +May Yet +Number of +Average +Announced +Be Purchased +Shares +Price Paid +Plans or +Under the Plans +Period +Purchased +per Share +Programs +or Programs +Period 1 (September 13, 2009 to October 10, +2009) +Common Stock Repurchase Program (1) +— +$ +— +— +199,996 +Employee Transactions (2) +151 +24.14 +N/A +N/A +Period 2 (October 11, 2009 to November 7, 2009) +Common Stock Repurchase Program (1) +— +$ +— +— +199,996 +Employee Transactions (2) +39 +27.13 +N/A +N/A +Period 3 (November 8, 2009 to December 5, 2009) +Common Stock Repurchase Program (1) +— +$ +— +— +199,996 +Employee Transactions (2) +2,708 +26.95 +N/A +N/A +Period 4 (December 6, 2009 to January 2, 2010) +Common Stock Repurchase Program (1) +— +$ +— +— +199,996 +Employee Transactions (2) +10,719 +27.21 +N/A +N/A +Total for Fourth Quarter ended January 2, 2010 +Common Stock Repurchase Program (1) +— +$ +— +— +199,996 +Employee Transactions (2) +13,617 +27.12 +N/A +N/A +(1) +The Company’s Board of Directors approved a common stock repurchase +program on April 19, 2007. This program authorizes the repurchase of +7.0 million shares of common stock over a 36-month period, commencing +on the effective date of the program. The Company’s Board of +Directors approved an additional common stock repurchase program on +February 11, 2010. This program authorizes the repurchase of up to +$200.0 million of shares of common stock over a four-year period. +(2) +Employee transactions include: (1) shares delivered or attested in +satisfaction of the exercise price and/or tax withholding obligations +by holders of employee stock options who exercised options, and (2) +restricted shares withheld to offset statutory minimum tax withholding +that occurs upon vesting of restricted shares. The Company’s employee +stock compensation plans currently provide that the value of the +shares delivered or attested to, or withheld, shall be the closing +price of the Company’s common stock on the date the relevant +transaction occurs. +22 +Table of Contents +Item 6. +Selected Financial Data +Five-Year Operating and Financial Summary (1) +(Thousands of Dollars, Except Per Share Data) +2009 +2008 +2007 +2006 +2005 +Summary of Operations +Revenue +$ +1,101,056 +$ +1,220,568 +$ +1,198,972 +$ +1,141,887 +$ +1,060,999 +Net earnings +61,912 +95,821 +92,886 +83,647 +74,467 +Per share of common stock: +Basic net earnings (2)(3)(4) +$ +1.26 +$ +1.94 +$ +1.75 +$ +1.50 +$ +1.30 +Diluted net earnings (2)(3)(4) +1.24 +1.90 +1.70 +1.46 +1.26 +Cash dividends declared (2) +0.44 +0.44 +0.36 +0.30 +0.26 +Financial Position at Year End +Total assets +$ +707,933 +$ +664,780 +$ +638,378 +$ +671,092 +$ +626,580 +Long-term debt +1,615 +5 +10,731 +21,471 +32,411 +Notes to Five-Year Operating and Financial Summary +(1) +This summary should be read in conjunction with the consolidated +financial statements and the related notes, which are attached as +Appendix A to this Annual Report on Form 10-K. +(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 that was distributed to stockholders on +February 1, 2005. All per share data has been retroactively adjusted +for the increased shares resulting from this 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 restricted common stock. Diluted earnings per share +assume the exercise of dilutive stock options and the vesting of all +outstanding restricted stock. +(4) +Basic and diluted net earnings per share have been retroactively +adjusted to reflect the adoption of FASB ASC Topic 260, Earnings Per +Share on January 4, 2009 , for participating securities which represent +unvested restricted common stock which contain nonforfeitable rights +to dividends or dividend equivalents. +23 +Table of Contents +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of +Operations +OVERVIEW +BUSINESS OVERVIEW +Wolverine World Wide, Inc. (the “Company”) is a leading global marketer of branded footwear, +apparel and accessories. The Company’s stated mission is to “ Excite Consumers Around the World +with Innovative Footwear and Apparel that Bring Style to Purpose .” The Company intends to fulfill +this mission by offering innovative products and compelling brand propositions, delivering supply +chain excellence and operating efficiency, complementing its footwear brands with strong apparel +and accessories offerings and building a more substantial global consumer-direct footprint. +The Company’s portfolio consists of 12 footwear and apparel brands that were marketed in +approximately 180 countries and territories in 2009. The Company controls distribution of its +brands into the retail channel via subsidiary operations in the United States, Canada, the United +Kingdom and certain continental European countries. In other markets, the Company relies on a +network of distributors and licensees to market its brands, from which the Company receives +distribution fees and royalty income. The Company also owned and operated 88 brick-and-mortar +retail stores in the United States, Canada and the United Kingdom and operated 23 e-commerce +websites at the end of fiscal 2009. +Difficult economic conditions in most of the Company’s major markets in 2009 resulted in +consolidations and bankruptcy filings among certain of the Company’s customers and a general +reduction in consumer spending. Furthermore, foreign exchange volatility had a negative impact on +the Company’s 2009 results. The Company has proactively taken actions to respond to the +challenging economic conditions by reducing costs, delivering revenue growth via its January 2009 +acquisitions of the Chaco ® and Cushe TM brands and improving performance by +thoroughly examining all profit levers. The Company believes these measures will continue to +enable it to combat the economic uncertainty caused by tough global economic conditions. The +Company remains focused on building strong global lifestyle brands that have compelling consumer +propositions and excellent prospects for growth. +FINANCIAL OVERVIEW +• +Profitable operations combined with outstanding working capital management and +disciplined capital spending helped generate $168.6 million of cash from operating +activities in 2009, compared to $93.5 million in 2008. +• +The Company ended 2009 with $160.4 million of cash and cash equivalents and +interest-bearing debt of only $1.6 million. +• +Revenue for 2009 was $1.101 billion, 9.8% below 2008 revenue of $1.221 billion, due to +negative foreign exchange impact, tough global trading conditions and one fewer week in +the current fiscal year compared to the prior fiscal year partially offset by revenue +contributions from newly acquired brands. +• +Accounts receivable decreased 2.5% in 2009 compared to 2008, due in part to the 9.8% +decrease in full year revenue. +• +Inventory decreased $38.7 million, or 19.7%, in 2009 compared to 2008, due to +successful inventory reduction initiatives. +• +Diluted earnings per share for 2009 were $1.24 per share compared to $1.90 per share +for 2008, including the impact of $0.53 per share of non-recurring restructuring and +other transition costs and a negative $0.16 per share impact from foreign exchange rate +fluctuations. +• +The Company declared cash dividends of $0.44 per share in 2009, equal to the prior year. +• +Despite tough retail conditions, the Company’s consumer direct business reported a high +single-digit sales increase over 2008 due to significant growth from e-commerce and +strong comparable store sales performance. +24 +Table of Contents +2009 DEVELOPMENTS +Strategic Restructuring Plan +On January 7, 2009, the Board of Directors of the Company approved a strategic restructuring plan +designed to create significant operating efficiencies, improve the Company’s supply chain and +create a stronger global platform. On October 7, 2009, the Company announced that two initiatives +in its restructuring plan had been expanded to enable the consolidation of two domestic +manufacturing facilities into one and to finalize realignment in certain product creation +organizations. +The Company estimates that the total non-recurring implementation costs relating to the strategic +restructuring plan, spanning both fiscal 2009 and fiscal 2010, will range from approximately $38.0 +million to $39.0 million and that all remaining initiatives under this plan will be completed in +the first half of fiscal 2010. Approximately $10.0 million to $11.0 million of the estimated total +costs represent non-cash charges. In fiscal 2009 the Company incurred non-recurring restructuring +and other transition costs of approximately $35.6 million, or $0.53 per diluted share. Continuing +annualized pretax benefits once all initiatives are fully implemented are estimated in the range of +$19.0 million to $21.0 million. The Company estimates that 2009 results reflect approximately +$13.0 million in pretax benefits relating to the strategic restructuring plan, with the remainder +of the estimated pretax benefits to be realized in reported financial results for future periods as +all initiatives are completed. +Cushe TM Footwear Brand +On January 8, 2009, the Company announced the acquisition of the Cushe TM footwear brand, +an acquisition that is expected to drive new global opportunities and leverage the strength of the +Company’s business model and operating infrastructure. Cushe TM is included in the +financial results of the Hush Puppies Company. +Chaco ® Footwear Brand +On January 22, 2009, the Company announced the acquisition of Chaco ® , a performance +outdoor footwear brand with a unique heritage and strong consumer following. This acquisition +represents an excellent opportunity for the Company to leverage its world-class sourcing and +logistics infrastructure, building upon Chaco ® ’s leadership in the U.S. market while +expanding its business internationally. Chaco ® is included in the financial results of +the Outdoor Group. +Effective Tax Rate +The Company’s full year effective tax rate in fiscal year 2009 was 27.8%, compared to 31.8% in +fiscal year 2008. The lower effective tax rate reflects benefits from the strategic restructuring +plan, the cumulative full year benefits from new tax planning strategies related primarily to the +Company’s international operations and the net benefit from non-recurring adjustments in the +current year. +OUTLOOK FOR 2010 +The Company observed stabilization in many of its major markets in the latter part of fiscal 2009, +and signs of improving consumer confidence and economic output. Though unemployment rates remain +high, the Company expects continued improvement in economic conditions in most of its major markets +and, based on an improved order backlog position throughout its portfolio, expects to deliver both +revenue and earnings growth in 2010. Foreign exchange rates are not expected to have a significant +impact on revenue. +The Company expects modest improvement in gross margin in 2010, based on relatively flat product +costs, a full-year benefit from 2009 price increases and benefits from shifts in both product and +geographic mix, partially offset by negative foreign exchange primarily from foreign currency +forward contracts. +A moderate increase is expected in operating expenses due to incremental investments behind the +Merrell ® , Chaco ® , Sebago ® and Cushe TM brands and consumer-direct +initiatives, strategies designed to capitalize on opportunities to gain market share and accelerate +growth of these important drivers of sales and profit. +The Company’s Board of Directors approved an additional common stock repurchase program on February +11, 2010. This program authorizes the repurchase of up to $200.0 million of shares of common stock +over a four-year period. +25 +Table of Contents +The following is a discussion of the Company’s results of operations and liquidity and capital +resources. This section should be read in conjunction with the Company’s consolidated financial +statements and related notes included elsewhere in this Annual Report. +RESULTS OF OPERATIONS — FISCAL 2009 COMPARED TO FISCAL 2008 +FINANCIAL SUMMARY — 2009 VERSUS 2008 +2009 +2008 +Change +% of +% of +(Millions of Dollars, Except Per Share Data) +$ +Total +$ +Total +$ +% +Revenue +Branded footwear, apparel and +licensing +$ +991.2 +90.0 +% +$ +1,106.1 +90.6 +% +$ +(114.9 +) +(10.4 +%) +Other business units +109.9 +10.0 +% +114.5 +9.4 +% +(4.6 +) +(4.0 +%) +Total Revenue +$ +1,101.1 +100.0 +% +$ +1,220.6 +100.0 +% +$ +(119.5 +) +(9.8 +%) +% of +% of +$ +Revenue +$ +Revenue +$ +% +Gross Profit +Branded footwear, apparel and +licensing +$ +390.8 +39.4 +% +$ +444.7 +40.2 +% +$ +(53.9 +) +(12.1 +%) +Other business units +40.9 +37.2 +% +41.3 +36.1 +% +(0.4 +) +(0.9 +%) +Total Gross Profit +$ +431.7 +39.2 +% +$ +486.0 +39.8 +% +$ +(54.3 +) +(11.2 +%) +Selling, general and +administrative expenses +$ +316.4 +28.7 +% +$ +345.2 +28.3 +% +$ +(28.8 +) +(8.3 +%) +Restructuring and other transition +costs +29.7 +2.7 +% +— +0.0 +% +29.7 +100.0 +% +Total Operating Expenses +$ +346.1 +31.4 +% +$ +345.2 +28.3 +% +$ +0.9 +0.3 +% +Interest expense — net +$ +0.1 +0.0 +% +$ +1.1 +0.1 +% +$ +(1.0 +) +(89.8 +%) +Other (income) — net +(0.2 +) +0.0 +% +(0.9 +) +(0.1 +%) +0.7 +78.3 +% +Earnings before income taxes +85.7 +7.8 +% +140.6 +11.5 +% +(54.9 +) +(39.0 +%) +Net Earnings +$ +61.9 +5.6 +% +$ +95.8 +7.9 +% +$ +(33.9 +) +(35.4 +%) +Diluted earnings per share +$ +1.24 +— +$ +1.90 +— +$ +(0.66 +) +(34.7 +%) +The Company has one reportable segment that is engaged in manufacturing, sourcing, marketing, +licensing and distributing branded footwear, apparel and accessories. Within the branded footwear, +apparel and licensing segment, the Company has identified four primary operating units: +• +Outdoor Group, consisting of the Merrell ® , Chaco ® and +Patagonia ® footwear, and Merrell ® brand apparel; +• +Wolverine Footwear Group, consisting of the Bates ® , HyTest ® , and +Wolverine ® , boots and shoes, and Wolverine ® brand apparel and +certain private label branded products; +• +Heritage Brands Group, consisting of the Cat ® footwear, +Harley-Davidson ® footwear and Sebago ® footwear and apparel; and +• +Hush Puppies Company, consisting of the Hush Puppies ® , Soft Style ® +and Cushe TM brands. +26 +Table of Contents +The Company’s other business units, which do not collectively comprise a separate reportable +segment, consist of Wolverine Retail, Wolverine Procurement and Wolverine Leathers. +The following is supplemental information on total revenue: +TOTAL REVENUE +2009 +2008 +Change +(Millions of Dollars) +$ +% +$ +% +$ +% +Outdoor Group +$ +416.2 +37.8 +% +$ +428.4 +35.1 +% +$ +(12.2 +) +(2.8 +%) +Wolverine Footwear Group +233.2 +21.2 +% +261.9 +21.5 +% +(28.7 +) +(10.9 +%) +Heritage Brands Group +198.3 +18.0 +% +242.3 +19.8 +% +(44.0 +) +(18.2 +%) +Hush Puppies Company +131.6 +12.0 +% +160.9 +13.2 +% +(29.3 +) +(18.2 +%) +Other +11.9 +1.1 +% +12.6 +1.0 +% +(0.7 +) +(6.1 +%) +Total branded footwear, +apparel and licensing +revenue +$ +991.2 +90.0 +% +$ +1,106.1 +90.6 +% +$ +(114.9 +) +(10.4 +%) +Other business units +109.9 +10.0 +% +114.5 +9.4 +% +(4.6 +) +(4.0 +%) +Total Revenue +$ +1,101.1 +100.0 +% +$ +1,220.6 +100.0 +% +$ +(119.5 +) +(9.8 +%) +REVENUE +Revenue for 2009 decreased $119.5 million from 2008, to $1,101.1 million. Declines in unit volume +for the branded footwear, apparel and licensing operations were primarily due to tough market +conditions brought about by the global recession. These declines were only partially offset by +price increases for selected brands, causing revenue to decrease $76.7 million. Changes in foreign +exchange rates decreased revenue by $38.2 million. Revenue from the other business units decreased +$4.6 million. International revenue represented 37.3% of total revenue in 2009 compared to 40.2% +in 2008, with the decline resulting primarily from the stronger U.S. dollar. +The Outdoor Group generated revenue of $416.2 million for 2009, a $12.2 million decrease from 2008. +The Merrell ® brand’s revenue decreased at a mid single-digit rate over the prior year, +primarily as a result of the strengthening of the U.S. dollar and tough economic conditions in the +brand’s international markets. Patagonia ® Footwear’s revenue decreased at a rate in the +low single-digits in 2009 compared to 2008, due primarily to tough economic conditions. The +addition and successful integration of the Chaco ® brand early in the fiscal year +contributed to the group’s overall revenue performance in 2009. +The Wolverine Footwear Group recorded revenue of $233.2 million in 2009, a $28.7 million decrease +from 2008. Revenue for the Wolverine ® brand declined at a high single-digit rate due +primarily to negative economic conditions in the U.S. work sector. The Bates ® uniform +footwear business realized a decrease in revenue at a rate in the low teens due primarily to +planned reduction in purchases by the U.S. Department of Defense. HyTest ® ’s revenue +declined at a rate in the low thirties due to factory closures and high unemployment rates among +the brand’s target consumers. +The Heritage Brands Group recorded revenue of $198.3 million during 2009, a $44.0 million decrease +over 2008. Cat ® Footwear’s revenue decreased at a rate in the low twenties compared to +2008, reflecting challenging economic conditions in many of the brand’s major markets and the +impact of the stronger U.S. dollar. Harley-Davidson ® Footwear revenue decreased at rate +in the mid teens due primarily to declines in the dealer and retail market. The Sebago ® +brand experienced a decline in revenue at a rate in the low teens for 2009 as a result of tough +economic conditions in many of the brand’s most important markets and the stronger U.S. dollar. +The Hush Puppies Company recorded revenue of $131.6 million in 2009, a $29.3 million decrease from +2008. Hush Puppies ® revenue decreased at a rate in the high teens due primarily to +continued retail consolidation in Europe caused by weaker consumer spending and the strengthening +of the U.S. dollar compared to 2008. The Soft Style ® brand experienced a decline in +revenue at a rate in the mid thirties as a result of a weak retail environment and production +delays at third-party factories. Revenue generated by the Cushe TM brand, acquired in +early fiscal 2009, partially offset these revenue declines. +27 +Table of Contents +Within the Company’s other business units, Wolverine Retail reported a high single-digit sales +increase versus 2008 +as a result of growth from the Company’s e-commerce channel and low single-digit growth in +comparable store sales from Company-owned stores. Wolverine Retail operated 88 retail stores +worldwide at the end of 2009 compared to 90 at the end of 2008, as 9 new store openings were more +than offset by the Company’s decision to close 11 underperforming locations in order to improve +financial results. The Wolverine ® Leathers business reported a revenue decline at a rate in the +mid twenties for 2009, primarily due to a decline in demand for its proprietary products and a +significant decline in the market price for finished leather. +GROSS MARGIN +Gross margin in 2009 of 39.2% was 60 basis points lower than the prior year. Non-recurring +restructuring and other transition costs of $5.9 million included in cost of goods sold in 2009 +accounted for 50 basis points of the decline, with the remainder of the decrease resulting from the +negative impact of foreign exchange, increases in product costs and a higher mix of lower margin +product sales in 2009. +OPERATING EXPENSES +Operating expenses of $346.1 million in 2009 increased $0.9 million from $345.2 million in 2008. +The increase was related to non-recurring restructuring and other transition costs of $29.7 +million, operating expenses associated with recently acquired brands of $6.9 million and increased +pension expense of $8.8 million. These increases were offset by the favorable impact of foreign +exchange of $8.6 million, lower general and administrative costs as a result of the Company’s +restructuring and cost-savings initiatives and decreases in certain operating expenses that vary +with revenue, such as selling commissions and distribution costs. +INTEREST, OTHER AND TAXES +The decrease in net interest expense reflected lower outstanding debt as a result of the repayment +in full of the Company’s senior notes during the fourth quarter of 2008 and lower average balances +outstanding on the Company’s revolving line of credit during 2009. +The decrease in other income is related primarily to the change in realized gains or losses on +foreign denominated assets and liabilities. +The Company’s full year effective tax rate for fiscal year 2009 was 27.8%, compared to 31.8% for +fiscal year 2008. The lower effective tax rate reflects benefits from the Company’s strategic +restructuring plan, the cumulative full year benefits from tax planning strategies related +primarily to the Company’s international operations and the net benefit from non-recurring +adjustments in the current year. +NET EARNINGS AND EARNINGS PER SHARE +As a result of the revenue, gross margin and expense changes discussed above, the Company had net +earnings of $61.9 million in 2009 compared to $95.8 million in 2008, a decrease of $33.9 million. +Diluted net earnings per share decreased 34.7% in 2009 to $1.24 from $1.90 in 2008. The decrease +was primarily attributable to non-recurring restructuring and other transition costs, increased +pension expense and the negative effect of foreign exchange rates. +Inflation has not had a significant impact on revenue or net earnings. +28 +Table of Contents +RESULTS OF OPERATIONS — FISCAL 2008 COMPARED TO FISCAL 2007 +FINANCIAL SUMMARY — 2008 VERSUS 2007 +2008 +2007 +Change +% of +% of +% of +(Millions of Dollars, Except Per Share Data) +$ +Total +$ +Total +$ +Total +Revenue +Branded footwear, apparel and +licensing +$ +1,106.1 +90.6 +% +$ +1,099.2 +91.7 +% +$ +6.9 +0.6 +% +Other business units +114.5 +9.4 +% +99.8 +8.3 +% +14.7 +14.8 +% +Total Revenue +$ +1,220.6 +100.0 +% +$ +1,199.0 +100.0 +% +$ +21.6 +1.8 +% +% of +% of +% of +$ +Revenue +$ +Revenue +$ +Revenue +Gross Profit +Branded footwear, apparel and +licensing +$ +444.7 +40.2 +% +$ +434.6 +39.5 +% +$ +10.1 +2.3 +% +Other business units +41.3 +36.1 +% +37.3 +37.4 +% +4.0 +10.7 +% +Total Gross Profit +$ +486.0 +39.8 +% +$ +471.9 +39.4 +% +$ +14.1 +3.0 +% +Selling, general and +administrative expenses +$ +345.2 +28.3 +% +$ +333.2 +27.8 +% +$ +12.0 +3.6 +% +Total Operating Expenses +$ +345.2 +28.3 +% +$ +333.2 +27.8 +% +$ +12.0 +3.6 +% +Interest (income) expense — net +1.1 +0.1 +% +(0.7 +) +(0.1 +%) +1.8 +264.6 +% +Other (income) expense — net +(0.9 +) +(0.1 +%) +0.8 +0.1 +% +(1.7 +) +(196.2 +%) +Earnings before income taxes +$ +140.6 +11.5 +% +$ +138.6 +11.6 +% +$ +2.0 +1.5 +% +Net Earnings +$ +95.8 +7.9 +% +$ +92.9 +7.7 +% +$ +2.9 +3.2 +% +Diluted earnings per share +$ +1.90 +— +$ +1.70 +— +$ +0.20 +11.8 +% +In 2007 and 2008, the Company had one reportable segment that was engaged in manufacturing, +sourcing, marketing, licensing, and distributing branded footwear, apparel and accessories. Within +the branded footwear, apparel and licensing segment, the Company has identified four primary +operating units: +• +Outdoor Group, consisting of the Merrell ® and Patagonia ® footwear, +and Merrell ® brand apparel; +• +Wolverine Footwear Group, consisting of the Bates ® , HyTest ® , +Stanley ® and Wolverine ® , boots and shoes, and Wolverine brand apparel +and certain private label branded products; +• +Heritage Brands Group, consisting of the Cat ® footwear, +Harley-Davidson ® footwear and Sebago ® footwear brands; and +• +Hush Puppies Company. +The Company’s other business units, which do not collectively comprise a second reportable segment, +consist of Wolverine Retail, Wolverine Procurement and Wolverine Leathers. +29 +Table of Contents +The following is supplemental information on total revenue: +TOTAL REVENUE +2008 +2007 +Change +(Millions of Dollars) +$ +% +$ +% +$ +% +Outdoor Group +$ +428.4 +35.1 +% +$ +416.7 +34.8 +% +$ +11.7 +2.8 +% +Wolverine Footwear Group +261.9 +21.5 +% +256.6 +21.4 +% +5.3 +2.1 +% +Heritage Brands Group +242.3 +19.8 +% +241.0 +20.1 +% +1.3 +0.5 +% +Hush Puppies Company +160.9 +13.2 +% +174.1 +14.5 +% +(13.2 +) +(7.6 +%) +Other +12.6 +1.0 +% +10.8 +0.9 +% +1.8 +17.2 +% +Total branded footwear, +apparel, and licensing +revenue +$ +1,106.1 +90.6 +% +$ +1,099.2 +91.7 +% +$ +6.9 +0.6 +% +Other business units +114.5 +9.4 +% +99.8 +8.3 +% +14.7 +14.8 +% +Total Revenue +$ +1,220.6 +100.0 +% +$ +1,199.0 +100.0 +% +$ +21.6 +1.8 +% +REVENUE +Revenue for 2008 exceeded revenue for 2007 by $21.6 million. Changes in product mix and price +increases for the branded footwear, apparel and licensing operations, as discussed below, +contributed $16.7 million of the revenue increase. The impact of translating foreign-denominated +revenue to U.S. dollars increased revenue by $3.2 million. These increases were partially offset +by a decrease of $13.0 million due to the planned phase-out of the Hush Puppies ® slippers, Stanley ® +Footgear and private label businesses. The other business units contributed $14.7 million to the +revenue increase. International revenue represented 40.2% of total revenue in 2008 compared to +39.0% in 2007. +The Outdoor Group earned revenue of $428.4 million for 2008, an $11.7 million increase over 2007. +The Merrell ® brand grew revenue at a low single-digit rate over the prior year, due primarily to +the inclusion of a full year of sales of Merrell ® Apparel, which was introduced in the second half +of 2007. Patagonia ® Footwear grew its revenue at a rate in the low teens in 2008, its second full +year of operation. The solid revenue growth, which is primarily attributable to increased sales of +Patagonia ® Footwear products in the performance category, demonstrates the brand’s appeal for +outdoor enthusiasts. +The Wolverine Footwear Group recorded revenue of $261.9 million for 2008, a $5.3 million increase +from 2007. Despite the challenging retail environment in the United States, revenue from the +Wolverine ® brand increased at a low single-digit rate for 2008 compared to 2007 due primarily to +the success of the premium-priced Contour Welt ® collection. The Bates ® military and +civilian uniform footwear business delivered a strong performance in 2008, growing its revenue at a +rate in the mid teens due to increased civilian business and U.S. Department of Defense contract +shipments compared to 2007. HyTest ® grew revenue at a high single-digit rate over the prior year +due primarily to a successful contract bid for one of its distributors. Revenue from the Stanley ® +Footgear and private label businesses decreased by $11.4 million in 2008 compared to 2007 as a +result of the planned phase-out of these businesses. The Stanley ® Footgear license expired on June +30, 2008. +The Heritage Brands Group generated revenue of $242.3 million during 2008, a $1.3 million increase +over 2007. Cat ® Footwear’s revenue increased at a low single-digit rate in 2008 as a result of +solid revenue growth in the United States, Canada and globally through the international +distribution network, partially offset by a decrease in Europe as a result of the challenging +retail climate. Harley-Davidson ® Footwear revenue decreased at a mid single-digit rate in 2008 due +primarily to the planned repositioning of the brand in the United States market and resulting +distribution channel modifications. Revenue for the Sebago ® brand increased slightly from 2007, as +strong revenue growth in the United States was offset by lower sales in international markets. +The Hush Puppies Company recorded revenue of $160.9 million in 2008, a $13.2 million decrease from +2007. Revenue earned by the international licensing business grew at a rate in the mid teens +during 2008 due to positive response to Hush Puppies ® product offerings. Decreases in the United +States, Europe and Canada more than offset this increase, driven by bankruptcies of key retailers +in the United States and United Kingdom, soft retail conditions, +production delays resulting from factory closures and a planned exit of a highly-promotional +department store customer in Canada. Hush Puppies ® 2008 revenue also declined by $1.6 +million from 2007 as a result of the planned phase-out of the slipper business. +30 +Table of Contents +Within the Company’s other business units, Wolverine Retail reported a high single-digit sales +increase in comparison to 2007 as a result of growth from the Company’s e-commerce channel. +Wolverine Retail operated 90 retail stores in North America at the end of both 2008 and 2007. The +Wolverine ® Leathers operation reported a revenue growth rate in the mid twenties for +2008, primarily due to an increase in orders placed by key customers and increased demand for its +proprietary products. +GROSS MARGIN +Gross margin for 2008 of 39.8% was 40 basis points higher than the prior year. Benefits from +foreign exchange were partially offset by higher freight and product costs from third-party +manufacturers and service providers and the variation in the business mix. +SELLING, GENERAL AND ADMINISTRATIVE EXPENSES +Selling, general and administrative expenses of $345.2 million for 2008 increased $12.0 million +from $333.2 million in 2007. Continued investment in brand development through product, marketing +and retail placement initiatives increased costs in 2008 by $4.7 million in comparison to 2007. +The remaining increase related primarily to increased selling costs due to the increase in revenue +and an increase in corporate general and administrative expenses, partially driven by costs +associated with the consolidation of the Company’s European operations in new London-based offices. +INTEREST, OTHER AND TAXES +The change in net interest (income) expense reflected increased borrowings to fund the repurchase +of the Company’s stock throughout 2008. +The change in other (income) expense primarily related to the change in realized gains or losses on +foreign denominated assets and liabilities. +The Company’s effective tax rate for 2008 was 31.8% compared to 33.0% in 2007. In the fourth +quarter of 2008, the research and development tax credit was extended by the U.S. Congress and as a +result the Company recognized an income tax benefit in the fourth quarter. In addition, the +reduced rate reflects a higher portion of earnings from lower-taxed foreign jurisdictions. +NET EARNINGS AND EARNINGS PER SHARE +As a result of the revenue, gross margin and expense changes discussed above, the Company achieved +net earnings of $95.8 million in 2008 compared to $92.9 million in 2007, an increase of $2.9 +million. +Diluted net earnings per share increased 11.8% in 2008 to $1.90 from $1.70 in 2007. In addition to +the increase in net earnings, the increase in earnings per share is attributable to fewer shares +outstanding throughout 2008 as a result of the repurchase of the Company’s common stock. +Inflation has not had a significant impact on revenue or net earnings. +31 +Table of Contents +LIQUIDITY AND CAPITAL RESOURCES +January 2, +January 3, +Change +(Millions of Dollars) +2010 +2009 +$ +% +Cash and cash equivalents +$ +160.4 +$ +89.5 +$ +70.9 +79.3 +% +Accounts receivable +163.8 +167.9 +(4.1 +) +(2.5 +%) +Inventories +158.1 +196.8 +(38.7 +) +(19.7 +%) +Accounts payable +42.3 +45.3 +(3.0 +) +(6.7 +%) +Current accrued liabilities +90.1 +86.5 +3.6 +4.1 +% +Interest-bearing debt +1.6 +59.5 +(57.9 +) +(97.3 +%) +Cash provided by operating activities +168.6 +93.5 +75.1 +80.4 +% +Additions to property, plant and equipment +11.7 +24.1 +(12.4 +) +(51.6 +%) +Depreciation and amortization +17.6 +20.7 +(3.1 +) +(14.9 +%) +Cash and cash equivalents at the end of fiscal 2009 increased 79.3% from 2008 due primarily to +significant reductions in net working capital and lower capital expenditures. Cash from operating +activities was $168.6 million in 2009 compared to $93.5 million in 2008. +Accounts receivable at the end of fiscal 2009 decreased 2.5% compared to 2008 primarily due to the +decrease in revenue. No single customer accounted for more than 10% of the outstanding accounts +receivable balance at January 2, 2010. Inventory levels at the end of fiscal 2009 decreased 19.7% +from 2008. The decrease in inventory levels at the end of fiscal 2009 was primarily attributable +to the higher levels of inventory at the end of 2008, as the Company purchased inventory in the +fourth quarter of that year ahead of announced price increases from third party factories and the +Company’s focused efforts to achieve meaningful reductions in inventory during the year. +Current accrued liabilities increased in comparison to 2008 primarily due to an increase in the +accrual for foreign exchange contracts and taxes payable to the Canadian government in connection +with a legal entity restructuring related to the Company’s Canadian subsidiary. Applying the +provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification +(“ASC”) Topic 715, Compensation — Retirement Benefits , the Company’s qualified defined benefit +pension plans (the “Plans”) were underfunded by $52.2 million and $36.4 million, at January 2, 2010 +and January 3, 2009, respectively. Under the Employee Retirement Income Security Act of 1974, the +Plans had no minimum funding requirements for 2009 and 2008. Discretionary cash contributions were +made to the Plans totaling $2.6 million in 2009 and $3.0 million in 2008. The Company expects to +contribute approximately $10.5 million to its qualified defined benefit pension plans and to pay +approximately $2.0 million in benefits under the Supplemental Executive Retirement Plan (the +“SERP”) in 2010. +The Company has a revolving credit agreement that expires in July 2010 and allows for borrowings of +a maximum of $150.0 million. The Company plans to negotiate a new revolving credit agreement, and +anticipates closing on the new facility before the expiration of the current facility. The +revolving credit facility is used to support working capital requirements and other business needs. +There were no amounts outstanding under the revolving credit facility at January 2, 2010 compared +to $59.5 million outstanding at January 3, 2009. The Company considers balances drawn on the +revolving credit facility, if any, to be short-term in nature. The Company was in compliance with +all debt covenant requirements at January 2, 2010 and January 3, 2009. Proceeds from the existing +credit facility and the expected new credit facility, 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 Company had commercial letter-of-credit facilities outstanding of $0.5 million and $2.5 million +at January 2, 2010 and January 3, 2009, respectively. The total debt to total capital ratio for +the Company was 0.3% at the end of fiscal year 2009 and 12.2% at the end of fiscal year 2008. +32 +Table of Contents +The majority of capital expenditures in 2009 were for information system enhancements, +manufacturing equipment and building improvements. The Company leases machinery, equipment and +certain warehouse, office and retail store space under operating lease agreements that expire at +various dates through 2023. +The Company’s Board of Directors approved a common stock repurchase program on April 19, 2007. The +program authorized the repurchase of 7.0 million shares of common stock over a 36-month period +beginning on the effective date of the program. The Company repurchased 406,200 shares at an +average price of $13.77 per share during the first quarter of 2009 under the program. No shares +were repurchased in the remaining quarters of 2009. As of January 2, 2010, the Company was +authorized to repurchase an additional 199,996 shares under the program. The primary purpose of +the stock repurchase program is to increase stockholder 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. The Company’s Board of Directors +approved an additional common stock repurchase program on February 11, 2010. This program +authorizes the repurchase of up to $200.0 million of shares of common stock over a four-year +period. +2009 +2008 +Cumulative +(Thousands of Dollars, +Market price +Market price +Market price +Except Per Share Data) +Shares +of shares +Shares +of shares +Shares +of shares +Authorization effective date +repurchased +repurchased +repurchased +repurchased +repurchased +repurchased +April 19, 2007 +406,200 +$ +5,593 +2,844,269 +$ +73,948 +6,800,004 +$ +175,498 +The Company declared dividends of $21.5 million, or $0.44 per share for fiscal years 2009 and 2008. +On February 11, 2010, the Company declared a quarterly cash dividend of $0.11 per share of common +stock, to be paid on May 3, 2010 to shareholders of record on April 1, 2010. +NEW ACCOUNTING STANDARDS +In December 2007, the FASB issued ASC Topic 805, Business Combinations (“ASC 805”). ASC 805 +establishes principles and requirements for how the acquirer of a business recognizes and measures +in its financial statements the identifiable assets acquired, the liabilities assumed and any +noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and +measuring the goodwill acquired in the business combination and determines what information to +disclose to enable users of the financial statements to evaluate the nature and financial effects +of the business combination. ASC 805 is to be applied prospectively to business combinations for +which the acquisition date is on or after an entity’s fiscal year beginning after December 15, 2008 +(fiscal year 2009 for the Company). The Company adopted ASC 805 in fiscal year 2009. +In December 2007, the FASB issued ASC Topic 810, Consolidation (“ASC 810”). ASC 810 establishes +new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the +deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a +noncontrolling interest (minority interest) as equity in the consolidated financial statements and +separate from the parent’s equity. The amount of net income attributable to the noncontrolling +interest will be included in consolidated net income on the face of the income statement. ASC 810 +clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in +deconsolidation are equity transactions if the parent retains its controlling financial interest. +In addition, this statement requires that a parent recognize a gain or loss in net income when a +subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the +noncontrolling equity investment on the deconsolidation date. ASC 810 also includes expanded +disclosure requirements regarding the interests of the parent and its noncontrolling interest. ASC +810 is effective for fiscal years, and interim periods within those fiscal years, beginning on or +after December 15, 2008 (fiscal year 2009 for the Company). Earlier adoption is prohibited. The +Company currently does not have any noncontrolling interests and will apply this standard when +future acquisitions occur. +In March 2008, the FASB issued ASC Topic 815, Derivatives and Hedging (“ASC 815”). ASC 815 changes +the disclosure requirements for derivative instruments and hedging activities. Entities are +required to provide enhanced disclosures about how and why an entity uses derivative instruments, +how the instruments are accounted for under +ASC 815 and its related interpretations, and how the instruments and related hedged items affect an +entity’s financial position, financial performance and cash flows. The guidance in ASC 815 is +effective for financial statements issued for fiscal years and interim periods beginning after +November 15, 2008 (fiscal year 2009 for the Company). Since ASC 815 requires only additional +disclosures concerning derivatives and hedging activities, adoption of ASC 815 did not affect the +Company’s financial position, results of operations or cash flows. +33 +Table of Contents +In June 2008, the FASB issued ASC Topic 260, Earnings Per Share (“ASC 260”). ASC 260 provides that +unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend +equivalents (whether paid or unpaid) are participating securities and shall be included in the +computation of earnings per share pursuant to the two-class method. ASC 260 is effective for +fiscal years beginning after December 15, 2008 (fiscal year 2009 for the Company). Upon adoption, +a company is required to retrospectively adjust its earnings per share data, including any amounts +related to interim periods, summaries of earnings, and selected financial data, to conform to the +provisions of ASC 260. The impact of adopting the standard reduced previously reported basic net +earnings per share by $0.02 and had no impact on diluted net earnings per share for the years ended +January 3, 2009 and December 29, 2007. +On December 30, 2008, the FASB issued ASC Topic 715, Compensation — Retirement Benefits (“ASC +715”) to provide guidance on an employer’s disclosures about plan assets of a defined benefit +pension or other postretirement plan. The disclosures about plan assets required by ASC 715 must +be provided for fiscal years ending after December 15, 2009 (fiscal year 2009 for the Company). +Upon initial application, the additional disclosure under ASC 715 is not required for earlier +periods that are presented for comparative purposes. Earlier application of the provisions of ASC +715 is permitted. Because ASC 715 requires only additional disclosures concerning plan assets, +adoption of ASC 715 did not affect the Company’s consolidated financial position, results of +operations or cash flows. +In April 2009, the FASB issued FASB ASC Topic 825, Financial Instruments and ASC Topic 270, Interim +Reporting (“ASC 825” and “ASC 270”), to require, on an interim basis, disclosures about the fair +value of financial instruments for public entities. ASC 825 and ASC 270 are expected to improve +the transparency and quality of information provided to financial statement users by increasing the +frequency of disclosures about fair value for interim periods as well as annual periods. ASC 825 +and ASC 270 are effective for interim and annual periods ending after June 15, 2009, with early +adoption permitted for periods ending after March 15, 2009. The Company has disclosed the +information required by ASC 825 and ASC 270 on an interim basis, and the adoption did not affect +the Company’s consolidated financial position, results of operations or cash flows. +In May 2009, the FASB issued FASB ASC Topic 855, Subsequent Events (“ASC 855”). The objective of +this statement is to establish general standards of accounting for and disclosure of events that +occur after the balance sheet date but before financial statements are issued or are available to +be issued. ASC 855, among other things, sets forth the period after the balance sheet date during +which management should evaluate events or transactions that may occur for potential recognition or +disclosure in the financial statements, the circumstances under which an entity should recognize +events or transactions occurring after the balance sheet date in its financial statements and the +disclosures an entity should make about events or transactions that occurred after the balance +sheet date. In accordance with this statement, an entity should apply the requirements to interim +or annual financial periods ending after June 15, 2009. The Company adopted ASC 855 in the second +quarter of 2009 and the adoption did not affect the Company’s consolidated financial position, +results of operations or cash flows. +In June 2009, the FASB issued FASB ASC Topic 105, Generally Accepted Accounting Principles (“ASC +105”). ASC 105 establishes the FASB Accounting Standards Codification TM +(“Codification”) as the source of authoritative U.S. generally accepted accounting principles +(“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive +releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities +laws are also sources of authoritative U.S. GAAP for SEC registrants. ASC 105 and the Codification +were effective for financial statements issued for interim and annual periods ending after +September 15, 2009 (fiscal year 2009 for the Company). The Company adopted this ASC and changed +applicable disclosures. +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 materially from these estimates under different assumptions or conditions. +34 +Table of Contents +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 Company’s consolidated financial +statements. +REVENUE RECOGNITION +Revenue is recognized on the sale of products manufactured or sourced by the Company when the +related goods have been shipped, legal title has passed to the customer and collectability is +reasonably assured. 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 licensees and distributors. +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 may differ from +the Company’s estimates. The Company records either an increase or decrease to net sales in the +period in which it determines 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 in which the Company made +such a determination. At January 2, 2010 and January 3, 2009, management believed that it had +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 certain domestic finished goods inventories. Cost is determined using the first-in, first-out +(“FIFO”) method for all raw materials, work-in-process and finished goods inventories in foreign +countries. The FIFO method is also used for all finished goods inventories of the Company’s retail +business, due to the unique nature of those operations, and for certain domestic finished goods +inventories. The Company has applied these inventory cost valuation methods consistently from year +to year. +The Company reduces the carrying 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 in 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 is recorded in the period in which such +determination was made. At January 2, 2010 and January 3, 2009, +management believed that it had provided sufficient reserves for excess or obsolete inventories. +35 +Table of Contents +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 or when indicators of impairment exist. 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 expected future cash flows of the reporting unit and by completing a market analysis. +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 the discounted cash flow and market approach analyses, +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-amortizable 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 determined that there was no impairment for the years ended +January 2, 2010 or January 3, 2009. +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. Income tax audits associated with the allocation of +this income and other complex issues may require an extended period of time to resolve and may +result in income tax adjustments if changes to the income allocation are required between +jurisdictions with different income tax rates. Because income tax adjustments in certain +jurisdictions can be significant, the Company records accruals representing management’s best +estimate of the probable resolution of these matters. To the extent additional information becomes +available, such accruals are adjusted to reflect the revised estimated probable outcome. 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 +cause the Company to record additional income tax expense in the Company’s consolidated statements +of operations. Management evaluates the potential the Company will be able to realize its gross +deferred tax assets and assesses the need for valuation allowances on a quarterly basis. +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 in +each 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 reflects the revised anticipated annual rate. +RETIREMENT BENEFITS +The determination of the obligation and expense for retirement benefits is dependent on the +selection of certain actuarial assumptions used in calculating such amounts. These assumptions +include, among others, the discount rate, expected long-term rate of return on plan assets and +rates of increase in compensation. These assumptions are reviewed with the Company’s actuaries and +updated annually based on relevant external and internal factors and information, including but not +limited to, long-term expected asset returns, rates of termination, regulatory requirements and +plan changes. +The Company utilizes a bond matching calculation to determine the discount rate used to calculate +its year-end pension liability and subsequent year pension expense. A hypothetical bond portfolio +is created based on a presumed purchase of bonds with maturities that match the plan’s expected +future cash outflows. The discount rate +is the resulting yield of the hypothetical bond portfolio. The bonds selected are rated AA- or +higher by a recognized ratings agency and are non-callable, currently purchasable and +non-prepayable. The discount rate at year end 2009 was 6.17%. Pension expense is also impacted by +the expected long-term rate of return on plan assets, which the Company has determined to be 8.5%. +This determination is based on both actual historical rates of return experienced by the pension +assets and the long-term rate of return of a composite portfolio of equity and fixed income +securities that reflects the approximate diversification of the pension assets. +36 +Table of Contents +STOCK-BASED COMPENSATION +The Company accounts for stock-based compensation in accordance with the fair value recognition +provisions of FASB ASC Topic 718, Compensation — Stock Compensation . The Company utilizes the +Black-Scholes model, which requires the input of subjective assumptions. These assumptions include +estimating (a) the length of time employees will retain their vested stock options before +exercising them (“expected term”), (b) the volatility of the Company’s common stock price over the +expected term and (c) the number of options that will be forfeited. Changes in these assumptions +can materially affect the estimate of fair value of stock-based compensation and, consequently, the +related expense amounts recognized on the consolidated statements of operations. +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. +The Company does not believe that there has been a material change during 2009 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 on Form 10-K, 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 FASB ASC Topic 815, Derivatives and Hedging , the Company is required to +recognize all derivatives on the balance sheet at fair value. Derivatives that are not qualifying +hedges must be adjusted to fair value through earnings. If a derivative is a qualifying 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 income until the hedged item is +recognized in earnings. +The Company conducts wholesale operations outside of the United States in the United Kingdom, +continental Europe and Canada where the functional currencies are primarily the British pound, euro +and Canadian dollar, respectively. The Company utilizes foreign currency forward exchange +contracts to manage the volatility associated with U.S. dollar inventory purchases made by non-U.S. +wholesale operations in the normal course of business. At January 2, 2010 and January 3, 2009, the +Company had outstanding forward currency exchange contracts to purchase $69.6 million and $63.1 +million, respectively, of U.S. dollars with maturities ranging up to 308 days. +The Company also has production facilities in the Dominican Republic and sourcing locations in +Asia, where financial statements reflect the U.S. dollar 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’s reported results are subject to foreign currency exposure for +this stream of revenue and expenses. +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 year ended January 2, 2010, the weakening of the +U.S. dollar compared to foreign currencies increased the value of these investments in net assets +by $15.3 million. For the year ended January 3, 2009, the strengthening of the U.S. dollar +compared to foreign currencies decreased the value of these investments in net assets by $36.3 +million. These changes resulted in cumulative foreign currency translation adjustments at January +2, 2010 and January 3, 2009 of $14.5 million and $0.9 million, respectively, that are deferred and +recorded as a component of accumulated other comprehensive income in stockholders’ equity. +37 +Table of Contents +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 revolving credit +agreement. As of January 2, 2010, the Company had no outstanding balance on its revolving credit, +compared to $59.5 million as of January 3, 2009. +The Company does not enter into contracts for speculative or trading purposes, nor is it a party to +any leveraged derivative instruments. +OFF-BALANCE SHEET ARRANGEMENTS +The Company has no off-balance sheet arrangements as of January 2, 2010. +38 +Table of Contents +CONTRACTUAL OBLIGATIONS +The Company has the following payments under contractual obligations due by period: +Less than +More than +(Thousands of Dollars) +Total +1 year +1-3 years +3-5 years +5 years +Operating leases +$ +114,877 +$ +16,107 +$ +26,093 +$ +20,509 +$ +52,168 +Short- and long-term debt obligations +1,615 +538 +1,077 +— +— +Purchase obligations (1) +146,760 +146,760 +— +— +— +Restructuring related obligations +948 +948 +— +— +— +Deferred compensation +918 +191 +333 +208 +186 +Pension (2) +10,466 +10,466 +— +— +— +SERP +25,036 +1,988 +3,983 +4,942 +14,123 +Dividends declared +5,446 +5,446 +— +— +— +Minimum royalties +7,374 +1,544 +2,742 +2,028 +1,060 +Minimum advertising +16,922 +2,208 +4,618 +4,899 +5,197 +Total (3) +$ +330,362 +$ +186,196 +$ +38,846 +$ +32,586 +$ +72,734 +(1) +Purchase obligations primarily relate to inventory and capital expenditure commitments. +(2) +Pension obligations reflect only expected 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. +(3) +The Company adopted FASB ASC Topic 740, Income Taxes, on December 31, 2006. The total +amount of unrecognized tax benefits on the Consolidated Balance Sheet at January 2, +2010 is $8.4 million. At this time, the Company is unable to make a reasonably +reliable estimate of the timing of payments in individual years beyond 12 months due +to uncertainties in the timing of tax audit outcomes. As a result, this amount is not +included in the table above. +The Company had $153.7 million of additional borrowing capacity available under all of its existing +credit facilities at January 2, 2010. The Company’s additional borrowing capacity is summarized as +follows: +Expiration of availability +Total commitments +Less than +1 year or +(Millions of Dollars) +available +1 year +greater +Revolving credit +$ +150.0 +$ +150.0 +$ +— +Standby letters of credit +3.7 +3.7 +— +39 +Table of Contents +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. +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 management, including our Chief Executive Officer and +Chief Financial Officer, we conducted an evaluation of the effectiveness of internal control over +financial reporting as of January 2, 2010, 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, management concluded that internal control over financial reporting was +effective as of January 2, 2010. +The effectiveness of the Company’s internal control over financial reporting as of January 2, 2010, +has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated +in its 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 2, 2010 that has materially affected, or that is reasonably +likely to materially affect, the Company’s internal control over financial reporting. +40 +Table of Contents +Item 9B. +Other Information +None. +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 SEC regulations and New York Stock +Exchange standards (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 an understanding of financial statements, +internal controls and audit committee functions. The Company’s Board of Directors has determined +that Jeffrey M. Boromisa and William K. Gerber 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 with respect to the Annual Meeting of Stockholders to be held on April 22, +2010, under the caption “Corporate Governance” under the subheading “Board and Committee Membership +and Meetings.” +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, and has +adopted a Code of Conduct & Compliance that applies to the Company’s directors and employees. The +Accounting and Finance Code of Ethics and the Code of Conduct & Compliance are available on the +Company’s website at www.wolverineworldwide.com/investors_governance.asp . Any waiver from the +Accounting and Finance Code of Ethics or the Code of Conduct & Compliance with respect to the +Company’s executive officers and directors will be disclosed on the Company’s website. Any +amendment to the Accounting and Finance Code of Ethics and the Code of Conduct & Compliance will be +disclosed on the Company’s website. +The information regarding directors of the Company contained under the caption “Directors” in the +Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be +held on April 22, 2010, is incorporated herein by reference. +The information regarding directors and executive officers of the Company under the caption +“Additional Information” under the subheading “Section 16(a) Beneficial Ownership Reporting +Compliance” in the Definitive Proxy Statement of the Company with respect to the Annual Meeting of +Stockholders to be held on April 22, 2010, is incorporated herein by reference. +Item 11. +Executive Compensation +The information contained under the caption “Executive Compensation” and under the caption +“Corporate Governance” under the subheading “Board and Committee Membership and Meetings” in the +Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be +held on April 22, 2010, 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 “Corporate Governance” under the subheading “Securities +Ownership of Officers and Directors and Certain Beneficial Owners” and under the caption “Stock +Incentive Plan of 2010” under the subheading “New Plan Benefits” contained in the Definitive Proxy +Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 22, +2010, is incorporated herein by reference. +41 +Table of Contents +Item 13. +Certain Relationships and Related Transactions, and Director Independence +The information contained under the caption “Related Matters” under the subheadings “Certain +Relationships and Related Transactions” and “Related Person Transactions Policy” contained in the +Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be +held on April 22, 2010, is incorporated herein by reference. The information contained under the +caption “Corporate Governance” under the subheading “Director Independence” contained in the +Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be +held on April 22, 2010, is incorporated herein by reference. +Item 14. +Principal Accountant Fees and Services +The information contained under the caption “Independent Auditor” in the Definitive Proxy Statement +of the Company with respect to the Annual Meeting of Stockholders to be held on April 22, 2010, 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 its subsidiaries +are filed as a part of this report: +• +Consolidated Balance Sheets as of January 2, 2010 and January 3, 2009. +• +Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Fiscal +Years Ended January 2, 2010, January 3, 2009, and December 29, 2007. +• +Consolidated Statements of Operations for the Fiscal Years Ended January 2, 2010, +January 3, 2009, and December 29, 2007. +• +Consolidated Statements of Cash Flows for the Fiscal Years Ended January 2, 2010, +January 3, 2009, and December 29, 2007. +• +Notes to the Consolidated Financial Statements as of January 2, 2010. +• +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 its +subsidiaries is filed as a part of this report: +• +Schedule II—Valuation and Qualifying Accounts. +All other schedules (I, III, IV, and V) for which provision is made in the applicable accounting +regulations of the SEC are not required under the related instructions or are inapplicable and, +therefore, have been omitted. +42 +Table of Contents +Item 15(a)(3). Exhibits +The following exhibits are filed as part of this report: +Exhibit +Number +Document +3.1 +Restated Certificate of Incorporation. Previously filed as +Exhibit 3.1 to the Company’s Annual Report on Form 10-K for +the period ended December 30, 2006. Here incorporated by +reference. +3.2 +Amended and Restated By-laws. Previously filed as Exhibit +3.1 to the Company’s Current Report on Form 8-K filed on +October 15, 2008. Here incorporated by reference. +4.1 +The Registrant has other long-term debt instruments +outstanding in addition to those described in Exhibit 4.2. +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. +4.2 +Credit Agreement dated as of July 22, 2005, among Wolverine +World Wide, Inc. and certain of its subsidiaries, JPMorgan +Chase Bank, N.A., as Administrative Agent, Harris, N.A., as +Syndication Agent, Comerica Bank, Standard Federal Bank +N.A. and National City Bank of the Midwest, as +Documentation Agents, and certain other Banks that are +parties to the Credit Agreement. Previously filed as +Exhibit 10.1 to the Company’s Current Report on Form 8-K +filed on July 28, 2005. Here incorporated by reference. +10.1 +1993 Stock Incentive Plan, as amended and restated.* +Previously filed as Exhibit 10.1 to the Company’s Annual +Report on Form 10-K for the fiscal year ended January 3, +2009. Here incorporated by reference. +10.2 +Amended and Restated 1995 Stock Incentive Plan.* Previously +filed as Exhibit 10.2 to the Company’s Annual Report on +Form 10-K for the fiscal year ended January 3, 2009. Here +incorporated by reference. +10.3 +Amended and Restated 1997 Stock Incentive Plan.* Previously +filed as Exhibit 10.3 to the Company’s Annual Report on +Form 10-K for the fiscal year ended January 3, 2009. Here +incorporated by reference. +10.4 +Amended and Restated Stock Incentive Plan of 1999.* +Previously filed as Exhibit 10.4 to the Company’s Annual +Report on Form 10-K for the fiscal year ended January 3, +2009. Here incorporated by reference. +10.5 +Amended and Restated Stock Incentive Plan of 2001.* +Previously filed as Exhibit 10.5 to the Company’s Annual +Report on Form 10-K for the fiscal year ended January 3, +2009. Here incorporated by reference. +10.6 +Amended and Restated Stock Incentive Plan of 2003.* +Previously filed as Exhibit 10.6 to the Company’s Annual +Report on Form 10-K for the fiscal year ended January 3, +2009. Here incorporated by reference. +10.7 +Amended and Restated Stock Incentive Plan of 2005.* +Previously filed as Exhibit 10.7 to the Company’s Annual +Report on Form 10-K for the fiscal year ended January 3, +2009. Here incorporated by reference. +10.8 +Amended and Restated Directors’ Stock Option Plan.* +Previously filed as Exhibit 10.8 to the Company’s Annual +Report on Form 10-K for the fiscal year ended January 3, +2009. Here incorporated by reference. +10.9 +Amended and Restated Outside Directors’ Deferred +Compensation Plan.* Previously filed as Exhibit 10.9 to the +Company’s Annual Report on Form 10-K for the fiscal year +ended December 29, 2007. Here incorporated by reference. +10.10 +Amended and Restated Executive Short-Term Incentive Plan +(Annual Bonus Plan).* Previously filed as Exhibit 10.10 to +the Company’s Annual Report on Form 10-K for the fiscal +year ended January 3, 2009. Here incorporated by +reference. +43 +Table of Contents +Exhibit +Number +Document +10.11 +Amended and Restated Executive Long-Term Incentive Plan +(3-Year Bonus Plan).* Previously filed as Exhibit 10.11 to +the Company’s Annual Report on Form 10-K for the fiscal +year ended January 3, 2009. Here incorporated by +reference. +10.12 +Amended and Restated Stock Option Loan Program.* Previously +filed as Exhibit 10.12 to the Company’s Annual Report on +Form 10-K for the fiscal year ended December 29, 2007. +Here incorporated by reference. +10.13 +Executive Severance Agreement.* Previously filed as Exhibit +10.3 to the Company’s Current Report on Form 8-K filed on +December 17, 2008. Here incorporated by reference. A +participant schedule of current executive officers who are +parties to the agreement is attached as Exhibit 10.13. +10.14 +Form of Indemnification Agreement.* The Company has entered +into an Indemnification Agreement with each director and +with Messrs. Grady, Grimes, Krueger, McBreen and Zwiers +and Ms. Linton. Previously filed as Exhibit 10.1 to the +Company’s Current Report on Form 8-K filed on April 25, +2007. Here incorporated by reference. +10.15 +Amended and Restated Benefit Trust Agreement dated April +25, 2007.* Previously filed as Exhibit 10.5 to the +Company’s Current Report on Form 8-K filed on April 25, +2007. Here incorporated by reference. +10.16 +Employees’ Pension Plan (Restated as amended through +November 30, 2007).* Previously filed as Exhibit 10.17 to +the Company’s Annual Report on Form 10-K for the fiscal +year ended December 29, 2007. Here incorporated by +reference. +10.17 +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. Here incorporated by reference. +10.18 +Form of Non-Qualified Stock Option Agreement for 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. Here incorporated by reference. +10.19 +Form of Non-Qualified Stock Option Agreement for executive +officers other than those to whom Exhibit 10.18 applies.* +Previously filed as Exhibit 10.3 to the Company’s Current +Report on Form 8-K dated February 9, 2005. Here +incorporated by reference. +10.20 +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. Here incorporated by reference. +10.21 +Form of Incentive Stock Option Agreement.* Previously filed +as Exhibit 10.1 to the Company’s Current Report on Form 8-K +dated February 15, 2006. Here incorporated by reference. +10.22 +Form of Non-Qualified Stock Option Agreement for Blake W. +Krueger and Timothy J. O’Donovan.* Previously filed as +Exhibit 10.2 to the Company’s Current Report of Form 8-K +dated February 15, 2006. Here incorporated by reference. +10.23 +Form of Non-Qualified Stock Option Agreement for executive +officers other than those to whom Exhibit 10.22 applies.* +Previously filed as Exhibit 10.3 to the Company’s Current +Report on Form 8-K dated February 15, 2006. Here +incorporated by reference. +10.24 +Form of Restricted Stock Agreement.* Previously filed as +Exhibit 10.4 to the Company’s Current Report on Form 8-K +dated February 15, 2006. Here incorporated by reference. +10.25 +Form of Stock Option Agreement for non-employee directors.* +Previously filed as Exhibit 10.23 to the Company’s Annual +Report on Form 10-K for the fiscal year ended January 1, +2005. Here incorporated by reference. +10.26 +2009 Form of Non-Qualified Stock Option Agreement for +Donald T. Grimes, Blake W. Krueger, Pamela L. Linton, +Michael F. McBreen and James D. Zwiers.* Previously filed +as Exhibit 10.26 to the Company’s Annual Report on Form +10-K for the fiscal year ended January 3, 2009. Here +incorporated by reference. +44 +Table of Contents +Exhibit +Number +Document +10.27 +2009 Form of Non-Qualified Stock Option Agreement for +executive officers other than those to whom Exhibit 10.26 +applies.* Previously filed as Exhibit 10.27 to the +Company’s Annual Report on Form 10-K for the fiscal year +ended January 3, 2009. Here incorporated by reference. +10.28 +Form of Performance Share Award Agreement.* Previously +filed as Exhibit 10.28 to the Company’s Annual Report on +Form 10-K for the fiscal year ended (2009-2011 Performance Period) January 3, 2009. Here +incorporated by reference. +10.29 +Form of Performance Share Award Agreement (2010-2012 Performance Period).* +10.30 +Separation Agreement between Wolverine World Wide, Inc. +and Blake W. Krueger, dated as of March 13, 2008, as +amended.* Previously filed as Exhibit 10.1 to the Company’s +Quarterly Report on Form 10-Q for the period ended March +22, 2008. +10.31 +First Amendment to Separation Agreement between Wolverine +World Wide, Inc. and Blake W. Krueger, dated as of +December 11, 2008.* Previously filed as Exhibit 10.30 to +the Company’s Annual Report on Form 10-K for the fiscal +year ended January 3, 2009. Here incorporated by +reference. +10.32 +409A Supplemental Executive Retirement Plan.* Previously +filed as Exhibit 10.1 to the Company’s Current Report on +Form 8-K filed on December 17, 2008. Here incorporated by +reference. A participant schedule of current executive +officers who participate in this plan is attached as +Exhibit 10.32. +10.33 +Form of 409A Supplemental Retirement Plan Participation +Agreement with Mr. Krueger.* Previously filed as Exhibit +10.32 to the Company’s Annual Report on Form 10-K for the +fiscal year ended January 3, 2009. Here incorporated by +reference. +10.34 +Outside Directors’ Deferred Compensation Plan.* Previously +filed as Exhibit 10.2 to the Company’s Current Report on +Form 8-K filed on December 17, 2008. Here incorporated by +reference. +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 Senior 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. Kenneth A. Grady, General Counsel and Secretary, 9341 Courtland Drive +N.E., Rockford, Michigan 49351. +45 +Table of Contents +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 3, 2010 +By: +/s/ Blake W. Krueger +Blake W. Krueger +Chairman, Chief Executive Officer and President +(Principal Executive 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/ Blake W. Krueger +Blake W. Krueger +Chairman, Chief Executive Officer and +President +(Principal Executive Officer) +March 3, 2010 +/s/ Donald T. Grimes +Donald T. Grimes +Senior Vice President, Chief Financial +Officer and Treasurer +(Principal Financial and Accounting Officer) +March 3, 2010 +*/s/ Jeffrey M. Boromisa +Jeffrey M. Boromisa +Director +March 3, 2010 +*/s/ William K. Gerber +William K. Gerber +Director +March 3, 2010 +*/s/ Alberto L. Grimoldi +Alberto L. Grimoldi +Director +March 3, 2010 +*/s/ Joseph R. Gromek +Joseph R. Gromek +Director +March 3, 2010 +*/s/ David T. Kollat +David T. Kollat +Director +March 3, 2010 +/s/ Blake W. Krueger +Blake W. Krueger +Director +March 3, 2010 +*/s/ Brenda J. Lauderback +Brenda J. Lauderback +Director +March 3, 2010 +*/s/ David P. Mehney +David P. Mehney +Director +March 3, 2010 +*/s/ Timothy J. O’Donovan +Timothy J. O’Donovan +Director +March 3, 2010 +*/s/ Shirley D. Peterson +Shirley D. Peterson +Director +March 3, 2010 +*/s/ Michael A. Volkema +Michael A. Volkema +Director +March 3, 2010 +*By: /s/ Blake W. Krueger +Blake W. Krueger +Attorney-in-Fact +Chairman, Chief Executive Officer and President +March 3, 2010 +46 +Table of Contents +APPENDIX A +Financial Statements +Table of Contents +CONSOLIDATED BALANCE SHEETS +As of Fiscal Year End +(Thousands of Dollars, Except Per Share Data) +2009 +2008 +ASSETS +Current assets: +Cash and cash equivalents +$ +160,439 +$ +89,502 +Accounts receivable, less allowances (2009 – $13,946; 2008 – $15,161) +163,755 +167,949 +Inventories +Finished products +140,124 +177,801 +Raw materials and work-in-process +17,941 +18,976 +158,065 +196,777 +Deferred income taxes +12,475 +8,127 +Prepaid expenses and other current assets +8,804 +11,487 +Total current assets +503,538 +473,842 +Property, plant and equipment: +Land +881 +882 +Buildings and improvements +80,511 +81,875 +Machinery and equipment +147,197 +143,203 +Software +74,559 +72,478 +303,148 +298,438 +Less accumulated depreciation +229,196 +212,681 +73,952 +85,757 +Other assets: +Goodwill +39,972 +32,310 +Other non-amortizable intangibles +16,226 +9,257 +Cash surrender value of life insurance +35,405 +35,531 +Deferred income taxes +35,094 +23,314 +Other +3,746 +4,769 +130,443 +105,181 +Total assets +$ +707,933 +$ +664,780 +LIABILITIES AND STOCKHOLDERS’ EQUITY +Current liabilities: +Accounts payable +$ +42,262 +$ +45,320 +Accrued salaries and wages +20,751 +22,702 +Income taxes +18,887 +1,817 +Taxes, other than income taxes +4,521 +4,308 +Restructuring reserve +5,926 +— +Other accrued liabilities +37,922 +29,533 +Accrued pension liabilities +2,044 +28,144 +Current maturities of long-term debt +538 +5 +Revolving credit agreement +— +59,500 +Total current liabilities +132,851 +191,329 +Long-term debt (less current maturities) +1,077 +— +Deferred compensation +5,870 +7,714 +Accrued pension liabilities +84,134 +34,777 +Other liabilities +1,968 +1,038 +Stockholders’ equity: +Common stock, $1 par value: authorized 160,000,000 shares; shares +issued, including treasury shares: 2009 – 62,763,924; 2008 – 61,655,814 +62,764 +61,656 +Additional paid-in capital +81,021 +64,696 +Retained earnings +706,439 +666,027 +Accumulated other comprehensive income (loss) +(42,806 +) +(42,834 +) +Cost of shares in treasury: 2009 – 13,170,471 shares; 2008 – 12,748,721 shares +(325,385 +) +(319,623 +) +Total stockholders’ equity +482,033 +429,922 +Total liabilities and stockholders’ equity +$ +707,933 +$ +664,780 +See accompanying notes to consolidated financial statements. +A-1 +Table of Contents +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY +AND COMPREHENSIVE INCOME +Fiscal Year +(Thousands of Dollars, Except Per Share Data) +2009 +2008 +2007 +COMMON STOCK +Balance at beginning of the year +$ +61,656 +$ +61,085 +$ +60,468 +Common stock issued under stock incentive plans +(2009 – 1,108,112 shares; 2008 – 570,691 shares; +2007 – 618,123 shares) +1,108 +571 +617 +Balance at end of the year +62,764 +61,656 +61,085 +ADDITIONAL PAID-IN CAPITAL +Balance at beginning of the year +64,696 +47,786 +31,341 +Stock-based compensation expense +8,935 +8,164 +8,316 +Amounts associated with common stock issued +under stock incentive plans: +Proceeds over par value +6,557 +5,859 +4,603 +Income tax benefits +1,427 +2,842 +3,572 +Issuance of performance-based shares (2009 – 286,006 shares) +(286 +) +— +— +Issuance of treasury shares (2009 – 32,455 shares; +2008 – 22,842 shares; 2007 – 12,661 shares) +(111 +) +54 +47 +Net change in employee notes receivable +(197 +) +(9 +) +(93 +) +Balance at end of the year +81,021 +64,696 +47,786 +RETAINED EARNINGS +Balance at beginning of the year +666,027 +591,706 +519,815 +Net earnings +61,912 +95,821 +92,886 +Cash dividends declared (2009 – $0.44 per share; +2008 – $0.44 per share; 2007 – $0.36 per share) +(21,500 +) +(21,500 +) +(18,844 +) +Cumulative effect of adopting ASC Topic 740 (See Note 7) +— +— +(509 +) +Pension adjustments (See Note 6) +— +— +(1,642 +) +Balance at end of the year +706,439 +666,027 +591,706 +ACCUMULATED OTHER COMPREHENSIVE +INCOME (LOSS) +Balance at beginning of the year +(42,834 +) +22,268 +3,923 +Foreign currency translation adjustments +15,349 +(36,305 +) +13,643 +Change in fair value of foreign exchange contracts, +net of taxes (2009 – $3,482; 2008 – ($3,447); 2007 – +$929) +(7,469 +) +5,978 +(1,007 +) +Pension adjustments, net of taxes +(2009 – $4,228; 2008 – $18,963; 2007 – ($3,396)) +(7,852 +) +(34,775 +) +5,709 +Balance at end of the year +(42,806 +) +(42,834 +) +22,268 +COST OF SHARES IN TREASURY +Balance at beginning of the year +(319,623 +) +(244,066 +) +(110,988 +) +Common stock purchased for treasury (2009 – 454,205 +shares; 2008 – 2,921,264 shares; 2007 – 4,587,473 shares) +(6,566 +) +(76,129 +) +(133,379 +) +Issuance of treasury shares (2009 – 32,455 shares; +2008 – 22,842 shares; 2007 – 12,661 shares) +804 +572 +301 +Balance at end of the year +(325,385 +) +(319,623 +) +(244,066 +) +Total stockholders’ equity at end of the year +$ +482,033 +$ +429,922 +$ +478,779 +COMPREHENSIVE INCOME +Net earnings +$ +61,912 +$ +95,821 +$ +92,886 +Foreign currency translation adjustments +15,349 +(36,305 +) +13,643 +Change in fair value of foreign exchange contracts, net +of taxes +(7,469 +) +5,978 +(1,007 +) +Pension adjustments, net of taxes +(7,852 +) +(34,775 +) +5,709 +Total comprehensive income +$ +61,940 +$ +30,719 +$ +111,231 +See accompanying notes to consolidated financial statements. +A-2 +Table of Contents +CONSOLIDATED STATEMENTS OF OPERATIONS +Fiscal Year +(Thousands of Dollars, Except Per Share Data) +2009 +2008 +2007 +Revenue +$ +1,101,056 +$ +1,220,568 +$ +1,198,972 +Cost of goods sold +663,461 +734,547 +727,041 +Restructuring and other transition costs +5,873 +— +— +Gross profit +431,722 +486,021 +471,931 +Selling, general and administrative expenses +316,378 +345,183 +333,151 +Restructuring and other transition costs +29,723 +— +— +Operating profit +85,621 +140,838 +138,780 +Other expenses (income): +Interest expense +494 +2,850 +2,470 +Interest income +(383 +) +(1,757 +) +(3,134 +) +Other (income) expense +(182 +) +(839 +) +873 +(71 +) +254 +209 +Earnings before income taxes +85,692 +140,584 +138,571 +Income taxes +23,780 +44,763 +45,685 +Net earnings +$ +61,912 +$ +95,821 +$ +92,886 +Net earnings per share (see Note 1): +Basic +$ +1.26 +$ +1.94 +$ +1.75 +Diluted +1.24 +1.90 +1.70 +See accompanying notes to consolidated financial statements. +A-3 +Table of Contents +CONSOLIDATED STATEMENTS OF CASH FLOWS +Fiscal Year +(Thousands of Dollars) +2009 +2008 +2007 +OPERATING ACTIVITIES +Net earnings +$ +61,912 +$ +95,821 +$ +92,886 +Adjustments necessary to reconcile net earnings +to net cash provided by operating activities: +Depreciation +15,932 +18,460 +20,223 +Amortization +1,689 +2,236 +2,568 +Deferred income taxes +(7,845 +) +(43 +) +(5,660 +) +Stock-based compensation expense +8,935 +8,164 +8,316 +Excess tax benefits from stock-based compensation +(462 +) +(1,610 +) +(2,620 +) +Pension expense +11,177 +1,252 +2,884 +Restructuring and other transition costs +35,596 +— +— +Cash payments related to restructuring and other +transition costs +(20,653 +) +— +— +Other +(7,921 +) +13,966 +4,339 +Changes in operating assets and liabilities: +Accounts receivable +9,817 +3,419 +(21,530 +) +Inventories +44,500 +(39,201 +) +22,450 +Other operating assets +3,103 +(386 +) +3,141 +Accounts payable +(7,326 +) +(5,064 +) +3,140 +Income taxes +17,070 +(2,094 +) +(2,524 +) +Other operating liabilities +3,085 +(1,450 +) +(4,325 +) +Net cash provided by operating activities +168,609 +93,470 +123,288 +INVESTING ACTIVITIES +Business acquisitions +(7,954 +) +— +— +Additions to property, plant and equipment +(11,670 +) +(24,126 +) +(17,879 +) +Other +(2,679 +) +(4,133 +) +(4,441 +) +Net cash used in investing activities +(22,303 +) +(28,259 +) +(22,320 +) +FINANCING ACTIVITIES +Net borrowings under revolver +(59,500 +) +59,500 +— +Payments of long-term debt +— +(10,714 +) +(10,713 +) +Payments of capital lease obligations +(5 +) +(12 +) +(26 +) +Cash dividends paid +(21,502 +) +(20,758 +) +(18,391 +) +Purchase of common stock for treasury +(6,566 +) +(76,129 +) +(133,379 +) +Proceeds from shares issued under stock incentive plans +7,867 +7,047 +5,662 +Excess tax benefits from stock-based compensation +462 +1,610 +2,620 +Net cash used in financing activities +(79,244 +) +(39,456 +) +(154,227 +) +Effect of foreign exchange rate changes +3,875 +(12,340 +) +4,683 +Increase (decrease) in cash and cash equivalents +70,937 +13,415 +(48,576 +) +Cash and cash equivalents at beginning of the year +89,502 +76,087 +124,663 +Cash and cash equivalents at end of the year +$ +160,439 +$ +89,502 +$ +76,087 +OTHER CASH FLOW INFORMATION +Interest paid +$ +486 +$ +2,365 +$ +1,916 +Net income taxes paid +7,297 +35,995 +48,336 +See accompanying notes to consolidated financial statements. +A-4 +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +All amounts are in thousands of dollars except share data and elsewhere as noted. +1. Summary of Significant Accounting Policies +NATURE OF OPERATIONS +Wolverine World Wide, Inc. is a leading designer, manufacturer and marketer of a broad range of +quality casual shoes, performance outdoor footwear, apparel, work shoes and boots, and uniform +shoes and boots. The Company’s global portfolio of owned and licensed brands includes: Bates ® , +Cat ® Footwear, Chaco ® , Cushe TM Harley-Davidson ® Footwear, Hush Puppies ® , HyTest ® , +Merrell ® , Patagonia ® Footwear, Sebago ® , Soft Style ® and Wolverine ® . Licensing programs are +utilized to extend the global reach of the Company’s owned brands. The Company also operates a +retail division to market its brands and branded footwear and apparel from other manufacturers; a +leathers division that markets 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-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 2, +2010, the 53-week period ended January 3, 2009 and the 52-week period ended December 29, 2007. +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, legal title has passed to the customer and collectability is +reasonably assured. 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 licensees and distributors. +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 sales returns, historical cash discounts taken and +analysis of credit memorandum activity. +COST OF GOODS SOLD +Cost of goods sold for the Company’s operations include the actual product costs, including inbound +freight charges, purchasing, sourcing, inspection and receiving costs. Warehousing costs are +included in selling, general 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 goods sold. +CASH EQUIVALENTS +Cash equivalents include highly liquid investments with a maturity of three months or less when +purchased. Cash equivalents are stated at cost, which approximates market. +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 for the majority of its customers. +A-5 +Table of Contents +INVENTORIES +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 certain domestic finished goods inventories. Cost is determined using the first-in, first-out +(“FIFO”) method for all raw materials, work-in-process and finished goods inventories in foreign +countries. The FIFO method is also used for all finished goods inventories of the Company’s retail +business, due to the unique nature of those operations and for certain domestic finished goods +inventories. 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 computer +hardware and software, store furniture and fixtures, office furniture and machinery and equipment. +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. Leasehold improvements are depreciated at the +lesser of the estimated useful life or lease term, including reasonably assured lease renewals as +determined at lease inception. +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 and patents. Goodwill and intangible assets deemed to have indefinite lives are not +amortized, but are subject to impairment tests at least annually in accordance with FASB ASC Topic +350, Intangibles – Goodwill and Other . The Company reviews the carrying amounts of goodwill and +other non-amortizable intangible assets at least annually, or when indicators of impairment are +present, by reporting unit to determine if such assets may be impaired. If the carrying amounts of +these assets are not recoverable based upon discounted cash flow and market approach analyses, the +carrying amounts of such assets are reduced by the estimated shortfall of fair value to recorded +value. +Inherent in the development of the present value of future cash flow projections are assumptions +and estimates the Company derives from a review of its operating results, business plans, expected +growth rates, cost of capital and tax rates. The Company also makes certain assumptions about +future economic conditions, interest rates and other market data which it relies upon in +determining the fair value of assets under the discounted cash flow method. Many of the factors +used in assessing fair value are outside the control of the Company, and these assumptions and +estimates can change in future periods. +The market approach is the other primary method used for estimating fair value of a reporting unit. +This approach relies on the market value (based on market capitalization) of companies that are +engaged in the same or a similar line of business. +Estimated aggregate amortization expense for such intangibles for each of the five fiscal years +subsequent to 2009 is as follows: +2010 +2011 +2012 +2013 +2014 +Amortization expense +$ +1,801 +$ +1,005 +$ +294 +$ +141 +$ +74 +Other amortizable intangible assets (principally patents) are amortized using the straight-line +method over their estimated useful lives (periods ranging from two to ten years). Other +amortizable intangible assets are included in other assets on the consolidated balance sheets and +have net carrying amounts of $3,363 and $4,390 for 2009 and 2008, respectively, and accumulated +amortization of $4,860 and $4,433 for 2009 and 2008, respectively. +The Company has performed the required annual impairment tests and has determined that goodwill and +other non-amortizable intangibles were not impaired at January 2, 2010 and January 3, 2009. +A-6 +Table of Contents +The changes in the carrying amount of goodwill and other non-amortizable intangibles for the years +ended January 2, 2010 and January 3, 2009 are as follows: +Goodwill +Trademarks +Total +Balance at December 29, 2007 +$ +39,573 +$ +8,936 +$ +48,509 +Intangibles acquired +— +338 +338 +Intangibles disposed +— +(17 +) +(17 +) +Foreign currency translation effects +(7,263 +) +— +(7,263 +) +Balance at January 3, 2009 +$ +32,310 +$ +9,257 +$ +41,567 +Intangibles acquired +5,464 +6,969 +12,433 +Foreign currency translation effects +2,198 +— +2,198 +Balance at January 2, 2010 +$ +39,972 +$ +16,226 +$ +56,198 +IMPAIRMENT 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 asset or asset group to the +future undiscounted net cash flows expected to be generated by the asset 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. +RETIREMENT BENEFITS +The determination of the obligation and expense for retirement benefits is dependent on the +selection of certain actuarial assumptions used in calculating such amounts. These assumptions +include, among others, the discount rate, expected long-term rate of return on plan assets and +rates of increase in compensation. These assumptions are reviewed with the Company’s actuaries and +updated annually based on relevant external and internal factors and information, including but not +limited to, long-term expected asset returns, rates of termination, regulatory requirements and +plan changes. See Note 6 to the consolidated financial statements for additional information. +STOCK-BASED COMPENSATION +The Company accounts for stock-based compensation in accordance with the fair value recognition +provisions of FASB ASC Topic 718, Compensation – Stock Compensation (“ASC 718”). The Company +recognized compensation costs of $8,935, $8,164 and $8,316 and related income tax benefits of +$2,321, $1,699 and $2,092 for grants under its stock-based compensation plans in the statements of +operations for the years ended January 2, 2010, January 3, 2009 and December 29, 2007, +respectively. +Stock-based compensation expense recognized in the consolidated condensed statements of operations +for the years ended January 2, 2010, January 3, 2009 and December 29, 2007 has been reduced for +estimated forfeitures, as it is based on awards ultimately expected to vest. ASC 718 requires +forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods +if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical +experience. +The Company estimated the fair value of employee stock options on the date of grant using the +Black-Scholes model. The estimated weighted-average fair value for each option granted was $4.40, +$5.68 and $6.87 per share in 2009, 2008 and 2007, respectively, with the following weighted-average +assumptions: +2009 +2008 +2007 +Expected market price volatility (1) +34.8 +% +28.9 +% +23.3 +% +Risk-free interest rate (2) +1.6 +% +2.5 +% +4.8 +% +Dividend yield (3) +1.8 +% +1.6 +% +1.4 +% +Expected term (4) +4 years +4 years +4 years +(1) +Based on historical volatility of the Company’s common stock. The expected volatility is based on the +daily percentage change in the price of the stock over the four years prior to the grant. +(2) +Represents the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. +(3) +Represents the Company’s cash dividend yield for the expected term. +(4) +Represents the period of time that options granted are expected to be outstanding. As part of the +determination of the expected term, the Company concluded that all employee groups exhibit similar exercise +and post-vesting termination behavior. +A-7 +Table of Contents +The Company issued 1,217,244 shares of common stock in connection with the exercise of stock +options and restricted stock grants made during the fiscal year ended January 2, 2010. The Company +cancelled 58,979 shares of common stock issued under restricted stock awards as a result of +forfeitures during 2009. +INCOME TAXES +The provision for income taxes is based on the earnings reported in the consolidated financial +statements. A deferred income tax asset or liability is determined by applying currently enacted +tax laws and rates to the cumulative temporary differences between the carrying values of assets +and liabilities for financial statement and income tax purposes. The Company recognizes interest +and penalties related to unrecognized tax benefits through interest expense and income tax expense, +respectively. +EARNINGS PER SHARE +The following table sets forth the computation of basic and diluted earnings per share: +2009 +2008 +2007 +Numerator: +Net earnings +$ +61,912 +$ +95,821 +$ +92,886 +Adjustment for earnings allocated to +nonvested restricted common stock +(1,036 +) +(996 +) +(1,123 +) +Net earnings used in calculating basic +earnings per share +60,876 +94,825 +91,763 +Adjustment for earnings reallocated to +nonvested restricted common stock +8 +18 +26 +Net earnings used in calculating +diluted earnings per share +$ +60,884 +$ +94,843 +$ +91,789 +Denominator: +Weighted average shares outstanding +49,192,662 +49,381,789 +53,140,581 +Adjustment for nonvested restricted +common stock +(921,715 +) +(513,063 +) +(641,088 +) +Shares used in calculating basic +earnings per share +48,270,947 +48,868,726 +52,499,493 +Effect of dilutive stock options +708,485 +1,151,565 +1,586,803 +Shares used in calculating diluted +earnings per share +48,979,432 +50,020,291 +54,086,296 +Net earnings per share: +Basic +$ +1.26 +$ +1.94 +$ +1.75 +Diluted +$ +1.24 +$ +1.90 +$ +1.70 +Options to purchase 2,353,412 shares of common stock in 2009, 1,273,676 shares in 2008 and +546,247 shares in 2007 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 anti-dilutive. +Effective January 4, 2009, the Company implemented FASB ASC Topic 260, Earnings Per Share (“ASC +260”). ASC 260 addresses whether instruments granted in share-based payment transactions are +participating securities prior to vesting, and therefore need to be included in the earnings +allocation in computing earnings per share under the two-class method. Under the guidance in ASC +260, unvested share-based payment awards that contain nonforfeitable rights to dividends or +dividend equivalents, whether paid or unpaid, are participating securities, as defined, and +therefore should be included in the computation of basic and diluted earnings per share using the +two-class method. Certain of the Company’s restricted stock awards allow the holder to receive a +nonforfeitable dividend equivalent. The impact of adopting the standard reduced previously +reported basic net earnings per share by $0.02 and had no impact on diluted net earnings per share +for the years ended January 3, 2009 and December 29, 2007. +FOREIGN CURRENCY +For most of 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 +each 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 in 2009, 2008 and 2007. +A-8 +Table of Contents +FINANCIAL INSTRUMENTS AND RISK MANAGEMENT +The Company follows FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), which +provides a consistent definition of fair value, focuses on exit price, prioritizes the use of +market-based inputs over entity-specific inputs for measuring fair value and establishes a +three-tier hierarchy for fair value measurements. As required, effective January 3, 2009 and +January 2, 2010, the Company adopted the provisions of ASC 820 for financial assets and liabilities +and nonfinancial assets and liabilities, respectively. This topic requires fair value measurements +to be classified and disclosed in one of the following three categories: +Level 1: +Quoted prices (unadjusted) in active markets for identical assets and liabilities. +Level 2: +Either direct or indirect inputs, other than quoted prices included within +Level 1, which are observable for similar assets or liabilities. +Level 3: +Valuations derived from valuation techniques in which one or more +significant inputs are unobservable. +The Company’s financial instruments consist of cash and cash equivalents, accounts and notes +receivable, accounts payable, borrowings under the revolving credit agreement and long-term debt. +The carrying amounts of the Company’s financial instruments approximate their fair value. As of +January 2, 2010 the carrying value and fair value of the Company’s fixed rate long-term debt was +$1,615 and $1,658, respectively. There was no long-term debt outstanding at January 3, 2009. 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. +As of January 2, 2010 and January 3, 2009, a liability of $2,625 and an asset of $3,246, +respectively, have been recognized for the fair value of the Company’s foreign currency forward +exchange contracts. In accordance with ASC 820, these assets and liabilities fall within Level 2 +of the fair value hierarchy. The prices for the financial instruments are determined using prices +for recently-traded financial instruments with similar underlying terms as well as directly or +indirectly observable inputs. The Company did not have any additional assets or liabilities that +were measured at fair value on a recurring basis at January 2, 2010. +The Company follows FASB ASC Topic 815, Derivatives and Hedging , which is intended to improve +transparency in financial reporting and requires that all derivative instruments be recorded on the +consolidated balance sheets at fair value by establishing criteria for designation and +effectiveness of hedging relationships. The Company utilizes foreign currency forward exchange +contracts to manage the volatility associated with U.S. dollar inventory purchases made by non-U.S. +wholesale operations in the normal course of business. At January 2, 2010 and January 3, 2009, +foreign exchange contracts with a notional value of $69,618 and $63,129, respectively, were +outstanding to purchase U.S. dollars with maturities ranging up to 308 days. These contracts have +been designated as cash flow hedges. +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 goods +sold caption of the consolidated condensed statements of operations. Hedge ineffectiveness was not +material to the Company’s consolidated condensed financial statements in 2009, 2008, or 2007. 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. +For the fiscal years ended January 2, 2010, January 3, 2009 and December 29, 2007, the Company +recognized a net loss of $547, a net gain of $434 and a net loss of $2,615, respectively, in +accumulated other comprehensive income (loss) related to the effective portion of its foreign +exchange contracts. For the fiscal years ended January 2, 2010, January 3, 2009 and December 29, +2007, the Company reclassified a loss of $2,996, and gains of $2,132 and $1,894, respectively, from +accumulated other comprehensive income (loss) into cost of goods sold related to the effective +portion of its foreign exchange contracts designated and qualifying as cash flow hedges. +COMPREHENSIVE INCOME (LOSS) +Comprehensive income (loss) represents net earnings and any revenue, expenses, gains and losses +that, under accounting principles generally accepted in the United States, are excluded from net +earnings and recognized directly as a component of stockholders’ equity. +A-9 +Table of Contents +The ending accumulated other comprehensive income (loss) is as follows: +2009 +2008 +Foreign currency translation adjustments +$ +14,477 +$ +(872 +) +Change in fair value of foreign exchange contracts, +net of taxes +(2009 – $1,578; 2008 – $(1,904)) +(3,546 +) +3,923 +Pension adjustments, net of taxes +(2009 – $28,459; 2008 – $24,231) +(53,737 +) +(45,885 +) +Accumulated other comprehensive income (loss) +$ +(42,806 +) +$ +(42,834 +) +SUBSEQUENT EVENTS +In preparing these financial statements, the Company has evaluated events and transactions for +potential recognition or disclosure through March 3, 2010, the date financial statements were +issued. +RECLASSIFICATIONS +Certain amounts on the consolidated condensed financial statements previously reported in 2008 and +2007 have been reclassified to conform to the presentation used in 2009. These reclassifications +did not affect net earnings. +2. Inventories +Inventories of $48,800 at January 2, 2010 and $65,000 at January 3, 2009 have been valued using the +LIFO method. If the FIFO method had been used, inventories would have been $9,838 and $11,854 +higher than reported at January 2, 2010 and January 3, 2009, respectively. +3. Debt +Long-term debt consists of the following obligations: +2009 +2008 +Notes payable +$ +1,615 +$ +— +Other +— +5 +1,615 +5 +Less current maturities +538 +5 +Total long-term debt +$ +1,077 +$ +— +In 2009, the Company entered into a $1,615 note payable in connection with the Cushe TM +acquisition. The note is payable over three years at a fixed interest rate of 4.5%. +The Company has an unsecured revolving credit agreement that allows for borrowings up to $150,000, +subject to increase or decrease as specified in the credit agreement. This agreement, which +expires in July 2010, contains restrictive covenants that, among other things, require the Company +to maintain certain financial ratios related to debt to total capital and minimum fixed charge +coverage. At January 2, 2010, the Company was in compliance with all restrictive covenants. +Interest is paid at a variable rate based on one of the following options elected by the Company: +prime, LIBOR, or money market rate plus applicable spread. The Company had zero drawn on the +revolving credit facility at January 2, 2010. At January 3, 2009, $59,500 was outstanding under +the revolving credit agreement, which the Company considered short-term in nature. +The Company had commercial letters of credit outstanding of $450 and $2,466 at January 2, 2010 and +January 3, 2009, respectively. +Interest costs of $158 in 2009, $227 in 2008 and $237 in 2007 were capitalized in connection with +various capital improvement and computer hardware and software installation projects. +A-10 +Table of Contents +4. Leases +The Company leases machinery, equipment, and certain warehouse, office and retail store space under +operating lease agreements that expire at various dates through 2023. Certain leases contain +renewal provisions and generally require the Company to pay utilities, insurance, taxes and other +operating expenses. At January 2, 2010, minimum rental payments due under all non-cancelable +leases were as follows: +2010 +2011 +2012 +2013 +2014 +Thereafter +Minimum rental payments +$ +16,107 +$ +14,241 +$ +11,852 +$ +10,715 +$ +9,794 +$ +52,168 +Rental expense under all operating leases, consisting primarily of minimum rentals, totaled $19,187 +in 2009, $18,255 in 2008 and $14,681 in 2007. +5. Capital Stock +The Company has 2,000,000 authorized shares of $1 par value preferred stock, of which none was +issued or outstanding as of January 2, 2010 or January 3, 2009. The Company has designated 150,000 +shares of preferred stock as Series A junior participating preferred stock and 500,000 shares of +preferred stock as Series B junior participating preferred stock for possible future issuance. +As of January 2, 2010, the Company had stock options outstanding or available for grant under stock +incentive plans adopted in 1993, 1995, 1997, 1999, 2001, 2003 and 2005. Shares of restricted stock +may also be granted under each of these plans, with the exception of the 1993, 1995 and 1997 plans. +As of January 2, 2010, the Company had approximately 1,712,056 stock incentive units (stock +options, stock appreciation rights, restricted stock, restricted stock units and common stock) +available for issuance under the Stock Incentive Plan of 2005. Under the provisions of the Stock +Incentive Plan of 2005, each option granted counts as one stock incentive unit and all other awards +granted, including restricted stock, counts as two stock incentive units. In addition, as of +January 2, 2010, the Company had approximately 255,238 stock incentive units (stock options, +restricted stock and common stock) available for grant under the balance of its other plans. +Options granted under each plan have an exercise price equal to the fair market value of the +underlying stock on the grant date, expire no later than ten years from the grant date, and +generally vest over three years. Restricted 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 during the vesting period (except for certain transfers for estate planning +purposes for certain officers), and a requirement to forfeit all or a certain portion of the award +upon certain terminations of employment or upon failure to achieve performance criteria in certain +instances. These restrictions typically lapse over a three- to five-year period from the date of +the award. The Company has elected to recognize expense for these stock-based incentive plans +ratably over the vesting term on a straight-line basis. Certain option and restricted share awards +provide for accelerated vesting under various scenarios, including retirement and upon a change in +control of the Company. With regard to acceleration of vesting upon retirement, employees of +eligible retirement age are vested in accordance with plan provisions and applicable stock option +and restricted stock agreements. The Company issues shares to plan participants upon exercise or +vesting of stock-based incentive awards from either authorized, but unissued, shares or treasury +shares. +A-11 +Table of Contents +A summary of the transactions under the stock option plans is as follows: +Average +Weighted- +Remaining +Shares +Average +Contractual +Aggregate +Under +Exercise +Term +Intrinsic +Option +Price +(Years) +Value +Outstanding at December 30, 2006 +4,574,945 +$ +16.53 +5.6 +$ +54,873,000 +Granted +623,577 +30.16 +Exercised +(551,020 +) +14.67 +Cancelled +(59,257 +) +27.73 +Outstanding at December 29, 2007 +4,588,245 +$ +18.46 +5.4 +$ +31,096,000 +Granted +845,843 +25.21 +Exercised +(713,048 +) +15.46 +Cancelled +(148,656 +) +25.36 +Outstanding at January 3, 2009 +4,572,384 +$ +19.95 +5.6 +$ +16,155,438 +Granted +863,017 +17.55 +Exercised +(582,318 +) +13.56 +Cancelled +(233,737 +) +20.91 +Outstanding at January 2, 2010 +4,619,346 +$ +20.17 +5.8 +$ +34,212,280 +Estimated forfeitures +(6,389 +) +Vested or expected to vest at +January 2, 2010 +4,612,957 +$ +20.17 +5.8 +$ +34,159,759 +Nonvested at January 2, 2010 +and expected to vest +(1,238,396 +) +Exercisable at January 2, 2010 +3,374,561 +$ +19.75 +4.8 +$ +26,437,862 +The total pretax intrinsic value of options exercised during the year ended January 2, 2010 was +$5,745. As of January 2, 2010, there was $2,329 of unrecognized compensation cost related to stock +option awards that is expected to be recognized over a weighted-average period of 1.2 years. +The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, +based on the Company’s closing stock price of $27.22 as of December 31, 2009, which would have been +received by the option holders had all option holders exercised in-the-money options as of that +date. The total number of in-the-money options exercisable as of January 2, 2010 was 2,921,804. +As of January 3, 2009, 3,467,874 outstanding options were exercisable, and the weighted-average +exercise price was $17.75. +A summary of the nonvested restricted shares issued under stock award plans is as follows: +Weighted- +Average +Grant Date +Shares +Fair Value +Nonvested at December 30, 2006 +775,810 +$ +17.09 +Granted +146,950 +30.17 +Vested +(335,695 +) +14.81 +Forfeited +(13,684 +) +27.64 +Nonvested at December 29, 2007 +573,381 +$ +21.52 +Granted +179,755 +24.85 +Vested +(234,581 +) +18.36 +Forfeited +(46,063 +) +24.08 +Nonvested at January 3, 2009 +472,492 +$ +24.11 +Granted +636,659 +17.28 +Vested +(145,797 +) +20.31 +Forfeited +(58,979 +) +20.45 +Nonvested at January 2, 2010 +904,375 +$ +20.14 +A-12 +Table of Contents +As of January 2, 2010, there was $4,792 of unrecognized compensation cost related to nonvested +share-based compensation arrangements granted under restricted stock award plans. That cost is +expected to be recognized over a weighted-average period of 2 years. The total fair value of +shares vested during the year ended January 2, 2010 was $2,761. +6. Retirement Plans +The Company has non-contributory, defined benefit pension plans covering a majority of its domestic +employees. The Company’s principal defined benefit pension plan provides benefits based on the +employee’s years of service and final average earnings (as defined in the plan), while the other +plan provides benefits at a fixed rate per year of service. +The Company has a Supplemental Executive Retirement Plan (the “SERP”) for certain current and +former employees that entitles a participating employee to receive payments from the Company +following retirement based on the employee’s 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 $35,405 at January 2, 2010 and $35,531 at January 3, 2009 +that are intended to fund deferred compensation benefits under the SERP and deferred compensation +agreements. +The Company has a defined contribution 401(k) plan covering substantially all domestic employees +that provides for Company contributions based on earnings. The Company recognized expense for its +defined contribution plan of $1,919 in 2009, $2,245 in 2008 and $2,078 in 2007. +The Company has certain defined contribution plans at foreign subsidiaries. Contributions to these +plans were $954 in 2009, $1,194 in 2008 and $1,327 in 2007. The Company also has a defined benefit +plan at a foreign location that provides for retirement benefits based on years of service. The +obligation recorded under this plan was $2,778 at January 2, 2010 and $2,620 at January 3, 2009 +which is recognized as a deferred compensation liability on the accompanying balance sheet. +Effective in 2007, the Company adopted the measurement date provisions of FASB ASC Topic 715, +Compensation – Retirement Benefits, requiring the measurement date of the defined benefit pension +plans to correspond with the Company’s fiscal year end (the previous measurement date was September +30). As a result, the Company recognized a reduction of $1,642 in retained earnings and a +reduction in accumulated other comprehensive income (loss) of $6,338. +A-13 +Table of Contents +The following summarizes the status of and changes in the Company’s pension assets and related +obligations for its pension plans (which include the Company’s defined benefit pension plans and +the SERP) as of: +2009 +2008 +Change in projected benefit obligations: +Projected benefit obligations at beginning of the year +$ +174,970 +$ +175,091 +Service cost pertaining to benefits earned during the year +4,543 +4,859 +Interest cost on projected benefit obligations +12,232 +11,413 +Actuarial (gains) losses +30,521 +(5,309 +) +Plan amendment +— +220 +Special termination benefits +139 +— +Benefits paid to plan participants +(10,735 +) +(11,304 +) +Projected benefit obligations at end of the year +$ +211,670 +$ +174,970 +Change in fair value of pension assets: +Fair value of pension assets at beginning of the year +$ +112,049 +$ +167,159 +Actual return (loss) on plan assets +19,464 +(48,879 +) +Company contributions +4,714 +5,073 +Benefits paid to plan participants +(10,735 +) +(11,304 +) +Fair value of pension assets at end of the year +$ +125,492 +$ +112,049 +Funded status +$ +(86,178 +) +$ +(62,921 +) +Amounts recognized in the consolidated balance sheets: +Current liabilities +$ +(2,044 +) +$ +(28,144 +) +Non current liabilities +(84,134 +) +(34,777 +) +Net amount recognized +$ +(86,178 +) +$ +(62,921 +) +Amounts recognized in accumulated other comprehensive income (loss), +net of tax: +Unrecognized net actuarial loss +$ +(53,165 +) +$ +(44,707 +) +Unrecognized prior service cost +(572 +) +(1,178 +) +Net amount recognized +$ +(53,737 +) +$ +(45,885 +) +Funded status of pension plans and SERP (supplemental): +Funded status of qualified defined benefit plans and SERP +$ +(86,178 +) +$ +(62,921 +) +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 +33,731 +33,633 +Net funded status of pension plans and SERP (supplemental) +$ +(52,447 +) +$ +(29,288 +) +Information for pension plans with an accumulated benefit obligation in excess of plan assets: +2009 +2008 +Projected benefit obligations +$ +211,670 +$ +174,970 +Accumulated benefit obligations +202,428 +165,432 +Fair value of plan assets +125,492 +112,049 +The accumulated benefit obligations for all defined benefit pension plans and the SERP were +$202,428 at January 2, 2010 and $165,432 at January 3, 2009. +A-14 +Table of Contents +The following is a summary of net pension and SERP cost recognized by the Company: +2009 +2008 +2007 +Service cost pertaining to benefits earned during the year +$ +(4,543 +) +$ +(4,859 +) +$ +(4,849 +) +Interest cost on projected benefit obligations +(12,233 +) +(11,413 +) +(11,011 +) +Expected return on pension assets +10,911 +13,914 +14,024 +Net amortization loss +(9,275 +) +(3,967 +) +(5,569 +) +Curtailment (gain) +(612 +) +— +— +Special termination benefit charge +(139 +) +— +— +Net pension cost +$ +(15,891 +) +$ +(6,325 +) +$ +(7,405 +) +The prior service cost and actuarial loss included in accumulated other comprehensive income (loss) +and expected to be recognized in net periodic pension cost during 2010 is $258 ($168, net of tax) +and $10,046 ($6,530, net of tax), respectively. Expense for qualified defined benefit pension +plans was $12,871 in 2009, $3,601 in 2008 and $4,707 in 2007. +2009 +2008 +Weighted-average assumptions used to determine benefit obligations at fiscal year end: +Discount rate +6.17 +% +7.25 +% +Rate of compensation increase +3.25 +% +3.50 +% +Weighted average assumptions used to determine net periodic benefit cost for the years ended: +Discount rate +7.25 +% +6.70 +% +Expected long-term rate of return on plan assets +8.50 +% +8.50 +% +Rate of compensation increase +3.50 +% +3.50 +% +Unrecognized net actuarial losses exceeding certain corridors are amortized over a five-year +period, unless the minimum amortization method based on average remaining service periods produces +a higher amortization. The Company utilizes a bond matching calculation to determine the discount +rate. A hypothetical bond portfolio is created based on a presumed purchase of bonds with +maturities that match the plan’s expected future cash outflows. The discount rate is the resulting +yield of the hypothetical bond portfolio. The discount rate is used in the calculation of the year +end pension liability and pension expense for the subsequent year. +The long-term rate of return is based on overall market expectations for a balanced portfolio with +an asset mix similar to the Company’s, utilizing historic returns for broad market and fixed income +indices. +2009 +2008 +$ +% +$ +% +Weighted average asset allocations at +fiscal year end by asset category are +as follows: +Equity securities +85,026 +67.8 +% +73,776 +65.8 +% +Fixed income investments +36,302 +29.0 +% +35,585 +31.8 +% +Cash and money market investments +4,164 +3.2 +% +2,688 +2.4 +% +Fair value of plan assets +125,492 +100.0 +% +112,049 +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. +In accordance with ASC 820, these assets fall within Level 1 of the fair value hierarchy. Fair +value is determined using quoted prices (unadjusted) in active markets for identical assets. +The Company expects to contribute $10,466 to its qualified defined benefit pension plans and $1,988 +to the SERP in 2010. +A-15 +Table of Contents +Expected benefit payments for the five years subsequent to 2009 and the sum of the five years +following those are as follows: +2010 +2011 +2012 +2013 +2014 +2015-2019 +Expected benefit payments +$ +11,061 +$ +11,357 +$ +11,493 +$ +12,015 +$ +13,055 +$ +73,490 +7. Income Taxes +Earnings before income taxes consist of the following: +2009 +2008 +2007 +United States +$ +51,167 +$ +82,604 +$ +87,648 +Foreign +34,525 +57,980 +50,923 +$ +85,692 +$ +140,584 +$ +138,571 +The provisions for income taxes consist of the following: +2009 +2008 +2007 +Current expense: +Federal +$ +11,492 +$ +26,053 +$ +33,442 +State +1,596 +483 +977 +Foreign +17,547 +18,270 +16,926 +Deferred credit +(6,855 +) +(43 +) +(5,660 +) +$ +23,780 +$ +44,763 +$ +45,685 +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: +2009 +2008 +2007 +Income taxes at statutory rate +$ +29,992 +$ +49,204 +$ +48,500 +State income taxes, net of federal income tax +324 +375 +302 +Nontaxable earnings of foreign affiliates +(2,981 +) +(1,555 +) +(2,026 +) +Research and development credits +(700 +) +(875 +) +(877 +) +Foreign earnings taxed at rates differing from +the U.S. statutory rate +(8,444 +) +(3,352 +) +(1,439 +) +Tax reserve adjustments +4,908 +244 +670 +Other +681 +722 +555 +$ +23,780 +$ +44,763 +$ +45,685 +Significant components of the Company’s deferred income tax assets and liabilities as of the end of +2009 and 2008 are as follows: +2009 +2008 +Deferred income tax assets: +Accounts receivable and inventory valuation allowances +$ +5,210 +$ +5,631 +Deferred compensation accruals +2,466 +2,825 +Accrued pension costs +31,584 +24,231 +Net operating loss carryforwards +1,026 +646 +Other amounts not deductible until paid +14,246 +7,153 +Total gross deferred income tax assets +54,532 +40,486 +Less valuation allowance +(1,026 +) +(646 +) +Net deferred income tax assets +53,506 +39,840 +Deferred income tax liabilities: +Tax depreciation in excess of book depreciation +(4,107 +) +(4,484 +) +Prepaid pension costs +(994 +) +(2,173 +) +Other +(836 +) +(1,742 +) +Total deferred income tax liabilities +(5,937 +) +(8,399 +) +Net deferred income tax assets +$ +47,569 +$ +31,441 +A-16 +Table of Contents +The valuation allowance for deferred tax assets as of January 2, 2010, and January 3, 2009, was +$1,026 and $646, respectively. The net change in the total valuation allowance for each of the +years ended January 2, 2010, and January 3, 2009, was $380 and $646, respectively. The valuation +allowance was related to foreign net operating loss carryforwards that, in the judgment of +management, are not more likely than not to be realized. The ultimate realization of the net +operating loss carryforwards depends on the generation of future taxable income in the foreign tax +jurisdictions. +At January 2, 2010, the Company has foreign net operating loss carryforwards of $3,634, which are +available for an unlimited carryforward period to offset future foreign taxable income. +The following table summarizes the activity related to the Company’s unrecognized tax benefits: +2009 +2008 +2007 +Beginning balance +$ +3,171 +$ +2,927 +$ +2,415 +Increases related to current year tax positions +5,225 +244 +1,001 +Release due to settlements of audits +— +— +(489 +) +Ending balance +$ +8,396 +$ +3,171 +$ +2,927 +The Company had unrecognized tax benefits of $7,588 as of January 2, 2010, $2,646 as of January 3, +2009 and $2,382 as of December 29, 2007, that if recognized currently would reduce the annual +effective tax rate. The Company recognizes interest and penalties related to unrecognized tax +benefits through interest expense and income tax expense, respectively. Interest accrued related +to unrecognized tax benefits was $681 as of January 2, 2010, $553 as of January 3, 2009 and $282 as +of December 29, 2007. +The Company is subject to periodic audits by domestic and foreign tax authorities. Currently, the +Company is undergoing routine periodic audits in both domestic and foreign tax jurisdictions. It +is reasonably possible that the amounts of unrecognized tax benefits could change in the next 12 +months as a result of the audits; however, any payment of tax is not expected to be significant to +the consolidated financial statements. +For the majority of tax jurisdictions, the Company is no longer subject to U.S. federal, state and +local, or non-U.S. income tax examinations by tax authorities for years before 2005. +No provision has been made for U.S. federal and state income taxes or foreign taxes that may result +from future remittances of the remaining undistributed earnings of foreign subsidiaries of $163,664 +at January 2, 2010, as the Company expects such earnings will remain invested overseas +indefinitely. At January 3, 2009, undistributed foreign earnings were $169,600. +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 U.S. 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 adverse effect on the Company’s consolidated financial position, results +of operations or cash flows. +The Company is involved in routine litigation incidental to its business and is a party to legal +actions and claims, including, but not limited to, those related to employment and intellectual +property. Some of the legal proceedings include claims for compensatory as well as punitive +damages. While the final outcome of these matters cannot be predicted with certainty, considering, +among other things, the meritorious legal defenses available and liabilities that have been +recorded along with applicable insurance, it is currently the opinion of the Company’s management +that these items will not have a material adverse effect on the Company’s financial position, +results of operations or cash flows. +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 require +the Company to indemnify and reimburse the third parties for costs, including but not limited to +adverse judgments in lawsuits, 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. +A-17 +Table of Contents +The Company has future minimum royalty and advertising obligations due under the terms of certain +licenses held by the Company. These minimum future obligations are as follows: +2010 +2011 +2012 +2013 +2014 +Minimum royalties +$ +1,544 +$ +1,772 +$ +970 +$ +999 +$ +1,029 +Minimum advertising +2,208 +2,275 +2,343 +2,413 +2,486 +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 $2,861, $3,198 and +$3,456 for 2009, 2008 and 2007, respectively. +The terms of certain license agreements also require the Company to make advertising expenditures +based on the level of sales. In accordance with these agreements, the Company incurred advertising +expense of $2,682, $3,018 and $3,508 for 2009, 2008 and 2007, respectively. +9. Business Segments +The Company has one reportable segment that is engaged in manufacturing, sourcing, marketing, +licensing, and distributing branded footwear, apparel and accessories to the retail sector. +Revenue earned by operation of this segment is derived from the sale of branded footwear and +apparel to external customers as well as royalty income from the licensing of the Company’s +trademarks and brand names to licensees and distributors. The operating segments aggregated into +the branded footwear, apparel and licensing segment manufacture or source, market and distribute +products in a similar manner. Branded footwear, apparel and licensed products are distributed +through wholesale channels and under licensing and distributor arrangements. +The other business units in the following tables consist of the Company’s retail, leather and +pigskin procurement operations. These other operations do not collectively form a reportable +segment because their respective operations are dissimilar and they do not meet the quantitative +requirements. The Company operated 83 retail stores in North America, 5 retail stores in the +United Kingdom and 23 consumer-direct internet sites at January 2, 2010 that sell Company-branded +products, as well as footwear, apparel and accessory brands owned by unaffiliated companies. The +other business units distribute products through retail and wholesale channels. +The Company measures segment profits as earnings before income taxes. The accounting policies used +to determine profitability and total assets of the branded footwear, apparel and licensing segment +and other business units are the same as disclosed in Note 1. +Business segment information is as follows: +2009 +Branded +Footwear, +Apparel +Other +and Licensing +Businesses +Corporate +Consolidated +Revenue +$ +991,168 +$ +109,888 +$ +— +$ +1,101,056 +Intersegment sales +55,983 +3,019 +— +59,002 +Interest (income) expense – net +8,893 +1,159 +(9,941 +) +111 +Depreciation expense +6,501 +3,035 +6,396 +15,932 +Earnings (loss) before income taxes +116,568 +(8,092 +) +(22,784 +) +85,692 +Total assets +499,091 +34,036 +174,806 +707,933 +Additions to property, plant and equipment +3,240 +3,712 +4,718 +11,670 +A-18 +Table of Contents +2008 +Branded +Footwear, +Apparel +Other +and Licensing +Businesses +Corporate +Consolidated +Revenue +$ +1,106,081 +$ +114,487 +$ +— +$ +1,220,568 +Intersegment sales +47,386 +3,542 +— +50,928 +Interest (income) expense – net +9,650 +1,102 +(9,659 +) +1,093 +Depreciation expense +6,823 +3,768 +7,869 +18,460 +Earnings (loss) before income taxes +158,615 +3,294 +(21,325 +) +140,584 +Total assets +483,041 +57,049 +124,690 +664,780 +Additions to property, plant and equipment +11,443 +4,654 +8,029 +24,126 +2007 +Branded +Footwear, +Apparel +Other +and Licensing +Businesses +Corporate +Consolidated +Revenue +$ +1,099,205 +$ +99,767 +$ +— +$ +1,198,972 +Intersegment sales +45,603 +2,616 +— +48,219 +Interest (income) expense – net +9,578 +1,128 +(11,370 +) +(664 +) +Depreciation expense +9,660 +3,621 +6,942 +20,223 +Earnings (loss) before income taxes +145,686 +2,338 +(9,453 +) +138,571 +Total assets +491,926 +52,018 +94,434 +638,378 +Additions to property, plant and equipment +7,313 +3,380 +7,186 +17,879 +Geographic information, based on shipping destination, related to revenue from external customers +included in the consolidated statements of operations is as follows: +2009 +2008 +2007 +United States +$ +690,269 +$ +729,826 +$ +730,654 +Foreign countries: +Europe +198,487 +243,701 +250,428 +Canada +89,409 +90,789 +86,339 +Other +122,891 +156,252 +131,551 +Total from foreign countries +410,787 +490,742 +468,318 +$ +1,101,056 +$ +1,220,568 +$ +1,198,972 +The Company’s long-lived assets (primarily property, plant and equipment) are as follows: +2009 +2008 +United States +$ +68,883 +$ +82,072 +Foreign countries +8,815 +8,454 +$ +77,698 +$ +90,526 +The Company does not believe that it is dependent upon any single customer because no customer +accounts for more than 10% of consolidated revenue. +The Company sources approximately 93% (based on pairs) of its footwear products from unrelated +suppliers located primarily in the Asia-Pacific region. The remainder is produced in Company-owned +manufacturing facilities in the United States and the Dominican Republic. All 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. +Revenue derived from the branded footwear, apparel and licensing segment accounted for +approximately 90% of revenue in 2009, 91% in 2008 and 92% in 2007. No other product groups account +for more than 10% of +consolidated revenue. +A-19 +Table of Contents +10. Restructuring and Other Transition Costs +On January 7, 2009, the Board of Directors of the Company approved a strategic restructuring plan +designed to create significant operating efficiencies, improve the Company’s supply chain and +create a stronger global platform. On October 7, 2009, the Company announced that two initiatives +in its restructuring plan had been expanded to enable the consolidation of two domestic +manufacturing facilities into one and to finalize realignment in certain of the Company’s product +creation organizations. The Company incurred restructuring and other transition costs of $35,596 +($25,700 on an after-tax basis), or $0.53 per diluted share for the year ended January 2, 2010. +The following is a summary of the restructuring and other transition costs recorded as of January +2, 2010: +Year Ended +January 2, 2010 +Restructuring +$ +29,083 +Other transition costs +6,513 +Total restructuring and other transition costs +$ +35,596 +Restructuring +The Company incurred restructuring charges of $29,083 ($20,998 on an after-tax basis) for the year +ended January 2, 2010. +The following is a summary of the activity with respect to a reserve established by the Company in +connection with the restructuring plan, by category of costs: +Non-cash +Severance and +charges related +employee +to property and +Facility exit +Other related +related +equipment +costs +restructuring +Total +Balance at January 3, 2009 +$ +— +$ +— +$ +— +$ +— +$ +— +Charges incurred +15,391 +7,964 +2,473 +3,255 +29,083 +Amounts paid or utilized +(11,525 +) +(7,964 +) +(988 +) +(2,680 +) +(23,157 +) +Balance at January 2, 2010 +$ +3,866 +$ +— +$ +1,485 +$ +575 +$ +5,926 +Other Transition Costs +Incremental costs incurred related to the restructuring plan that do not qualify as restructuring +under the provisions of FASB ASC Topic 420, Exit or Disposal Cost Obligations , have been included +in the Company’s consolidated condensed statements of operations on the line items titled +“Restructuring and other transition costs”. These primarily include costs related to closure of +facilities, new employee training and transition to outsourced services. All costs included in +this caption were solely related to the transition and implementation of the restructuring plan and +do not include ongoing business operating costs. Other transition costs for the year ended January +2, 2010, were $6,513 ($4,702 on an after-tax basis). +11. Business Acquisitions +The Company accounted for the following acquisitions under the provisions of FASB ASC Topic 805, +Business Combinations . +On January 8, 2009, the Company announced the acquisition of the Cushe TM footwear brand. +The purchase price consisted of $1,615 cash, a $1,615 note payable over three years and contingent +consideration of $918. The Company acquired assets valued at $299, consisting primarily of +property, plant and equipment, inventory, and assumed operating liabilities valued at $317, +resulting in goodwill and intangibles of $4,167 at January 2, 2010. Amounts relating to the +acquisition are subject to changes in foreign currency exchange rates. +On January 22, 2009, the Company acquired the Chaco ® footwear brand and certain assets for cash of +$6,910 and assumed operating liabilities valued at $4,662. The Company acquired assets valued at +$3,912, consisting primarily of accounts receivable and inventory. The purchase resulted in +goodwill and intangibles recorded at January 2, 2010 of $7,660. +A-20 +Table of Contents +Using the purchase method of accounting, the purchase price in each of these acquisitions is +allocated to the assets acquired and liabilities assumed based on their estimated fair values as of +the effective date of the acquisition. The excess purchase price over the assets and liabilities +is recorded as goodwill. The purchase price allocation for each acquisition was finalized during +the third quarter of 2009 and a final determination of all purchase accounting adjustments was made +upon finalization of asset valuations and acquisition costs. Pro forma results of operations have +not been presented because the effects of these acquisitions, individually and in the aggregate, +were not material to the Company’s consolidated results of operations. Both of the brands have +been consolidated into the Company’s results of operations since their respective acquisition +dates. +12. Quarterly Results of Operations (Unaudited) +The Company reports its quarterly results of operations on the basis of 12-week periods for each of +the first three quarters and a 16- or 17-week period for the fourth quarter. The fourth quarter of +2009 includes 16 weeks and the fourth quarter of 2008 includes 17 weeks. The aggregate quarterly +earnings per share amounts disclosed in the table below may not equal the annual per share amounts +due to rounding and the fact that results for each quarter are calculated independently of the +annual period. +The Company’s unaudited quarterly results of operations are as follows: +2009 +First +Second +Third +Fourth +Quarter +Quarter +Quarter +Quarter +Revenue +$ +255,324 +$ +246,438 +$ +286,764 +$ +312,530 +Gross profit +102,943 +92,041 +113,965 +122,773 +Net earnings +10,495 +7,885 +26,794 +16,738 +Net earnings per share: +Basic +$ +0.21 +$ +0.16 +$ +0.54 +$ +0.34 +Diluted +0.21 +0.16 +0.54 +0.33 +2008 +First +Second +Third +Fourth +Quarter +Quarter +Quarter +Quarter +Revenue +$ +288,238 +$ +267,362 +$ +318,852 +$ +346,116 +Gross profit +121,561 +102,399 +128,730 +133,331 +Net earnings +23,701 +16,812 +31,191 +24,117 +Net earnings per share: +Basic +$ +0.47 +$ +0.34 +$ +0.64 +$ +0.50 +Diluted +0.46 +0.33 +0.62 +0.49 +A-21 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Shareholders of Wolverine World Wide, Inc. +We have audited the accompanying consolidated balance sheets of Wolverine World Wide, Inc. and +subsidiaries as of January 2, 2010 and January 3, 2009, and the related consolidated statements of +stockholders’ equity and comprehensive income, operations, and cash flows for each of the three +fiscal years in the period ended January 2, 2010. 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 2, 2010 and January 3, 2009, and the consolidated results of their operations and their +cash flows for each of the three fiscal years in the period ended January 2, 2010, 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), Wolverine World Wide, Inc.’s internal control over financial reporting as of +January 2, 2010, based on criteria established in Internal Control-Integrated Framework issued by +the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, +2010 expressed an unqualified opinion thereon. +/s/ Ernst & Young LLP +Grand Rapids, Michigan +March 3, 2010 +A-22 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Shareholders of Wolverine World Wide, Inc. +We have audited Wolverine World Wide, Inc.’s internal control over financial reporting as of +January 2, 2010, 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 included in the accompanying Management’s Report on Internal Control Over Financial +Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and +evaluating the design and operating effectiveness of internal control based on the assessed risk, +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, Wolverine World Wide, Inc. maintained, in all material respects, effective internal +control over financial reporting as of January 2, 2010, based on the COSO criteria. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight +Board (United States), the consolidated balance sheets of Wolverine World Wide, Inc. and +subsidiaries as of January 2, 2010 and January 3, 2009, and the related consolidated statements of +stockholders’ equity and comprehensive income, operations, and cash flows for each of the three +fiscal years in the period ended January 2, 2010 of Wolverine World Wide, Inc. and our report dated +March 3, 2010 expressed an unqualified opinion thereon. +/s/ Ernst & Young LLP +Grand Rapids, Michigan +March 3, 2010 +A-23 +Table of Contents +APPENDIX B +Schedule II — Valuation and Qualifying Accounts +Wolverine World Wide, Inc. and Subsidiaries +Column A +Column B +Column C +Column D +Column E +Additions +(2) +(1) +Charged to +Balance at +Charged to +Other +Balance at +Beginning of +Costs and +Accounts +Deductions +End of +Description +Period +Expenses +(Describe) +(Describe) +Period +Fiscal year ended January 2, 2010 +Deducted from asset accounts: +Allowance for doubtful accounts +$ +8,383,000 +$ +1,733,000 +$ +1,979,000 +(A) +$ +8,137,000 +Allowance for sales returns +5,311,000 +28,386,000 +29,048,000 +(B) +4,649,000 +Allowance for cash discounts +1,467,000 +11,717,000 +12,024,000 +(C) +1,160,000 +Inventory valuation allowances +8,912,000 +6,419,000 +8,981,000 +(D) +6,350,000 +$ +24,073,000 +$ +48,255,000 +$ +52,032,000 +$ +20,296,000 +Fiscal year ended January 3, 2009 +Deducted from asset accounts: +Allowance for doubtful accounts +$ +6,866,000 +$ +2,266,000 +$ +749,000 +(A) +$ +8,383,000 +Allowance for sales returns +5,269,000 +31,994,000 +31,952,000 +(B) +5,311,000 +Allowance for cash discounts +1,508,000 +14,602,000 +14,643,000 +(C) +1,467,000 +Inventory valuation allowances +14,902,000 +9,806,000 +15,796,000 +(D) +8,912,000 +$ +28,545,000 +$ +58,668,000 +$ +63,140,000 +$ +24,073,000 +Fiscal year ended December 29, 2007 +Deducted from asset accounts: +Allowance for doubtful accounts +$ +6,324,000 +$ +2,169,000 +$ +1,627,000 +(A) +$ +6,866,000 +Allowance for sales returns +5,322,000 +30,363,000 +30,416,000 +(B) +5,269,000 +Allowance for cash discounts +1,674,000 +14,955,000 +15,121,000 +(C) +1,508,000 +Inventory valuation allowances +10,458,000 +6,831,000 +2,387,000 +(D) +14,902,000 +$ +23,778,000 +$ +54,318,000 +$ +49,551,000 +$ +28,545,000 +(A) +Accounts charged off, net of recoveries. +(B) +Actual customer returns. +(C) +Discounts given to customers. +(D) +Adjustment upon disposal of related inventories. +Table of Contents +EXHIBIT INDEX +Exhibit +Number +Document +3.1 +Restated Certificate of Incorporation. Previously filed as +Exhibit 3.1 to the Company’s Annual Report on Form 10-K for +the period ended December 30, 2006. Here incorporated by +reference. +3.2 +Amended and Restated By-laws. Previously filed as Exhibit +3.1 to the Company’s Current Report on Form 8-K filed on +October 15, 2008. Here incorporated by reference. +4.1 +The Registrant has other long-term debt instruments +outstanding in addition to those described in Exhibit 4.2. +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. +4.2 +Credit Agreement dated as of July 22, 2005, among Wolverine +World Wide, Inc. and certain of its subsidiaries, JPMorgan +Chase Bank, N.A., as Administrative Agent, Harris, N.A., as +Syndication Agent, Comerica Bank, Standard Federal Bank +N.A. and National City Bank of the Midwest, as +Documentation Agents, and certain other Banks that are +parties to the Credit Agreement. Previously filed as +Exhibit 10.1 to the Company’s Current Report on Form 8-K +filed on July 28, 2005. Here incorporated by reference. +10.1 +1993 Stock Incentive Plan, as amended and restated.* +Previously filed as Exhibit 10.1 to the Company’s Annual +Report on Form 10-K for the fiscal year ended January 3, +2009. Here incorporated by reference. +10.2 +Amended and Restated 1995 Stock Incentive Plan.* Previously +filed as Exhibit 10.2 to the Company’s Annual Report on +Form 10-K for the fiscal year ended January 3, 2009. Here +incorporated by reference. +10.3 +Amended and Restated 1997 Stock Incentive Plan.* Previously +filed as Exhibit 10.3 to the Company’s Annual Report on +Form 10-K for the fiscal year ended January 3, 2009. Here +incorporated by reference. +10.4 +Amended and Restated Stock Incentive Plan of 1999.* +Previously filed as Exhibit 10.4 to the Company’s Annual +Report on Form 10-K for the fiscal year ended January 3, +2009. Here incorporated by reference. +10.5 +Amended and Restated Stock Incentive Plan of 2001.* +Previously filed as Exhibit 10.5 to the Company’s Annual +Report on Form 10-K for the fiscal year ended January 3, +2009. Here incorporated by reference. +10.6 +Amended and Restated Stock Incentive Plan of 2003.* +Previously filed as Exhibit 10.6 to the Company’s Annual +Report on Form 10-K for the fiscal year ended January 3, +2009. Here incorporated by reference. +10.7 +Amended and Restated Stock Incentive Plan of 2005.* +Previously filed as Exhibit 10.7 to the Company’s Annual +Report on Form 10-K for the fiscal year ended January 3, +2009. Here incorporated by reference. +10.8 +Amended and Restated Directors’ Stock Option Plan.* +Previously filed as Exhibit 10.8 to the Company’s Annual +Report on Form 10-K for the fiscal year ended January 3, +2009. Here incorporated by reference. +10.9 +Amended and Restated Outside Directors’ Deferred +Compensation Plan.* Previously filed as Exhibit 10.9 to the +Company’s Annual Report on Form 10-K for the fiscal year +ended December 29, 2007. Here incorporated by reference. +10.10 +Amended and Restated Executive Short-Term Incentive Plan +(Annual Bonus Plan).* Previously filed as Exhibit 10.10 to +the Company’s Annual Report on Form 10-K for the fiscal +year ended January 3, 2009. Here incorporated by +reference. +i +Table of Contents +Exhibit +Number +Document +10.11 +Amended and Restated Executive Long-Term Incentive Plan +(3-Year Bonus Plan).* Previously filed as Exhibit 10.11 to +the Company’s Annual Report on Form 10-K for the fiscal +year ended January 3, 2009. Here incorporated by +reference. +10.12 +Amended and Restated Stock Option Loan Program.* Previously +filed as Exhibit 10.12 to the Company’s Annual Report on +Form 10-K for the fiscal year ended December 29, 2007. +Here incorporated by reference. +10.13 +Executive Severance Agreement.* Previously filed as Exhibit +10.3 to the Company’s Current Report on Form 8-K filed on +December 17, 2008. Here incorporated by reference. A +participant schedule of current executive officers who are +parties to the agreement is attached as Exhibit 10.13. +10.14 +Form of Indemnification Agreement.* The Company has entered +into an Indemnification Agreement with each director and +with Messrs. Grady, Grimes, Krueger, McBreen and Zwiers +and Ms. Linton. Previously filed as Exhibit 10.1 to the +Company’s Current Report on Form 8-K filed on April 25, +2007. Here incorporated by reference. +10.15 +Amended and Restated Benefit Trust Agreement dated April +25, 2007.* Previously filed as Exhibit 10.5 to the +Company’s Current Report on Form 8-K filed on April 25, +2007. Here incorporated by reference. +10.16 +Employees’ Pension Plan (Restated as amended through +November 30, 2007).* Previously filed as Exhibit 10.17 to +the Company’s Annual Report on Form 10-K for the fiscal +year ended December 29, 2007. Here incorporated by +reference. +10.17 +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. Here incorporated by reference. +10.18 +Form of Non-Qualified Stock Option Agreement for 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. Here incorporated by reference. +10.19 +Form of Non-Qualified Stock Option Agreement for executive +officers other than those to whom Exhibit 10.18 applies.* +Previously filed as Exhibit 10.3 to the Company’s Current +Report on Form 8-K dated February 9, 2005. Here +incorporated by reference. +10.20 +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. Here incorporated by reference. +10.21 +Form of Incentive Stock Option Agreement.* Previously filed +as Exhibit 10.1 to the Company’s Current Report on Form 8-K +dated February 15, 2006. Here incorporated by reference. +10.22 +Form of Non-Qualified Stock Option Agreement Blake W. +Krueger and Timothy J. O’Donovan.* Previously filed as +Exhibit 10.2 to the Company’s Current Report of Form 8-K +dated February 15, 2006. Here incorporated by reference. +10.23 +Form of Non-Qualified Stock Option Agreement for executive +officers other than those to whom Exhibit 10.22 applies.* +Previously filed as Exhibit 10.3 to the Company’s Current +Report on Form 8-K dated February 15, 2006. Here +incorporated by reference. +10.24 +Form of Restricted Stock Agreement.* Previously filed as +Exhibit 10.4 to the Company’s Current Report on Form 8-K +dated February 15, 2006. Here incorporated by reference. +10.25 +Form of Stock Option Agreement for non-employee directors.* +Previously filed as Exhibit 10.23 to the Company’s Annual +Report on Form 10-K for the fiscal year ended January 1, +2005. Here incorporated by reference. +10.26 +2009 Form of Non-Qualified Stock Option Agreement for +Donald T. Grimes, Blake W. Krueger, Pamela L. Linton, +Michael F. McBreen and James D. Zwiers.* Previously filed +as Exhibit 10.26 to the Company’s Annual Report on Form +10-K for the fiscal year ended January 3, 2009. Here +incorporated by reference. +ii +Table of Contents +Exhibit +Number +Document +10.27 +2009 Form of Non-Qualified Stock Option Agreement for +executive officers other than those to whom Exhibit 10.26 +applies.* Previously filed as Exhibit 10.27 to the +Company’s Annual Report on Form 10-K for the fiscal year +ended January 3, 2009. Here incorporated by reference. +10.28 +Form of Performance Share Award Agreement.* Previously +filed as Exhibit 10.28 to the Company’s Annual Report on +Form 10-K for the fiscal year ended (2009-2011 Performance Period) January 3, 2009. Here +incorporated by reference. +10.29 +Form of Performance Share Award Agreement (2010-2012 Performance Period).* +10.30 +Separation Agreement between Wolverine World Wide, Inc. and +Blake W. Krueger, dated as of March 13, 2008, as amended.* +Previously filed as Exhibit 10.1 to the Company’s Quarterly +Report on Form 10-Q for the period ended March 22, 2008. +Here incorporated by reference. +10.31 +First Amendment to Separation Agreement between Wolverine +World Wide, Inc. and Blake W. Krueger, dated as of +December 11, 2008.* Previously filed as Exhibit 10.30 to +the Company’s Annual Report on Form 10-K for the fiscal +year ended January 3, 2009. Here incorporated by +reference. +10.32 +409A Supplemental Executive Retirement Plan.* Previously +filed as Exhibit 10.1 to the Company’s Current Report on +Form 8-K filed on December 17, 2008. Here incorporated by +reference. A participant schedule of current executive +officers who participate in this plan is attached as +Exhibit 10.32. +10.33 +Form of 409A Supplemental Retirement Plan Participation +Agreement with Mr. Krueger.* Previously filed as Exhibit +10.32 to the Company’s Annual Report on Form 10-K for the +fiscal year ended January 3, 2009. Here incorporated by +reference. +10.34 +Outside Directors’ Deferred Compensation Plan.* Previously +filed as Exhibit 10.2 to the Company’s Current Report on +Form 8-K filed on December 17, 2008. Here incorporated by +reference. +21 +Subsidiaries of Registrant. +23 +Consent of Ernst & Young LLP. +24 +Powers of Attorney. +31.1 +Certification of Chairman, Chief Executive Officer and +President under Section 302 of the Sarbanes-Oxley Act of +2002. +31.2 +Certification of Senior 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 \ No newline at end of file diff --git a/raw/filings/0000110471/2009/0000950123-10-020483/filing_metadata.csv b/raw/filings/0000110471/2009/0000950123-10-020483/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..67adfc967b876d21f2a36b1d4b6f7e5d16796cf9 --- /dev/null +++ b/raw/filings/0000110471/2009/0000950123-10-020483/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000110471,WWW,WOLVERINE WORLD WIDE INC /DE/,10-K,2010-03-03,2010-01-02,2010-03-03T19:51:37.000Z,0000950123-10-020483,c97050e10vk.htm,FORM 10-K,998336,0,0,https://www.sec.gov/Archives/edgar/data/110471/000095012310020483/c97050e10vk.htm,https://www.sec.gov/Archives/edgar/data/110471/000095012310020483/,2009,2009,1 diff --git a/raw/filings/0000110471/2009/0000950123-10-020483/item1.txt b/raw/filings/0000110471/2009/0000950123-10-020483/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..3cd47718a24694b045a6959ac2bfc9ad6c18d6d3 --- /dev/null +++ b/raw/filings/0000110471/2009/0000950123-10-020483/item1.txt @@ -0,0 +1,456 @@ +Item 1. +Business +General +Wolverine World Wide, Inc. (the “Company”) is a leading designer, manufacturer and marketer of a +broad range of quality casual, rugged outdoor and work footwear and over the last few years has +extended certain of its footwear brands into casual, outdoor and work apparel. 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. +Approximately 42.9 million pairs/units of the Company’s branded footwear and apparel were sold +during fiscal 2009 in approximately 180 countries and territories around the world. 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 ® Footwear, +Chaco ® , Cushe TM , Harley-Davidson ® +Footwear, Hush Puppies ® , HyTest ® , +Merrell ® , Patagonia ® Footwear, Sebago ® , Soft Style ® and Wolverine ® . The Company believes that +its primary competitive advantages are its well-recognized brand names, its patented proprietary +designs and comfort technologies, its wide range of distribution channels and its diversified +manufacturing and sourcing base. Cat ® is a registered trademark of Caterpillar +Inc., Harley-Davidson ® is a registered trademark of H-D Michigan, Inc. and +Patagonia ® is a registered trademark of Patagonia, Inc. +The Company’s products are sold at numerous price points under a variety of brand names designed to +appeal to most consumers of casual, work and outdoor footwear. The Company’s products are +organized under four operating units: (i) the Wolverine Footwear Group, consisting of the +Bates ® , HyTest ® and Wolverine ® boots +and shoes, and Wolverine ® brand apparel, (ii) the Outdoor Group, consisting of +Merrell ® , Patagonia ® and Chaco ® +footwear, and Merrell ® brand apparel, (iii) the Heritage Brands +Group, consisting of Cat ® footwear, Harley-Davidson ® +footwear and Sebago ® footwear and apparel, and (iv) The Hush Puppies +Company, consisting of Hush Puppies ® footwear, Soft Style ® footwear +and Cushe TM footwear. The Company also licenses some of its brands for use on +non-footwear products. +The Company’s Global Operations Group is responsible for manufacturing, sourcing, distribution and +customer support for the Company’s business. The Company wholesales products domestically to a +wide range of retail customers, including department stores, national chains, catalogs, specialty +retailers, mass merchants and Internet retailers and to governments and municipalities. Many of +the retailers carrying Wolverine products operate multiple storefront locations. The Company’s +products are marketed worldwide in approximately 180 countries and territories through +Company-owned wholesale operations, licensees and distributors. +4 +Table of Contents +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, Apparel, and Licensing. The Branded Footwear, Apparel, +and Licensing segment engages in manufacturing, sourcing, licensing, marketing and distributing +branded footwear and apparel, including casual shoes and apparel, dress shoes, boots, uniform +shoes, work shoes and rugged outdoor footwear and apparel. The Company’s Other Business units +consist of its retail operations and leather and pigskin procurement operations, which are +described below. Financial information regarding the Company’s business segments and financial +information by geographic area is found in Note 9 to the consolidated financial statements of the +Company that are attached as Appendix A to this Annual Report on Form 10-K. +Branded Footwear, Apparel and Licensing +The Company sources and markets a broad range of footwear styles, including shoes, boots and +sandals under many recognizable brand names, including Bates ® , +Cat ® , Chaco ® , Cushe TM , +Harley-Davidson ® , Hush Puppies ® , +HyTest ® , Merrell ® , Patagonia ® , +Sebago ® , Soft Style ® and Wolverine ® . +The Company combines quality materials and skilled workmanship to produce footwear according to its +specifications at both Company-owned and third-party manufacturing facilities. The Company also +markets Merrell ® , Sebago ® , and Wolverine ® +brand apparel and licenses some of its brands for use on non-footwear products, +including Hush Puppies ® apparel, eyewear, watches, socks, handbags and plush +toys and Wolverine ® brand eyewear and gloves. +The Company’s four branded footwear, apparel, and licensing operating units are described below. +1. +The Outdoor Group The Outdoor Group consists of +Merrell ® Footwear, Merrell ® Apparel and +accessories, Patagonia ® Footwear and Chaco ® +Footwear. Outdoor Group products include performance outdoor and hiking +footwear, casual and after-sport footwear and performance and casual Merrell ® +apparel. +Merrell ® Footwear The Merrell ® footwear +line consists primarily of running, technical hiking, rugged outdoor and +outdoor-inspired casual footwear designed for backpacking, day hiking and everyday +use. The Merrell ® footwear 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. +Merrell ® footwear products are sold primarily through outdoor +specialty retailers, department stores and catalogs. Merrell ® +footwear is marketed in approximately 150 countries and territories +worldwide. +Merrell ® Apparel and Accessories The +Merrell ® apparel line consists primarily of technical outdoor +and outdoor-inspired casual apparel and performance socks. In addition to +Merrell ® apparel, the Outdoor Group markets Merrell ® +accessories, including packs, bags and luggage. +Patagonia ® Footwear Pursuant to an agreement with Lost Arrow +Corporation, the Company has obtained the exclusive worldwide rights to manufacture, +market, distribute and sell footwear under Patagonia ® and other +trademarks. The Patagonia ® Footwear line focuses primarily on +casual and outdoor performance footwear. Patagonia ® is a registered +trademark of Patagonia, Inc. +Chaco ® Footwear The Company acquired Chaco ® +in January, 2009. The line is focused primarily on technical outdoor performance +sandals. The Chaco ® brand was launched in 1989 to meet the needs of the +whitewater enthusiast and continues to focus on performance sandals for the outdoor +enthusiast. Chaco ® footwear is sold primarily through specialty outdoor +retailers and department stores. +2. +Wolverine Footwear Group The Wolverine Footwear Group markets footwear +and apparel products under the Wolverine ® brand and footwear under +the Bates ® and HyTest ® brands. Wolverine +Footwear Group products feature performance and comfort features to serve a variety of +work, outdoor and lifestyle functions. +5 +Table of Contents +Wolverine ® Footwear The Wolverine ® brand +offers high quality work boots and shoes that incorporate innovative technologies to +deliver comfort and durability. The Wolverine ® brand, which has +been in existence for 127 years, markets work and outdoor footwear in three +categories: (i) work and industrial; (ii) outdoor sport; and (iii) rugged casual. +The development of DuraShocks ® , MultiShox ® , +Wolverine Fusion ® and Wolverine Compressor ® +technologies as well as the development of the Contour Welt ® +line have allowed the Wolverine ® brand to introduce a +broad line of work footwear with a focus on comfort. The Wolverine ® +work product line features work boots and shoes with protective features +such as toe caps, metatarsal guards and electrical hazard protection, targeting +industrial and farm workers. The Wolverine ® rugged casual and +outdoor sport product lines incorporate DuraShocks ® , Wolverine +iCS TM and other technologies and comfort features into products designed +for casual and outdoor sport use. The rugged casual line targets active lifestyles +and includes trail shoes and outdoor sandals. The outdoor sport line is designed to +meet the demands of hunters, fishermen and other active outdoor sports enthusiasts. +Wolverine ® Apparel and Licensing The Wolverine Footwear Group +markets a line of work and rugged casual Wolverine ® brand +apparel. In addition, the Company licenses its Wolverine ® brand +for use on eyewear 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 , Wolverine iCS TM and other proprietary comfort +technologies in the design of its military-style boots and oxfords. 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 that incorporate +various specialty safety features, including steel toe, composite toe, metatarsal +guards, electrical hazard, static dissipating and conductive footwear designed to +protect against hazards of the workplace. 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. +3. +The Heritage Brands Group The Heritage Brands Group consists of +Cat ® Footwear, Harley-Davidson ® Footwear and +the Sebago ® product line. +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 ® , 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 iTechnology ™ and +Hidden Tracks ® comfort features. Cat ® +footwear products target work and industrial users and active lifestyle +users. Cat ® footwear is marketed in approximately 140 countries +and territories worldwide. Cat ® , +Caterpillar ® , Cat & Design and Walking Machines ® +are registered trademarks of Caterpillar Inc. +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 ® +branded footwear throughout the world. Harley-Davidson ® +branded 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. Harley-Davidson ® is a +registered trademark of H-D Michigan, Inc. +6 +Table of Contents +Sebago ® The Sebago ® product line has been +marketed since 1946 and consists primarily of performance nautical and +American-inspired casual footwear for men and women, such as boat shoes and hand +sewn loafers. Highly recognized Sebago ® line extensions include +Sebago Docksides ® , Drysides ™ and Athletic Marine. The +Sebago ® product line is marketed in approximately 115 countries +and territories worldwide. The Sebago ® manufacturing and design +tradition of quality components, durability, comfort and “Americana” heritage is +further supported by targeted distribution to better-grade independent, marine and +department store retailers throughout the world. The Company also launched a +classic and marine Sebago ® apparel line in 2009. +4. +The Hush Puppies Company +Hush Puppies ® 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 marketed in approximately 140 countries and +territories. The modern styling is complemented by a variety of comfort features +and proprietary technologies that have earned the brand its reputation for comfort, +style and value. In addition, the Hush Puppies ® brand is +licensed for use on certain items, including apparel, eyewear, handbags, socks, +watches and plush toys. +Soft Style ® The Soft Style ® product line consists primarily +of women’s dress and casual footwear. +Cushe TM The Company acquired the Cushe TM +Footwear business in January 2009. The Cushe TM business focuses +on relaxed, design-led footwear for active men and women. The +Cushe TM Footwear business targets younger consumers and +better-grade retailers with products ranging from sport casuals to sandals. +Other Businesses +In addition to manufacturing, sourcing, marketing and distributing the Company’s footwear and +apparel products as reported in the branded footwear, apparel, and licensing segment, the Company +also (i) operates 83 North American and 5 U.K.-based retail stores featuring footwear and apparel, +(ii) operates a performance leathers business through its Wolverine Leathers Division, and (iii) +purchases and cures raw pigskins for sale to various customers through its wholly-owned subsidiary +Wolverine Procurement, Inc. +1. +Wolverine Retail . The Company operates 83 North American and 5 +U.K.-based retail stores as of February 2010. These stores are operated under the Hush +Puppies ® , Hush Puppies and Family SM , Track’N +Trail ® , Rockford Footwear Depot ® and +Merrell ® names. Both the Rockford Footwear Depot ® +and Track’N Trail ® retail formats carry a large +selection of Company-branded products, featuring such brands as +Wolverine ® , Merrell ® , Hush +Puppies ® , Cat ® , Chaco ® , +Cushe TM , Patagonia ® , Sebago ® +and Harley-Davidson ® . The Company also operates +Merrell ® concept stores and Hush Puppies ® concept stores, +providing a platform to showcase these brands exclusively. In addition, the Company +operates 23 direct-to-customer retail websites, including, www.merrell.com, +www.catfootwear.com , www.hushpuppies.com , www.sebago.com, www.wolverine.com, +www.chacousa.com, www.cushe.com and www.batesfootwear.com . +2. +The Wolverine Leathers Division . The Wolverine Leathers Division +markets pigskin leather primarily for use in the footwear industry. The Company +believes pigskin leather offers superior performance and advantages over cowhide +leather. The Company’s waterproof and stain resistant leathers are featured in some of +the Company’s domestic footwear lines and many products offered by the Company’s +international licensees and distributors. +3. +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. +7 +Table of Contents +Marketing +The Company’s marketing strategy is to develop brand-specific plans and related promotional +materials for U.S. and international markets to foster a consistent message for each of the +Company’s core brands. Each brand group has dedicated marketing personnel who develop the +marketing strategy for brands within that group. Marketing campaigns and strategies vary by brand +and may target accounts and/or end users as they strive to increase awareness of, and affinity 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 +products. Components of the brand-specific plans vary and may include print, radio and television +advertising, social networking sites, event sponsorships, in-store point of purchase displays, +promotional materials, and sales and technical assistance. +The Company’s brand groups provide its international licensees and distributors with creative +direction and materials to convey consistent messages and brand images, including (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 brand names provide a competitive advantage and the +Company makes significant 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 domestic distribution channels and strategies to distribute its +branded footwear products: +• +The Company uses a dedicated sales force and customer service team, advertising, point +of purchase support and in-stock inventories to service department stores, national chains, +specialty retailers, catalogs, independent retailers and uniform outlets. +• +Volume direct programs ship products directly to the retail customer without going +through a Company distribution center and provide products 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 distributes 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. Such contracts typically contain future +purchase options that are not required to be exercised. +In addition to its wholesale activities, the Company also operates a consumer-direct business as +described above. The Company continues to develop new 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 2009. +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. +The Company expects current seasonal sales patterns to continue in future years. +International Operations and Global Licensing +The Company’s foreign-sourced revenue is generated from a combination of (i) sales of branded +footwear and apparel through the Company’s owned operations in Canada, the United Kingdom, Austria, +Finland, France, +Germany, Italy, the Netherlands, Spain, Sweden and Switzerland; (ii) sales to international +distributors for certain markets and businesses; and (iii) royalty income from a network of +third-party licensees and distributors. The Company’s owned operations are located in markets +where the Company believes it can gain a strategic advantage by more directly controlling the sale +into retail accounts. 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. +8 +Table of Contents +The Company continues to develop its network of licensees and distributors to market its footwear +brands. The Company assists in designing products that are appropriate to each foreign market, but +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 marketing support from the +Company. +Manufacturing and Sourcing +The Company controls the majority of the units of footwear and apparel marketed globally under the +Company’s brand names. The balance is controlled directly by the Company’s licensees. Of the +units sourced and/or manufactured by the Company, approximately 93% are purchased or sourced from +third parties, with the remainder produced at Company-operated facilities. The Company sources a +majority of its footwear from a variety of foreign manufacturing facilities in the Asia-Pacific +region, South America and India. The Company maintains offices in the Asia-Pacific region to +facilitate and develop strategies for the sourcing and importation of quality footwear and apparel. +The Company has established guidelines for each of its third-party manufacturers in order to +monitor product quality, labor practices and financial viability. 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. Footwear produced by the Company is manufactured at Company-operated facilities +located in Michigan and the Dominican Republic. +The Company’s owned manufacturing operations allow the Company to (i) reduce its production lead +time, enabling it to more quickly respond to market demand and reduce inventory risk, (ii) lower +freight, shipping and duty costs for sales to certain markets, and (iii) more closely monitor +product quality. The Company’s third party sourcing 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 capital expenditures necessary +for additional owned factories. The Company believes that its overall global manufacturing +strategy provides the flexibility to properly balance the need for timely shipments, high quality +products and competitive pricing. +The Company’s principal required raw material is quality leather, which it purchases from a select +group of domestic and offshore suppliers. 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 for its Wolverine +Leathers Division from one domestic source, which has been a reliable and consistent supplier for +over 30 years. Alternative sources of raw pigskin are available, but with less advantageous +pricing, quality and compatibility with the Company’s processing method. The Company purchases all +of its other raw materials and component parts from a variety of sources and does not believe that +any of these sources are 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, tariffs and duties, 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, +but that a sustained disruption of such sources of supply could have an adverse impact on the +Company’s results of operations and financial position. +9 +Table of Contents +Trademarks, Licenses and Patents +The Company holds a significant portfolio of registered and common law trademarks that identify its +branded products. The Company’s owned trademarks include Hush Puppies ® , +Wolverine ® , Bates ® , Cushe TM , +Chaco ® , Soft Style ® , Wolverine Fusion ® , +DuraShocks ® , MultiShox ® , Wolverine +Compressor ® , Hidden Tracks ® , +iTechnology TM , Bounce ® , Comfort Curve ® , +HyTest ® , Merrell ® , M Circle Design (registered +design trademark), Continuum ® , Sebago ® , +Q-Form ® and Track ‘N Trail ® . The Company’s Wolverine +Leathers Division markets its pigskin leathers under the trademarks Wolverine Warrior +Leather ® , Weather Tight ® , All Season Weather Leathers ™ and +its registered Wolverine Leathers & Design trademark. The Company has the rights to manufacture, +market and distribute footwear throughout the world under the Cat ® , +Harley-Davidson ® and Patagonia ® trademarks pursuant to +license arrangements with the respective trademark owners. The Cat ® , +Harley-Davidson ® , and Patagonia ® licenses extend for five +or more years and are subject to early termination for breach. +The Company believes that consumers identify its products by the Company’s trademarks and that its +trademarks are valuable assets. The Company is not aware of any infringing uses or any prior +claims of ownership of its trademarks that could materially affect its current business. The +Company has a policy of pursuing registration of its primary trademarks whenever practicable and to +vigorously defend its trademarks against infringement or other threats. The Company also holds +many design and utility patents, copyrights and various other proprietary rights. The Company +vigorously protects its proprietary rights under applicable laws. +Order Backlog +At February 20, 2010, the Company had an order backlog of approximately $424 million compared to an +order backlog of approximately $357 million at February 21, 2009, determined on a consistent basis. +Substantially all of the backlog relates to orders for products expected to be shipped in 2010. +Orders in the 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 predictive of eventual actual +shipments. +Competition +The Company markets its footwear and apparel lines in a highly competitive and fragmented +environment. The Company competes with numerous domestic and international marketers and +importers, some of which are larger and have greater resources than the Company. The Company has +at least thirty major competitors for its brands of footwear and apparel. Product performance and +quality, including technological improvements, product identity, competitive pricing and ability to +control costs, and the ability to adapt to style changes are all important elements of competition +in the footwear and apparel markets served by the Company. The footwear and apparel industries in +general are subject to changes in consumer preferences. The Company strives to maintain its +competitive position through promotions designed to increase brand awareness, manufacturing and +sourcing efficiencies, 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 and apparel industries. Market shares in the non-athletic footwear +and apparel industry are highly fragmented and no one company has a dominant market position. +10 +Table of Contents +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 helped validate and refine 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 expects to continue to be a leading developer of footwear innovations, research and +development costs do not represent a material portion of operating expenses. +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 2, 2010, the Company had approximately 4,018 domestic and foreign production, office +and sales employees. Approximately 149 employees were covered by two union contracts expiring at +various dates through March 31, 2011. 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, and Governance Committee Charter, is +available at its website at www.wolverineworldwide.com/investors_governance.asp . Printed copies of +the documents listed above are available, without charge, by writing to the Company at 9341 +Courtland Drive, N.E., Rockford, Michigan 49351, Attention: General Counsel. +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 . \ No newline at end of file diff --git a/raw/filings/0000110471/2009/0000950123-10-020483/item13.txt b/raw/filings/0000110471/2009/0000950123-10-020483/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..07051c43f848164e6bee2f1252ed8f59f02ca361 --- /dev/null +++ b/raw/filings/0000110471/2009/0000950123-10-020483/item13.txt @@ -0,0 +1,9 @@ +Item 13. +Certain Relationships and Related Transactions, and Director Independence +The information contained under the caption “Related Matters” under the subheadings “Certain +Relationships and Related Transactions” and “Related Person Transactions Policy” contained in the +Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be +held on April 22, 2010, is incorporated herein by reference. The information contained under the +caption “Corporate Governance” under the subheading “Director Independence” contained in the +Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be +held on April 22, 2010, is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000110471/2009/0000950123-10-020483/item9a.txt b/raw/filings/0000110471/2009/0000950123-10-020483/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..0e2194d37f66457856720fd551b9b1aae52d89d4 --- /dev/null +++ b/raw/filings/0000110471/2009/0000950123-10-020483/item9a.txt @@ -0,0 +1,27 @@ +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. +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 management, including our Chief Executive Officer and +Chief Financial Officer, we conducted an evaluation of the effectiveness of internal control over +financial reporting as of January 2, 2010, 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, management concluded that internal control over financial reporting was +effective as of January 2, 2010. +The effectiveness of the Company’s internal control over financial reporting as of January 2, 2010, +has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated +in its 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 2, 2010 that has materially affected, or that is reasonably +likely to materially affect, the Company’s internal control over financial reporting. +40 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000110471/2009/0000950123-10-020483/rp_note.txt b/raw/filings/0000110471/2009/0000950123-10-020483/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000110471/2009/0000950123-10-020483/rpt_disclosure.txt b/raw/filings/0000110471/2009/0000950123-10-020483/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..c0c32d9f4a9f9adb71f38855de1e84d4cca0d783 --- /dev/null +++ b/raw/filings/0000110471/2009/0000950123-10-020483/rpt_disclosure.txt @@ -0,0 +1,96 @@ +related person transactions policy, as described below. +Related Person +Transactions Policy +Wolverine’s Board adopted written policies and procedures +regarding related person transactions. They require the +Governance Committee to review and either approve or disapprove +the Company entering into +55 +Table of Contents +any Interested Transactions (defined below). If advance approval +is not feasible, then the Governance Committee must review and +ratify the Interested Transaction at its next meeting. +Interested +Transaction +Any transaction, arrangement or relationship or series of +similar transactions, arrangements or relationships (including +any indebtedness or guarantee of indebtedness) in which: +(1) +the aggregate amount involved is or is expected to exceed +$100,000 since the beginning of Wolverine’s last completed +fiscal year; +(2) +Wolverine is a participant; and +(3) +any Related Person (defined below) has or will have a direct or +indirect interest (other than solely as a result of being a +director or less than ten percent beneficial owner of another +entity). +Related Person +Any: +(a) +person who is or was at any point during the last fiscal year +for which Wolverine filed a Form 10-K and proxy statement, an +executive officer, director or nominee for election as a +director; +(b) +greater than five percent beneficial owner of Wolverine’s +common stock; or +(c) +immediate family +member * +of any of the foregoing. +* +Immediate family member includes a +person’s spouse, parents, stepparents, children, +stepchildren, siblings, mothers- and +fathers-in-law, +sons- and +daughters-in-law, +and brothers- and +sisters-in-law +and anyone residing in such person’s home (other than a +tenant or employee). +The Governance Committee considers whether the Interested +Transaction is on terms no less favorable than terms generally +available to an unaffiliated third-party under the same or +similar circumstances, the extent of the Related Person’s +interest in the transaction, and other factors that it deems +relevant. No director participates in any discussion or approval +of an Interested Transaction for which he or she is a Related +Person, except to provide all material information to the +Governance Committee. +The following Interested Transactions are pre-approved under the +policies and procedures: +(a) +any transaction with another company where a Related +Person’s only relationship is as an employee, director or +beneficial owner of less than ten percent of that company’s +shares, if the aggregate amount involved does not exceed the +greater of $1,000,000, or two percent of that company’s +total revenues. +(b) +any charitable contribution by Wolverine to a charitable +organization where a Related Person is an employee, if the +aggregate amount involved does not exceed the lesser of +$100,000, or two percent of the charitable organization’s +total annual receipts. +ADDITIONAL +INFORMATION +Stockholders +List +A list of stockholders entitled to vote at the meeting will be +available for review by Wolverine stockholders at the office of +Kenneth A. Grady, Secretary and General Counsel of Wolverine, +located at 9341 Courtland Drive, N.E., Rockford, Michigan 49351, +during ordinary business hours for the +10-day +period before the meeting. +56 +Table of Contents +Director and +Officer Indemnification +The Company indemnifies its directors and NEOs to the fullest +extent permitted by law so that they will be free from undue +concern about personal liability in connection with their +service to the Company. \ No newline at end of file diff --git a/raw/filings/0000110471/2013/0000110471-14-000003/filing.txt b/raw/filings/0000110471/2013/0000110471-14-000003/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..98e57447196aadd41156acf8249585feadb41561 --- /dev/null +++ b/raw/filings/0000110471/2013/0000110471-14-000003/filing.txt @@ -0,0 +1,6287 @@ +10-K +1 +wolverineform10-k2013.htm +FORM 10-K +Wolverine Form 10-K 2013 +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +þ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 28, 2013 +or +¨ +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 001-6024 +WOLVERINE WORLD WIDE, INC. +(Exact name of registrant as specified in its charter) +Delaware +38-1185150 +State or other jurisdiction of +incorporation or organization +(I.R.S. Employer +Identification No.) +9341 Courtland Drive N.E., +Rockford, Michigan +49351 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code (616) 866-5500 +Securities registered pursuant to Section 12(b) of the Securities Exchange Act: +Title of each class +Name of each exchange on which registered +Common Stock, $1 Par Value +New York Stock Exchange +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ +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 þ No ¨ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer þ Accelerated filer ¨ +Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ +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 14, 2013 , the last business day of the registrant’s most recently completed second fiscal quarter: $ 2,527,728,401 . Number of shares outstanding of the registrant’s Common Stock, $1 par value as of February 10, 2014 : 100,816,660 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the definitive proxy statement for the registrant’s annual stockholders’ meeting to be held April 23, 2014 are incorporated by reference into Part III of this report. +Table of Contents +Table of Contents +PART I +Item 1. +Business +4 +Item 1A. +Risk Factors +10 +Item 1B. +Unresolved Staff Comments +18 +Item 2. +Properties +18 +Item 3. +Legal Proceedings +19 +Item 4. +Mine Safety Disclosures +19 +Supplemental Item. +Executive Officers of the Registrant +19 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +20 +Item 6. +Selected Financial Data +22 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +22 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +32 +Item 8. +Financial Statements and Supplementary Data +33 +Item 9. +Changes in and Disagreements With Accountants on Accounting and Financial Disclosure +33 +Item 9A. +Controls and Procedures +33 +Item 9B. +Other Information +33 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +33 +Item 11. +Executive Compensation +34 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +34 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +35 +Item 14. +Principal Accounting Fees and Services +35 +PART IV +Item 15. +Exhibits, Financial Statement Schedules +36 +SIGNATURES +37 +Appendix A: Financial Statements +A-1 +Appendix B: Financial Statement Schedule +B-1 +Exhibit Index +E-1 +2 +Table of Contents +FORWARD-LOOKING STATEMENTS +This document contains “forward-looking statements,” which are statements relating to future, not past, events. In this context, forward-looking statements often address management’s current beliefs, assumptions, expectations, estimates and projections about future business and financial performance, global political, economic and market conditions, and the Company itself. Such statements often contain words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “should,” “will,” variations of such words, and similar expressions. Forward-looking statements, by their nature, address matters that are, to varying degrees, uncertain. Uncertainties that could cause the Company’s performance to differ materially from what is expressed in forward-looking statements include, but are not limited to, the following: +• +changes in national, regional or global economic and market conditions; +• +the impact of financial and credit markets on the Company, its suppliers and customers; +• +changes in interest rates, tax laws, duties, tariffs, quotas or applicable assessments in countries of import and export; +• +the impact of regulation, regulatory and legal proceedings and legal compliance risks; +• +currency fluctuations; +• +currency restrictions; +• +changes in future pension funding requirements and pension expenses; +• +the risk of impairment to goodwill and other acquired intangibles; +• +the risks of doing business in developing countries, and politically or economically volatile areas; +• +the ability to secure and protect owned intellectual property or use licensed intellectual property; +• +potential negative effects that could result from a U.S. federal government shutdown, including but not limited to delays in importing products at U.S. ports, supply chain disruption, and reduced purchasing by the Department of Defense or other military purchasers; +• +changes in consumer preferences, spending patterns, buying patterns, price sensitivity or demand for the Company’s products; +• +risks related to the significant investment in, and performance of, the Company consumer direct business; +• +the impact of seasonality and unpredictable weather conditions; +• +changes in relationships with, including the loss of, significant customers; +• +the cancellation of orders for future delivery; +• +the failure of the U.S. Department of Defense to exercise future purchase options or award new contracts, or the cancellation or modification of existing contracts by the Department of Defense or other military purchasers; +• +matters relating to the Company’s 2012 acquisition of the Performance + Lifestyle Group business of Collective Brands, Inc. (“PLG” or “the PLG acquisition”), including the Company’s ability to continue to integrate and realize the benefits of the PLG acquisition or to do so on a timely basis; +• +the cost, availability and management of raw materials, inventories, services and labor for owned and contract manufacturers; +• +problems affecting the Company’s distribution system, including service interruptions at shipping and receiving ports; +• +the failure to maintain the security of personally identifiable and other information of the Company’s customers and employees; +• +the inability for any reason to effectively compete in global footwear, apparel and consumer direct markets; and +• +strategic actions, including new initiatives and ventures, acquisitions and dispositions, and the Company’s success in integrating acquired businesses and implementing new initiatives and ventures. +These uncertainties could cause a material difference between an actual outcome and a forward-looking statement. The uncertainties included here are not exhaustive and are described in more detail in Part I, Item 1A, “Risk Factors” of this Annual Report on Form 10-K. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The Company does not undertake an obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise. +3 +Table of Contents +PART I +Item 1. +Business +General +Wolverine World Wide, Inc. (the “Company”) is a leading designer, manufacturer and marketer of a broad range of quality casual footwear and apparel, performance outdoor and athletic footwear and apparel, children’s footwear, industrial work boots and apparel, and uniform shoes and boots. 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. +The Company sources and markets a broad range of footwear styles, including shoes, boots and sandals under many recognizable brand names including Bates ® , Cat ® , Chaco ® , Cushe ® , Harley-Davidson ® , Hush Puppies ® , HyTest ® , Keds ® , Merrell ® , Patagonia ® , Saucony ® , Sebago ® , Soft Style ® , Sperry Top-Sider ® , Stride Rite ® and Wolverine ® . Cat ® is a registered trademark of Caterpillar, Inc., Harley-Davidson ® is a registered trademark of H-D U.S.A., LLC and Patagonia ® is a registered trademark of Patagonia, Inc. The Company’s products generally feature contemporary styling with proprietary technologies designed to provide maximum comfort and performance. The Company believes that its primary competitive advantages are its well-recognized brand names, its patented proprietary designs, its diverse product offerings and comfort technologies, its wide range of distribution channels and its diversified manufacturing and sourcing base. The Company combines quality materials and skilled workmanship to produce footwear according to its specifications at both Company-owned and third-party manufacturing facilities. The Company also markets Merrell ® , Saucony ® , Sebago ® , Sperry Top-Sider ® and Wolverine ® brand apparel and accessories and licenses some of its brands for use on non-footwear products, including Hush Puppies ® apparel, eyewear, watches, socks, handbags and plush toys, Wolverine ® brand eyewear and gloves, Keds ® apparel, Saucony ® apparel , Sperry Top-Sider ® apparel , and Stride Rite ® apparel. +The Company’s brands are sold at various price points targeting a wide range of consumers of casual, work, outdoor and athletic footwear and apparel. During the first quarter of fiscal 2013, the Company reorganized its portfolio of 16 brands, including brands acquired as part of the fiscal 2012 PLG acquisition, into the following three operating segments, which the Company has determined are reportable operating segments: +• +Lifestyle Group , consisting of Sperry Top-Sider ® footwear and apparel, Stride Rite ® footwear and apparel, Hush Puppies ® footwear and apparel, Keds ® footwear and apparel, and Soft Style ® footwear; +• +Performance Group , consisting of Merrell ® footwear and apparel, Saucony ® footwear and apparel, Chaco ® footwear, Patagonia ® footwear, and Cushe ® footwear; and +• +Heritage Group , consisting of Wolverine ® footwear and apparel, Cat ® footwear, Bates ® uniform footwear, Sebago ® footwear and apparel, Harley-Davidson ® footwear, and HyTest ® Safety footwear. +The operating segments are engaged in designing, manufacturing, sourcing, marketing, licensing and distributing branded footwear, apparel and accessories. Revenue of the operating segments includes revenue from the sale of branded footwear, apparel and accessories to third-party customers; royalty income from the licensing of the Company’s trademarks; revenue from distribution arrangements with third-party distributors; and revenue from the Company’s mono-branded consumer direct businesses, including revenue from eCommerce websites. Prior year results have been restated to reflect the operating segment reorganization. +The Company also reports an Other and Corporate category. The Other category consists of the Company’s multi-brand consumer direct business, leather marketing operations, and sourcing operations that include third-party commission revenues. The Corporate category consists of unallocated corporate expenses including acquisition-related transaction and integration costs and restructuring costs. The Company’s operating segments are determined on the basis of how the Company internally reports and evaluates financial information used to make operating decisions. +The Company’s Global Operations Group is responsible for manufacturing, sourcing, distribution, logistics and customer support. The Company directly sells its products in the United States ("U.S."), Canada and certain countries in Europe to a wide range of retail customers, including department stores, national chains, catalog retailers, specialty retailers, mass merchants and Internet retailers, and to governments and municipalities. The Company’s products are marketed worldwide in approximately 200 countries and territories through Company-owned wholesale and consumer direct operations and through third-party licensees and distributors. +For financial information regarding the Company, see the consolidated financial statements and the accompanying notes, which are attached as Appendix A to this Annual Report on Form 10-K. As described above, the Company has three reportable segments and the Other and Corporate categories. Financial information regarding the Company’s reportable segments and other operating categories and financial information by geographic area is found in Note 10 to the consolidated financial statements of the Company that are attached as Appendix A to this Annual Report on Form 10-K. +4 +Table of Contents +The Company's operating segments and related brands for fiscal 2013 are described in more detail below. +1. +Lifestyle Group - The Lifestyle Group consists of Sperry Top-Sider ® footwear and apparel, Stride Rite ® footwear and apparel, Hush Puppies ® footwear and apparel, Keds ® footwear and apparel, and Soft Style ® footwear. +Sperry Top-Sider ® : Sperry Top-Sider ® is a leading nautical performance and lifestyle brand offering footwear, apparel and accessories to a broad range of consumers. The brand has been an American favorite since 1935 with the advent of the industry’s first boat shoe. Today, Sperry Top-Sider ® remains the unquestioned leader in the boat shoe category, but has also expanded its business into casuals, dress casuals, wet weather, boots and vulcanized product categories. Sperry Top-Sider ® has evolved into a well-balanced, multi-category and year-round lifestyle brand for men, women and children. In addition to its lifestyle products, Sperry Top-Sider ® also offers sport-specific and athlete-tested performance footwear solutions for sailors, boaters, anglers and multi-water sports enthusiasts. The Advance Water Technologies ™ product collection featuring A SV™ (Anti-Shock and Vibration) , Grip X3 Technology ® and SON-R Technology ® has allowed Sperry Top-Sider ® to reinforce its position as an innovation leader in these categories. The brand is primarily distributed through leading premium and better lifestyle retailers, as well as through its own Company-owned specialty retail stores. +Stride Rite ® : With a history dating back to 1919, Stride Rite ® is an industry leader in children's footwear technology and innovation. Stride Rite ® is focused on delivering the best possible footwear across a range of categories for kids under 9 years of age. All Stride Rite ® products are created from an in-depth knowledge and understanding of how children walk and grow, every new material and component is rigorously tested to ensure safety, proper fit and durability for kids. Stride Rite’s ® RITE STEPs ™ program, featuring the brand’s proprietary Sensory Response Technology ™ , is a full footwear solution that meets children's needs from pre-walkers to pre-schoolers. Stride Rite ® sells product under its own namesake brand, as well as children's footwear offerings from Saucony ® , Sperry Top-Sider ® , Keds ® , Merrell ® and select other footwear brands, through a network of mall-based specialty retail stores and a consumer direct website. Stride Rite ® also distributes children's footwear through better department stores, independent retailers, sporting goods chains, mall specialty retailers, online retailers and national family footwear stores. +Hush Puppies ® : Since 1958, the Hush Puppies ® brand has been a leader in casual footwear. The brand offers shoes, sandals and boots for men, women and children. The brand’s modern styling is complemented by a variety of comfort features and proprietary technologies that have earned the brand its reputation for comfort, style and value. In addition, the Company licenses the Hush Puppies ® brand for use on certain non-footwear products, including apparel, eyewear, handbags, socks, watches and plush toys. +Keds ® : The Keds ® brand is an authentic casual lifestyle brand with a foundation in canvas footwear. This iconic American brand was founded in 1916 with the introduction of the Champion ® sneaker. The simple and chic design ignited a style revolution, capturing the hearts of girls everywhere from fashion icons to the girl next door. Today, Keds ® is a head-to-toe fashion brand fueled by a passion for imagination, inspiring a new generation of girls to stay authentic, optimistic and brave. The brand targets teen girl consumers through an extensive collection of Champion ® originals, as well as a wide assortment of fashion sneakers and slip-ons. The brand’s product architecture consists of both core offerings and seasonal iterations featuring updated prints, patterns, materials and constructions. +Soft Style ® : The Soft Style ® product line consists primarily of women’s dress and casual footwear. +2. +Performance Group - The Performance Group consists of Merrell ® footwear and apparel, Saucony ® footwear and apparel, Chaco ® footwear, Patagonia ® footwear, and Cushe ® footwear. +Merrell ® : Merrell ® footwear is designed to inspire and encourage participation in the outdoors. Known for quality, durability and comfort, Merrell ® uses a variety of proprietary designs and technologies to create footwear with distinctive styling, performance and comfort features for use on the trail or in town. Merrell ® footwear products offer a wide range of styles from technical hiking, multi-sport footwear and the minimalist Merrell ® Barefoot Collection, to versatile lifestyle products for more casual outdoor adventures for men, women and kids. Merrell ® footwear products are sold primarily through outdoor specialty retailers, sporting goods chains, department stores, online retailers and catalog retailers. The Merrell ® apparel line extends the Merrell ® commitment to an active outdoor lifestyle with a versatile line of apparel built for the summit or the street. The apparel line features stylized lifestyle silhouettes built with the technical, high performance, weather fighting materials that consumers expect from an outdoor brand. In addition to apparel, Merrell ® markets accessories for men and women, including packs, bags and luggage. +5 +Table of Contents +Saucony ® : Saucony ® is a leading global performance running brand with roots dating back to 1898. Saucony ® targets elite, dedicated and casual runners through best-in-class design, innovation and performance technology. The brand is focused on meeting the biomechanical needs of runners while maximizing comfort and protection, bringing to market innovations such as: PowerGrid™ midsole technology; Sauc-Fit ® , ComfortLite Sock Liner™ and HydraMAX™ upper technologies; and iBR+™ and XT-900™ outsole material innovations. Saucony ® offers five categories of footwear product—technical, natural motion, race, trail and lifestyle originals, as well as a complete line of performance running apparel. Through the Find Your Strong ™ brand platform, Saucony ® is strengthening connections with consumers and elevating the position of the brand globally. The brand’s products are distributed primarily through leading run specialty and sporting goods retailers. +Chaco ® : The Chaco ® footwear line focuses primarily on performance sandals and closed-toe products for the outdoor enthusiast. +Patagonia ® Footwear: Pursuant to an agreement with Lost Arrow Corporation, the Company has the exclusive footwear marketing and distribution rights under Patagonia ® and other trademarks. The Patagonia ® footwear line focuses primarily on casual and outdoor performance footwear. Patagonia ® is a registered trademark of Patagonia, Inc. +Cushe ® : Cushe ® focuses on relaxed, design-led footwear for active men and women. The Cushe ® footwear business targets younger adult consumers and with products ranging from sport casual footwear to sandals sold through better-grade retailers. +3. +Heritage Group - The Heritage Group consists of Wolverine ® footwear and apparel, Cat ® footwear, Bates ® uniform footwear, Sebago ® footwear and apparel, Harley-Davidson ® footwear, and HyTest ® Safety footwear. +Wolverine ® : The Wolverine ® brand offers high-quality boots and shoes that incorporate innovative technologies to deliver comfort and durability. The Wolverine ® brand, in existence since 1883, markets footwear in three categories: (i) work and industrial; (ii) outdoor sport; and (iii) rugged casual. The development of DuraShocks ® , MultiShox ® , Wolverine Fusion ® and Wolverine Compressor ® technologies, as well as the development of the Contour Welt ® line, allows the Wolverine ® brand to offer a broad line of work footwear with a focus on comfort. The Wolverine ® work product line targets industrial workers and features work boots and shoes with protective features such as toe caps, metatarsal guards and electrical hazard protection. The Wolverine ® rugged casual and outdoor sport product lines incorporate DuraShocks ® , Wolverine iCS ® and other technologies and comfort features into products designed for casual and outdoor sport use. The target consumers for the rugged casual line products have active lifestyles. The outdoor sport line is designed to meet the needs of hunters, fishermen and other active outdoor sports enthusiasts. The Heritage Group markets a line of work and rugged casual Wolverine ® brand apparel. In addition, the Company licenses its Wolverine ® brand for use on eyewear and gloves. +Cat ® Footwear: Pursuant to a license arrangement with Caterpillar, Inc., the Company has exclusive footwear marketing and distribution rights under Caterpillar ® , Cat ® , Cat & Design, Walking Machines ® and other trademarks. The Company's association with Cat ® equipment encourages customers to view the footwear as rugged, durable and of high quality. Cat ® brand footwear products include work boots and shoes, sport boots, rugged casual and lifestyle footwear, including lines of work and casual footwear featuring iTechnology ™ and Hidden Tracks ® comfort features. Cat ® footwear targets work and industrial users and active lifestyle users. Cat ® , Caterpillar ® , Cat & Design and Walking Machines ® are registered trademarks of Caterpillar, Inc. +Bates ® Uniform Footwear: The Bates ® brand is a leader in supplying footwear to military and civilian uniform wearers. Bates ® utilizes DuraShocks ® , DuraShocks SR ™ , Wolverine iCS ® and other proprietary comfort technologies in the design of its boots and oxford shoes. Bates ® supplies military footwear to the U.S. Department of Defense and the military branches of several foreign countries. Civilian uniform users include police officers; security, postal and restaurant workers; and others in industrial occupations. Bates ® products are also distributed through specialty retailers and catalog retailers. +Sebago ® : The Sebago ® product line has been marketed since 1946 and consists primarily of performance nautical and American-inspired casual footwear for men and women, such as boat shoes and hand sewn loafers. Highly recognized Sebago ® line extensions include Sebago Docksides ® , Drysides ® and Triwater ™ . The Sebago ® manufacturing and design tradition of quality components, durability, comfort and “Americana” heritage is further supported by targeted distribution to better-grade independent, marine and department store retailers throughout the world. +6 +Table of Contents +Harley-Davidson ® Footwear: Pursuant to a license arrangement with the Harley-Davidson Motor Company, the Company has footwear marketing and distribution rights for Harley-Davidson ® branded footwear. Harley-Davidson ® branded 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 and other retail outlets. Harley-Davidson ® is a registered trademark of H-D U.S.A., LLC. +HyTest ® Safety Footwear: The HyTest ® product line consists primarily of high-quality work boots and shoes that incorporate various specialty safety features designed to protect against hazards of the workplace, including steel toe, composite toe, metatarsal guards, electrical hazard protection, static dissipating and conductive footwear. 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. +Other Businesses +In addition to its reportable segments, the Company also operates a multi-brand consumer direct business and a performance leathers business. +Multi-brand Consumer Direct - The multi-brand consumer direct division includes brick and mortar and eCommerce operations which sell and distribute footwear and apparel from the Company's brand portfolio. +Wolverine Leathers Division - The Wolverine Leathers Division markets pigskin leather for use primarily in the footwear industry. The Company believes pigskin leather offers superior performance and other advantages over cowhide leather. The Company’s waterproof and stain resistant leathers are featured in some of the Company’s footwear lines and sold to external footwear brands. +Marketing +The Company’s marketing strategy is to develop brand-specific plans and related promotional materials for U.S. and international markets to foster a consistent message for each of the Company’s core brands. Each brand operating group has dedicated marketing personnel who develop the marketing strategy for brands within that group. Marketing campaigns and strategies vary by brand, but are generally designed to target wholesale and retail customers in order to increase awareness of, and affinity for, the Company’s brands. The Company’s advertisements typically emphasize fashion, comfort, quality, durability, functionality and other performance and lifestyle attributes of the Company’s products. Components of the brand-specific marketing plans vary and may include print, radio and television advertising, search engine optimization, social networking sites, event sponsorships, in-store point-of-purchase displays, promotional materials and sales and technical assistance. +In addition to the Company’s internal marketing efforts, each brand provides its third-party licensees and distributors with creative direction, brand images and other materials to convey globally consistent brand messaging, including (i) direction on the categories of footwear and apparel 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 services regarding retail store layout and design. The Company believes its brand names represent a competitive advantage, and the Company, along with its licensees and distributors, make significant marketing investments to promote and enhance the position of its products and enhance brand awareness. +Domestic Sales and Distribution +The Company targets a variety of domestic distribution channels for its branded products: +• +The Company uses a dedicated sales force and customer service team, third party sales representatives, advertising and point-of-purchase materials to support domestic sales. +• +The Company maintains core in-stock inventories to service department stores, national chains, specialty retailers, catalog retailers, independent retailers, uniform outlets and its own consumer direct business. +• +Volume direct programs ship products directly to the retail customer without going through a Company distribution center and provide products at competitive prices with limited marketing support. The Company uses these programs to service major retail, catalog, mass merchant and government customers. +• +A network of independent Shoemobile ® distribution outlets distributes certain of the Company’s work and occupational footwear brands at industrial facilities. +• +The Company solicits all branches of the U.S. military and submits bids for contracts to supply specific footwear products. Such contracts typically contain future purchase options that may or may not be exercised. +7 +Table of Contents +In addition to its wholesale activities, the Company also operates a mono- and multi-brand consumer direct distribution channel, as described above. The Company continues to develop new programs, both independently and in conjunction with its retail customers, for the distribution of its products. +A broad distribution base insulates the Company from dependence on any one customer. No single customer accounted for more than 10% of the Company’s consolidated revenue in fiscal 2013 . +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 Company’s fiscal fourth quarter versus the 12 weeks included in each of the first three fiscal quarters). The Company expects current seasonal sales patterns to continue in future years. The Company also experiences some fluctuation in its levels of working capital, typically including an increase in net working capital requirements near the end of the first and third fiscal quarters. The Company meets its working capital requirements through internal free cash flow and, as needed, the Revolving Credit Facility, as discussed in more detail under the caption "Liquidity and Capital Resources" in Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations". +International Operations and Global Licensing +The Company’s foreign-sourced revenue is generated from a combination of (i) sales of branded footwear and apparel through the Company’s owned operations in Canada, the United Kingdom and certain countries in continental Europe, (ii) sales to third-party distributors for certain markets and businesses, (iii) income from a network of third-party licensees and distributors, and (iv) income from joint ventures that market the Company’s branded products in certain countries in South America and Asia. The Company’s international owned operations are located in markets where the Company believes it can gain a strategic advantage by directly controlling the sale of its products into retail accounts. License and distribution arrangements enable the Company to generate sales in other markets without the capital commitment required to maintain related foreign operations, employees, inventories or localized marketing programs. The Company has formed joint ventures to market and distribute footwear and apparel in Colombia and India. The Company believes that these joint ventures will provide it with a more meaningful ownership stake and near-term brand impact in these fast-growing markets than its traditional licensee and distributor arrangements. +The Company continues to develop its international network of third-party licensees and distributors to market its branded products. The Company assists its licensees in designing products that are appropriate to each foreign market, but consistent with the global brand positioning. Pursuant to distribution or license agreements, third-party licensees and distributors either purchase goods directly from the Company and authorized third-party manufacturers or manufacture branded products themselves, consistent with Company standards. Distributors and licensees are responsible for independently marketing and distributing the Company’s branded products in their respective territories, with product and marketing support from the Company. +Manufacturing and Sourcing +The Company directly controls the majority of the units of footwear and apparel manufactured or sourced under the Company’s brand names. The Company’s licensees directly control the balance. A substantial majority of the units sourced or manufactured by the Company are procured from third parties, with the remainder produced at Company-owned facilities. The Company sources a majority of its footwear from numerous third-party manufacturers in Asia Pacific and South America. The Company maintains offices in the Asia Pacific region to facilitate and develop strategies for the sourcing and importation of quality footwear and apparel. The Company has established guidelines for each of its third-party manufacturers in order to monitor product quality, labor practices and financial viability. The Company has adopted “Engagement Criteria for Partners & Sources,” a policy that requires the Company’s domestic and foreign manufacturers, licensees and distributors to use ethical business standards, comply with all applicable health and safety laws and regulations, commit to use environmentally safe practices, treat employees fairly with respect to wages, benefits and working conditions and not use child or prison labor. The Company’s third-party sourcing strategy allows the Company to (i) benefit from lower manufacturing costs and state-of-the-art manufacturing facilities, (ii) source high quality raw materials from around the world, and (iii) avoid capital expenditures necessary for additional owned factories. The Company believes that its overall global manufacturing strategy provides the flexibility to properly balance the need for timely shipments, high quality products and competitive pricing. Footwear produced by the Company is manufactured at a Company-operated facility located in Michigan. During the fourth quarter of 2013, the Company substantially completed a restructuring of its manufacturing operations in the Dominican Republic that resulted in the closure of one facility and the sale to a third party of a second facility. +The Company’s principal required raw material is quality leather, which it purchases from a select group of domestic and foreign suppliers. The global availability of common upper materials and specialty leathers eliminates any reliance by the Company on a sole supplier. +The Company currently purchases all of the raw pigskins used for its Wolverine Leathers Division from one domestic source, which has been a reliable and consistent supplier to the Company for over 40 years. Alternative sources of raw pigskin are available, but the Company believes these sources offer less advantageous pricing, quality and compatibility with the Company’s processing +8 +Table of Contents +method. The Company purchases all of its other raw materials and component parts from a variety of sources and does not believe that any of these sources are 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, tariffs and duties, 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, but that a sustained disruption of such sources of supply could have an adverse impact on the Company’s results of operations and financial position. +Trademarks, Licenses and Patents +The Company holds a significant portfolio of registered and common law trademarks that identify its branded products and technologies. The Company’s owned trademarks include Hush Puppies ® , Dog Likeness (registered design trademark), Wolverine ® , Bates ® , Cushe ® , Chaco ® , Soft Style ® , Wolverine Fusion ® , DuraShocks ® , MultiShox ® , Wolverine Compressor ® , Wolverine ICS ® , Hidden Tracks ® , iTechnology ™ , Bounce ® , Comfort Curve ® , HyTest ® , Merrell ® , M Circle Design (registered design trademark), Continuum ® , Sebago ® , Q Form ® , Sperry Top-Sider ® , Saucony ® , Stride Rite ® and Keds ® . The Company’s Wolverine Leathers Division markets its pigskin leathers under the trademarks Wolverine Warrior Leather ® , Weather Tight ® and All Season Weather Leathers™ . The Company has footwear marketing and distribution rights under the Cat ® , Harley-Davidson ® and Patagonia ® trademarks pursuant to license arrangements with the respective trademark owners. The Cat ® and Patagonia ® licenses extend for five or more years and the Harley-Davidson ® license has a term through December 31, 2015. All three licenses are subject to early termination for breach. +The Company believes that consumers identify its products by the Company’s trademarks and that its trademarks are valuable assets. The Company is not aware of any third-party infringing uses or any prior claims of ownership of its trademarks that could materially affect its current business. The Company has a policy of registering its primary trademarks and vigorously defending its trademarks against infringement or other threats whenever practicable. The Company also holds many design and utility patents, copyrights and various other proprietary rights. The Company vigorously protects its proprietary rights under applicable laws. +Order Backlog +At February 8, 2014, the Company had an order backlog of approximately $1,005 million compared to an order backlog of approximately $1,000 million at February 9, 2013, determined on a consistent basis. The majority of the backlog relates to orders for products expected to ship in 2014 . Orders in the backlog are subject to cancellation by customers and to changes in planned customer demand or at-once orders. The backlog at any 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 predictive of eventual actual shipments. +Competition +The Company markets its footwear and apparel lines in a highly competitive and fragmented environment. The Company competes with numerous domestic and international footwear marketers, some of which are larger and have greater resources than the Company. The Company has a significant number of major competitors for its brands of footwear and apparel. Product performance and quality, including technological improvements, product identity, competitive pricing and ability to control costs and the ability to adapt to style changes are all important elements of competition in the footwear and apparel markets served by the Company. The footwear and apparel industries are subject to changes in consumer preferences. The Company strives to maintain its competitive position through promotions designed to increase brand awareness, manufacturing and sourcing efficiencies, 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 competitive position in the overall footwear and apparel industries. Market shares in the non-athletic footwear and apparel 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 activities related to the development of new production techniques and to the improvement of the function, performance, reliability and quality of its branded footwear and other products. For example, the Company’s continuing relationship with the Biomechanics Evaluation Laboratory at Michigan State University has helped validate and refine specific biomechanical design concepts, such as Bounce ® , DuraShocks ® and Hidden Tracks ® comfort technologies that have been incorporated into the Company’s footwear. The Company also utilizes the research and testing capabilities of the Saucony ® human performance and +9 +Table of Contents +innovation lab as well as research funded at university labs, including the University of Colorado and the University of Delaware, with a particular focus on quantifying the interaction between footwear and runners’ strides. While the Company expects to continue to be a leading developer of footwear innovations, research and development costs do not represent a material portion of operating expenses. +Environmental Matters +Compliance with foreign and domestic federal, state and local requirements regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, have not had, nor are they expected to have, any material effect on the capital expenditures, earnings or competitive position of the Company. The Company uses and generates certain substances and wastes that are regulated or may be deemed hazardous to the environment under certain federal, state and local regulations. The Company works with domestic and foreign federal, state and local agencies from time to time to resolve cleanup issues at various sites and other regulatory issues. +Employees +As of December 28, 2013 , the Company had approximately 7,274 domestic and foreign production, office and sales employees. Approximately 57 employees were covered by a single union contract that expires on March 31, 2015. 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, Finance Committee Charter, and Governance Committee Charter, is available at its website at www.wolverineworldwide.com/investor-relations/corporate-governance . Printed copies of the documents listed above are available upon request, without charge, by writing to the Company at 9341 Courtland Drive, N.E., Rockford, Michigan 49351, Attention: General Counsel. +The Company also makes available on or through its website at www.wolverineworldwide.com/investor-relations , 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 1A. +Risk Factors +Risks Related to the Company’s Business +Changes in general economic conditions and other factors affecting consumer spending could adversely affect the Company’s sales, operating results or financial position. +The Company’s global operations depend on factors affecting consumer disposable income and spending patterns. These factors include general economic conditions, employment rates, business conditions, interest rates and tax policy in each of the markets and regions in which the Company operates. Customers may defer or cancel purchases of the Company’s products due to uncertainty about global economic conditions. Consumer confidence may decline due to recessionary economic cycles, high interest rates on consumer or business borrowings, restricted credit availability, inflation, high levels of unemployment or consumer debt, high tax rates or other economic factors. A decline in consumer confidence could adversely affect demand for the Company’s products. Changes in the amount or severity of bad weather or unusual weather patterns and the growth or decline of global footwear, apparel or consumer direct markets could negatively affect consumer spending. A decline in demand for the Company’s products could reduce its revenues or profit margins. +General economic conditions and other factors such as those listed above may increase the Company’s cost of sales and decrease the Company’s profitability. The Company’s profitability is also dependent on the prices of commodities, such as cotton, leather, rubber, petroleum, cattle and pigskin hides, used to make and transport its products, as well as the prices of labor, insurance and health care, all of which may be affected by general economic conditions. +The Company operates in competitive industries and markets. +The Company competes with a large number of marketers of footwear or apparel, and consumer direct companies. Some of these competitors are larger and have greater resources than the Company. Important elements of such competition are product performance and quality, including technological improvements, product identity, competitive pricing and the ability to adapt to style changes. Consumer preferences and, as a result, the popularity of particular designs and categories of footwear and apparel, +10 +Table of Contents +generally change over time. The Company's efforts to maintain and improve its competitive position by monitoring and responding to changes in consumer preferences, increasing brand awareness, gaining sourcing efficiencies, and enhancing the style, comfort and perceived value of its products may not be successful. The Company’s continued ability to sell its products at competitive prices and to meet shifts in consumer preferences will affect its future sales. If the Company is unable to respond effectively to competitive pressures and changes in consumer preferences and spending, its results of operations and financial position may be adversely affected. +Many of the Company’s competitors have more developed consumer and customer bases, are able to sell their products at lower prices, or have greater financial, technical or marketing resources than the Company, particularly its competitors in the apparel and consumer direct businesses. The Company’s competitors may own more recognized brands; implement more effective marketing campaigns; adopt more aggressive pricing policies; make more attractive offers to potential employees, distribution partners and manufacturers; or respond more quickly to changes in consumer preferences. The Company’s results of operations and financial position could be adversely affected if its strategic initiatives are not successful. +The Company’s operating results could be adversely affected if it is unable to maintain its brands’ positive images with consumers or adjust to changing footwear and apparel trends. +The Company’s success depends in part on its brands’ images. If the Company is unable to timely and appropriately respond to changing consumer preferences and evolving footwear and apparel trends, the names and images of its brands may be impaired. If the Company fails to react appropriately to changes in consumer preferences, consumers may consider its brands’ images to be outdated or associate its brands with styles that are no longer popular. Such failures could result in substantial unsold inventory and adversely affect the Company’s operating results. +The Company’s operating results depend on effectively managing inventory levels. +The Company’s ability to manage its inventories effectively is an important factor in its operations. Inventory shortages can impede the Company’s ability to meet demand, adversely affect the timing of shipments to customers, and, consequently, diminish brand loyalty and decrease sales. Conversely, excess inventories can result in lower gross margins if the Company lowers prices in order to liquidate excess inventories. In addition, inventory may become obsolete as a result of changes in consumer preferences or otherwise. The Company’s business, results of operations and financial position could be adversely affected if it is unable to effectively manage its inventory. +Increases or changes in duties, quotas, tariffs and other trade restrictions could adversely impact the Company’s sales and profitability. +All of the Company’s products manufactured overseas and imported into the U.S., the European Union and other countries are subject to customs duties collected by customs authorities. The customs information submitted by the Company is routinely subject to review by customs authorities. Additional U.S. or foreign customs duties, quotas, tariffs, anti-dumping duties, safeguard measures, cargo restrictions to prevent terrorism, the loss of most favored nation trading status or other trade restrictions may be imposed on the importation of the Company’s products in the future. The imposition of such costs or restrictions in countries where the Company operates, as well as in countries where its third-party distributors and licensees operate, could result in increases in the cost of the Company’s products generally and could adversely affect its sales and profitability. +Foreign currency exchange rate fluctuations could adversely impact the Company’s business. +Foreign currency fluctuations affect the Company’s reported revenue and profitability. Changes in currency exchange rates may impact the Company’s financial results positively or negatively in one period and not another, which may make it difficult to compare its operating results from different periods. Currency exchange rate fluctuations may also adversely impact third parties that manufacture the Company’s products by making their costs of raw materials or other production costs more expensive and more difficult to finance, thereby raising prices for the Company, its distributors and its licensees. The Company’s hedging strategy may not be effective in reducing all risks, and no hedging strategy can completely insulate the Company from foreign exchange risk. For a more detailed discussion of the risks related to foreign currency fluctuation, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk". +Significant supplier capacity constraints, supplier production disruptions, supplier quality issues or price increases could increase the Company’s operating costs and adversely impact the Company’s business. +The Company currently sources a substantial majority of its products from third-party manufacturers in foreign countries, predominantly China. As is common in the industry, the Company does not have long-term contracts with its third-party suppliers. There can be no assurance that the Company will not experience difficulties with such suppliers, including reductions in the availability of production capacity, failures to meet production deadlines or increases in manufacturing costs. The Company’s future results will depend partly on its ability to maintain positive working relationships with third-party suppliers. +11 +Table of Contents +Foreign manufacturing is subject to a number of risks, including work stoppages, transportation delays and interruptions, political instability, foreign currency fluctuations, changing economic conditions, expropriation, nationalization, the imposition of tariffs, import and export controls and other non-tariff barriers and changes in governmental policies. Various factors could significantly interfere with the Company’s ability to source its products, including adverse developments in trade or political relations with China or other countries where it sources its products, or a shift in these countries' manufacturing capacities away from footwear and apparel to other industries. Any of these events could have an adverse effect on the Company’s business, results of operations and financial position and, in particular, on the Company’s ability to meet customer demands and produce its products in a cost-effective manner. +The cost of raw materials and services could adversely affect the Company’s results of operations. +The Company’s ability to competitively price its products depends on the cost of components, services, labor, equipment and raw materials, including leather and materials used in the production of footwear. The cost of services and materials is subject to change based on availability and market conditions that are difficult to predict. Various conditions, such as diseases affecting the availability of leather, affect the cost of the footwear marketed by the Company. In addition, fuel prices and numerous other factors, such as the possibility of service interruptions at shipping and receiving ports, affect the Company’s shipping costs. Increases in costs for services and materials used in production could have a negative impact on the Company’s results of operations and financial position. The Company purchases raw pigskins for its leathers operations from a single domestic source pursuant to short-term contracts. If this source fails to continue to supply the Company with raw pigskin or supplies the Company with raw pigskin on less favorable terms, the Company’s cost of raw materials for its leathers operations could increase and, as a result, have a negative impact on the Company’s results of operations and financial position. +Labor disruptions could adversely affect the Company’s business. +The Company’s business depends on its ability to source and distribute products in a timely manner. Labor disputes at or that affect independent factories where the Company’s goods are produced, shipping ports, tanneries, transportation carriers, retail stores or distribution centers create significant risks for the Company’s business, particularly if these disputes result in work slowdowns, lockouts, strikes or other disruptions during its peak manufacturing and importing seasons. Any labor dispute may have a material adverse effect on the Company’s business, potentially resulting in cancelled orders by customers and unanticipated inventory accumulation, and may negatively impact the Company’s results of operations and financial position. +A significant reduction in customer purchases of the Company’s products or failure of customers to pay for the Company’s products in a timely manner could adversely affect the Company’s business. +The Company’s financial success is directly related to its customers continuing to purchase its products. The Company does not typically have long-term contracts with its customers. Sales to the Company’s customers are generally on an order-to-order basis and are subject to rights of cancellation and rescheduling by the customers. Failure to fill customers’ orders in a timely manner could harm the Company’s relationships with its customers. Furthermore, if any of the Company’s major customers experiences a significant downturn in its business, or fails to remain committed to the Company’s products or brands, these customers may reduce or discontinue purchases from the Company, which could have an adverse effect on the Company’s results of operations and financial position. +The Company sells its products to customers and extends credit based on an evaluation of each customer’s financial condition. The financial difficulties of a customer could cause the Company to stop doing business with that customer or reduce its business with that customer. The Company’s inability to collect from its customers or a cessation or reduction of sales to certain customers because of credit concerns could have an adverse effect on the Company’s business, results of operations and financial position. +The general trend toward consolidation in retail and specialty retail could lead to fewer customers, customers seeking more favorable price, payment or other terms from the Company and a decrease in the number of stores that carry its products. In addition, changes in the channels of distribution, such as the continued growth of Internet commerce and the trend toward the sale of private label products by major retailers, could have an adverse effect on the Company’s results of operations and financial position. +The Company has been awarded a number of U.S. Department of Defense contracts that include future purchase options for Bates ® footwear. The U.S. Department of Defense is not obligated to exercise these future purchase options for Bates ® footwear or to solicit future footwear awards at levels consistent with historical awards or in a manner in which the Company, as a large business contractor, is eligible to bid. Failure by the U.S. Department of Defense to exercise purchase options or the Company’s failure to secure future U.S. Department of Defense contracts could have an adverse effect on the Company’s results of operations and financial position. +12 +Table of Contents +The Company’s consumer direct operations have required, and will continue to require, a substantial investment and commitment of resources and are subject to numerous risks and uncertainties. +The Company’s consumer direct locations have required substantial fixed investment in equipment and leasehold improvements, information systems, inventory and personnel. The Company has also made substantial operating lease commitments for retail space. Due to the high fixed-cost structure associated with the Company’s consumer direct operations, a decline in sales or the closure or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements, and employee-related costs. Many factors, some of which are beyond the Company’s control, pose risks and uncertainties to the Company’s consumer direct operations. These factors include, but are not limited to, credit card fraud, the inability to manage costs associated with store construction and operation, declines in consumer confidence, and changes in consumer spending patterns and retail shopping preferences, including the shift from brick and mortar to eCommerce and mobile channels. The Company’s failure to successfully respond to these factors could adversely affect the Company’s consumer direct business, as well as damage its reputation and brands, and could materially affect the Company’s results of operations. +Seasonality and weather conditions affect the Company’s business. +The Company markets and sells footwear and apparel suited for specific seasons, such as sandals in the summer season and boots in the winter season. If the weather conditions for a particular season vary significantly from those typical for the season, such as an unusually cold and rainy summer, or an unusually warm and dry winter, consumer demand for seasonally appropriate merchandise could be adversely affected. Lower demand for seasonally appropriate merchandise may result in excess inventory, forcing the Company to sell these products at significantly discounted prices, which would adversely affect the Company’s results of operations. Conversely, if weather conditions permit the Company to sell seasonal products early in the season, this may reduce inventory levels needed to meet customers’ needs later in that same season. Consequently, the Company’s results of operations are highly dependent on future weather conditions and its ability to react to changes in weather conditions. Weather conditions can also impact the Company's ability to distribute its products on a timely basis. +Changes in the credit markets could adversely affect the Company’s financial success. +Changes in the credit markets could adversely impact the Company’s future results of operations and financial position. If the Company’s third-party distributors, suppliers and retailers are not able to obtain financing on favorable terms, or at all, they may delay or cancel orders for the Company’s products, or fail to meet their obligations to the Company in a timely manner, either of which could adversely impact the Company’s sales, cash flow and operating results. In addition, the lack of available credit or an increase in the cost of credit may significantly impair the Company’s ability to obtain additional credit to finance future expansion plans, or refinance existing credit, on favorable terms, or at all. +Unfavorable findings resulting from a government audit could subject the Company to a variety of penalties and sanctions, and could negatively impact its future revenues. +The U.S. federal government has the right to audit the Company’s performance under its government contracts. If a government audit discovers improper or illegal activities, the Company could be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with U.S. federal government agencies. The Company could also suffer serious harm to its reputation if the U.S. government alleges that the Company acted in an improper or illegal manner, whether or not any such allegations have merit. If, as the result of an audit or for any other reason, the Company is suspended or barred from contracting with the U.S. federal government generally, or any specific agency thereof, if the Company’s reputation or relationship with government agencies is impaired, or if the U.S. federal government otherwise ceases doing business with the Company or significantly decreases the amount of business it does with the Company, the Company’s revenue and profitability would decrease. The Company is also subject to customs and other audits in various jurisdictions where it operates. Negative audit findings in foreign jurisdictions similarly could have an adverse effect on the Company’s results of operations and financial position. +An increase in the Company’s effective tax rate or negative determinations by domestic or foreign tax authorities could have a material adverse effect on the Company’s results of operations and financial position. +A significant amount of the Company’s earnings are generated by its Canadian, European and Asia Pacific subsidiaries and, to a lesser extent, in jurisdictions that are not subject to income tax. As a result, the Company’s income tax expense has historically differed from the tax computed at the U.S. federal statutory income tax rate due to discrete items and because the Company does not provide for U.S. taxes on earnings it considers to be permanently reinvested in foreign operations. The Company’s future effective tax rates could be unfavorably affected by a number of factors including: changes in the tax rates in jurisdictions in which the Company generates income; changes in, or in the interpretation of, tax rules and regulations in the jurisdictions in which the Company does business; decreases in the amount of earnings in countries with low statutory tax rates; or if the Company repatriates foreign earnings for which no provision for U.S. taxes has previously been made. An increase in the Company’s effective tax rate could have a material adverse effect on its after-tax results of operations and financial position. +13 +Table of Contents +In addition, the Company’s income tax returns are subject to examination by the Internal Revenue Service and other domestic and foreign tax authorities. The Company regularly assesses the likelihood of outcomes resulting from these examinations to determine the adequacy of its provision for income taxes, and establishes reserves for potential adjustments that may result from these examinations. There can be no assurance that the final determination of any of these examinations will not have an adverse effect on the Company’s results of operations and financial position. +Failure of the Company’s international licensees and distributors to meet sales goals or to make timely payments on amounts owed to the Company could adversely affect the Company’s financial performance. +In many international markets, independent licensees or distributors sell the Company’s products. Failure by the Company’s licensees or distributors to meet planned annual sales goals or to make timely payments on amounts owed to the Company could have an adverse effect on the Company’s business, results of operations and financial position. If a change in licensee or distributor becomes necessary, it may be difficult and costly to locate an acceptable substitute distributor or licensee and the Company may experience increased costs, as well as substantial disruption and a resulting loss of sales and brand equity in the market where such licensee or distributor operates. +The Company’s reputation and competitive position are dependent on its third-party manufacturers, distributors, licensees and others complying with applicable laws and the Company’s ethical standards. +The Company requires its independent contract manufacturers, distributors, licensees and others with which it does business to comply with its ethical standards and applicable laws relating to working conditions and other matters. If a party with which the Company does business is found to have violated the Company’s ethical standards or applicable laws, the Company could receive negative publicity that could damage its reputation, negatively affect the value of its brands and subject the Company to legal risks. +In addition, the Company relies on its licensees to help preserve the value of the Company’s brands. The Company's attempts to protect its brands through approval rights over design, production processes, quality, packaging, merchandising, distribution, advertising and promotion of its licensed products may not be successful as the Company cannot completely control the use by its licensees of its licensed brands. The misuse of a brand by a licensee could adversely affect the value of such brand. +Global political and economic uncertainty could adversely impact the Company’s business. +Concerns regarding acts of terrorism and regional and international conflicts have created significant global economic and political uncertainties that may have material and adverse effects on consumer demand, acceptance of U.S. brands in international markets, foreign sourcing of products, shipping and transportation, product imports and exports, and the sale of products in foreign markets, any of which could adversely affect the Company’s ability to source, manufacture, distribute and sell its products. The Company is subject to risks related to doing business in developing countries and economically volatile areas. These risks include social, political and economic instability, nationalization of the Company’s, or its distributors’ and licensees’, assets and operations by local government authorities; slower payment of invoices; and restrictions on the Company’s ability to repatriate foreign currency or receive payment of amounts owed by third-party distributors and licensees. In addition, commercial laws in these areas may not be well developed or consistently administered, and new unfavorable laws may be retroactively applied. Any of these risks could have an adverse impact on the Company’s prospects and results of operations in these areas. +Concerns regarding the European debt crisis, market perceptions and euro instability could adversely affect the Company’s business, results of operations and financing. +Concerns persist regarding the debt burden of certain countries in the Eurozone, in particular Greece, Italy, Ireland, Portugal and Spain, and their ability to meet future financial obligations, as well as the overall stability of the euro and the suitability of the euro as a single currency given the diverse economic and political circumstances in individual Eurozone countries. These concerns could lead to the re-introduction of individual currencies in one or more Eurozone countries, or, in more extreme circumstances, the possible dissolution of the euro as a currency. Should the euro be dissolved, the legal and contractual consequences for holders of euro-denominated obligations would be determined by laws in effect at that time. These potential developments, or market perceptions concerning these and related issues, could adversely affect the value of the Company’s euro-denominated assets and obligations. In addition, concerns over the effect of this financial crisis on financial institutions in Europe and elsewhere could have an adverse impact on the capital markets generally and, more specifically, on the ability of the Company’s customers, suppliers and lenders to finance their respective businesses. +If the Company is unsuccessful in establishing and protecting its intellectual property, the value of its brands could be adversely affected. +The Company invests significant resources to develop and protect its intellectual property, and it believes that its trademarks and other intellectual property rights are important to its future success. The Company’s ability to remain competitive is dependent upon its continued ability to secure and protect trademarks, patents and other intellectual property rights in the U.S. and +14 +Table of Contents +internationally for all of the Company’s lines of business. The Company relies on a combination of trade secret, patent, trademark, copyright and other laws, license agreements and other contractual provisions and technical measures to protect its intellectual property rights; however, some countries’ laws do not protect intellectual property rights to the same extent as do U.S. laws. +The Company’s business could be significantly harmed if it is not able to protect its intellectual property, or if a court found it to be infringing on other persons’ intellectual property rights. Any intellectual property lawsuits or threatened lawsuits in which the Company is involved, either as a plaintiff or as a defendant, could cost the Company a significant amount of time and money and distract management’s attention from operating the Company’s business. In addition, if the Company does not prevail on any intellectual property claims, then it may have to change its manufacturing processes, products or trade names, any of which could reduce its profitability. In addition, some of the Company’s branded footwear operations are operated pursuant to licensing agreements with third-party trademark owners. These agreements are subject to early termination for breach. Expiration or early termination by the licensor of any of these license agreements could have a material adverse effect on the Company’s business, results of operations and financial position. +The Company periodically discovers products that are counterfeit reproductions of its products or that it believes otherwise infringe on its intellectual property rights. The Company has not always been able to stop production and sales of counterfeit products and infringement of its intellectual property rights. The actions the Company takes to establish and protect trademarks, patents and other intellectual property rights both inside and outside of the U.S. may not be adequate to prevent imitation of its products by others. Continued sales of products that infringe the Company’s intellectual property rights could adversely affect its sales, devalue its brands and result in the shift of consumer preference away from its products. +The Company’s inability to attract and retain executive managers and other key employees, or the loss of one or more executive managers or other key employees, could adversely affect the Company’s business. +The Company depends on its executive management and other key employees. In the footwear, apparel and consumer direct industries, competition for key executive talent is intense, and the Company’s failure to identify, attract or retain executive managers or other key employees could adversely affect its business. The Company must offer and maintain competitive compensation packages to effectively recruit and retain such individuals. Further, the loss of one or more executive managers or other key employees, or the Company’s failure to successfully implement succession planning, could adversely affect the Company, its results of operations or financial position. +Inflationary pressures and regulatory changes may lead to higher employment and pension costs for the Company. +General inflationary pressures, changes in employment laws and regulations, and other factors could increase the Company’s overall employment costs. The Company’s employment costs include costs relating to health care benefits and benefits under its retirement plans, including U.S.-based defined benefit plans. The annual cost of benefits can vary significantly depending on a number of factors, including changes in the assumed or actual rate of return on pension plan assets, a change in the discount rate used to determine the annual service cost related to the defined benefit plans, a change in method or timing of meeting pension funding obligations and the rate of health care cost inflation. Increases in the Company’s overall employment and pension costs could have an adverse effect on the Company’s business, results of operations and financial position. +Disruption of the Company’s information technology systems could adversely affect the Company’s business. +The Company’s information technology systems are critical to the operations of its business. Any interruption, unauthorized access, impairment or loss of data integrity or malfunction of these systems could severely impact the Company’s business, including delays in product fulfillment and reduced efficiency in operations. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems, or with maintenance or adequate support of existing systems, could disrupt or reduce the efficiency of the Company’s operations. +If the Company encounters problems affecting its distribution system, its ability to deliver its products to the market could be adversely affected. +The Company relies on owned or independently operated distribution facilities to warehouse and ship products to its customers. The Company’s distribution system includes computer-controlled and automated equipment, which may be subject to a number of risks related to security or computer viruses, the proper operation of software and hardware, power interruptions or other system failures. Because substantially all of the Company’s products are distributed from a relatively small number of locations, its operations could also be interrupted by earthquakes, floods, fires or other natural disasters near its distribution centers. The Company's business interruption insurance may not adequately protect the Company from the adverse effects that could be caused by significant disruptions affecting its distribution facilities, such as the long-term loss of customers or an erosion of brand image. In addition, the Company’s distribution capacity is dependent on the timely performance of services by third parties, including the transportation of products to and from the Company’s distribution facilities. If the Company encounters problems affecting +15 +Table of Contents +its distribution system, its ability to meet customer expectations, manage inventory, complete sales and achieve operating efficiencies could be materially adversely affected. +Failure to maintain the security of personally identifiable and other information of the Company’s customers and employees could negatively impact its business. +In connection with the Company’s business, it collects and retains significant volumes of certain types of personally identifiable and other information pertaining to its customers and employees. Theft, loss, fraudulent use or misuse of customer, employee or the Company’s other data as a result of cybercrime or otherwise could adversely impact the Company’s reputation and could result in significant costs, fines, litigation or regulatory action against the Company. +The Company faces risks associated with its growth strategy and acquiring businesses. +The Company has expanded its products and markets in part through strategic acquisitions, and it may continue to do so in the future, depending on its ability to identify and successfully pursue suitable acquisition candidates. Acquisitions, including the PLG acquisition in 2012, involve numerous risks, including risks inherent in entering new markets in which the Company may not have prior experience; potential loss of significant customers or key personnel of the acquired business; managing geographically-remote operations; and potential diversion of management’s attention from other aspects of the Company’s business operations. Acquisitions may also cause the Company to incur debt or result in dilutive issuances of its equity securities, write-offs of goodwill and substantial amortization expenses associated with other intangible assets. The Company may not be able to obtain financing for future acquisitions on favorable terms, making any such acquisitions more expensive. Any such financing may have onerous terms that restrict the Company’s operations. The Company cannot provide assurance that it will be able to successfully integrate the operations of any acquired businesses into its operations and achieve the expected benefits of any acquisitions. The failure to successfully integrate newly acquired businesses or achieve the expected benefits of strategic acquisitions in the future could have an adverse effect on the Company’s results of operations and financial position. The Company may not consummate a potential acquisition for a variety of reasons, but it may nonetheless incur material costs in the preliminary stages of such an acquisition that it cannot recover. +Maintenance and growth of the Company’s business depends upon the availability of adequate capital. +The maintenance and growth of the Company’s business depends on the availability of adequate capital, which in turn depends in large part on cash flow generated by the Company’s business and the availability of equity and debt financing. The Company cannot provide assurance that its operations will generate positive cash flow or that it will be able to obtain equity or debt financing on acceptable terms, or at all. Further, the Company cannot provide assurance that it will be able to finance any expansion plans. +Expanding the Company’s brands into new markets and expanding its owned consumer direct operations may be difficult and costly, and unsuccessful efforts to do so may adversely affect the Company’s brands and business. +As part of the Company’s growth strategy, it seeks to enhance the positioning of its brands, to extend its brands into complementary product categories, to expand geographically and to expand its owned consumer direct operations. There can be no assurance that the Company will be able to successfully implement any or all of these growth strategies, and unsuccessful efforts to do so could have an adverse effect on its results of operations and financial position. +Part of the future growth of the Company’s owned consumer direct operations is significantly dependent on the Company’s ability to operate stores in desirable locations at reasonable lease costs. The Company cannot be sure as to when or whether such desirable locations will become available at reasonable costs. Further, if the Company is unable to renew or replace its existing store leases or enter into leases for new stores at attractive locations on favorable terms, or if the Company violates any of the terms of its current leases, its growth and profitability could be harmed. +An impairment of goodwill or other acquired intangibles could have an adverse material impact to the Company’s results of operations. +The carrying value of goodwill represents the fair value of acquired businesses in excess of identifiable assets and liabilities as of the acquisition date. The carrying value of other intangibles represents the fair value of trade names, and other acquired intangibles as of the acquisition date. Goodwill and other acquired intangibles expected to contribute indefinitely to the Company’s cash flows are not amortized, but must be evaluated by the Company at least annually for impairment. If the carrying amounts of one or more of these assets are not recoverable based upon discounted cash flow and market approach analyses, the carrying amounts of such assets are impaired by the estimated difference between the carrying value and estimated fair value. An impairment charge could materially affect the Company’s results of operations. +16 +Table of Contents +Changes in government regulation may increase the Company’s costs of compliance and failure to comply with government regulations or other standards may adversely affect its brands and business. +The Company’s business is affected by changes in government and regulatory policies in the U.S. and in foreign jurisdictions. New requirements relating to product safety and testing and new environmental requirements, as well as changes in tax laws, duties, tariffs and quotas, could have a negative impact on the Company’s ability to produce and market footwear at competitive prices. Failure to comply with such regulations, as well as comply with ethical, social, product, labor and environmental standards, could also jeopardize the Company’s reputation and potentially lead to various adverse consumer actions, including boycotts. Any negative publicity about these types of concerns may reduce demand for the Company’s merchandise. Damage to the Company’s reputation or loss of consumer confidence for any of these or other reasons could adversely affect the Company’s results of operations, as well as require additional resources to rebuild its reputation and brand value. +The Company’s operations are subject to environmental and workplace safety laws and regulations, and costs or claims related to these requirements could adversely affect the Company’s business. +The Company’s operations are subject to various federal, state and local laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air, soil and water, the management and disposal of solid and hazardous materials and wastes, employee exposure to hazards in the workplace, and the investigation and remediation of contamination resulting from releases of hazardous materials. Failure to comply with legal requirements could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. The Company may incur investigation, remediation or other costs related to releases of hazardous materials or other environmental conditions at its currently or formerly owned or operated properties, regardless of whether such environmental conditions were created by the Company or a third-party, such as a prior owner or tenant. The Company has incurred, and continues to incur, costs to address soil and groundwater contamination at some locations. If such issues become more expensive to address, or if new issues arise, they could increase the Company’s expenses, generate negative publicity, or otherwise adversely affect the Company. +The disruption, expense and potential liability associated with existing and future litigation against the Company could adversely affect its reputation, financial position or results of operations. +The Company is a defendant from time to time in lawsuits and regulatory actions relating to its business. Due to the inherent uncertainties of litigation and regulatory proceedings, the Company cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have an adverse impact on the Company’s business, financial position and results of operations. In addition, regardless of the outcome of any litigation or regulatory proceedings, such proceedings are expensive and may require that the Company devote substantial resources and executive time to the defense of such proceedings. +Provisions of Delaware law and the Company’s certificate of incorporation and bylaws could prevent or delay a change in control or change in management that could be beneficial to the Company’s stockholders. +Provisions of the Company’s certificate of incorporation and bylaws, as well as provisions of Delaware law, could discourage, delay or prevent a merger, acquisition or other change in control of the Company. These provisions are intended to provide the Company’s Board of Directors with a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a Board of Directors that is classified so that only one-third of directors stand for election each year. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions that may be beneficial to the Company's stockholders. +There are risks, including stock market volatility, inherent in owning the Company’s common stock. +The market price and volume of the Company’s common stock have been, and may continue to be, subject to significant fluctuations. These fluctuations may arise from general stock market conditions, the impact of risk factors described in this Item 1A. on the Company’s financial position and results of operations, or a change in opinion in the market regarding the Company’s business prospects or other factors, many of which may be outside the Company’s immediate control. Changes in the amounts and frequency of share repurchases or dividends also could adversely affect the value of the Company’s common stock. +A U.S. federal government shutdown could adversely affect the Company’s business. +A U.S. federal government shutdown could adversely affect the Company’s business due to, among other things, delays in importing products at U.S. ports, supply chain disruption and reduced purchasing by the U.S. Department of Defense or other domestic military purchasers. In addition, if the U.S. federal government is not able to manage its fiscal matters, economic confidence may decline in the U.S. and globally, which may cause economic conditions to deteriorate in the regions where the Company operates. This deterioration could adversely affect demand for the Company’s products. +17 +Table of Contents +Risks Related to the Acquisition of PLG +The Company’s failure to successfully integrate PLG or realize the benefits of the transaction in a timely and cost-efficient manner could adversely affect the Company’s business. +The long-term success of the PLG acquisition will depend, in part, on the Company’s ability to continue to realize the anticipated benefits and synergies from combining its business and PLG. Any failure to timely realize these anticipated benefits and synergies could have a material adverse effect on the Company’s results of operations and financial position. +The Company may incur unexpected future transaction and integration costs as a result of the PLG acquisition. +The Company could still incur unexpected future transaction costs specifically attributable to the PLG acquisition and integration. Any such costs could adversely affect the Company’s financial position or results of operations. +The Company’s indebtedness increased following the completion of the PLG acquisition, which could adversely affect the Company. +The Company’s current indebtedness, which is significantly greater than the Company’s indebtedness prior to the PLG acquisition, could adversely affect the Company by decreasing its business flexibility and increasing its borrowing costs. In connection with the acquisition, the Company entered into a credit agreement for a $1.1 billion senior secured credit facility and issued $375 million aggregate principal amount of 6.125% eight year senior notes in a private offering. The senior secured credit agreement, which was amended in October 2013, and the indenture governing the senior notes contain customary restrictive covenants imposing operating and financial restrictions on the Company, including restrictions that may limit the Company’s ability to engage in acts that may be in its long-term best interests. These covenants restrict the ability of the Company and certain of its subsidiaries to, among other things: incur or guarantee indebtedness; incur liens; pay dividends or repurchase stock; enter into transactions with affiliates; consummate asset sales, acquisitions or mergers; prepay certain other indebtedness; or make investments. In addition, the restrictive covenants in the senior secured credit agreement require the Company to maintain specified financial ratios and satisfy other financial condition tests. +These restrictive covenants may limit the Company’s ability to finance future operations or capital needs or to engage in other business activities. The Company’s ability to comply with any financial covenants could be materially affected by events beyond its control, and there can be no assurance that the Company will satisfy any such requirements. If the Company fails to comply with these covenants, it may need to seek waivers or amendments of such covenants, seek alternative or additional sources of financing or reduce its expenditures. The Company may be unable to obtain such waivers, amendments or alternative or additional financing on favorable terms or at all. +The Company has made certain assumptions relating to the PLG acquisition in its financial forecasts that may prove to be materially inaccurate. +The Company has made certain assumptions relating to future revenue growth, cost savings, synergies and associated costs of the PLG acquisition. These assumptions may be inaccurate based on the information available to the Company, the failure to realize the expected benefits of the PLG acquisition, higher than expected transaction and integration costs, the Company's increased indebtedness and/or unknown liabilities, as well as general economic and business conditions that may adversely affect the combined company. +Item 1B. +Unresolved Staff Comments +None. +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, as well as a leased facility of approximately 147,000 square feet in Lexington, Massachusetts. The Company’s manufacturing operations are conducted at owned facilities in Michigan. The Company operates its U.S. distribution operations primarily through an owned distribution facility of approximately 520,000 square feet in Louisville, Kentucky, a leased distribution center in Howard City, Michigan, of approximately 460,000 square feet, a leased distribution center in Cedar Springs, Michigan, of approximately 356,000 square feet, an owned distribution center in Rockford, Michigan, of approximately 305,000 square feet, and a leased distribution facility of approximately 200,000 square feet in Brookville, Ohio. +The Company also leases and owns various other offices and distribution centers throughout the U.S. to meet its operational requirements. In addition, the Company operates 463 retail stores through leases with various third-party landlords in the U.S., Canada and United Kingdom collectively occupying approximately 930,000 square feet. +18 +Table of Contents +The Company conducts its international operations in Canada, the United Kingdom, China, Hong Kong and continental Europe through leased distribution centers, offices and/or showrooms. The Company believes that its current facilities are suitable and adequate to meet 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 advice 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 position, results of operations, or cash flows. +Item 4. +Mine Safety Disclosures +Not applicable. +Supplemental Item. Executive Officers of the Registrant +The following table lists the names and ages of the Executive Officers of the Company and their positions held with the Company as of February 10, 2014 . The information provided below the table lists the business experience of each such Executive Officer for at least 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 +Donald T. Grimes +51 +Senior Vice President, Chief Financial Officer and Treasurer +Michael Jeppesen +54 +President, Global Operations Group +Douglas M. Jones +48 +Corporate Controller +Blake W. Krueger +60 +Chairman of the Board, Chief Executive Officer and President +Michael D. Stornant +47 +Vice President, Corporate Finance +James D. Zwiers +46 +Senior Vice President and President, Performance Group +Donald T. Grimes has served the Company as Senior Vice President, Chief Financial Officer and Treasurer since May 2008. From 2007 to 2008, he was the Executive Vice President and Chief Financial Officer for Keystone Automotive Operations, Inc., a distributor of automotive accessories and equipment. Prior to Keystone, Mr. Grimes held a series of senior corporate and divisional finance roles at Brown-Forman Corporation, a manufacturer and marketer of premium wines and spirits. During his employment at Brown-Forman, Mr. Grimes was Vice President, Director of Beverage Finance from 2006 to 2007; Vice President, Director of Corporate Planning and Analysis from 2003 to 2006; and Senior Vice President, Chief Financial Officer of Brown-Forman Spirits America from 1999 to 2003. +Michael Jeppesen has served the Company as President, Global Operations Group since January 2012. From 2005 to 2011, he was Senior Vice President, Design and Sourcing, for Collective Brands, Inc., a wholesaler and retailer of footwear and related accessories. +Douglas M. Jones has served the Company as Corporate Controller since September 2011. From 2009 to 2011, he was the Company’s Director, Internal Audit. From 2006 to 2009, he was Director – Controls and Plant Financial Reporting for Indalex Inc., a manufacturer of extruded aluminum. +Blake W. Krueger has served the Company as Chairman since January 2010 and as Chief Executive Officer and President since April 2007. From October 2005 to April 2007, he served as Chief Operating Officer and President. From August 2004 to October 2005, he served as Executive Vice President and Secretary of the Company and President of the Heritage Brands Group. From November 2003 to August 2004, he served the Company as Executive Vice President, Secretary, and President of Cat 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. +Michael D. Stornant has served the Company as Vice President, Corporate Finance, since January 2013. From 2011 until January 2013, he served as Vice President and General Manager of Bates footwear. From 2009 until 2011, he served as Vice President of Corporate Planning and Analysis. From 2008 until 2009, he served as Corporate Controller. From 2007 until 2008 he served as +19 +Table of Contents +Senior Vice President of Owned Operations for the Global Operations Group. From 2003 until 2006 he served the Company as Director of Internal Audit. From 1996 until 2003 he held various finance-related positions at the Company. +James D. Zwiers has served the Company as Senior Vice President and President, Performance Group since January 2013. From March 2009 until January 2013, he served as Senior Vice President and President, Outdoor Group, which was realigned into the Performance Group. From January 2008 until March 2009, he served as Senior Vice President of the Company. From October 2006 to December 2007, he served as President of the Company’s Hush Puppies U.S. Division. From October 2005 to October 2006, he served as the Company’s General Counsel and Secretary. From December 2003 to October 2005, he served as General Counsel and Assistant Secretary. 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 under the symbol “WWW.” On July 11, 2013, the Company’s Board of Directors approved a two-for-one stock split in the form of a stock dividend that was paid on November 1, 2013 to stockholders of record on October 1, 2013. All share and per share data within this Form 10-K have been adjusted for all periods presented to reflect the stock split. The following table shows the high and low stock prices on the New York Stock Exchange and dividends declared by fiscal quarter for 2013 and 2012 . The number of stockholders of record on February 10, 2014 , was 1,803. +2013 +2012 +Stock Price +High +Low +High +Low +First quarter +$ +23.19 +$ +19.20 +$ +20.38 +$ +16.65 +Second quarter +27.13 +21.42 +22.07 +17.00 +Third quarter +30.18 +24.72 +24.00 +18.49 +Fourth quarter +33.91 +27.54 +22.82 +19.74 +Cash Dividends Declared Per Share +2013 +2012 +First quarter +$ +0.06 +$ +0.06 +Second quarter +0.06 +0.06 +Third quarter +0.06 +0.06 +Fourth quarter +0.06 +0.06 +A quarterly dividend of $0.06 per share was declared during the first quarter of fiscal 2014 . The Company currently expects that comparable cash dividends will be paid in future quarters in fiscal 2014 . +The Company’s senior secured credit agreement and senior notes indenture impose certain restrictions on the Company’s ability to pay cash dividends. The Company may not pay a dividend if the Company is in default under the credit agreement or the indenture, or if payment of the dividend would cause a default under the credit agreement or the indenture, including the Company’s covenant to meet prescribed leverage ratios. +See Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" for information with respect to the Company’s equity compensation plans. +Stock Performance Graph +The following graph compares the five year cumulative total stockholder return on the Company’s common stock to the Standard & Poor’s Small Cap 600 Index and the Standard & Poor’s 600 Footwear Index, assuming an investment of $100 at the beginning of the period indicated. The Company is part of both the Standard & Poor’s Small Cap 600 Index and the Standard & Poor’s 600 Footwear Index. This Stock Performance Graph shall not be deemed to be incorporated by reference into the Company’s SEC filings and shall not constitute soliciting material or otherwise be considered filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. +20 +Table of Contents +Five Year Cumulative Total Return Summary +The following table provides information regarding the Company’s purchases of its own common stock during the fourth quarter of fiscal 2013 . +Issuer Purchases of Equity Securities +Period +Total Number of Shares Purchased +Average Price Paid per Share +Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs +Maximum Dollar Amount that May Yet Be Purchased Under the Plans or Programs +Period 1 (September 8, 2013 to October 5, 2013) +Common Stock Repurchase Program (1) +— +$ +— +— +$ +86,416,818 +Employee Transactions (2) +— +— +Period 2 (October 6, 2013 to November 2, 2013) +Common Stock Repurchase Program (1) +— +$ +— +— +$ +86,416,818 +Employee Transactions (2) +6,330 +29.79 +Period 3 (November 3, 2013 to November 30, 2013) +Common Stock Repurchase Program (1) +— +$ +— +— +$ +86,416,818 +Employee Transactions (2) +4,510 +31.70 +Period 4 (December 1, 2013 to December 28, 2013) +Common Stock Repurchase Program (1) +— +$ +— +— +$ +86,416,818 +Employee Transactions (2) +4,915 +32.70 +Total for Fourth Quarter ended December 28, 2013 +Common Stock Repurchase Program (1) +— +$ +— +— +$ +86,416,818 +Employee Transactions (2) +15,755 +31.25 +(1) +The Company’s Board of Directors approved a common stock repurchase program on February 11, 2010. This program authorized the repurchase of up to $200 million of common stock over a four-year period, which ended on February 11, 2014. There were no shares repurchased during the Company’s fourth fiscal quarter of fiscal 2013 other than repurchases pursuant to the “Employee Transactions” set forth above. On February 12, 2014, the Company's Board of Directors approved a common stock repurchase program that authorizes the repurchase of up to $200 million in common stock over a four-year period. +(2) +Employee transactions include: (1) shares delivered or attested to in satisfaction of the exercise price and/or tax withholding obligations by holders of employee stock options who exercised options, and (2) restricted shares withheld to offset statutory minimum tax withholding that occurs upon vesting of restricted shares. The Company’s employee stock compensation plans provide that the shares delivered or attested to, or withheld, shall be valued at the closing price of the Company’s common stock on the date the relevant transaction occurs. +21 +Table of Contents +Item 6. +Selected Financial Data +Five-Year Operating and Financial Summary (1) +(In millions, except per share data) +2013 (4) +2012 +2011 +2010 +2009 +Summary of Operations +Revenue +$ +2,691.1 +$ +1,640.8 +$ +1,409.1 +$ +1,248.5 +$ +1,101.1 +Net earnings attributable to Wolverine World Wide, Inc. +100.4 +80.7 +123.3 +104.5 +61.9 +Per share of common stock: +Basic net earnings (2)(3) +$ +1.01 +$ +0.84 +$ +1.27 +$ +1.08 +$ +0.63 +Diluted net earnings (2)(3) +0.99 +0.81 +1.24 +1.06 +0.62 +Cash dividends declared (3) +0.24 +0.24 +0.24 +0.22 +0.22 +Financial Position at Year-End +Total assets +$ +2,622.2 +$ +2,614.4 +$ +851.7 +$ +786.6 +$ +712.1 +Interest-bearing debt +1,150.0 +1,250.0 +11.5 +1.0 +1.6 +(1) +This summary should be read in conjunction with the consolidated financial statements and the related notes, which are attached as Appendix A to this Annual Report on Form 10-K. +(2) +Basic earnings per share are based on the weighted average number of shares of common stock outstanding during the year after adjustment for nonvested restricted common stock. Diluted earnings per share assume the exercise of dilutive stock options and the vesting of all outstanding restricted stock. +(3) +All per share data has been presented to reflect the two-for-one stock split in the form of a stock dividend paid on November 1, 2013 to stockholders of record on October 1, 2013. +(4) +The results for fiscal 2013 reflect the full year inclusion of the PLG business, acquired in the fourth quarter of fiscal 2012. +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +OVERVIEW +BUSINESS OVERVIEW +The Company is a leading global designer, manufacturer and marketer of branded footwear, apparel and accessories. The Company’s stated mission is to “ Excite Consumers Around the World with Innovative Footwear and Apparel that Bring Style to Purpose .” The Company seeks to fulfill this mission by offering innovative products and compelling brand propositions; complementing its footwear brands with strong apparel and accessories offerings; expanding its global consumer direct footprint; and delivering supply chain excellence. +The Company’s portfolio consists of 16 brands that were marketed in approximately 200 countries and territories at December 28, 2013 . The Company believes that this diverse brand portfolio and broad geographic reach position it for continued strong organic growth. The Company’s brands are distributed into the marketplace via owned operations in the United States, Canada, the United Kingdom and certain countries in continental Europe. In other regions (Asia Pacific, Latin America, Europe, the Middle East and Africa), the Company relies on a network of third-party distributors, licensees and joint ventures. At December 28, 2013 , the Company operated 463 retail stores in the United States, Canada and the United Kingdom and 63 consumer direct websites. +2013 FINANCIAL OVERVIEW +• +Revenue for fiscal 2013 was $ 2,691.1 million , an increase of 64.0 % compared to fiscal 2012. All three of the Company's reportable segments contributed to the excellent revenue performance in fiscal 2013. +• +Gross margin for fiscal 2013 was 39.6 %, an increase of 130 basis points from fiscal 2012. Gross margin benefited from favorable channel mix during fiscal 2013. +• +Operating expenses as a percentage of revenue increased to 32.4 % for fiscal 2013 compared to 31.4 % for fiscal 2012. The year-over-year increase was due to incremental acquisition-related transaction and integration costs; incremental amortization expense related to purchase price accounting for the PLG acquisition, incremental pension and incentive compensation expenses; incremental brand building investments to support future growth and the inclusion of the PLG business for a full fiscal year. +22 +Table of Contents +• +The effective tax rate in fiscal 2013 was 20.9 % compared to 14.2 % in fiscal 2012. The lower effective tax rate in the prior year reflects the non-recurring benefits of a favorable court decision in the first half of fiscal 2012 in a foreign tax jurisdiction supporting the Company’s long-term global tax planning strategies. +• +All per share data has been presented to reflect the two-for-one stock split in the form of a stock dividend that was paid out on November 1, 2013 to stockholders of record on October 1, 2013. Reported diluted earnings per share for fiscal 2013, on a post-stock split basis, were $ 0.99 compared to $ 0.81 per share for fiscal 2012. +• +The Company declared cash dividends of $ 0.24 per share, on a post-stock split basis, in both fiscal 2013 and 2012. +OUTLOOK FOR 2014 +Fiscal 2014 revenue is expected to be approximately $2.775 billion to $2.85 billion, growth in the range of 3% to 6% compared to fiscal 2013. The Company expects slight gross margin expansion, driven by strategic selling price increases; favorable product mix; and ongoing efficiencies in the Company’s manufacturing and sourcing operations. The Company expects modest operating expense leverage driven by a full year of acquisition-related synergies and lower pension expense. Continued investment in brand building initiatives and higher incentive compensation expenses will only partially offset these positive factors. The Company is forecasting net interest expense of $47 million, which reflects the benefits of the fourth quarter fiscal 2013 debt refinancing and lower average principal balances. The Company expects a full year effective tax rate of approximately 28% and fully diluted earnings per share in the range of $1.52 to $1.58. +RESULTS OF OPERATIONS +The following is a discussion of the Company’s results of operations and liquidity and capital resources. This section should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this Annual Report. +Percent change vs. prior year +(In millions, except per share data) +2013 +2012 +2011 +2013 +2012 +Revenue +$ +2,691.1 +$ +1,640.8 +$ +1,409.1 +64.0 +% +16.4 +% +Cost of goods sold +1,619.0 +1,008.1 +852.3 +60.6 +18.3 +Acquisition-related transaction and integration costs +— +4.5 +— +(100.0 +) +— +Restructuring costs +7.6 +— +— +— +— +Gross profit +1,064.5 +628.2 +556.8 +69.5 +12.8 +Selling, general and administrative expenses +830.7 +482.0 +386.6 +72.3 +24.7 +Acquisition-related transaction and integration costs +41.5 +32.5 +— +27.7 +— +Operating profit +192.3 +113.7 +170.2 +69.1 +(33.2 +) +Interest expense, net +52.0 +14.0 +1.0 +271.4 +1,300.0 +Acquisition-related interest expense +— +5.2 +— +(100.0 +) +— +Debt extinguishment costs +13.1 +— +— +— +— +Other (income) expense, net +(0.5 +) +0.3 +0.3 +(266.7 +) +— +Earnings before income taxes +127.7 +94.2 +168.9 +35.6 +(44.2 +) +Income tax expense +26.7 +13.4 +45.6 +99.3 +(70.6 +) +Net earnings +101.0 +80.8 +123.3 +25.0 +(34.5 +) +Less: net earnings attributable to non-controlling interests +0.6 +0.1 +— +500.0 +— +Net earnings attributable to Wolverine World Wide, Inc. +100.4 +80.7 +123.3 +24.4 +(34.5 +) +Diluted earnings per share +$ +0.99 +$ +0.81 +$ +1.24 +22.2 +% +(34.7 +)% +REVENUE +Revenue was $2,691.1 million for fiscal 2013, compared to $1,640.8 million for fiscal 2012. The full year inclusion of the PLG business, acquired in the fourth quarter of fiscal 2012, drove the majority of the increase. Changes in foreign exchange rates decreased reported revenue by $1.7 million in fiscal 2013. International revenue represented 26.2%, 34.2% and 40.2% of total reported revenues in fiscal 2013, fiscal 2012 and fiscal 2011, respectively. The decrease in international revenue in fiscal 2013 as a percent of total revenue was driven by the inclusion of the PLG business, which is primarily within the U.S. +23 +Table of Contents +Revenue for fiscal 2012 increased $231.7 million from fiscal 2011, to $1,640.8 million. The PLG business contributed $219.4 million during the fourth quarter of fiscal 2012. Changes in foreign exchange rates decreased reported revenue by $10.9 million. The remainder of the increase in revenues was due to increased volumes. +GROSS MARGIN +For fiscal 2013, the Company’s gross margin was 39.6 % compared to 38.3 % in fiscal 2012. The increase was driven by favorable channel mix (150 basis points), higher selling prices (80 basis points) and lower LIFO expense (20 basis points), which were partially offset by higher product costs (70 basis points), restructuring costs (40 basis points) and unfavorable variances on forward currency contracts due to changes in foreign exchange rates (20 basis points). +For fiscal 2012, the Company’s consolidated gross margin decreased 120 basis points compared to fiscal 2011. Approximately 70 basis points of the decrease was caused by a negative product mix shift. The Company incurred $4.5 million of acquisition-related transaction and integration costs relating to the fair value adjustment to acquisition-date inventory and severance costs, which contributed approximately 30 basis points of the decrease. The remainder of the decrease was caused by increased product costs that were only partially offset by higher selling prices. +OPERATING EXPENSES +Operating expenses increased $ 357.7 million , from $ 514.5 million in fiscal 2012 to $ 872.2 million in fiscal 2013. Approximately $9.0 million of the increase relates to higher acquisition-related transaction and integration costs associated with the integration of the PLG business. For fiscal 2013, these costs totaled $ 41.5 million , and include compensation expenses ($ 26.2 million ), other purchased services ($ 10.6 million ), amortization related to short-lived intangible assets ($ 2.4 million ) and professional and legal fees ($ 2.3 million ). Incremental compensation expense ($13.1 million), incremental amortization expense related to purchase price accounting for the PLG acquisition ($11.9 million), incremental pension expense ($9.4 million) and incremental brand building investments ($6.0 million) also contributed to the increase in operating expenses. Changes in foreign exchange rates had a $0.7 million favorable impact on reported operating expenses. The remainder of the operating expense increase was due to the full year inclusion of the operating expenses of the PLG business within the Company’s results. +Operating expenses increased $127.9 million, from $ 386.6 million in fiscal 2011 to $ 514.5 million in fiscal 2012. Approximately $77.8 million of the increase relates to the inclusion of the PLG business within the Company’s consolidated results. Approximately $32.5 million of the increase relates to acquisition-related transaction and integration costs associated with the acquisition of PLG. For fiscal 2012, these costs consisted of professional and legal fees ( $14.9 million ), taxes paid on behalf of the seller ( $9.7 million ), other purchased services ( $5.2 million ) and severance ( $2.7 million ). Pension expense for fiscal 2012 increased approximately $10.4 million compared to fiscal 2011 driven by a lower discount rate in fiscal 2012. Changes in foreign exchange rates had a $3.6 million favorable impact on reported operating expenses. The remainder of the increase was due to incremental variable expenses. +INTEREST, OTHER AND TAXES +Net interest expense was $ 52.0 million in fiscal 2013 compared to $19.2 million in fiscal 2012. Approximately $4.3 million of the increase was due to the amortization of deferred financing costs included within interest expense. The remainder of the increase in fiscal 2013 was due to a full year of interest expense on interest-bearing debt incurred to finance the PLG acquisition vs. only a partial year of interest expense in fiscal 2012. +Net interest expense increased $18.2 million to $19.2 million in fiscal 2012 from $1.0 million in fiscal 2011. Approximately $5.2 million of the increase was due to acquisition-related interest expense related to a financing commitment and refinancing fees associated with the PLG acquisition. Approximately $1.8 million of the increase was due to the amortization of deferred financing costs included within interest expense. The remainder of the increase was due to an increase in interest-bearing debt in the period of time from the date of the PLG acquisition to the end of fiscal 2012. +The Company incurred $ 13.1 million of debt extinguishment costs during the fourth quarter of fiscal 2013 in connection with the refinancing of the Company's interest-bearing debt. These costs represent a write-off of previously capitalized deferred financing fees. +The Company’s effective tax rates in fiscal 2013 and fiscal 2012 were 20.9 % and 14.2 %, respectively. The lower effective tax rate in fiscal 2012 reflects the non-recurring benefits of a favorable court decision in the first half of fiscal 2012 in a foreign tax jurisdiction supporting the Company’s long-term global tax planning strategies. The tax rate in fiscal 2013 also reflects the deductibility of acquisition-related transaction and integration costs in primarily high statutory tax rate jurisdictions. +The Company’s full year effective tax rate in fiscal 2012 was 14.2%, compared to 27.0% in fiscal 2011. The lower effective tax rate in fiscal 2012 reflects the non-recurring benefits of a favorable court decision in the first half of fiscal 2012 in a foreign tax +24 +Table of Contents +jurisdiction supporting the Company’s long-term global tax planning strategies. The lower tax rate in fiscal 2012 also benefited from the deductibility of acquisition-related transaction and integration costs in primarily high statutory tax rate jurisdictions. +The Company maintains certain strategic management and operational activities in overseas subsidiaries, and its foreign earnings are taxed at rates that are generally lower than the U.S. federal statutory income tax rate. A significant amount of the Company’s earnings are generated by its Canadian, European and Asia Pacific subsidiaries and, to a lesser extent, in jurisdictions that are not subject to income tax. The Company has not provided for U.S. taxes for earnings generated in foreign jurisdictions because it intends to reinvest these earnings indefinitely outside the U.S. However, if certain foreign earnings previously treated as permanently reinvested are repatriated, the additional U.S. tax liability could have a material adverse effect on the Company’s after-tax results of operations and financial position. +REPORTABLE OPERATING SEGMENTS +The Company has three reportable operating segments. The Company’s operating segments are determined on the basis of how the Company internally reports and evaluates financial information used to make operating decisions. The Company’s reportable operating segments are: +• +Lifestyle Group , consisting of Sperry Top-Sider ® footwear and apparel, Stride Rite ® footwear and apparel, Hush Puppies ® footwear and apparel, Keds ® footwear and apparel, and Soft Style ® footwear; +• +Performance Group , consisting of Merrell ® footwear and apparel, Saucony ® footwear and apparel, Chaco ® footwear, Patagonia ® footwear, and Cushe ® footwear; and +• +Heritage Group , consisting of Wolverine ® footwear and apparel, Cat ® footwear, Bates ® uniform footwear, Sebago ® footwear and apparel, Harley-Davidson ® footwear, and HyTest ® Safety footwear. +The Company also reports an Other and Corporate category. The Other category consists of the Company’s multi-brand consumer direct business, leather marketing operations and sourcing operations that include third-party commission revenues. The Corporate category consists of unallocated corporate expenses, including acquisition-related transaction and integration costs and restructuring costs. +The reportable operating segment results for fiscal years 2013, 2012 and 2011 are as follows: +(In millions) +2013 +2012 +Change +Percent +Change +2012 +2011 +Change +Percent +Change +Revenue: +Lifestyle Group +$ +1,086.6 +$ +309.6 +$ +777.0 +251.0 +% +$ +309.6 +$ +147.4 +$ +162.2 +110.0 +% +Performance Group +945.8 +674.6 +271.2 +40.2 +674.6 +619.4 +55.2 +8.9 +Heritage Group +567.4 +563.9 +3.5 +0.6 +563.9 +553.8 +10.1 +1.8 +Other +91.3 +92.7 +(1.4 +) +(1.5 +) +92.7 +88.5 +4.2 +4.7 +Total +$ +2,691.1 +$ +1,640.8 +$ +1,050.3 +64.0 +% +$ +1,640.8 +$ +1,409.1 +$ +231.7 +16.4 +% +(In millions) +2013 +2012 +Change +Percent +Change +2012 +2011 +Change +Percent +Change +Operating profit (loss): +Lifestyle Group +$ +168.2 +$ +44.6 +$ +123.6 +277.1 +% +$ +44.6 +$ +32.2 +$ +12.4 +38.5 +% +Performance Group +179.8 +128.4 +51.4 +40.0 +128.4 +135.5 +(7.1 +) +(5.2 +) +Heritage Group +85.7 +83.5 +2.2 +2.6 +83.5 +91.6 +(8.1 +) +(8.8 +) +Other +0.2 +(1.1 +) +1.3 +118.2 +(1.1 +) +— +(1.1 +) +— +Corporate +(241.6 +) +(141.7 +) +(99.9 +) +(70.5 +) +(141.7 +) +(89.1 +) +(52.6 +) +(59.0 +) +Total +$ +192.3 +$ +113.7 +$ +78.6 +69.1 +% +$ +113.7 +$ +170.2 +$ +(56.5 +) +(33.2 +)% +Further information regarding the reportable operating segments can be found in Note 10 to the consolidated financial statements. +Lifestyle Group +The Lifestyle Group’s revenue increased $ 777.0 million , or 251.0 %, in fiscal 2013 compared to fiscal 2012. The revenue increase in fiscal 2013 was due to the full year inclusion of the Sperry Top-Sider ® , Stride Rite ® and Keds ® brands. The Lifestyle Group’s operating profit increased $ 123.6 million , or 277.1 %, in fiscal 2013 compared to fiscal 2012. Hush Puppies ® operating profit increased at a growth rate in the mid teens due primarily to a mid single digit reduction in selling, general and administrative costs. The remainder of the operating profit increase in fiscal 2013 was due to the full year inclusion of the Sperry Top-Sider ® , Stride Rite ® and Keds ® brands. +25 +Table of Contents +The Lifestyle Group’s revenue increased $162.2 million, or 110.0%, in fiscal 2012 compared to fiscal 2011. The revenue increase in fiscal 2012 was due to the inclusion of the Sperry Top-Sider ® , Stride Rite ® and Keds ® brands from the date of acquisition. The Lifestyle Group’s operating profit increased $12.4 million in fiscal 2012 compared to fiscal 2011, due to inclusion of the Sperry Top-Sider ® , Stride Rite ® and Keds ® brands from the date of acquisition. +Performance Group +The Performance Group’s revenue increased $ 271.2 million , or 40.2 %, in fiscal 2013 compared to fiscal 2012. The increase was due partially to the Merrell ® brand's mid single digit revenue increase due to higher volumes. The remainder of the increase was due to the full year inclusion of the Saucony ® brand. The Performance Group’s operating profit increased $ 51.4 million , or 40.0 %, in fiscal 2013 compared to fiscal 2012. The Merrell ® brand experienced operating income growth in the low single digits. The remainder of the increase was due to the full year inclusion of the Saucony ® brand. +The Performance Group’s revenue increased $55.2 million, or 8.9%, in fiscal 2012 compared to fiscal 2011. The increase was due to the inclusion of the Saucony ® brand from the date of acquisition. The Performance Group’s operating profit decreased $7.1 million, or 5.2%, in fiscal 2012 compared to fiscal 2011 due to increased product costs. +Heritage Group +The Heritage Group’s revenue increased $ 3.5 million , or 0.6 %, in fiscal 2013 compared to fiscal 2012. The Heritage Group’s operating profit increased $ 2.2 million , or 2.6 %, in fiscal 2013 compared to fiscal 2012. +The Heritage Group’s revenue increased $ 10.1 million , or 1.8 %, in fiscal 2012 compared to fiscal 2011. The increase was due to increased volumes. The Heritage Group’s operating profit decreased $ 8.1 million , or 8.8 %, in fiscal 2012 compared to fiscal 2011 due to increased product costs. +Corporate +Corporate expenses increased $99.9 million compared to fiscal 2012. The drivers of the increase include $48.1 million of corporate expenses for the acquired PLG business, now included for a full year. The Company also incurred an incremental $4.5 million of acquisition-related transaction and integration costs, $7.6 million of restructuring costs related to its manufacturing operations in the Dominican Republic, incremental incentive compensation costs of $13.1 million and incremental pension costs of $9.4 million. The remainder of the increase was due to various incremental corporate expenses due to the larger size and complexity of the Company. +Corporate expenses were $141.7 million in fiscal 2012 compared to $89.1 million in fiscal 2011. The $52.6 million increase includes $9.7 million of corporate costs for the acquired PLG business and $37.0 million for acquisition-related transaction and integration costs. +LIQUIDITY AND CAPITAL RESOURCES +Fiscal Year +(In millions) +2013 +2012 +2011 +Cash and cash equivalents +$ +214.2 +$ +171.4 +$ +140.0 +Interest-bearing debt +1,150.0 +1,250.0 +11.5 +Available revolving credit facility (1) +196.5 +198.1 +139.0 +Cash provided by operating activities +202.3 +91.6 +78.8 +Cash used in investing activities +(44.7 +) +(1,246.1 +) +(22.6 +) +Cash (used in) provided by financing activities +(112.8 +) +1,183.4 +(62.3 +) +Additions to property, plant and equipment +41.7 +14.9 +19.4 +Depreciation and amortization +56.2 +27.7 +15.9 +(1) +For fiscal 2013 and 2012, amounts shown are net of both borrowings and outstanding standby letters of credit in accordance with the terms of the current revolving credit facility. The amount listed for fiscal 2011 is based on the terms of the Company’s previous revolving credit facility, and is shown net of borrowings. +Liquidity +Cash and cash equivalents of $ 214.2 million as of December 28, 2013 were $42.8 million higher compared to December 29, 2012. In addition, the Company had $ 196.5 million available under its revolver (the “Revolving Credit Facility”) as of December 28, 2013. +26 +Table of Contents +Operating Activities +The principal source of the Company’s operating cash flow is net earnings, including cash receipts from the sale of the Company’s products, net of costs of goods sold. +Higher earnings performance during fiscal 2013 drove an increase in cash from operations compared to fiscal 2012. During fiscal 2013, an increase in net working capital represented a use of cash of $ 2.5 million . Working capital balances were negatively impacted by an increase in accounts receivable of $41.3 million, which was partially offset by a decrease in inventory and other operating assets of $35.1 million and $12.8 million, respectively. A decrease in accounts payable represented a use of cash of $26.5 million, which was partially offset by an increase of $17.4 million from other operating liabilities and accrued income taxes. +Net cash provided by operating activities in fiscal 2012 was $91.6 million versus $78.8 million in fiscal 2011, an increase of $12.8 million. Lower earnings performance in fiscal 2012 was more than offset by lower investments in working capital and reduced cash pension contributions compared to fiscal 2011. +Investing Activities +The Company made capital expenditures of $ 41.7 million in fiscal 2013 compared to $ 14.9 million in fiscal 2012. The increase in capital expenditures was due to the acquisition of PLG in the fourth quarter of fiscal 2012 and the resulting larger scale and scope of the Company. The majority of the capital expenditures were for retail store investments, information system enhancements and building improvements. Included in investing activities in fiscal 2013 were net cash proceeds of $2.8 million from the sale of a distribution facility acquired as part of the PLG acquisition. The Company leases machinery, equipment and certain warehouse, office and retail store space under operating lease agreements that expire at various dates through 2023. +Included in the fiscal 2012 investing activities is a net cash outflow of $1,225.9 million related to the acquisition of PLG. The Company funded the acquisition primarily through net proceeds from term loan debt, the issuance of senior notes and cash on hand of approximately $88.8 million. +Financing Activities +On October 9, 2012, the Company entered into a credit agreement (the “Credit Agreement”) with a bank syndicate in connection with the PLG acquisition. The Credit Agreement provided the Company with two term loans (a “Term Loan A Facility”, and a “Term Loan B Facility”) and the Revolving Credit Facility. On October 10, 2013, the Company amended the Credit Agreement (the "Amendment") and paid off the outstanding balance of the Term Loan B Facility while increasing the principal balance of the Term Loan A Facility to $775.0 million. The Amendment provided for a lower effective interest rate on term loan debt, and a one-year extension on both the Term Loan A Facility and Revolving Credit Facility. In addition, the Amendment provided for increased debt capacity limited to an aggregate debt amount (including outstanding term loan principal and revolver commitment amounts in addition to permitted incremental debt) not to exceed $1,350.0 million. The Company incurred $13.1 million of debt extinguishment costs during the fourth quarter of fiscal 2013 in connection with the refinancing of the Company's debt. These costs represent a write-off of previously capitalized deferred financing fees. +On October 9, 2012, the Company issued $375.0 million of senior notes, which bear interest at a 6.125% fixed rate and are due in 2020. During the third quarter of fiscal 2013, the Company exchanged the senior notes (the "Public Bonds"). Related interest payments are due semi-annually. The Public Bonds are guaranteed by substantially all of the Company’s domestic subsidiaries. +The Company used the borrowings under the term loan facilities, together with the net proceeds from the senior notes and cash on hand, to finance the PLG acquisition, repay any amounts outstanding under prior indebtedness, terminate its prior revolving credit facility and provide for the working capital needs of the Company, including the payment of transaction expenses in connection with the acquisition. As of December 28, 2013, the Company was in compliance with all covenants and performance ratios and expects to continue to be in compliance in future periods. +Interest-bearing debt at December 28, 2013 was $ 1,150.0 million compared to $ 1,250.0 million at December 29, 2012. The net decrease in interest-bearing debt was primarily a result of principal payments including $85.0 million of voluntary payments on term loan debt during fiscal 2013. The Company had outstanding standby letters of credit under the Revolving Credit Facility totaling approximately $3.5 million at December 28, 2013. +The increase in interest-bearing debt during fiscal 2012 was a result of borrowings made to finance the acquisition of PLG in the fourth quarter of fiscal 2012. +At December 28, 2013, the Company had cash and cash equivalents of $ 214.2 million , of which $ 180.2 million was located in foreign jurisdictions. The Company intends to permanently reinvest cash in foreign locations. +27 +Table of Contents +Cash flow from operating activities, along with borrowings on the Revolving Credit Facility, if any, are expected to be sufficient to meet the Company’s working capital needs for the foreseeable future. Any excess cash flows from operating activities are expected to be used to reduce debt, fund internal and external growth initiatives, purchase property, plant and equipment, pay dividends or repurchase the Company’s common stock. +The Company did not repurchase any shares of Company common stock in fiscal 2013 under a stock repurchase program and repurchased $2.4 million of Company stock during fiscal 2012. On February 12, 2014, the Company's Board of Directors approved a common stock repurchase program that authorizes the repurchase of up to $200.0 million in common stock over a four-year period. In addition to the share repurchase program activity, the Company acquired $ 0.8 million and $11.7 million of shares in fiscal years 2013 and 2012, respectively, in connection with employee transactions related to stock incentive plans. +On July 11, 2013, the Company’s Board of Directors approved a two-for-one stock split in the form of a stock dividend which was paid on November 1, 2013 to stockholders of record on October 1, 2013. +The Company declared cash dividends of $0.24 per share in fiscal 2013, 2012 and 2011. Dividends paid totaled $ 23.7 million , $ 23.6 million and $ 22.7 million , for fiscal 2013, 2012 and 2011, respectively. +NEW ACCOUNTING STANDARDS +In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-02, Comprehensive Income (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 requires preparers to report, in one place, information about reclassifications out of accumulated other comprehensive income (AOCI). For significant items reclassified out of AOCI to net income in their entirety in the same reporting period, reporting (either on the face of the statement where net income is presented or in the notes) is required about the effect of the reclassifications on the respective line items in the statement where net income is presented. For items that are not reclassified to net income in their entirety in the same reporting period, a cross reference to other disclosures currently required under U.S. Generally Accepted Accounting Principles ("GAAP") is required in the notes. The above information must be presented in one place (parenthetically on the face of the financial statements by income statement line item or in a note). ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted the provisions of this ASU in the first quarter of fiscal 2013. The adoption of ASU 2013-02 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. +CRITICAL ACCOUNTING POLICIES +The preparation of the Company’s consolidated financial statements, which have been prepared in accordance with GAAP, 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 materially 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 Company’s consolidated financial statements. +REVENUE RECOGNITION +Revenue is recognized on the sale of products manufactured or sourced by the Company when the related goods have been shipped, legal title has passed to the customer and collectability is reasonably assured. Revenue generated through 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 licensees and distributors. Retail store revenue is recognized at time of sale. +The Company records provisions for estimated sales returns and allowances at the time of sale based on historical rates of returns and allowances and specific identification of outstanding returns not yet received from customers. However, estimates of actual returns and allowances in any future period are inherently uncertain and actual returns and allowances for the relevant periods may differ from these estimates. If actual or expected future returns and allowances were significantly greater or lower than established reserves, an adjustment to net revenues would be recorded in the period the determination was made. +28 +Table of Contents +ACCOUNTS RECEIVABLE +The Company maintains an allowance for uncollectible accounts receivable for estimated losses resulting from its customers' failure 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 adjustments 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 in which the Company made such a determination. At December 28, 2013 and December 29, 2012, management believed that it had 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 certain domestic finished goods inventories. Cost is determined using the first-in, first-out (“FIFO”) method for all raw materials, work-in-process and finished goods inventories in foreign countries. The FIFO method is also used for all finished goods inventories of the Company’s retail business, due to the unique nature of those operations, and for certain other domestic finished goods inventories. The Company has applied these inventory cost valuation methods consistently from year to year. +The Company reduces the carrying 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 in which they were realized or recorded. Inventory quantities are verified at various times throughout the year by performing physical inventory observations and perpetual inventory cycle count procedures. If the Company determines that adjustments to the inventory quantities are appropriate, an adjustment to the Company’s cost of goods sold and inventory is recorded in the period in which such determination was made. At December 28, 2013 and December 29, 2012, management believed that it had provided sufficient reserves for excess or obsolete inventories. +ACQUISITIONS +The Company accounts for acquired businesses using the purchase method of accounting. Under the purchase method, the Company’s consolidated financial statements include the operations of an acquired business starting from the date of acquisition. In addition, the assets acquired and liabilities assumed must be recorded at the date of acquisition at their respective estimated fair values, with any excess of the purchase price over the estimated fair values of the net assets acquired recorded as goodwill. +Significant judgment is required in estimating the fair value of intangible assets and in assigning their respective useful lives. Accordingly, the Company typically obtains the assistance of third-party valuation specialists for significant items. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management, but are inherently uncertain. +The Company typically uses an income method to estimate the fair value of intangible assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants and include the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product or technology life cycles, the economic barriers to entry and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur that could affect the accuracy or validity of the estimates and assumptions. +Determining the useful life of an intangible asset also requires judgment. Certain intangibles are expected to have indefinite lives based on their history and the Company’s plans to continue to support and build the acquired brands. Other acquired intangible assets (e.g., certain patents, customer relationships and technologies) are expected to have determinable useful lives. The Company’s assessment as to those intangibles that have an indefinite life and those that have a determinable life is based on a number of factors including competitive environment, market share, underlying product life cycles, operating plans and the macroeconomic environment of the countries in which the brands are sold. The Company’s estimates of the useful lives of determinable-lived intangibles are based primarily on these same factors. All of the Company’s acquired technology and customer-related intangibles are expected to have determinable useful lives. The costs of determinable-lived intangibles are amortized to expense over their estimated lives. +29 +Table of Contents +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 Company reviews the carrying amounts of goodwill and other non-amortizable intangible assets by reporting unit at least annually, or when indicators of impairment are present, to determine if such assets may be impaired. If the carrying amounts of these assets are not recoverable based upon discounted cash flow and market approach analyses, the carrying amounts of such assets are reduced by the estimated difference between the carrying value and estimated fair value. The Company includes assumptions about expected future operating performance as part of a discounted cash flow analysis to estimate fair value. If the carrying value of these assets are not recoverable, based on the discounted cash flow analysis, management performs the next step, which compares the fair value of the reporting unit to the recorded fair value of the tangible and intangible assets of the reporting units. Goodwill is considered impaired if the recorded fair value of the tangible and intangible net assets exceeds the fair value of the reporting unit. +The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. The Company would not be required to quantitatively determine the fair value of the indefinite-lived intangible unless the Company determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than the carrying value. The Company may skip the qualitative assessment and quantitatively test indefinite-lived intangibles by comparison of the individual carrying values to the fair value. Future cash flows of the individual indefinite-lived intangible assets are used to measure their fair value after consideration by management of certain assumptions, such as forecasted growth rates and cost of capital, which are derived from internal projections and operating plans. +The Company performs its annual testing for goodwill and indefinite-lived intangible asset impairment at the beginning of the fourth quarter of the fiscal year for all reporting units. The Company did not recognize any impairment charges for goodwill or indefinite-lived intangible assets during the fiscal years 2013, 2012 or 2011, as the annual impairment testing indicated that all reporting unit goodwill and indefinite-lived intangible asset fair values exceeded their respective carrying values. +INCOME TAXES +The Company maintains certain strategic management and operational activities in overseas subsidiaries, and its foreign earnings are taxed at rates that are generally lower than the U.S. federal statutory income tax rate. A significant amount of the Company’s earnings are generated by its Canadian, European and Asia Pacific subsidiaries and, to a lesser extent, in jurisdictions that are not subject to income tax. The Company has not provided for U.S. taxes for earnings generated in foreign jurisdictions because it plans to reinvest these earnings indefinitely outside the U.S. However, if certain foreign earnings previously treated as permanently reinvested are repatriated, the additional U.S. tax liability could have a material adverse effect on the Company’s after-tax results of operations and financial position. Income tax audits associated with the allocation of this income and other complex issues may require an extended period of time to resolve and may result in income tax adjustments if changes to the income allocation are required between jurisdictions with different income tax rates. Because income tax adjustments in certain jurisdictions can be significant, the Company records accruals representing management’s best estimate of the resolution of these matters. To the extent additional information becomes available, such accruals are adjusted to reflect the revised estimated outcome. The Company believed its tax accruals were 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 cause the Company to record additional income tax expense in its consolidated statements of operations. Management evaluates the potential that the Company will be able to realize its gross deferred tax assets and assesses the need for valuation allowances on a quarterly basis. +On a periodic basis, the Company estimates the full year effective tax rate and records a quarterly income tax provision in accordance with the projected full year rate. As the fiscal year progresses, that estimate is refined based upon actual events and the distribution of earnings in each tax jurisdiction 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 reflects the revised anticipated annual rate. +RETIREMENT BENEFITS +The determination of the obligation and expense for retirement benefits is dependent on the selection of certain actuarial assumptions used in calculating such amounts. These assumptions include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation. These assumptions are reviewed with the Company’s actuaries and updated annually based on relevant external and internal factors and information, including but not limited to, long-term expected asset returns, rates of termination, regulatory requirements and plan changes. +The Company utilizes a bond matching calculation to determine the discount rate used to calculate its year-end pension liability and subsequent fiscal year pension expense. A hypothetical bond portfolio is created based on a presumed purchase of individual +30 +Table of Contents +bonds to settle the plan’s expected future benefit payments. The discount rate is the resulting yield of the hypothetical bond portfolio. The bonds selected are listed as high grade by at least two recognized ratings agency and are non-callable, currently purchasable and non-prepayable. The discount rate at December 28, 2013 was 5.26 %. Pension expense is also impacted by the expected long-term rate of return on plan assets, which the Company determined to be 7.68 % in fiscal 2013. This determination is based on both actual historical rates of return experienced by the pension assets and the long-term rate of return of a composite portfolio of equity and fixed income securities that reflects the approximate diversification of the pension assets. +STOCK-BASED COMPENSATION +The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of FASB ASC Topic 718, Compensation - Stock Compensation . The Company utilizes the Black-Scholes model, which requires the input of subjective assumptions to calculate the amount to expense in the consolidated statements of operations related to stock options granted to employees. These assumptions include estimating (a) the length of time employees will retain their vested stock options before exercising them (“expected term”), (b) the volatility of the Company’s common stock price over the expected term and (c) the number of options that are expected to be forfeited. Changes in these assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related expense amounts recognized in the consolidated statements of operations. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +In the normal course of business, our financial position and results of operations are routinely subject to a variety of risks, including market risk associated with interest rate movements on borrowings and investments and currency rate movements on non-U.S. dollar denominated assets, liabilities and cash flows. The Company regularly assesses these risks and has established policies and business practices that should mitigate a portion of the adverse effect of these and other potential exposures. +Foreign Exchange 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. The Company manages these risks by attempting to denominate contractual and other foreign arrangements in U.S. dollars. +Under the provisions of FASB ASC Topic 815, Derivatives and Hedging , the Company is required to recognize all derivatives on the balance sheet at fair value. Derivatives that are not qualifying hedges must be adjusted to fair value through earnings. If a derivative is a qualifying 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 income until the hedged item is recognized in earnings. +The Company conducts wholesale operations outside of the U.S. in the United Kingdom, continental Europe and Canada where the functional currencies are primarily the British pound, euro and Canadian dollar, respectively. The Company utilizes foreign currency forward exchange contracts to manage the volatility associated with U.S. dollar inventory purchases made by non-U.S. wholesale operations in the normal course of business. At December 28, 2013 and December 29, 2012, the Company had outstanding forward currency exchange contracts to purchase U.S. dollars in the amounts of $129.1 million and $111.9 million , with maturities ranging up to 364 and 336 days for fiscal years 2013 and 2012, respectively. +Through the end of fiscal 2013, the Company had sourcing locations in Asia, where financial statements reflect the U.S. dollar as the functional currency. However, operating costs are paid in the local currency. Revenue generated by the Company from third-party foreign licensees and distributors is calculated in the local currencies, but paid in U.S. dollars. Accordingly, the Company’s reported results are subject to foreign currency exposure for this stream of revenue and expenses. Any associated foreign currency gains or losses on the settlement of local currency amounts are reflected within the Company's consolidated statement of operations. +Assets and liabilities outside the U.S. 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 currently does not hedge these net investments. At December 28, 2013, a stronger U.S. dollar compared to foreign currencies versus fiscal 2012 decreased the value of these investments in net assets by $ 5.4 million . At December 29, 2012, a weaker U.S. dollar compared to foreign currencies versus fiscal 2011 increased the value of these investments in net assets by $ 5.7 million . These changes resulted in cumulative foreign currency translation adjustments at December 28, 2013 and December 29, 2012 of $ 0.5 million and $ 5.9 million , respectively, that are recorded as a component of accumulated other comprehensive income in stockholders’ equity. +31 +Table of Contents +Interest Rate Risk +The Company is exposed to interest rate changes primarily as a result of interest expense on borrowings used to finance acquisitions and working capital requirements. The Company’s total variable-rate debt was $ 775.0 million at the end of fiscal 2013. At the end of fiscal 2013, the Company held one interest rate swap agreement denominated in U.S. dollars that effectively converts $ 455.5 million of its variable-rate debt to fixed-rate debt. The interest rate swap derivative instrument is held and used by the Company as a tool for managing interest rate risk. The counterparty to the swap instrument is a large financial institution that the Company believes is of high-quality creditworthiness. While the Company may be exposed to potential losses due to the credit risk of non-performance by this counterparty, such losses are not anticipated. The fair value of the interest rate swap was recorded within other assets for $ 0.9 million at the end of fiscal 2013. As of December 28, 2013, the weighted-average interest rate on the Company’s variable-rate debt was approximately 1.9%. Based on the level of variable-rate debt outstanding as of that date, a one percentage-point increase in the weighted-average interest rate would increase the Company’s annual pre-tax interest expense by approximately $3.2 million. +The Company does not enter into contracts for speculative or trading purposes, nor is it a party to any leveraged derivative instruments. +OFF-BALANCE SHEET ARRANGEMENTS +The Company has no off-balance sheet arrangements as of December 28, 2013. +CONTRACTUAL OBLIGATIONS +As of December 28, 2013, the Company had the following payments under contractual obligations due by period: +(In millions) +Total +Less than +1 year +1-3 years +3-5 years +More than +5 years +Operating leases +$ +278.7 +$ +51.5 +$ +84.2 +$ +58.7 +$ +84.3 +Debt obligations (1) +1,362.9 +91.8 +211.9 +642.5 +416.7 +Purchase obligations (2) +409.6 +409.6 +— +— +— +Deferred compensation +4.1 +0.7 +1.0 +1.1 +1.3 +Pension (3) +4.7 +4.7 +— +— +— +Supplemental Executive Retirement Plan +40.5 +3.8 +7.9 +8.2 +20.6 +Dividends declared +6.2 +6.2 +— +— +— +Minimum royalties +3.6 +1.9 +1.7 +— +— +Minimum advertising +31.5 +8.0 +12.1 +5.5 +5.9 +Total (4) +$ +2,141.8 +$ +578.2 +$ +318.8 +$ +716.0 +$ +528.8 +(1) +Includes principal and interest payments on the Company’s interest-bearing debt and payments on the interest rate swap. Estimated future interest payments on outstanding debt obligations are based on interest rates as of December 28, 2013. Actual cash outflows may differ significantly due to changes in underlying interest rates. +(2) +Purchase obligations related primarily to inventory and capital expenditure commitments. +(3) +Pension obligations reflect expected pension funding, which is the amount of 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. +(4) +The Company adopted FASB ASC Topic 740, Income Taxes, on December 31, 2006. The total amount of unrecognized tax benefits on the consolidated balance sheet at December 28, 2013 is $ 8.6 million . At this time, the Company is unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes. As a result, this amount is not included in the table above. +At December 28, 2013, the Company had $ 196.5 million of additional borrowing capacity available under the Revolving Credit Facility that terminates on October 10, 2018. +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. +32 +Table of Contents +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 Annual Report on Form 10-K. +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 management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of internal control over financial reporting as of December 28, 2013 , based on the framework in the Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that internal control over financial reporting was effective as of December 28, 2013 . +The effectiveness of the Company’s internal control over financial reporting as of December 28, 2013 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report, which is included in Appendix A of this Annual Report on Form 10-K and is incorporated herein by reference. +Changes in Internal Control Over Financial Reporting +During the sixteen-week period ended December 28, 2013, the Company converted certain PLG legacy operating systems related to consumer direct operations to the Company's existing enterprise resource planning software system. The Company took the necessary steps to monitor and maintain appropriate internal controls while the legacy systems were being converted. These steps included procedures to preserve the integrity of the data converted and a review by management to validate the data converted. Additionally, the Company provided training related to this system to individuals using the system to carry out their job responsibilities. The Company anticipates that the conversion of this legacy system will strengthen the Company's overall system of internal controls due to enhanced automation and integration of related processes. The system change was undertaken to integrate systems and consolidate information and was not undertaken in response to any actual or perceived deficiencies in the Company's internal control over financial reporting. +Item 9B. +Other Information +None. +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +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 SEC regulations and New York Stock Exchange standards (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 an understanding of financial statements, internal controls and audit committee functions. The Company’s Board of Directors has determined that Jeffrey M. Boromisa and William K. Gerber 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 with respect to the Annual Meeting of Stockholders to be held on April 23, 2014 , under the caption “Corporate Governance” under the subheading “Board Committees.” +33 +Table of Contents +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, and has adopted a Code of Conduct & Compliance that applies to the Company’s directors and employees. The Accounting and Finance Code of Ethics and the Code of Conduct & Compliance are available on the Company’s website at www.wolverineworldwide.com/investor-relations/corporate-governance . Any waiver from the Accounting and Finance Code of Ethics or the Code of Conduct & Compliance with respect to the Company’s executive officers and directors will be disclosed on the Company’s website. Any amendment to the Accounting and Finance Code of Ethics and the Code of Conduct & Compliance will be disclosed on the Company’s website. +The information regarding directors of the Company contained under the caption “Board of Directors” in the Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 23, 2014 , is incorporated herein by reference. +The information regarding directors and executive officers of the Company under the caption “Additional Information” under the subheading “Section 16(a) Beneficial Ownership Reporting Compliance” in the Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 23, 2014 , is incorporated herein by reference. +Item 11. +Executive Compensation +The information contained under the captions “Non-Employee Director Compensation in Fiscal Year 2013 ,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Summary Compensation Table,” “Grants of Plan-Based Awards in Fiscal Year 2013 ,” “Outstanding Equity Awards at 2013 Fiscal Year-End,” “Option Exercises and Stock Vested in Fiscal Year 2013 ,” “Pension Plans and 2013 Pension Benefits” and “Potential Payments Upon Termination or Change in Control” in the Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 23, 2014 , is incorporated herein by reference. The information contained under the caption “Corporate Governance” under the subheadings “Risk Considerations in Compensation Programs” and “Board Committees” in the Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 23, 2014 , is also incorporated herein by reference. +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information contained under the caption “Securities Ownership of Officers and Directors and Certain Beneficial Owners” and “Equity Compensation Plan Information” contained in the Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 23, 2014 , is incorporated herein by reference. +Equity Compensation Plan Information +The following table provides information about the Company’s equity compensation plans as of December 28, 2013 : +Plan Category (1) +Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights +(a) +Weighted Average Exercise Price of Outstanding Options, Warrants and Rights +(b) +Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans Excluding Securities Reflected in Column (a)) +(c) +Equity compensation plans approved by security holders +6,031,241 +(2), (3) +$16.00 +11,239,291 +(4) +Equity compensation plans not approved by security holders +— +— +— +Total +6,031,241 +$16.00 +11,239,291 +(1) +Each plan for which aggregated information is provided contains customary anti-dilution provisions that are applicable in the event of a stock split, stock dividend or certain other changes in the Company’s capitalization. +(2) +Includes: (i) 5,416,012 stock options awarded to employees under the Amended and Restated Stock Incentive Plan of 1999, the Amended and Restated Stock Incentive Plan of 2001, the Amended and Restated Stock Incentive Plan of 2003, the Amended and Restated Stock Incentive Plan of 2005, the Stock Incentive Plan of 2010 and the Stock Incentive Plan of 2013; and (ii) and 615,229 stock options awarded to non-employee directors under the Stock Incentive Plan of 2013, Stock Incentive Plan of 2010, the Amended and Restated Stock Incentive Plan of 2005 and the Amended and Restated Directors’ Stock Option Plan last approved by stockholders in 2002. Column (a) does not include stock units credited to outside directors’ fee accounts or retirement accounts under the Outside Directors’ Deferred Compensation Plan. Stock units do not have an exercise price. Each stock unit credited to a director’s fee account and retirement account under the Outside Directors’ Deferred Compensation Plan will be converted into one share of common stock upon distribution. Column (a) also does not include shares of restricted or unrestricted common stock previously issued under the Company’s equity compensation plans. +34 +Table of Contents +(3) +Of this amount, 2,026,843 options were not exercisable as of December 28, 2013 due to vesting restrictions. +(4) +Comprised of: (i) 289,059 shares available for issuance under the Outside Directors’ Deferred Compensation Plan upon the retirement of the current directors or upon a change in control; and (ii) 10,950,232 shares issuable under the Stock Incentive Plan of 2013. +The Outside Directors’ Deferred Compensation Plan is a supplemental, unfunded, nonqualified deferred compensation plan for non-employee directors. Beginning in 2006, the Company began paying an annual equity retainer to non-management directors in the form of a contribution under the Outside Directors’ Deferred Compensation Plan. Non-management directors may also voluntarily elect to receive, in lieu of some or all directors’ fees, a number of stock units equal to the amount of the deferred directors’ fees divided by the fair market value of the Company’s common stock on the date of payment of the next cash dividend on the Company’s common stock. These stock units are increased by a dividend equivalent based on dividends paid by the Company and the amount of stock units credited to the participating director’s fee account and retirement account. Upon distribution, the participating directors receive a number of shares of the Company’s common stock equal to the number of stock units to be distributed at that time. Distribution is triggered by termination of service as a director or by a change in control of the Company and can occur in a lump sum, in installments or on another deferred basis. A total of 411,116 shares have been issued to a trust to satisfy the Company’s obligations when distribution is triggered and are included in shares the Company reports as issued and outstanding. +The Stock Incentive Plan of 2013 is an equity-based incentive plan for officers, key employees, and directors. The Stock Incentive Plan of 2013 authorizes awards of stock options, restricted common stock, common stock, restricted stock units and/or stock appreciation rights. The Stock Incentive Plan of 2013 provides that each share of restricted or unrestricted common stock and each restricted stock unit issued under the plan is counted as two shares against the total number of shares authorized for issuance under the plan. The number of securities listed as remaining available in column (c) of the table assumes only stock options will be issued under the plan in the future; each stock option counts as only one share against the total number of shares authorized for issuance under the plan. Actual shares available under the plan will be less to the extent that the Company awards restricted common stock, unrestricted common stock or restricted stock units under the plan. The numbers provided in this footnote and in column (c) will increase to the extent that options relating to the number of shares listed in column (a) of the table or other outstanding awards (e.g., shares of restricted or unrestricted stock, restricted stock units or stock appreciation rights) previously issued under the plan are canceled, surrendered, modified, exchanged for substitutes, expire or terminate prior to exercise or vesting because the number of shares underlying any such awards will again become available for issuance under the plan under which the award was granted. +Of the total number of shares available under column (c), the number of shares with respect to the following plans may be issued other than upon the exercise of an option, warrant or right outstanding as of December 28, 2013 : +• +Outside Directors’ Deferred Compensation Plan: 289,059 +• +Stock Incentive Plan of 2013: 4,211,628 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +The information contained under the caption “Related Party Matters” under the subheadings “Certain Relationships and Related Transactions” and “Related Person Transactions Policy” contained in the Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 23, 2014 , is incorporated herein by reference. The information contained under the caption “Corporate Governance” under the subheading “Director Independence” contained in the Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 23, 2014 , is incorporated herein by reference. +Item 14. +Principal Accounting Fees and Services +The information contained under the caption “Independent Registered Public Accounting Firm” in the Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 23, 2014 , is incorporated herein by reference. +35 +Table of Contents +PART IV +Item 15. +Exhibits, Financial Statement Schedules +(a) +The following documents are filed as part of this report: +(1) +Financial Statements Attached as Appendix A +The following consolidated financial statements of Wolverine World Wide, Inc. and its subsidiaries are filed as a part of this report: +• +Consolidated Balance Sheets as of December 28, 2013 and December 29, 2012. +• +Consolidated Statements of Operations for the Fiscal Years Ended December 28, 2013 , December 29, 2012 and December 31, 2011. +• +Consolidated Statements of Comprehensive Income for the Fiscal Years Ended December 28, 2013 , December 29, 2012 and December 31, 2011. +• +Consolidated Statements of Cash Flows for the Fiscal Years Ended December 28, 2013 , December 29, 2012 and December 31, 2011. +• +Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended December 28, 2013 , December 29, 2012 and December 31, 2011. +• +Notes to the Consolidated Financial Statements. +• +Reports of Independent Registered Public Accounting Firm. +(2) +Financial Statement Schedules Attached as Appendix B +The following consolidated financial statement schedule of Wolverine World Wide, Inc. and its subsidiaries is filed as a part of this report: +• +Schedule II - Valuation and Qualifying Accounts. +All other schedules (I, III, IV, and V) for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted. +(3) +Exhibits +See the Exhibit Index included in this Form 10-K for the exhibits filed with this Annual Report or incorporated by reference. The Company will furnish a copy of any exhibit listed in the Exhibit Index to any stockholder without charge upon written request to General Counsel and Secretary, 9341 Courtland Drive N.E., Rockford, Michigan 49351. +36 +Table of Contents +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. +Date: +February 25, 2014 +By: +/s/ Blake W. Krueger +Blake W. Krueger +Chairman, Chief Executive Officer and President (Principal Executive Officer) +37 +Table of Contents +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 +By: +/s/ Blake W. Krueger +Chairman, Chief Executive Officer and President (Principal Executive Officer) +February 25, 2014 +Blake W. Krueger +By: +/s/ Donald T. Grimes +Senior Vice President, Chief Financial Officer and Treasurer +(Principal Financial and Accounting Officer) +February 25, 2014 +Donald T. Grimes +*/s/ Jeffrey M. Boromisa +Director +February 25, 2014 +Jeffrey M. Boromisa +*/s/ Gina R. Boswell +Director +February 25, 2014 +Gina R. Boswell +*/s/ William K. Gerber +Director +February 25, 2014 +William K. Gerber +*/s/ Alberto L. Grimoldi +Director +February 25, 2014 +Alberto L. Grimoldi +*/s/ Joseph R. Gromek +Director +February 25, 2014 +Joseph R. Gromek +*/s/ David T. Kollat +Director +February 25, 2014 +David T. Kollat +By: +/s/ Blake W. Krueger +Director +February 25, 2014 +Blake W. Krueger +*/s/ Brenda J. Lauderback +Director +February 25, 2014 +Brenda J. Lauderback +*/s/ Nicholas T. Long +Director +February 25, 2014 +Nicholas T. Long +*/s/ Timothy J. O’Donovan +Director +February 25, 2014 +Timothy J. O’Donovan +*/s/ Shirley D. Peterson +Director +February 25, 2014 +Shirley D. Peterson +*/s/ Michael A. Volkema +Director +February 25, 2014 +Michael A. Volkema +*By: +/s/ Blake W. Krueger +Attorney-in-Fact +February 25, 2014 +Blake W. Krueger +38 +Table of Contents +APPENDIX A +Financial Statements +A-1 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Balance Sheets +(In millions, except share data) +December 28, +2013 +December 29, +2012 +ASSETS +Current assets: +Cash and cash equivalents +$ +214.2 +$ +171.4 +Accounts receivable, less allowances: +December 28, 2013 – $37.8 +December 29, 2012 – $26.7 +398.1 +353.6 +Inventories: +Finished products +406.0 +431.8 +Raw materials and work-in-process +22.2 +34.4 +Total inventories +428.2 +466.2 +Deferred income taxes +29.1 +28.0 +Prepaid expenses and other current assets +48.4 +55.7 +Total current assets +1,118.0 +1,074.9 +Property, plant and equipment: +Gross cost +416.1 +384.8 +Accumulated depreciation +(264.2 +) +(235.1 +) +Property, plant and equipment, net +151.9 +149.7 +Other assets: +Goodwill +445.3 +459.9 +Indefinite-lived intangibles +690.5 +679.8 +Amortizable intangibles, net +126.7 +153.5 +Deferred income taxes +3.4 +0.9 +Deferred financing costs, net +22.0 +38.9 +Other +64.4 +56.8 +Total other assets +1,352.3 +1,389.8 +Total assets +$ +2,622.2 +$ +2,614.4 +See accompanying notes to consolidated financial statements. +A-2 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Balance Sheets – continued +(In millions, except share data) +December 28, +2013 +December 29, +2012 +LIABILITIES AND STOCKHOLDERS’ EQUITY +Current liabilities: +Accounts payable +$ +135.2 +$ +160.9 +Accrued salaries and wages +41.5 +36.4 +Other accrued liabilities +99.3 +91.3 +Current maturities of long-term debt +53.3 +30.7 +Total current liabilities +329.3 +319.3 +Long-term debt, less current maturities +1,096.7 +1,219.3 +Accrued pension liabilities +74.2 +165.5 +Deferred income taxes +253.9 +240.5 +Other liabilities +26.7 +26.1 +Stockholders’ equity +Wolverine World Wide, Inc. stockholders’ equity: +Common stock – par value $1, authorized 160,000,000 shares; shares issued (including shares in treasury): +December 28, 2013 – 100,817,972 shares +December 29, 2012 – 98,749,221 shares +100.8 +98.7 +Additional paid-in capital +5.0 +— +Retained earnings +743.1 +633.4 +Accumulated other comprehensive loss +(9.2 +) +(87.5 +) +Cost of shares in treasury: +December 28, 2013 – 72,514 shares +December 29, 2012 – 82,019 shares +(2.1 +) +(2.2 +) +Total Wolverine World Wide, Inc. stockholders’ equity +837.6 +642.4 +Non-controlling interest +3.8 +1.3 +Total stockholders’ equity +841.4 +643.7 +Total liabilities and stockholders’ equity +$ +2,622.2 +$ +2,614.4 +See accompanying notes to consolidated financial statements. +A-3 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Statements of Operations +Fiscal Year +(In millions, except per share data) +2013 +2012 +2011 +Revenue +$ +2,691.1 +$ +1,640.8 +$ +1,409.1 +Cost of goods sold +1,619.0 +1,008.1 +852.3 +Acquisition-related transaction and integration costs +— +4.5 +— +Restructuring costs +7.6 +— +— +Gross profit +1,064.5 +628.2 +556.8 +Selling, general and administrative expenses +830.7 +482.0 +386.6 +Acquisition-related transaction and integration costs +41.5 +32.5 +— +Operating profit +192.3 +113.7 +170.2 +Other expenses: +Interest expense, net +52.0 +14.0 +1.0 +Acquisition-related interest expense +— +5.2 +— +Debt extinguishment costs +13.1 +— +— +Other expense (income), net +(0.5 +) +0.3 +0.3 +Total other expenses +64.6 +19.5 +1.3 +Earnings before income taxes +127.7 +94.2 +168.9 +Income taxes +26.7 +13.4 +45.6 +Net earnings +101.0 +80.8 +123.3 +Less: net earnings attributable to non-controlling interests +0.6 +0.1 +— +Net earnings attributable to Wolverine World Wide, Inc. +$ +100.4 +$ +80.7 +$ +123.3 +Net earnings per share (see Note 1): +Basic +$ +1.01 +$ +0.84 +$ +1.27 +Diluted +$ +0.99 +$ +0.81 +$ +1.24 +See accompanying notes to consolidated financial statements. +A-4 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Statements of Comprehensive Income +Fiscal Year +(In millions) +2013 +2012 +2011 +Net earnings +$ +101.0 +$ +80.8 +$ +123.3 +Other comprehensive income (loss), net of tax: +Foreign currency translation adjustments +(5.4 +) +5.7 +(11.3 +) +Effective portion of changes related to foreign exchange contracts: +Net (loss) gain arising during the period, net of taxes of $0.2, $1.0 and $(1.0) +(0.4 +) +(2.1 +) +2.2 +Reclassification adjustments into cost of goods sold, net of taxes of $(0.6), $1.3 and $(1.4) +1.3 +(2.9 +) +2.9 +Unrealized gain (loss) on interest rate swap, net of taxes of $(0.8) and $0.5 +1.6 +(1.0 +) +— +Pension adjustments: +Net actuarial gain (loss) arising during the period, net of taxes of $(33.1), $16.0 and $17.0 +61.4 +(29.8 +) +(31.6 +) +Amortization of prior actuarial losses, net of taxes of $(10.7), $(7.3) and $(4.2) +19.7 +13.5 +7.8 +Amortization of prior service cost, net of taxes of $0, $0 and $(0.1) +0.1 +0.1 +0.1 +Other comprehensive income (loss) +78.3 +(16.5 +) +(29.9 +) +Comprehensive income +179.3 +64.3 +93.4 +Less: comprehensive income attributable to non-controlling interests +0.5 +— +— +Comprehensive income attributable to Wolverine World Wide, Inc. +$ +178.8 +$ +64.3 +$ +93.4 +See accompanying notes to consolidated financial statements. +A-5 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Statements of Cash Flow +Fiscal Year +(In millions) +2013 +2012 +2011 +OPERATING ACTIVITIES +Net earnings +$ +101.0 +$ +80.8 +$ +123.3 +Adjustments necessary to reconcile net earnings to net cash provided by operating activities: +Depreciation and amortization +56.2 +27.7 +15.9 +Deferred income taxes +(27.8 +) +(4.2 +) +7.7 +Stock-based compensation expense +28.2 +15.0 +14.1 +Excess tax benefits from stock-based compensation +(3.4 +) +(9.9 +) +(3.3 +) +Pension contribution +(2.4 +) +(26.7 +) +(31.8 +) +Pension expense +37.3 +27.9 +17.5 +Debt extinguishment costs +13.1 +— +— +Restructuring costs +7.6 +— +— +Cash payments related to restructuring activities +(1.4 +) +— +(1.0 +) +Other +(3.6 +) +4.8 +11.3 +Changes in operating assets and liabilities: +Accounts receivable +(41.3 +) +15.1 +(24.8 +) +Inventories +35.1 +(29.4 +) +(25.1 +) +Other operating assets +12.8 +(17.1 +) +(21.6 +) +Accounts payable +(26.5 +) +5.9 +(7.1 +) +Income taxes +0.2 +(0.3 +) +0.1 +Other operating liabilities +17.2 +2.0 +3.6 +Net cash provided by operating activities +202.3 +91.6 +78.8 +INVESTING ACTIVITIES +Business acquisition, net of cash acquired +— +(1,225.9 +) +— +Additions to property, plant and equipment +(41.7 +) +(14.9 +) +(19.4 +) +Proceeds from sales of property, plant and equipment +2.8 +— +0.1 +Investments in joint ventures +(2.5 +) +(2.9 +) +— +Other +(3.3 +) +(2.4 +) +(3.3 +) +Net cash used in investing activities +(44.7 +) +(1,246.1 +) +(22.6 +) +FINANCING ACTIVITIES +Net borrowings (repayments) under revolver +— +(11.0 +) +11.0 +Borrowings of long-term debt +775.0 +1,275.0 +— +Payments of long-term debt +(875.0 +) +(25.5 +) +(0.5 +) +Payments of debt issuance costs +(2.3 +) +(40.1 +) +— +Cash dividends paid +(23.7 +) +(23.6 +) +(22.7 +) +Purchase of common stock for treasury +(0.8 +) +(14.1 +) +(67.5 +) +Proceeds from shares issued under stock incentive plans +8.6 +11.6 +14.1 +Excess tax benefits from stock-based compensation +3.4 +9.9 +3.3 +Contributions from non-controlling interests +2.0 +1.2 +— +Net cash (used) provided by in financing activities +(112.8 +) +1,183.4 +(62.3 +) +Effect of foreign exchange rate changes +(2.0 +) +2.5 +(4.3 +) +Increase (decrease) in cash and cash equivalents +42.8 +31.4 +(10.4 +) +Cash and cash equivalents at beginning of the year +171.4 +140.0 +150.4 +Cash and cash equivalents at end of the year +$ +214.2 +$ +171.4 +$ +140.0 +OTHER CASH FLOW INFORMATION +Interest paid +$ +48.8 +$ +10.0 +$ +0.8 +Net income taxes paid +$ +33.5 +$ +16.3 +$ +30.0 +See accompanying notes to consolidated financial statements. +A-6 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Statements of Stockholders' Equity +Wolverine World Wide, Inc. Stockholders' Equity +(In millions, except share data) +Common Stock +Additional Paid-In Capital +Retained Earnings +Accumulated +Other +Comprehensive +Loss +Treasury Stock +Non- controlling Interest +Total +Balance as of January 1, 2011 +$ +98.0 +$ +— +$ +487.0 +$ +(41.1 +) +$ +— +$ +— +$ +543.9 +Net earnings +123.3 +123.3 +Shares issued under stock incentive plans, net of forfeitures (2,086,038 shares) +1.0 +1.0 +Stock-based compensation expense +14.1 +14.1 +Amounts associated with shares issued under stock incentive plans: +Proceeds over par value +4.9 +4.9 +Income tax benefits +4.1 +4.1 +Issuance of performance shares (412,296 shares) +7.6 +7.6 +Issuance of treasury shares (24,354 shares) +(0.3 +) +0.6 +0.3 +Shares acquired for treasury (1,895,893 shares) +(67.4 +) +(67.4 +) +Cash dividends declared ($0.24 per share) +(23.2 +) +(23.2 +) +Other comprehensive loss +(29.9 +) +— +(29.9 +) +Impact of stock split in the form of a stock dividend +(2.7 +) +(30.4 +) +(33.7 +) +66.8 +— +Balance as of December 31, 2011 +$ +96.3 +$ +— +$ +553.4 +$ +(71.0 +) +$ +— +$ +— +$ +578.7 +Net earnings +80.7 +0.1 +80.8 +Shares issued under stock incentive plans, net of forfeitures (2,992,428 shares) +1.5 +1.5 +Stock-based compensation expense +15.0 +15.0 +Amounts associated with shares issued under stock incentive plans: +Proceeds over par value +9.5 +9.5 +Income tax benefits +11.0 +11.0 +Issuance of performance shares (394,608 shares) +(0.2 +) +(0.2 +) +Issuance of treasury shares (20,766 shares) +— +0.5 +0.5 +Shares acquired for treasury (354,411 shares) +(14.1 +) +(14.1 +) +Cash dividends declared ($0.24 per share) +(23.7 +) +(23.7 +) +Other comprehensive loss +(16.5 +) +— +(16.5 +) +Capital contribution from non-controlling interest +1.2 +1.2 +Impact of stock split in the form of stock dividend +0.9 +(35.3 +) +23.0 +11.4 +— +Balance as of December 29, 2012 +$ +98.7 +$ +— +$ +633.4 +$ +(87.5 +) +$ +(2.2 +) +$ +1.3 +$ +643.7 +See accompanying notes to consolidated financial statements +A-7 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Statements of Stockholders' Equity – continued +Wolverine World Wide, Inc. Stockholders' Equity +(In millions, except share data) +Common Stock +Additional Paid-In Capital +Retained Earnings +Accumulated +Other +Comprehensive +Loss +Treasury Stock +Non- controlling Interest +Total +Balance as of December 29, 2012 +$ +98.7 +$ +— +$ +633.4 +$ +(87.5 +) +$ +(2.2 +) +$ +1.3 +$ +643.7 +Net earnings +100.4 +0.6 +101.0 +Shares issued under stock incentive plans, net of forfeitures (2,068,751 shares) +1.1 +1.1 +Stock-based compensation expense +28.2 +28.2 +Amounts associated with shares issued under stock incentive plans: +Proceeds over par value +7.5 +7.5 +Income tax benefits +3.9 +3.9 +Issuance of performance shares (785,458 shares) +(0.4 +) +(0.4 +) +Issuance of treasury shares (26,590 shares) +— +0.6 +0.6 +Shares acquired for treasury (17,085 shares) +(0.8 +) +(0.8 +) +Cash dividends declared ($0.24 per share) +(23.6 +) +(23.6 +) +Other comprehensive income +78.3 +(0.1 +) +78.2 +Capital contribution from non-controlling interest +2.0 +2.0 +Impact of stock split in the form of a stock dividend +1.0 +(34.2 +) +32.9 +0.3 +— +Balance as of December 28, 2013 +$ +100.8 +$ +5.0 +$ +743.1 +$ +(9.2 +) +$ +(2.1 +) +$ +3.8 +$ +841.4 +See accompanying notes to consolidated financial statements. +A-8 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +Fiscal Years Ended December 28, 2013 , December 29, 2012 and December 31, 2011 +1. +SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +Nature of Operations +Wolverine World Wide, Inc. is a leading designer, manufacturer and marketer of a broad range of quality casual footwear and apparel; performance outdoor and athletic footwear and apparel; children’s footwear, industrial work shoes, boots and apparel; and uniform shoes and boots. The Company’s portfolio of owned and licensed brands includes: Bates ® , Cat ® , Chaco ® , Cushe ® , Harley-Davidson ® , Hush Puppies ® , HyTest ® , Keds ® , Merrell ® , Patagonia ® , Saucony ®, Sebago ® , Soft Style ® Sperry Top-Sider ® , Stride Rite ® and Wolverine ® . Licensing and distribution arrangements with third parties extend the global reach of the Company’s brand portfolio. The Company also operates a consumer direct division to market both its own brands and branded footwear and apparel from other manufacturers, as well as a leathers division that markets Wolverine Performance Leathers™ . +Principles of Consolidation +The consolidated financial statements include the accounts of Wolverine World Wide, Inc. and its 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. All fiscal years presented herein are 52-week periods. +Use of Estimates +The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("U.S.") 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, legal title has passed to the customer and collectability is reasonably assured. Revenue generated through 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 licensees and distributors. Retail store revenue is recognized at time of sale. +The Company records provisions for estimated sales returns and allowances at the time of sale based on historical rates of returns and allowances and specific identification of outstanding returns not yet received from customers. However, estimates of actual returns and allowances in any future period are inherently uncertain and actual returns and allowances may differ from these estimates. If actual or expected future returns and allowances were significantly greater or lower than established reserves, a reduction or increase to net revenues would be recorded in the period this determination was made. +Cost of Goods Sold +Cost of goods sold includes the actual product costs, including inbound freight charges and certain outbound freight charges, purchasing, sourcing, inspection and receiving costs. Warehousing costs are included in selling, general 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 goods sold. +Cash Equivalents +Cash equivalents include highly liquid investments with an original maturity of three months or less. Cash equivalents are stated at cost, which approximates market. +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. +A-9 +Table of Contents +Inventories +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 certain domestic finished goods inventories. Cost is determined using the first-in, first-out (“FIFO”) method for all raw materials, work-in-process and finished goods inventories in foreign countries; certain domestic finished goods inventories; and for all finished goods inventories of the Company’s consumer direct business, due to the unique nature of those operations. 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 computer hardware and software, store furniture and fixtures, office furniture and machinery and equipment. 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 14 to 20 years for buildings and improvements and from 3 to 10 years for machinery, equipment and software. +Operating Leases +The Company leases its retail stores and certain distribution and office facilities under operating leases. In addition to the minimum lease payments, leases may include rent escalation clauses, contingent rental expense and lease incentives, including rent holidays and tenant improvement allowances. Rent expense is recognized on a straight-line basis over the term of the lease from the time at which the Company takes possession of the property. Landlord-provided tenant improvement allowances are recorded in other liabilities and amortized as a credit to rent expense over the term of the lease. Leasehold improvements are depreciated at the lesser of the estimated useful life or lease term, including reasonably-assured lease renewals as determined at lease inception. +Deferred Financing Costs +Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining commitments for financing that result in a closing of such financings for the Company. These costs are amortized into earnings through interest expense over the terms of the respective agreements. Costs incurred in seeking financing transactions that do not close are expensed in the period in which it is determined that the financing will not close. +Acquisitions +The Company accounts for acquired businesses using the purchase method of accounting. Under the purchase method, the Company’s consolidated financial statements include the operations of an acquired business from the date of acquisition. In addition, the assets acquired and liabilities assumed are recorded at the date of acquisition at their respective estimated fair values, with any excess of the purchase price over the estimated fair values of the net assets acquired recorded as goodwill. +The Company typically uses an income method to estimate the fair value of intangible assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants and include the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product or technology life cycles, the economic barriers to entry and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur that could affect the accuracy or validity of the estimates and assumptions. +Determining the useful life of an intangible asset also requires judgment. Certain intangibles are expected to have indefinite lives based on their history and the Company’s plans to continue to support and build the acquired brands. Other acquired intangible assets (e.g., certain trademarks or brands, customer relationships, patents and technologies) are expected to have determinable useful lives. The Company’s assessment as to trademarks and brands that have an indefinite life and those that have a determinable life is based on a number of factors including competitive environment, market share, trademark and/or brand history, underlying product life cycles, operating plans and the macroeconomic environment of the countries in which the trademarks or brands are sold. The Company’s estimates of the useful lives of determinable-lived intangibles are based primarily on these same factors. All of the Company’s acquired technology and customer-related intangibles are expected to have determinable useful lives. The costs of determinable-lived intangibles are amortized to expense over their estimated lives. +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. Indefinite-lived intangibles comprises trademarks and trade names. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to impairment tests at least annually. The Company reviews the carrying amounts of goodwill and other non-amortizable intangible assets by reporting unit at least annually, or when indicators of impairment are present, to determine if such assets may be impaired. If the carrying amounts of these assets are not recoverable based upon +A-10 +Table of Contents +discounted cash flow and market approach analyses, the carrying amounts of such assets are reduced by the estimated difference between the carrying value and estimated fair value. The Company includes assumptions about expected future operating performance as part of a discounted cash flow analysis to estimate fair value. If the carrying values of these assets are not recoverable, based on the discounted cash flow analysis, management performs the next step, which compares the fair value of the reporting unit to the carrying value of the tangible and intangible net assets of the reporting units. Goodwill is considered impaired if the recorded fair value of the tangible and intangible net assets exceeds the fair value of the reporting unit. +The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. The Company would not be required to quantitatively determine the fair value of the indefinite-lived intangible unless the Company determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than the carrying value. The Company may skip the qualitative assessment and quantitatively test indefinite-lived intangibles by comparison of the individual carrying values to the fair value. Future cash flows of the individual indefinite-lived intangible assets are used to measure their fair value after consideration by management of certain assumptions, such as forecasted growth rates and cost of capital, which are derived from internal projections and operating plans. +The Company performs its annual testing for goodwill and indefinite-lived intangible asset impairment at the beginning of the fourth quarter of the fiscal year for all reporting units. The Company did not recognize any impairment charges for goodwill or indefinite-lived intangible assets during the fiscal years 2013, 2012 or 2011 as the Company’s annual impairment testing indicated that all reporting unit goodwill and indefinite-lived intangible asset fair values exceeded their respective carrying values. +Amortizable intangible assets are amortized using the straight-line method over their estimated useful lives. They consist primarily of customer relationships, licensing arrangements and developed product technology. The combined gross carrying value and accumulated amortization for these amortizable intangibles was as follows: +December 28, 2013 +(In millions) +Average remaining life (years) +Gross carrying +value +Accumulated +amortization +Net +Customer relationships +18 +$ +100.5 +$ +6.4 +$ +94.1 +Licensing arrangements +3 +28.8 +8.3 +20.5 +Developed product technology +4 +14.9 +3.8 +11.1 +Backlog +0 +5.2 +5.2 +— +Other +2 +9.3 +8.3 +1.0 +Total +$ +158.7 +$ +32.0 +$ +126.7 +December 29, 2012 +(In millions) +Average remaining life (years) +Gross carrying +value +Accumulated +amortization +Net +Customer relationships +19 +$ +110.5 +$ +1.3 +$ +109.2 +Licensing arrangements +4 +28.1 +1.5 +26.6 +Developed product technology +5 +14.5 +0.7 +13.8 +Backlog +1 +5.1 +2.3 +2.8 +Other +2 +9.1 +8.0 +1.1 +Total +$ +167.3 +$ +13.8 +$ +153.5 +Amortization expense for other intangible assets was $ 18.4 million and $ 6.5 million for fiscal years 2013 and 2012, respectively. Estimated aggregate amortization expense for such intangibles for each of the five fiscal years subsequent to 2013 is as follows: +(In millions) +2014 +2015 +2016 +2017 +2018 +Amortization expense +$ +15.5 +$ +15.3 +$ +13.5 +$ +8.4 +$ +5.0 +A-11 +Table of Contents +The changes in the carrying amount of goodwill and other non-amortizable intangibles for the years ended December 28, 2013 and December 29, 2012 are as follows: +(In millions) +Goodwill +Other +non-amortizable +intangibles +Total +Balance at December 31, 2011 +$ +38.9 +$ +17.4 +$ +56.3 +Acquisition of PLG +419.6 +661.8 +1,081.4 +Foreign currency translation effects +1.4 +0.6 +2.0 +Balance at December 29, 2012 +$ +459.9 +$ +679.8 +$ +1,139.7 +Acquisition adjustments +(10.8 +) +10.0 +(0.8 +) +Foreign currency translation effects +(3.8 +) +0.7 +(3.1 +) +Balance at December 28, 2013 +$ +445.3 +$ +690.5 +$ +1,135.8 +Impairment 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 asset or asset group to the future undiscounted net cash flows expected to be generated by the asset 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. During fiscal 2013, the Company recorded an impairment of $ 0.7 million related to certain consumer direct store assets where the estimated future cash flows did not support the net book value of the store assets. +Retirement Benefits +The determination of the obligation and expense for retirement benefits is dependent on the selection of certain actuarial assumptions used in calculating such amounts. These assumptions include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation. These assumptions are reviewed with the Company’s actuaries and updated annually based on relevant external and internal factors and information, including, but not limited to, long-term expected asset returns, rates of termination, regulatory requirements and plan changes. See Note 7 to the consolidated financial statements for additional information. +Stock-Based Compensation +The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of FASB ASC Topic 718, Compensation – Stock Compensation (“ASC 718”). The Company recognized compensation expense of $ 28.2 million , $ 15.0 million , and $ 14.1 million and related income tax benefits of $ 9.3 million , $ 4.9 million , and $ 4.5 million for grants under its stock-based compensation plans in the statements of operations for fiscal years 2013, 2012 and 2011, respectively. +Stock-based compensation expense recognized in the consolidated statements of operations for fiscal years 2013, 2012 and 2011, was based on awards ultimately expected to vest and, as such, was reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. +The Company estimated the fair value of employee stock options on the date of grant using the Black-Scholes model. The estimated weighted-average fair value for each option granted was $5.24 , $5.36 and $5.23 per share for fiscal years 2013, 2012 and 2011, respectively, with the following weighted-average assumptions: +2013 +2012 +2011 +Expected market price volatility (1) +33.2 +% +37.8 +% +38.6 +% +Risk-free interest rate (2) +0.6 +% +0.6 +% +1.8 +% +Dividend yield (3) +1.2 +% +1.3 +% +1.6 +% +Expected term (4) +4 years +4 years +4 years +(1) +Based on historical volatility of the Company’s common stock. The expected volatility is based on the daily percentage change in the price of the stock over the four years prior to the grant. +(2) +Represents the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. +(3) +Represents the Company’s cash dividend yield for the expected term. +(4) +Represents the period of time that options granted are expected to be outstanding. As part of the determination of the expected term, the Company concluded that all employee groups exhibit similar exercise and post-vesting termination behavior. +A-12 +Table of Contents +The Company issued 2,371,937 shares of common stock in connection with the exercise of stock options and new restricted and performance stock awards during fiscal 2013. The Company cancelled 219,228 shares of common stock issued under restricted and performance stock awards as a result of forfeitures during fiscal 2013. +Income Taxes +The provision for income taxes is based on the geographic dispersion of 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. +The Company records an increase in liabilities for income tax accruals associated with tax benefits claimed on tax returns but not recognized for financial statement purposes (unrecognized tax benefits). The Company recognizes interest and penalties related to unrecognized tax benefits through interest expense and income tax expense, respectively. +Earnings Per Share +The Company calculates earnings per share in accordance with FASB ASC Topic 260, Earnings Per Share (“ASC 260”). ASC 260 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the earnings allocation in computing earnings per share under the two-class method. Under the guidance in ASC 260, the Company’s unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and must be included in the computation of earnings per share pursuant to the two-class method. +On July 11, 2013, the Company’s Board of Directors approved a two-for-one stock split in the form of a stock dividend that was paid on November 1, 2013 to stockholders of record on October 1, 2013. All share and per share data in this Annual Report on Form 10-K has been presented to reflect the split. +The following table sets forth the computation of basic and diluted earnings per share: +(In millions, except share and per share data) +2013 +2012 +2011 +Numerator: +Net earnings attributable to Wolverine World Wide, Inc. +$ +100.4 +$ +80.7 +$ +123.3 +Adjustment for earnings allocated to nonvested restricted common stock +(2.3 +) +(1.7 +) +(2.6 +) +Net earnings used to calculate basic earnings per share +98.1 +79.0 +120.7 +Adjustment for earnings reallocated to nonvested restricted common stock +0.1 +0.1 +0.1 +Net earnings used to calculate diluted earnings per share +$ +98.2 +$ +79.1 +$ +120.8 +Denominator: +Weighted average shares outstanding +100,253,617 +97,632,336 +97,821,198 +Adjustment for nonvested restricted common stock +(3,308,162 +) +(2,757,836 +) +(2,865,082 +) +Shares used to calculate basic earnings per share +96,945,455 +94,874,500 +94,956,116 +Effect of dilutive stock options +1,993,343 +2,154,152 +2,501,224 +Shares used to calculate diluted earnings per share +98,938,798 +97,028,652 +97,457,340 +Net earnings per share: +Basic +$ +1.01 +$ +0.84 +$ +1.27 +Diluted +$ +0.99 +$ +0.81 +$ +1.24 +Options granted to purchase 449,036 shares of common stock in fiscal 2013, 775,182 shares in fiscal 2012, and 677,754 shares in fiscal 2011 have not been included in the denominator for the computation of diluted earnings per share for each of those fiscal years because the related exercise prices were greater than the average market price for the year, and they were, therefore, anti-dilutive. +Foreign Currency +For most of 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 each 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. +A-13 +Table of Contents +Transaction gains and losses are included in the consolidated statements of operations and were not material for fiscal years 2013, 2012 and 2011. +Financial Instruments and Risk Management +The Company follows FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), which provides a consistent definition of fair value, focuses on exit price, prioritizes the use of market-based inputs over entity-specific inputs for measuring fair value and establishes a three-tier hierarchy for fair value measurements. ASC 820 requires fair value measurements to be classified and disclosed in one of the following three categories: +Level 1: +Fair value is measured using quoted prices (unadjusted) in active markets for identical assets and liabilities. +Level 2: +Fair value is measured using either direct or indirect inputs, other than quoted prices included within Level 1, which are observable for similar assets or liabilities. +Level 3: +Fair value is measured using valuation techniques in which one or more significant inputs are unobservable. +The Company’s financial instruments consist of cash and cash equivalents, accounts and notes receivable, accounts payable, foreign currency forward exchange contracts, an interest rate swap agreement, borrowings under the Company’s Revolving Credit Facility and interest-bearing debt. The carrying amount of the Company’s financial instruments is historical cost, which approximates fair value, except for the interest rate swap and foreign currency forward exchange contracts, which are carried at fair value. As of December 28, 2013 the carrying value and the fair value of the Company’s interest-bearing debt, including current maturities, were $ 1,150.0 million and $ 1,183.8 million , respectively. As of December 29, 2012, the carrying value and the fair value of the Company’s interest-bearing debt, were $ 1,250.0 million and $ 1,308.9 million , respectively. The fair value of the fixed-rate debt is based on third-party quotes (Level 2). The fair value of the variable-rate debt was calculated by discounting the future cash flows to their present value using a discount rate based on the risk free rate of the same maturity (Level 3). The Company does not hold or issue financial instruments for trading purposes. +The Company follows FASB ASC Topic 815, Derivatives and Hedging (“ASC 815”), which is intended to improve transparency in financial reporting and requires that all derivative instruments be recorded on the consolidated balance sheets at fair value by establishing criteria for designation and effectiveness of hedging relationships. The Company utilizes foreign currency forward exchange contracts to manage the volatility associated with U.S. dollar inventory purchases made by non-U.S. wholesale operations in the normal course of business. At December 28, 2013 and December 29, 2012, the Company had outstanding forward currency exchange contracts to purchase $ 129.1 million and $111.9 million , of U.S. dollars with maturities ranging up to 364 and 336 days for fiscal years 2013 and 2012, respectively. +The following table sets forth financial assets and liabilities measured at fair value in the consolidated balance sheets and the respective pricing levels to which the fair value measurements are classified within the fair value hierarchy as of December 28, 2013 and December 29, 2012. +Fair Value Measurements +Quoted Prices With Other Observable Inputs (Level 2) +(In millions) +December 28, 2013 +December 29, 2012 +Financial assets +Foreign exchange contracts asset +$ +1.7 +$ +— +Interest rate swap asset +0.9 +— +Financial liabilities +Foreign exchange contracts liability +$ +2.3 +$ +2.3 +Interest rate swap liability +— +1.5 +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 goods sold caption of the consolidated statements of operations. Hedge ineffectiveness was not material to the Company’s consolidated financial statements for fiscal years 2013, 2012 and 2011. 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. +The Company has one interest rate swap agreement which exchanges floating rate for fixed rate interest payments over the life of the agreement without the exchange of the underlying notional amounts. The notional amounts of the interest rate swap agreement are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. +A-14 +Table of Contents +The differential paid or received on the interest rate swap agreement is recognized as interest expense. The Company’s interest rate swap arrangement, which reduces the Company’s exposure to fluctuations in interest rates on its variable rate debt, has a notional amount of $ 455.5 million as of December 28, 2013 . This derivative instrument, which, unless otherwise terminated, will mature on October 6, 2017 , has been designated as a cash flow hedge of the debt. In accordance with ASC 815, the Company formally documented the relationship between the interest rate swap and the variable rate borrowings, as well as its risk management objective and strategy for undertaking the hedge transaction. This process included linking the derivative to the specific liability or asset on the balance sheet. The Company also assessed at the hedge’s inception and continues to assess on an ongoing basis, whether the derivative used in the hedging transaction is highly effective in offsetting changes in the cash flows of the hedged item. The effective portion of unrealized gains (losses) is deferred as a component of accumulated other comprehensive income (loss) and will be recognized in earnings at the time the hedged item affects earnings. Any ineffective portion of the change in fair value will be immediately recognized in earnings. +2. +INVENTORIES +Inventories of $ 59.3 million at December 28, 2013 and $ 62.7 million at December 29, 2012 have been valued using the LIFO method. If the FIFO method had been used, inventories would have been $ 21.8 million and $ 21.6 million higher than reported at December 28, 2013 and December 29, 2012 , respectively. +3. +INDEBTEDNESS +Total borrowings consist of the following obligations: +(In millions) +December 28, +2013 +December 29, +2012 +Term Loan A, due October 10, 2018 +$ +775.0 +$ +550.0 +Term Loan B, due October 9, 2019 +— +325.0 +Public Bonds, 6.125% interest, due October 15, 2020 +375.0 +375.0 +Total interest-bearing debt +1,150.0 +1,250.0 +Less: current maturities of long-term debt +53.3 +30.7 +Total long-term debt +$ +1,096.7 +$ +1,219.3 +On October 10, 2013, the Company amended the Credit Agreement resulting in the payoff of the Term Loan B Facility while establishing a principal balance of $775.0 million for the Term Loan A Facility. The Amendment provided for a lower effective interest rate on the term loan debt, and a one-year extension on both the Term Loan A Facility and the Revolving Credit Facility. In addition, the Amendment provided for increased debt capacity subject to a maximum aggregate debt amount (including outstanding term loan principal and revolver commitment amounts in addition to permitted incremental debt) of $1,350.0 million . The Company incurred $ 13.1 million of debt extinguishment costs during the fourth quarter of fiscal 2013 in connection with the Amendment. These costs represent a write-off of previously capitalized deferred financing costs. +The interest rates applicable to amounts outstanding under the Term Loan A Facility and to U.S. dollar denominated amounts outstanding under the Revolving Credit Facility will be, at the Company’s option, either (1) the Alternate Base Rate plus an applicable margin as determined by the Company’s Consolidated Leverage Ratio, within a range of 0.375% to 1.25% , or (2) the Eurocurrency Rate plus an applicable margin as determined by the Company’s Consolidated Leverage Ratio, within a range of 1.375% to 2.25% with all capitalized terms as defined in the Credit Agreement. +The Revolving Credit Facility allows the Company to borrow up to an aggregate amount of $200.0 million and includes a $100.0 million foreign currency subfacility under which borrowings may be made, subject to certain conditions, in Canadian dollars, British pounds, euros, Hong Kong dollars, Swedish kronor, Swiss francs and such additional currencies as are determined in accordance with the Credit Agreement. The Revolving Credit Facility also includes a $50.0 million swingline subfacility and a $50.0 million letter of credit subfacility. +The only usage against the Company’s unsecured Revolving Credit Facility as of December 28, 2013 and December 29, 2012, was due to outstanding standby letters of credit totaling $3.5 million and $1.9 million , respectively. The Company's outstanding letters of credit reduce the borrowing capacity under the Company’s Revolving Credit Facility. +As required by the Credit Agreement, the Company also entered into an interest rate swap with a notional amount as of December 28, 2013 and December 29, 2012 of $455.5 million and $ 462.2 million , respectively. The interest rate swap reduces the Company’s exposure to fluctuations in interest rates on its variable rate debt. This derivative instrument was designated as a cash flow hedge of the Company's variable rate debt. +A-15 +Table of Contents +The obligations of the Company pursuant to the Credit Agreement are guaranteed by substantially all of the Company’s material domestic subsidiaries and secured by substantially all of the personal and real property of the Company and its material domestic subsidiaries, subject to certain exceptions. +The Credit Agreement also contains certain affirmative and negative covenants, including covenants that limit the ability of the Company and its Restricted Subsidiaries (as defined in the Credit Agreement) to, among other things: incur or guarantee indebtedness; incur liens; pay dividends or repurchase stock; enter into transactions with affiliates; consummate asset sales, acquisitions or mergers; prepay certain other indebtedness; or make investments, as well as covenants restricting the activities of certain foreign subsidiaries of the Company that hold intellectual property related assets. Further, the Credit Agreement requires compliance with the following financial covenants: a maximum Consolidated Leverage Ratio; a maximum Consolidated Secured Leverage Ratio; and a minimum Consolidated Interest Coverage Ratio (all capitalized terms are as defined in the Credit Agreement). The Company was in compliance with all such restrictions and financial covenants during fiscal 2013 and fiscal 2012. +On October 9, 2012, the Company issued a total of $375.0 million in senior notes. During the third quarter of fiscal 2013, the Company exchanged the senior notes (the "Public Bonds"). The Public Bonds bear interest at 6.125% and are due on October 15, 2020. Related interest payments are due semi-annually. The Public Bonds are guaranteed by substantially all of the Company’s domestic subsidiaries. +The Company included in interest expense the amortization of deferred financing costs of approximately $6.1 million and $1.8 million in fiscal 2013 and fiscal 2012, respectively. +In fiscal 2012, the Company used the borrowings under the term loan facilities, together with the net proceeds from the Public Bonds and cash on hand, to finance the PLG acquisition, repay any amounts outstanding under prior indebtedness, terminate its previous revolving credit facility and provide for the working capital needs of the Company, including the payment of transaction expenses in connection with the PLG acquisition. +Cash flows from operating activities, along with borrowings under the Revolving Credit Facility, if any, are expected to be sufficient to meet the Company’s working capital needs for the foreseeable future. Any excess cash flows from operating activities are expected to be used to reduce debt, fund internal and external growth initiatives, purchase property, plant and equipment, pay dividends or repurchase the Company’s common stock. +Annual maturities of interest-bearing debt for the five fiscal years subsequent to December 28, 2013, are as follows: +(In millions) +2014 +2015 +2016 +2017 +2018 +Thereafter +Annual maturities of interest-bearing debt +$ +53.3 +$ +63.0 +$ +77.5 +$ +77.5 +$ +503.7 +$ +375.0 +The above maturities exclude the recorded fair value of the Company’s interest rate swap arrangement, which was recorded within other assets for $ 0.9 million as of December 28, 2013. The interest rate swap was recorded within other liabilities for $ 1.5 million as of December 29, 2012. Additional information regarding the interest rate swap is provided in Note 1 of the consolidated financial statements. +A-16 +Table of Contents +4. +ACCUMLATED OTHER COMPREHENSIVE INCOME (LOSS) +Comprehensive income (loss) represents net earnings and any revenue, expenses, gains and losses that, under U.S. GAAP, are excluded from net earnings and recognized directly as a component of stockholders’ equity. +The change in accumulated other comprehensive income (loss) during fiscal 2013 is as follows: +(In millions) +Foreign +currency +translation +adjustments +Foreign +exchange +contracts +Interest +rate +swap +Pension +adjustments +Total +Balance of accumulated other comprehensive income (loss) as of December 29, 2012 +$ +5.9 +$ +(1.7 +) +$ +(1.0 +) +$ +(90.7 +) +$ +(87.5 +) +Other comprehensive income (loss) before reclassifications +(5.4 +) +(0.4 +) +1.6 +61.4 +57.2 +Amounts reclassified from accumulated other comprehensive income +— +1.9 +(1) +— +30.5 +(2) +32.4 +Income tax expense (benefit) +— +(0.6 +) +— +(10.7 +) +(11.3 +) +Net reclassifications +— +1.3 +— +19.8 +21.1 +Net current-period other comprehensive income (loss) +(5.4 +) +0.9 +1.6 +81.2 +78.3 +Balance of accumulated other comprehensive income (loss) as of December 28, 2013 +$ +0.5 +$ +(0.8 +) +$ +0.6 +$ +(9.5 +) +$ +(9.2 +) +(1) +Amounts reclassified are included in cost of goods sold. +(2) +Amounts reclassified are included in the computation of net periodic pension costs (see Note 7 for additional details). +5. +PROPERTY, PLANT AND EQUIPMENT +Property, plant and equipment consisted of the following: +(In millions) +December 28, +2013 +December 29, +2012 +Land +3.9 +3.9 +Buildings and improvements +119.0 +107.0 +Machinery and equipment +192.1 +180.1 +Software +101.1 +93.8 +Gross cost +416.1 +384.8 +Less: accumulated depreciation +264.2 +235.1 +Property, plant and equipment, net +151.9 +149.7 +Depreciation expense was $ 37.8 million , $ 21.2 million and $ 14.9 million for fiscal years 2013, 2012 and 2011, respectively. +The Company leases machinery, equipment and certain warehouse, office and retail store space under operating lease agreements that expire at various dates through 2023. Certain leases contain renewal provisions and generally require the Company to pay utilities, insurance, taxes and other operating expenses. +At December 28, 2013 , minimum rental payments due under all non-cancelable leases were as follows: +(In millions) +2014 +2015 +2016 +2017 +2018 +Thereafter +Minimum rental payments +$ +51.5 +$ +45.4 +$ +38.8 +$ +31.6 +$ +27.1 +$ +84.3 +Rental expense under all operating leases, consisting primarily of minimum rentals, totaled $ 55.9 million in fiscal 2013 , $ 29.4 million in fiscal 2012 and $ 20.1 million in fiscal 2011 . +A-17 +Table of Contents +6. +CAPITAL STOCK +The Company has 2,000,000 authorized shares of $ 1 par value preferred stock, of which none was issued or outstanding as of December 28, 2013 or December 29, 2012. The Company has designated 150,000 shares of preferred stock as Series A junior participating preferred stock and 500,000 shares of preferred stock as Series B junior participating preferred stock for possible future issuance. +The Company did not repurchase any shares of Company common stock in fiscal 2013 under a stock repurchase program and repurchased $ 2.4 million of Company stock during fiscal 2012. On February 12, 2014, the Company's Board of Directors approved a common stock repurchase program that authorizes the repurchase of up to $ 200.0 million in common stock over a four-year period. In addition to the share repurchase program activity, the Company acquired $ 0.8 million and $ 11.7 million of shares in fiscal years 2013 and 2012, respectively, in connection with employee transactions related to stock incentive plans. +As of December 28, 2013 , the Company had stock options outstanding under various stock incentive plans. As of December 28, 2013 , the Company had approximately 10,950,232 stock incentive units (stock options, stock appreciation rights, restricted stock, restricted stock units and common stock) available for issuance. Each option or stock appreciation right granted counts as one stock incentive unit and all other awards granted, including restricted stock, count as 2.6 stock incentive units. Options granted under each plan have an exercise price equal to the fair market value of the underlying stock on the grant date, expire no later than ten years from the grant date, and generally vest over three years . Restricted 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 during the vesting period (except for certain transfers for estate planning purposes for certain officers), and a requirement to forfeit all or a certain portion of the award upon certain terminations of employment or upon failure to achieve performance criteria in certain instances. These restrictions typically lapse over a three- to five-year period from the date of the award. The Company has elected to recognize expense for these stock-based incentive plans ratably over the vesting term on a straight-line basis. Certain option and restricted share awards provide for accelerated vesting under various scenarios, including retirement and upon a change in control of the Company. With regard to acceleration of vesting upon retirement, employees of eligible retirement age are vested in accordance with plan provisions and applicable stock option and restricted stock agreements. The Company issues shares to plan participants upon exercise or vesting of stock-based incentive awards from either authorized, but unissued, shares or treasury shares. +A summary of the transactions under the stock option plans is as follows: +Shares Under Option +Weighted-Average Exercise Price +Average Remaining Contractual Term (Years) +Aggregate Intrinsic Value +(In millions) +Outstanding at January 1, 2011 +8,497,820 +$ +10.74 +5.7 +$ +44.3 +Granted +797,498 +18.38 +Exercised +(1,775,342 +) +9.95 +Cancelled +(130,008 +) +13.40 +Outstanding at December 31, 2011 +7,389,968 +$ +11.70 +5.5 +$ +45.7 +Granted +902,554 +19.85 +Exercised +(2,729,502 +) +9.95 +Cancelled +(62,038 +) +17.78 +Outstanding at December 29, 2012 +5,500,982 +$ +13.84 +5.9 +$ +34.4 +Granted +1,489,813 +21.76 +Exercised +(851,874 +) +11.46 +Cancelled +(107,680 +) +20.89 +Outstanding at December 28, 2013 +6,031,241 +$ +16.00 +6.2 +$ +104.9 +Estimated forfeitures +(10,585 +) +Vested or expected to vest at December 28, 2013 +6,020,656 +$ +15.99 +6.2 +$ +104.8 +Nonvested at December 28, 2013 and expected to vest +(2,016,258 +) +Exercisable at December 28, 2013 +4,004,398 +$ +13.54 +5.0 +$ +79.5 +The total pretax intrinsic value of options exercised during the years ended December 28, 2013 , December 29, 2012 and December 31, 2011 was $12.8 million , $30.1 million and $14.9 million , respectively. As of December 28, 2013 , there was $ 4.3 million of unrecognized compensation expense related to stock option grants that is expected to be recognized over a weighted-average period of 1.3 years. As of December 29, 2012 and December 31, 2011, there was $2.9 million and $2.4 million , respectively, +A-18 +Table of Contents +of unrecognized compensation expense related to stock option awards that was expected to be recognized over a weighted-average period of 1.2 and 1.0 years, respectively. +The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $ 33.40 as of December 28, 2013 , which would have been received by the option holders had all option holders exercised in-the-money options as of that date. The total number of in-the-money options exercisable as of December 28, 2013 was 4,004,398 and the weighted-average exercise price was $13.54 . As of December 29, 2012, 3,972,228 outstanding options were exercisable and in-the-money and the weighted-average exercise price was $12.18 . +Beginning in 2009, the Board of Directors has awarded an annual grant of performance share awards to the officers of the Company. The number of performance-based shares that will be earned (and eligible to vest) during the performance period will depend on the Company’s level of success in achieving two specifically identified performance targets. Any portion of the performance shares that are not earned by the end of the three-year measurement period will be forfeited. The final determination of the number of shares to be issued in respect to an award is determined by the Compensation Committee of the Company’s Board of Directors. +A summary of the nonvested restricted shares issued under stock award plans is as follows: +Restricted +Awards +Weighted- +Average +Grant Date +Fair Value +Performance +Awards +Weighted- +Average +Grant Date +Fair Value +Nonvested at January 1, 2011 +1,527,092 +$ +11.28 +949,050 +$ +10.22 +Granted +400,854 +18.29 +412,296 +18.32 +Vested +(330,372 +) +12.14 +— +— +Forfeited +(105,716 +) +12.36 +(78,686 +) +12.38 +Nonvested at December 31, 2011 +1,491,858 +$ +12.89 +1,282,660 +$ +12.69 +Granted +703,348 +20.14 +401,190 +19.89 +Vested +(730,434 +) +12.51 +(872,352 +) +10.63 +Forfeited +(66,310 +) +16.13 +(32,104 +) +12.82 +Nonvested at December 29, 2012 +1,398,462 +$ +16.58 +779,394 +$ +18.93 +Granted +744,287 +22.18 +789,814 +21.52 +Vested +(102,724 +) +15.35 +(28,580 +) +13.62 +Forfeited +(109,600 +) +19.96 +(109,628 +) +20.99 +Nonvested at December 28, 2013 +1,930,425 +$ +18.61 +1,431,000 +$ +20.31 +As of December 28, 2013 , there was $ 13.8 million of unrecognized compensation expense related to nonvested stock-based compensation arrangements granted under restricted stock award plans. That cost is expected to be recognized over a weighted-average period of 1.9 years. The total fair value of shares vested during the year ended December 28, 2013 was $ 2.7 million . As of December 29, 2012, there was $11.6 million of unrecognized compensation expense related to nonvested stock-based compensation arrangements granted under restricted stock award plans. That cost was expected to be recognized over a weighted-average period of 2.1 years. The total fair value of shares vested during the year ended December 29, 2012 was $14.9 million . As of December 31, 2011, there was $6.5 million of unrecognized compensation expense related to nonvested stock-based compensation arrangements granted under restricted stock award plans that was expected to be recognized over a weighted-average period of 2.0 years. The total fair value of shares vested during the year ended December 31, 2011 was $6.2 million . +As of December 28, 2013 , there was $ 8.0 million of unrecognized compensation expense related to nonvested stock-based compensation arrangements granted under performance-based award plans. That cost is expected to be recognized over a weighted-average period of 1.2 years. The total fair value of shares vested during the year ended December 28, 2013 was $ 0.6 million . As of December 29, 2012, there was $3.5 million of unrecognized compensation expense related to nonvested stock-based compensation arrangements granted under performance-based restricted stock award plans. That cost was expected to be recognized over a weighted-average period of 1.2 years. The total fair value of shares vested during the year ended December 29, 2012 was $17.5 million . As of December 31, 2011, there was $4.7 million of unrecognized compensation expense related to nonvested share-based compensation arrangements granted under performance-based restricted stock award plans that was expected to be recognized over a weighted-average period of 2.0 years. +A-19 +Table of Contents +7. +RETIREMENT PLANS +The Company has three non-contributory, defined benefit pension plans covering a majority of its domestic employees. The Company’s principal defined benefit pension plan provides benefits based on the employee’s years of service and final average earnings. Effective January 1, 2013, the Company closed this plan to new participants. The Company’s second plan provides benefits at a fixed rate per year of service for certain employees under a collective bargaining arrangement. The Company’s third non-contributory defined benefit pension plan, which no longer accrues future benefits, covers certain eligible PLG associates. Prior to the freezing of that plan, eligible PLG participants accrued pension benefits at a fixed unit rate based on the participant’s service and compensation. +The Company has a Supplemental Executive Retirement Plan (the “SERP”) for certain current and former employees that entitles a participating employee to receive payments from the Company following retirement based on the employee’s 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 those employees to receive payments from the Company for a period of time which generally extends 15 to 18 years following retirement. The Company maintains life insurance policies with a cash surrender value of $ 49.4 million at December 28, 2013 and $ 46.7 million at December 29, 2012 that are intended to fund deferred compensation benefits under the SERP and deferred compensation agreements. +The Company has two defined contribution 401(k) plans covering substantially all domestic employees that provide for Company contributions based on earnings. The Company recognized expense for its defined contribution plans of $ 4.8 million in fiscal 2013, $ 2.9 million in fiscal 2012 and $ 2.5 million in fiscal 2011. +The Company has certain defined contribution plans at foreign subsidiaries. Contributions to these plans were $ 1.5 million in fiscal 2013, $ 0.9 million in fiscal 2012 and $ 0.9 million in fiscal 2011. The Company also has a benefit plan at a foreign location that provides for retirement benefits based on years of service. The obligation recorded under this plan was $ 2.6 million at December 28, 2013 and $ 3.0 million at December 29, 2012 and was recognized as a deferred compensation liability on the consolidated balance sheets. +A-20 +Table of Contents +The following summarizes the status of and changes in the Company’s assets and related obligations for its pension plans (which include the Company’s defined benefit pension plans and the SERP) for the fiscal 2013 and 2012: +(In millions) +2013 +2012 +Change in projected benefit obligations: +Projected benefit obligations at beginning of the year +$ +445.2 +$ +269.1 +PLG projected benefit obligations at acquisition date +— +109.7 +Service cost pertaining to benefits earned during the year +9.0 +7.7 +Interest cost on projected benefit obligations +18.8 +15.3 +Actuarial (gains) losses +(62.3 +) +55.7 +Benefits paid to plan participants +(15.3 +) +(12.3 +) +Projected benefit obligations at end of the year +$ +395.4 +$ +445.2 +Change in fair value of pension assets: +Fair value of pension assets at beginning of the year +$ +277.3 +$ +163.1 +PLG fair value of pension assets at acquisition date +— +72.0 +Actual return on plan assets +53.1 +26.0 +Company contributions - pension +2.4 +26.7 +Company contributions - SERP +2.1 +1.8 +Benefits paid to plan participants +(15.3 +) +(12.3 +) +Fair value of pension assets at end of the year +$ +319.6 +$ +277.3 +Funded status +$ +(75.8 +) +$ +(167.9 +) +Amounts recognized in the consolidated balance sheets: +Non-current assets +$ +2.3 +$ +— +Current liabilities +(3.9 +) +(2.4 +) +Non-current liabilities +(74.2 +) +(165.5 +) +Net amount recognized +$ +(75.8 +) +$ +(167.9 +) +Amounts recognized in accumulated other comprehensive loss: +Unrecognized net actuarial loss (amounts net of tax: $(9.3) and $(90.5)) +$ +(13.1 +) +$ +(137.9 +) +Unrecognized prior service cost (amounts net of tax: $(0.2) and $(0.2)) +(0.2 +) +(0.4 +) +Net amount recognized +$ +(13.3 +) +$ +(138.3 +) +Funded status of pension plans and SERP (supplemental): +Funded status of qualified defined benefit plans and SERP +$ +(75.8 +) +$ +(167.9 +) +Nonqualified trust assets (cash surrender value of life insurance) recorded in other assets and intended to satisfy the projected benefit obligation of unfunded SERP obligations +49.4 +46.7 +Net funded status of pension plans and SERP (supplemental) +$ +(26.4 +) +$ +(121.2 +) +The accumulated benefit obligations for all defined benefit pension plans and the SERP were $ 380.1 million at December 28, 2013 and $ 425.4 million at December 29, 2012. +The following is a summary of net pension and SERP expense recognized by the Company: +(In millions) +2013 +2012 +2011 +Service cost pertaining to benefits earned during the year +$ +(9.0 +) +$ +(7.7 +) +$ +(6.5 +) +Interest cost on projected benefit obligations +(18.8 +) +(15.3 +) +(13.4 +) +Expected return on pension assets +21.0 +15.9 +14.3 +Net amortization loss +(30.5 +) +(20.8 +) +(11.9 +) +Net pension expense +$ +(37.3 +) +$ +(27.9 +) +$ +(17.5 +) +The actuarial loss and prior service cost included in accumulated other comprehensive loss and expected to be recognized in net periodic pension expense during 2014 is $ 7.4 million and $ 0.1 million , respectively. Expense for qualified defined benefit pension plans was $ 29.2 million in fiscal 2013, $ 20.2 million in fiscal 2012 and $ 12.6 million in fiscal 2011. +A-21 +Table of Contents +The weighted-average actuarial assumptions used to determine the benefit obligation amounts and the net periodic benefit cost for the Company’s pension and post-retirement plans are as follows: +2013 +2012 +Weighted-average assumptions used to determine benefit obligations at fiscal year-end: +Discount rate +5.26% +4.30% +Rate of compensation increase - pension +4.85% +4.85% +Rate of compensation increase - SERP +7.00% +7.00% +Weighted average assumptions used to determine net periodic benefit cost for the years ended: +Discount rate +4.30% +5.14% +Expected long-term rate of return on plan assets +7.68% +7.68% +Rate of compensation increase - pension +4.85% +4.85% +Rate of compensation increase - SERP +7.00% +7.00% +Unrecognized net actuarial 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 Company utilizes a bond matching calculation to determine the discount rate. A hypothetical bond portfolio is created based on a presumed purchase of high-quality corporate bonds with maturities that match the plan’s expected future cash outflows. The discount rate is the resulting yield of the hypothetical bond portfolio. The discount rate is used in the calculation of the year-end pension liability and service cost for the subsequent year. +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. The Company’s asset allocations at fiscal year-end by asset category and fair value measurement are as follows: +2013 +(In millions) +Level 1 +Level 2 +Total +Equity securities +$ +15.4 +$ +196.1 +$ +211.5 +66.0 +% +Fixed income investments +26.7 +81.2 +107.9 +33.6 +% +Cash and money market investments +1.4 +— +1.4 +0.4 +% +Total +$ +43.5 +$ +277.3 +$ +320.8 +100.0 +% +Expenses payable to plan sponsor +(1.2 +) +Fair value of plan assets +$ +319.6 +2012 +(In millions) +Level 1 +Level 2 +Total +Equity securities +$ +12.8 +$ +185.6 +$ +198.4 +71.6 +% +Fixed income investments +25.5 +53.4 +78.9 +28.4 +% +Fair value of plan assets +$ +38.3 +$ +239.0 +$ +277.3 +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 75 % and fixed income securities should not exceed 40 %. Within the equity and fixed income classifications, the investments are diversified. +The Company expects to contribute approximately $ 4.7 million to its qualified defined benefit pension plans and approximately $ 3.8 million to the SERP in fiscal 2014 . +Expected benefit payments for the five years subsequent to 2013 and the sum of the five years following those are as follows: +(In millions) +2014 +2015 +2016 +2017 +2018 +2019-2023 +Expected benefit payments +$ +19.0 +$ +19.6 +$ +20.5 +$ +21.2 +$ +22.0 +$ +123.6 +A-22 +Table of Contents +8. +INCOME TAXES +The geographic components of earnings before income taxes are as follows: +(In millions) +2013 +2012 +2011 +United States +$ +76.7 +$ +38.3 +$ +105.5 +Foreign +51.0 +55.9 +63.4 +Earnings before income taxes +$ +127.7 +$ +94.2 +$ +168.9 +The provisions for income taxes consist of the following: +(In millions) +2013 +2012 +2011 +Current expense: +Federal +$ +37.1 +$ +15.3 +$ +22.9 +State +2.2 +1.4 +0.1 +Foreign +15.0 +3.1 +15.1 +Deferred expense (credit): +Federal +(23.5 +) +(5.1 +) +5.8 +State +(3.0 +) +(0.4 +) +0.5 +Foreign +(1.1 +) +(0.9 +) +1.2 +Income tax provision +$ +26.7 +$ +13.4 +$ +45.6 +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: +(In millions) +2013 +2012 +2011 +Income taxes at U.S. statutory rate (35%) +$ +44.7 +$ +33.0 +$ +59.1 +State income taxes, net of federal income tax +0.5 +0.2 +1.0 +(Nontaxable earnings) non-deductible losses of foreign affiliates: +Cayman Islands +(5.4 +) +(4.6 +) +(3.2 +) +Bermuda +2.7 +1.7 +— +Dominican Republic +1.7 +(2.0 +) +(1.4 +) +Research and development credits +(2.2 +) +— +(0.6 +) +Foreign earnings taxed at rates different from the U.S. statutory rate: +Hong Kong +(17.1 +) +(12.2 +) +(12.8 +) +Other +3.1 +(1.6 +) +(1.8 +) +Adjustments for uncertain tax positions +(1.2 +) +(6.7 +) +3.5 +Change in valuation allowance +0.1 +0.7 +1.1 +Change in state tax rates +(2.0 +) +— +— +Non deductible expenses +0.9 +4.9 +0.7 +Other +0.9 +— +— +Income tax provision +$ +26.7 +$ +13.4 +$ +45.6 +A-23 +Table of Contents +Significant components of the Company’s deferred income tax assets and liabilities are as follows: +(In millions) +December 28, +2013 +December 29, +2012 +Deferred income tax assets: +Accounts receivable and inventory valuation allowances +$ +18.7 +$ +16.5 +Deferred compensation accruals +11.0 +9.9 +Accrued pension expense +26.6 +58.9 +Stock-based compensation +16.2 +7.7 +Net operating loss, capital loss and foreign tax credit carryforward +32.1 +3.9 +Other amounts not deductible until paid +9.2 +10.1 +Other +0.7 +1.4 +Total gross deferred income tax assets +114.5 +108.4 +Less valuation allowance +(29.7 +) +(3.2 +) +Net deferred income tax assets +84.8 +105.2 +Deferred income tax liabilities: +Tax depreciation in excess of book depreciation +(5.3 +) +(9.9 +) +Intangible assets +(294.8 +) +(302.0 +) +Other +(6.1 +) +(4.9 +) +Total deferred income tax liabilities +(306.2 +) +(316.8 +) +Net deferred income tax liabilities +$ +(221.4 +) +$ +(211.6 +) +The valuation allowance for deferred income tax assets as of December 28, 2013 and December 29, 2012 was $ 29.7 million and $ 3.2 million , respectively. The net change in the total valuation allowance for fiscal years 2013 and 2012 was $ 26.5 million and $ 0.7 million , respectively. The valuation allowance for 2012 was primarily related to foreign net operating loss carryforwards and tax credit carryforwards in foreign jurisdictions that, in the judgment of management, are not more likely than not to be realized. The ultimate realization of the carryforwards depends on the generation of future taxable income in the foreign tax jurisdictions. In addition to the foreign net operating losses and foreign tax credit carryforwards, the Company also added a valuation allowance in fiscal 2013 for a capital loss generated from the PLG acquisition, in which the Company acquired all of the outstanding equity interests of PLG as well as certain other assets. During the measurement period, the Company made a post-closing adjustment related to a capital loss generated on the transaction by the seller that transferred to the Company, creating a deferred tax asset in the amount of $ 26.4 million . The deferred tax asset was offset by a full valuation allowance of $ 26.4 million , since in the judgment of management, the Company was not more likely than not generating future capital gains to offset the capital loss prior to the expiration of the carryforward period. During the year, $ 0.8 million of the valuation allowance was released by the Company to offset the gain generated on the sale of a capital asset. +At December 28, 2013 , the Company had foreign net operating loss carryforwards of $ 20.3 million , which have expiration periods ranging from seven years to an unlimited term during which they are available to offset future foreign taxable income. The Company also had foreign tax credit carryforwards in foreign jurisdictions of $ 1.5 million , which are available for an unlimited carryforward period to offset future foreign taxes. The Company also had a U.S. capital loss carryforward of $ 73.1 million , which is available to offset future U.S. capital gain income, and expires in 2016 . +The following table summarizes the activity related to the Company’s unrecognized tax benefits: +(In millions) +2013 +2012 +Beginning balance +$ +9.8 +$ +13.8 +Increase related to business acquisition +— +2.6 +Increases related to current year tax positions +2.0 +1.5 +Decreases related to prior years positions +(0.4 +) +(4.8 +) +Settlements +— +(2.7 +) +Decrease due to lapse of statute +(2.8 +) +(0.6 +) +Ending balance +$ +8.6 +$ +9.8 +The portion of the unrecognized tax benefits that, if recognized currently, would reduce the annual effective tax rate was $ 7.3 million as of December 28, 2013 and $8.5 million as of December 31, 2012. The Company recognizes interest and penalties related +A-24 +Table of Contents +to unrecognized tax benefits through interest expense and income tax expense, respectively. Interest accrued related to unrecognized tax benefits was $ 2.2 million as of December 28, 2013 and $ 2.0 million as of December 31, 2012. +The Company is subject to periodic audits by domestic and foreign tax authorities. Currently, the Company is undergoing routine periodic audits in both domestic and foreign tax jurisdictions. It is reasonably possible that the amounts of unrecognized tax benefits could change in the next 12 months as a result of the audits; however, any payment of tax is not expected to be significant to the consolidated financial statements. +For the majority of tax jurisdictions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2009 . +The Company has not established a deferred tax liability on the amount of unremitted earnings of $ 367.0 million at December 28, 2013 . As of December 28, 2013, the Company had $ 214.2 million of cash and equivalents on hand, of which $ 180.2 million was held outside of the United States. The Company intends to permanently reinvest these funds outside of the United States, and current plans do not demonstrate a need to repatriate this cash to fund our U.S. operations. However, if these funds were repatriated, the Company would be required to accrue and pay applicable United States taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various countries. It is not practicable to estimate the amount of the deferred tax liability associated with these unremitted earnings due to the complexity of the hypothetical calculation. +On September 13, 2013, the U.S. Department of the Treasury and the Internal Revenue Service issued final regulations regarding the deduction and capitalization of expenditures related to tangible property. The final regulations under Internal Revenue Code Sections 162, 167 and 263(a) apply to amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2014. The Company has evaluated these regulations and determined they will not have a material impact on its consolidated results of operations, cash flows or financial position. +9. +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 U.S. 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, it is management’s opinion that the outcome of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. +The Company is involved in routine litigation incidental to its business and is a party to legal actions and claims, including, but not limited to, those related to employment and intellectual property. Some of the legal proceedings include claims for compensatory as well as punitive damages. While the final outcome of these matters cannot be predicted with certainty, considering, among other things, the meritorious legal defenses available and liabilities that have been recorded along with applicable insurance, it is management’s opinion that the outcome of these items will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. +The Company has future minimum royalty and advertising obligations due under the terms of certain licenses held by the Company. These minimum future obligations are as follows: +(In millions) +2014 +2015 +2016 +2017 +2018 +Thereafter +Minimum royalties +$ +1.9 +$ +1.7 +$ +— +$ +— +$ +— +$ +— +Minimum advertising +8.0 +9.0 +3.1 +2.7 +2.8 +5.9 +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 $ 1.7 million , $ 2.8 million and $ 3.3 million for fiscal years 2013, 2012 and 2011, respectively. +The terms of certain license agreements also require the Company to make advertising expenditures based on the level of sales. In accordance with these agreements, the Company incurred advertising expense of $ 4.4 million , $ 4.1 million and $ 3.3 million for fiscal years 2013, 2012 and 2011, respectively. +A-25 +Table of Contents +10. +BUSINESS SEGMENTS +During the first quarter of fiscal 2013, the Company reorganized its portfolio of 16 brands, including the PLG brands acquired in the fourth quarter of fiscal 2012, into the following three operating segments, which the Company has determined are reportable operating segments: +• +Lifestyle Group , consisting of Sperry Top-Sider ® footwear and apparel, Stride Rite ® footwear and apparel, Hush Puppies ® footwear and apparel, Keds ® footwear and apparel, and Soft Style ® footwear; +• +Performance Group , consisting of Merrell ® footwear and apparel, Saucony ® footwear and apparel, Chaco ® footwear, Patagonia ® footwear, and Cushe ® footwear; and +• +Heritage Group , consisting of Wolverine ® footwear and apparel, Cat ® footwear, Bates ® uniform footwear, Sebago ® footwear and apparel, Harley-Davidson ® footwear, and HyTest ® Safety footwear. +The reportable segments are engaged in designing, manufacturing, sourcing, marketing, licensing and distributing branded footwear, apparel and accessories. Reported revenue of the reportable operating segments includes revenue from the sale of branded footwear, apparel and accessories to third-party customers; income from a network of third-party licensees and distributors; and revenue from the Company’s mono-branded consumer direct business. Prior year results have been restated to reflect these new reportable operating segments. +The Company also reports an Other and Corporate category. The Other category consists of the Company’s multi-brand consumer direct business, leather marketing operations and sourcing operations that include third-party commission revenues. The Corporate category consists of unallocated corporate expenses including acquisition-related transaction and integration costs and restructuring costs. The Company’s operating segments are determined on the basis of how the Company internally reports and evaluates financial information used to make operating decisions. The Company allocated goodwill in accordance with FASB ASC Topic 350, Intangibles – Goodwill and Other in connection with the reorganization of the Company’s brand portfolio in the first quarter of fiscal 2013. +The accounting policies of each operating segment are the same as those described in the summary of significant accounting policies set forth in Note 1 to the consolidated financial statements. +A-26 +Table of Contents +Company management uses various financial measures to evaluate the performance of the reportable operating segments. The following is a summary of certain key financial measures for the respective fiscal periods indicated. +(In millions) +2013 +2012 +2011 +Revenue: +Lifestyle Group +$ +1,086.6 +$ +309.6 +$ +147.4 +Performance Group +945.8 +674.6 +619.4 +Heritage Group +567.4 +563.9 +553.8 +Other +91.3 +92.7 +88.5 +Total +$ +2,691.1 +$ +1,640.8 +$ +1,409.1 +Operating (loss) profit: +Lifestyle Group +$ +168.2 +$ +44.6 +$ +32.2 +Performance Group +179.8 +128.4 +135.5 +Heritage Group +85.7 +83.5 +91.6 +Other +0.2 +(1.1 +) +— +Corporate +(241.6 +) +(141.7 +) +(89.1 +) +Total +$ +192.3 +$ +113.7 +$ +170.2 +Depreciation and amortization expense: +Lifestyle Group +$ +6.5 +$ +2.0 +$ +0.5 +Performance Group +3.7 +3.0 +3.0 +Heritage Group +1.2 +1.2 +1.1 +Other +4.1 +4.0 +3.6 +Corporate +40.7 +17.5 +7.7 +Total +$ +56.2 +$ +27.7 +$ +15.9 +Additions to property, plant and equipment: +Lifestyle Group +$ +18.3 +$ +1.7 +$ +1.9 +Performance Group +3.3 +1.9 +3.7 +Heritage Group +0.9 +0.3 +1.5 +Other +5.4 +2.5 +1.1 +Corporate +13.8 +8.5 +11.2 +Total +$ +41.7 +$ +14.9 +$ +19.4 +(In millions) +December 28, +2013 +December 29, +2012 +December 31, +2011 +Total assets: +Lifestyle Group +$ +1,431.1 +$ +1,338.3 +$ +76.2 +Performance Group +476.4 +513.7 +231.2 +Heritage Group +247.2 +319.0 +234.0 +Other +56.9 +80.8 +60.4 +Corporate +410.6 +362.6 +249.9 +Total +$ +2,622.2 +$ +2,614.4 +$ +851.7 +Goodwill: +Lifestyle Group +$ +329.0 +$ +349.5 +$ +6.4 +Performance Group +92.8 +87.0 +10.4 +Heritage Group +23.5 +23.4 +22.1 +Total +$ +445.3 +$ +459.9 +$ +38.9 +A-27 +Table of Contents +Geographic information, related to revenue from external customers, based on shipping destination, included in the consolidated statements of operations is as follows: +(In millions) +2013 +2012 +2011 +United States +$ +1,984.8 +$ +1,079.9 +$ +842.0 +Foreign: +Europe, Middle East and Africa +362.0 +310.1 +336.9 +Canada +166.2 +112.6 +114.0 +Other +178.1 +138.2 +116.2 +Total from foreign territories +706.3 +560.9 +567.1 +Total revenue +$ +2,691.1 +$ +1,640.8 +$ +1,409.1 +The location of the Company’s tangible long-lived assets (primarily property, plant and equipment) is as follows: +(In millions) +December 28, +2013 +December 29, +2012 +December 31, +2011 +United States +$ +136.7 +$ +136.8 +$ +71.4 +Foreign countries +15.2 +14.2 +8.9 +Total +$ +151.9 +$ +151.0 +$ +80.3 +The Company does not believe that it is dependent upon any single customer because no customer accounts for more than 10% of consolidated revenue. +During fiscal 2013, the Company sourced approximately 98% (based on pairs) of its footwear products from third-party suppliers located primarily in the Asia Pacific region. For fiscal 2013, the remainder was produced at Company-owned manufacturing facilities in the U.S. and the Dominican Republic. During the fourth quarter of fiscal 2013, the Company closed its Company-owned Dominican Republic manufacturing facilities as part of a restructuring plan. All apparel and accessories are sourced from third-party 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. +11. +RESTRUCTURING ACTIVITIES +On October 4, 2013, the Board of Directors of the Company approved a plan to restructure the Company's Dominican Republic manufacturing operations in a manner intended to lower the Company’s cost of goods sold, as described below (the “Restructuring Plan”). During the fourth quarter of fiscal 2013, the Company sold a manufacturing facility in the Dominican Republic and closed a second manufacturing facility. As of December 28, 2013, the Restructuring Plan was substantially complete and the Company no longer maintains any Company-owned manufacturing capability in the Dominican Republic. The total amount expected to be incurred relating to the Restructuring Plan is $8.0 million . The Company incurred restructuring costs of $7.6 million for fiscal 2013. All costs incurred and expected to be incurred will be recognized in the Company's Corporate category and are included in the Restructuring costs line item in the consolidated statements of operations. +The following is a summary of the activity with respect to a reserve established by the Company in connection with the Restructuring Plan, by category of costs. +(In millions) +Severance and employee related +Costs associated with exit or disposal activities +Total +Balance at December 29, 2012 +$ +— +$ +— +$ +— +Restructuring costs +1.4 +6.2 +7.6 +Amounts paid +(1.4 +) +— +(1.4 +) +Charges against assets +— +(5.7 +) +(5.7 +) +Balance at December 28, 2013 +$ +— +$ +0.5 +$ +0.5 +A-28 +Table of Contents +12. +BUSINESS ACQUISITIONS +On October 9, 2012, the Company acquired all of the outstanding equity interests of PLG as well as certain other assets. Consideration paid to acquire PLG was approximately $ 1,249.5 million in cash. PLG markets casual and athletic footwear, apparel and related accessories for adults and children under well-known brand names including Sperry Top-Sider ® , Saucony ® , Stride Rite ® , and Keds ® . The Company accounted for the acquisition under the provisions of FASB ASC Topic 805, Business Combinations . The related assets acquired and liabilities assumed were recorded at fair value on the acquisition date. The operating results for PLG are included in the Company’s consolidated results of operations beginning October 9, 2012. +The Company funded the transaction using a combination of approximately $ 88.8 million of cash on hand and new borrowings. The Company’s debt financing included net proceeds from the term loan debt associated with the Credit Agreement and net proceeds from the senior notes. +For fiscal 2013, the Company incurred $ 41.5 million of acquisition-related transaction and integration costs included within selling, general and administrative expenses within the Company’s consolidated statements of operations. These costs include compensation expenses ($ 26.2 million ), other purchased services ($ 10.6 million ), amortization related to short-lived intangible assets ($ 2.4 million ) and professional and legal fees ($ 2.3 million ). For fiscal 2012, the Company incurred $ 42.2 million of acquisition-related transaction and integration costs of which $4.5 million , $32.5 million and $5.2 million were included within cost of goods sold, selling, general, and administrative expenses and interest expense, respectively, within the Company’s consolidated statements of operations. The charge to cost of goods sold of $4.5 million relates to the fair value adjustment to acquisition-date inventory and severance costs. The costs within selling, general and administrative expenses include professional and legal fees ( $14.9 million ), taxes paid on behalf of the seller ( $9.7 million ), other purchased services ( $5.2 million ) and severance ( $2.7 million ), respectively. The $5.2 million of interest expense includes an acquisition-related financing commitment fee and refinancing fees associated with the Company’s acquisition of PLG. +During the measurement period, the Company made certain post-closing adjustments related to the valuation of a receivable due from the seller, other assets and accruals, intangible assets and deferred income taxes that resulted in a net reduction to goodwill of $ 10.8 million . The following table summarizes the final fair values of the assets acquired and liabilities assumed in connection with the PLG acquisition: +(In millions) +Initial valuation at +December 29, 2012 +Measurement +period +adjustments +Final valuation at December 28, 2013 +Cash +$ +23.6 +$ +— +$ +23.6 +Accounts receivable +146.9 +4.3 +151.2 +Inventories +203.5 +— +203.5 +Deferred income taxes +13.6 +— +13.6 +Other current assets +13.2 +— +13.2 +Property, plant and equipment +77.1 +— +77.1 +Goodwill +419.6 +(10.8 +) +408.8 +Intangible assets +820.6 +1.2 +821.8 +Other +11.2 +— +11.2 +Total assets acquired +1,729.3 +(5.3 +) +1,724.0 +Accounts payable +97.4 +— +97.4 +Other accrued liabilities +40.0 +2.2 +42.2 +Deferred income taxes +294.7 +(7.5 +) +287.2 +Accrued pension liabilities +37.7 +— +37.7 +Other liabilities +10.0 +— +10.0 +Total liabilities assumed +479.8 +(5.3 +) +474.5 +Net assets acquired +$ +1,249.5 +$ +— +$ +1,249.5 +A-29 +Table of Contents +The excess of the purchase price over the fair value of net assets acquired of $ 408.8 million was recorded as goodwill in the consolidated balance sheets and has been assigned to the Performance Group and Lifestyle Group reportable operating segments as follows: +(In millions) +Goodwill from the acquisition of PLG +Performance Group +$ +82.5 +Lifestyle Group +326.3 +Total +$ +408.8 +The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of PLG. Substantially all of the goodwill is not amortizable for income tax purposes. +Intangible assets acquired in the PLG acquisition were valued as follows: +(In millions) +Intangible asset +Useful life +Trade names and trademarks +$ +671.8 +Indefinite +Customer lists +100.5 +3-20 years +Licensing agreements +28.8 +4-5 years +Developed product technology +14.9 +3-5 years +Backlog +5.2 +6 months +Net favorable leases +0.6 +10 years +Total intangible assets acquired +$ +821.8 +The Company assigned fair values to the identifiable intangible assets through a combination of the relief from royalty and the excess earnings methods. +At the time of the acquisition, a step-up in the value of inventory of $ 4.0 million was recorded in the allocation of the purchase price based on valuation estimates, all of which was charged to cost of sales in the fourth quarter of fiscal 2012 as the inventory was deemed sold. In addition, fixed assets were written up by approximately $ 18.8 million to their estimated fair market value based on a valuation method that included both cost and market approaches. This additional step-up in value is being depreciated over the estimated remaining useful lives of the assets. +13. +SUBSIDIARY GUARANTORS OF THE PUBLIC BONDS +The following tables present consolidated condensed financial information for (a) the Company (for purposes of this discussion and table, “Parent”); (b) the guarantors of the Public Bonds, which include substantially all of the domestic, 100 % owned subsidiaries of the Parent (“Subsidiary Guarantors”); and (c) the wholly- and partially-owned foreign subsidiaries of the Parent, which do not guarantee the Notes (“Non-Guarantor Subsidiaries”). Separate financial statements of the Subsidiary Guarantors are not presented because they are fully and unconditionally, jointly and severally liable under the guarantees, except for normal and customary release provisions. +A-30 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Condensed Statements of Operations +For the fiscal year ended December 28, 2013 +(In millions) +Parent +Subsidiary +Guarantors +Non-Guarantor +Subsidiaries +Eliminations +Consolidated +Revenue +$ +538.2 +$ +3,849.1 +$ +774.4 +$ +(2,470.6 +) +$ +2,691.1 +Cost of goods sold +383.8 +3,207.9 +415.4 +(2,388.1 +) +1,619.0 +Restructuring costs +0.1 +— +7.5 +— +7.6 +Gross profit +154.3 +641.2 +351.5 +(82.5 +) +1,064.5 +Selling, general and administrative expenses +139.0 +506.7 +267.5 +(82.5 +) +830.7 +Acquisition-related transaction and integration costs +16.9 +14.9 +9.7 +— +41.5 +Operating (loss) profit +(1.6 +) +119.6 +74.3 +— +192.3 +Other expenses: +Interest expense (income), net +52.1 +(0.2 +) +0.1 +— +52.0 +Debt extinguishment costs +13.1 +— +— +— +13.1 +Other expense (income), net +(3.7 +) +0.1 +3.1 +— +(0.5 +) +Total other expenses (income) +61.5 +(0.1 +) +3.2 +— +64.6 +Earnings (loss) before income taxes +(63.1 +) +119.7 +71.1 +— +127.7 +Income taxes +1.5 +19.3 +5.9 +— +26.7 +Earnings (loss) before equity in earnings (loss) of consolidated subsidiaries +(64.6 +) +100.4 +65.2 +— +101.0 +Equity in earnings of consolidated subsidiaries +165.0 +114.5 +21.7 +(301.2 +) +— +Net earnings +100.4 +214.9 +86.9 +(301.2 +) +101.0 +Less: net earnings attributable to non-controlling interests +— +— +0.6 +— +0.6 +Net earnings attributable to Wolverine World Wide, Inc. +$ +100.4 +$ +214.9 +$ +86.3 +$ +(301.2 +) +$ +100.4 +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Condensed Statements of Comprehensive Income +For the fiscal year ended December 28, 2013 +(In millions) +Parent +Subsidiary +Guarantors +Non-Guarantor +Subsidiaries +Eliminations +Consolidated +Net earnings +$ +100.4 +$ +214.9 +$ +86.9 +$ +(301.2 +) +$ +101.0 +Other comprehensive income (loss), net of tax: +Foreign currency translation adjustments +(5.4 +) +— +(5.4 +) +5.4 +(5.4 +) +Change in fair value of foreign exchange contracts +0.9 +— +0.9 +(0.9 +) +0.9 +Change in fair value of interest rate swap +1.6 +— +— +— +1.6 +Pension adjustments +81.2 +13.1 +— +(13.1 +) +81.2 +Other comprehensive income (loss) +78.3 +13.1 +(4.5 +) +(8.6 +) +78.3 +Comprehensive income +178.7 +228.0 +82.4 +(309.8 +) +179.3 +Less: comprehensive (loss) income attributable to non-controlling interests +(0.1 +) +— +0.6 +— +0.5 +Comprehensive income attributable to Wolverine World Wide, Inc. +$ +178.8 +$ +228.0 +$ +81.8 +$ +(309.8 +) +$ +178.8 +A-31 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Condensed Statements of Operations +For the fiscal year ended December 29, 2012 +(In millions) +Parent +Subsidiary +Guarantors +Non-Guarantor +Subsidiaries +Eliminations +Consolidated +Revenue +$ +527.1 +$ +1,065.7 +$ +539.2 +$ +(491.2 +) +$ +1,640.8 +Cost of goods sold +390.6 +780.6 +277.1 +(440.2 +) +1,008.1 +Acquisition-related transaction and integration costs +0.8 +3.7 +— +— +4.5 +Gross profit +135.7 +281.4 +262.1 +(51.0 +) +628.2 +Selling, general and administrative expenses +123.0 +206.0 +204.7 +(51.7 +) +482.0 +Acquisition-related transaction and integration costs +31.3 +1.2 +— +— +32.5 +Operating profit (loss) +(18.6 +) +74.2 +57.4 +0.7 +113.7 +Other expenses: +Interest expense (income), net +13.9 +(0.2 +) +0.3 +— +14.0 +Acquisition-related interest expense +5.2 +— +— +— +5.2 +Other expense (income), net +0.4 +(0.2 +) +0.1 +— +0.3 +Total other expenses (income) +19.5 +(0.4 +) +0.4 +— +19.5 +(Loss) earnings before income taxes +(38.1 +) +74.6 +57.0 +0.7 +94.2 +Income taxes +12.3 +(0.1 +) +1.2 +— +13.4 +(Loss) earnings before equity in earnings (loss) of consolidated subsidiaries +(50.4 +) +74.7 +55.8 +0.7 +80.8 +Equity in earnings of consolidated subsidiaries +131.1 +54.4 +61.2 +(246.7 +) +— +Net earnings +80.7 +129.1 +117.0 +(246.0 +) +80.8 +Less: net earnings attributable to non-controlling interests +— +— +0.1 +— +0.1 +Net earnings attributable to Wolverine World Wide, Inc. +$ +80.7 +$ +129.1 +$ +116.9 +$ +(246.0 +) +$ +80.7 +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Condensed Statements of Comprehensive Income +For the fiscal year ended December 29, 2012 +(In millions) +Parent +Subsidiary +Guarantors +Non-Guarantor +Subsidiaries +Eliminations +Consolidated +Net earnings +$ +80.7 +$ +129.1 +$ +117.0 +$ +(246.0 +) +$ +80.8 +Other comprehensive income (loss), net of tax: +Foreign currency translation adjustments +5.7 +— +5.7 +(5.7 +) +5.7 +Change in fair value of foreign exchange contracts +(5.0 +) +— +(5.0 +) +5.0 +(5.0 +) +Change in fair value of interest rate swap +(1.0 +) +— +— +— +(1.0 +) +Pension adjustments +(16.2 +) +— +— +— +(16.2 +) +Other comprehensive income (loss) +(16.5 +) +— +0.7 +(0.7 +) +(16.5 +) +Comprehensive (loss) income +64.2 +129.1 +117.7 +(246.7 +) +64.3 +Less: comprehensive (loss) income attributable to non-controlling interests +(0.1 +) +— +0.1 +— +— +Comprehensive income attributable to Wolverine World Wide, Inc. +$ +64.3 +$ +129.1 +$ +117.6 +$ +(246.7 +) +$ +64.3 +A-32 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Condensed Statements of Operations +For the fiscal year ended December 31, 2011 +(In millions) +Parent +Subsidiary +Guarantors +Non-Guarantor +Subsidiaries +Eliminations +Consolidated +Revenue +$ +524.7 +$ +504.7 +$ +490.0 +$ +(110.3 +) +$ +1,409.1 +Cost of goods sold +384.3 +306.3 +232.1 +(70.4 +) +852.3 +Gross profit +140.4 +198.4 +257.9 +(39.9 +) +556.8 +Selling, general and administrative expenses +136.2 +98.1 +191.3 +(39.0 +) +386.6 +Operating profit +4.2 +100.3 +66.6 +(0.9 +) +170.2 +Other expenses: +Interest expense (income), net +1.1 +— +(0.1 +) +— +1.0 +Other expense, net +0.1 +0.1 +0.1 +— +0.3 +Total other expenses +1.2 +0.1 +— +— +1.3 +Earnings before income taxes +3.0 +100.2 +66.6 +(0.9 +) +168.9 +Income taxes +41.9 +— +3.7 +— +45.6 +(Loss) earnings before equity in earnings (loss) of consolidated subsidiaries +(38.9 +) +100.2 +62.9 +(0.9 +) +123.3 +Equity in earnings of consolidated subsidiaries +162.2 +59.7 +71.1 +(293.0 +) +— +Net earnings attributable to Wolverine World Wide, Inc. +$ +123.3 +$ +159.9 +$ +134.0 +$ +(293.9 +) +$ +123.3 +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Condensed Statements of Comprehensive Income +For the fiscal year ended December 31, 2011 +(In millions) +Parent +Subsidiary +Guarantors +Non-Guarantor +Subsidiaries +Eliminations +Consolidated +Net earnings +$ +123.3 +$ +159.9 +$ +134.0 +$ +(293.9 +) +$ +123.3 +Other comprehensive income (loss), net of tax: +Foreign currency translation adjustments +(11.3 +) +— +(11.3 +) +11.3 +(11.3 +) +Change in fair value of foreign exchange contracts +5.1 +— +5.1 +(5.1 +) +5.1 +Pension adjustments +(23.7 +) +— +— +— +(23.7 +) +Other comprehensive (loss) income +(29.9 +) +— +(6.2 +) +6.2 +(29.9 +) +Comprehensive income +93.4 +159.9 +127.8 +(287.7 +) +93.4 +Comprehensive income attributable to Wolverine World Wide, Inc. +$ +93.4 +$ +159.9 +$ +127.8 +$ +(287.7 +) +$ +93.4 +A-33 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Condensed Balance Sheets +As of December 28, 2013 +(In millions) +Parent +Subsidiary +Guarantors +Non-Guarantor +Subsidiaries +Eliminations +Consolidated +ASSETS +Current assets: +Cash and cash equivalents +$ +18.8 +$ +15.0 +$ +180.4 +$ +— +$ +214.2 +Accounts receivable, net +63.9 +213.2 +121.0 +— +398.1 +Inventories: +Finished products +55.0 +270.8 +81.0 +(0.8 +) +406.0 +Raw materials and work-in-process +(0.1 +) +0.9 +21.4 +— +22.2 +Total inventories +54.9 +271.7 +102.4 +(0.8 +) +428.2 +Deferred income taxes +15.3 +12.6 +1.2 +— +29.1 +Prepaid expenses and other current assets +26.9 +11.1 +10.4 +— +48.4 +Total current assets +179.8 +523.6 +415.4 +(0.8 +) +1,118.0 +Property, plant and equipment: +Gross cost +223.7 +143.2 +49.2 +— +416.1 +Accumulated depreciation +(174.4 +) +(57.4 +) +(32.4 +) +— +(264.2 +) +Property, plant and equipment, net +49.3 +85.8 +16.8 +— +151.9 +Other assets: +Goodwill +7.7 +354.3 +83.3 +— +445.3 +Indefinite-lived intangibles +4.4 +674.7 +11.4 +— +690.5 +Amortizable intangibles, net +0.2 +126.4 +0.1 +— +126.7 +Deferred income taxes +— +— +3.4 +— +3.4 +Deferred financing costs, net +22.0 +— +— +— +22.0 +Other +46.0 +12.3 +5.3 +0.8 +64.4 +Intercompany accounts receivable +— +1,445.4 +347.5 +(1,792.9 +) +— +Investment in affiliates +3,033.2 +555.6 +393.5 +(3,982.3 +) +— +Total other assets +3,113.5 +3,168.7 +844.5 +(5,774.4 +) +1,352.3 +Total assets +$ +3,342.6 +$ +3,778.1 +$ +1,276.7 +$ +(5,775.2 +) +$ +2,622.2 +A-34 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Condensed Balance Sheets - continued +As of December 28, 2013 +(In millions) +Parent +Subsidiary +Guarantors +Non-Guarantor +Subsidiaries +Eliminations +Consolidated +LIABILITIES AND STOCKHOLDERS’ EQUITY +Current liabilities: +Accounts payable +$ +31.6 +$ +61.7 +$ +41.9 +$ +— +$ +135.2 +Accrued salaries and wages +27.0 +8.6 +5.9 +— +41.5 +Other accrued liabilities +40.8 +22.1 +36.4 +— +99.3 +Current maturities of long-term debt +53.3 +— +— +— +53.3 +Total current liabilities +152.7 +92.4 +84.2 +— +329.3 +Long-term debt, less current maturities +1,096.7 +— +— +— +1,096.7 +Accrued pension liabilities +60.9 +13.3 +— +— +74.2 +Deferred income taxes +(38.2 +) +287.7 +4.4 +— +253.9 +Intercompany accounts payable +1,220.5 +153.7 +418.7 +(1,792.9 +) +— +Other liabilities +12.4 +11.5 +2.8 +— +26.7 +Stockholders’ equity: +Wolverine World Wide, Inc. stockholders’ equity +837.6 +3,219.5 +762.8 +(3,982.3 +) +837.6 +Non-controlling interest +— +— +3.8 +— +3.8 +Total stockholders’ equity +837.6 +3,219.5 +766.6 +(3,982.3 +) +841.4 +Total liabilities and stockholders’ equity +$ +3,342.6 +$ +3,778.1 +$ +1,276.7 +$ +(5,775.2 +) +$ +2,622.2 +A-35 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Condensed Balance Sheets +As of December 29, 2012 +(In millions) +Parent +Subsidiary +Guarantors +Non-Guarantor +Subsidiaries +Eliminations +Consolidated +ASSETS +Current assets: +Cash and cash equivalents +$ +21.3 +$ +48.5 +$ +101.6 +$ +— +$ +171.4 +Accounts receivable, net +107.7 +143.0 +102.9 +— +353.6 +Inventories: +Finished products +57.9 +278.8 +96.0 +(0.9 +) +431.8 +Raw materials and work-in-process +1.6 +4.2 +28.6 +— +34.4 +Total inventories +59.5 +283.0 +124.6 +(0.9 +) +466.2 +Deferred income taxes +9.5 +17.6 +0.9 +— +28.0 +Prepaid expenses and other current assets +35.9 +9.5 +10.3 +— +55.7 +Total current assets +233.9 +501.6 +340.3 +(0.9 +) +1,074.9 +Property, plant and equipment: +Gross cost +212.1 +119.2 +53.5 +— +384.8 +Accumulated depreciation +(165.2 +) +(36.0 +) +(33.9 +) +— +(235.1 +) +Property, plant and equipment, net +46.9 +83.2 +19.6 +— +149.7 +Other assets: +Goodwill +7.3 +365.3 +87.3 +— +459.9 +Indefinite-lived intangibles +4.1 +664.4 +11.3 +— +679.8 +Amortizable intangibles, net +0.2 +153.1 +0.2 +— +153.5 +Deferred income taxes +0.9 +— +— +— +0.9 +Deferred financing costs, net +38.9 +— +— +— +38.9 +Other +40.4 +12.7 +3.7 +— +56.8 +Intercompany accounts receivable +— +1,114.8 +118.8 +(1,233.6 +) +— +Investment in affiliates +2,585.4 +219.8 +344.5 +(3,149.7 +) +— +Total other assets +2,677.2 +2,530.1 +565.8 +(4,383.3 +) +1,389.8 +Total assets +$ +2,958.0 +$ +3,114.9 +$ +925.7 +$ +(4,384.2 +) +$ +2,614.4 +A-36 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Condensed Balance Sheets - continued +As of December 29, 2012 +(In millions) +Parent +Subsidiary +Guarantors +Non-Guarantor +Subsidiaries +Eliminations +Consolidated +LIABILITIES AND STOCKHOLDERS’ EQUITY +Current liabilities: +Accounts payable +$ +30.0 +$ +91.8 +$ +39.1 +$ +— +$ +160.9 +Accrued salaries and wages +10.4 +20.0 +6.0 +— +36.4 +Other accrued liabilities +39.5 +27.7 +25.0 +(0.9 +) +91.3 +Current maturities of long-term debt +30.7 +— +— +— +30.7 +Total current liabilities +110.6 +139.5 +70.1 +(0.9 +) +319.3 +Long-term debt, less current maturities +1,219.3 +— +— +— +1,219.3 +Accrued pension liabilities +127.3 +38.2 +— +— +165.5 +Deferred income taxes +(52.2 +) +291.3 +1.4 +— +240.5 +Intercompany accounts payable +900.3 +11.0 +322.3 +(1,233.6 +) +— +Other liabilities +10.3 +10.7 +5.1 +— +26.1 +Stockholders’ equity: +Wolverine World Wide, Inc. stockholders’ equity +642.4 +2,624.2 +525.5 +(3,149.7 +) +642.4 +Non-controlling interest +— +— +1.3 +— +1.3 +Total stockholders’ equity +642.4 +2,624.2 +526.8 +(3,149.7 +) +643.7 +Total liabilities and stockholders’ equity +$ +2,958.0 +$ +3,114.9 +$ +925.7 +$ +(4,384.2 +) +$ +2,614.4 +A-37 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Condensed Statements of Cash Flow +For the fiscal year ended December 28, 2013 +(In millions) +Parent +Subsidiary +Guarantors +Non-Guarantor +Subsidiaries +Eliminations +Consolidated +Net cash provided by (used in) operating activities +$ +127.1 +$ +(10.0 +) +$ +85.2 +$ +— +$ +202.3 +Investing activities +Additions to property, plant and equipment +(11.9 +) +(25.0 +) +(4.8 +) +— +(41.7 +) +Proceeds from sale of property, plant and equipment +— +2.8 +— +— +2.8 +Investment in joint venture +— +— +(2.5 +) +— +(2.5 +) +Other +(2.9 +) +(1.3 +) +0.9 +— +(3.3 +) +Net cash used in investing activities +(14.8 +) +(23.5 +) +(6.4 +) +— +(44.7 +) +Financing activities +Borrowings of long-term debt +775.0 +— +— +— +775.0 +Payments of long-term debt +(875.0 +) +— +— +— +(875.0 +) +Payments of debt issuance costs +(2.3 +) +— +— +— +(2.3 +) +Cash dividends paid +(23.7 +) +— +— +— +(23.7 +) +Purchase of common stock for treasury +(0.8 +) +— +— +— +(0.8 +) +Proceeds from shares issued under stock incentive plans +8.6 +— +— +— +8.6 +Excess tax benefits from stock-based compensation +3.4 +— +— +— +3.4 +Contributions from non-controlling interests +— +— +2.0 +— +2.0 +Net cash (used in) provided by financing activities +(114.8 +) +— +2.0 +— +(112.8 +) +Effect of foreign exchange rate changes +— +— +(2.0 +) +— +(2.0 +) +(Decrease) increase in cash and cash equivalents +(2.5 +) +(33.5 +) +78.8 +— +42.8 +Cash and cash equivalents at beginning of the year +21.3 +48.5 +101.6 +— +171.4 +Cash and cash equivalents at end of the year +$ +18.8 +$ +15.0 +$ +180.4 +$ +— +$ +214.2 +A-38 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Condensed Statements of Cash Flow +For the fiscal year ended December 29, 2012 +(In millions) +Parent +Subsidiary +Guarantors +Non-Guarantor +Subsidiaries +Eliminations +Consolidated +Net cash provided by operating activities +$ +11.0 +$ +26.0 +$ +54.6 +$ +— +$ +91.6 +Investing activities +Business acquisition, net of cash acquired +(1,160.7 +) +23.6 +(88.8 +) +— +(1,225.9 +) +Additions to property, plant and equipment +(10.8 +) +(4.1 +) +— +— +(14.9 +) +Investment in joint venture +— +— +(2.9 +) +— +(2.9 +) +Other +(2.4 +) +— +— +— +(2.4 +) +Net cash (used in) provided by investing activities +(1,173.9 +) +19.5 +(91.7 +) +— +(1,246.1 +) +Financing activities +Net borrowings under revolver +(11.0 +) +— +— +— +(11.0 +) +Borrowings of long-term debt +1,275.0 +— +— +— +1,275.0 +Payments of long-term debt +(25.0 +) +— +(0.5 +) +— +(25.5 +) +Payments of debt issuance costs +(40.1 +) +— +— +— +(40.1 +) +Cash dividends paid +(23.6 +) +— +— +— +(23.6 +) +Purchase of common stock for treasury +(14.1 +) +— +— +— +(14.1 +) +Proceeds from shares issued under stock incentive plans +11.6 +— +— +— +11.6 +Excess tax benefits from stock-based compensation +9.9 +— +— +— +9.9 +Contributions from non-controlling interests +— +— +1.2 +— +1.2 +Net cash provided by financing activities +1,182.7 +— +0.7 +— +1,183.4 +Effect of foreign exchange rate changes +— +— +2.5 +— +2.5 +Increase (decrease) in cash and cash equivalents +19.8 +45.5 +(33.9 +) +— +31.4 +Cash and cash equivalents at beginning of the year +1.5 +3.0 +135.5 +— +140.0 +Cash and cash equivalents at end of the year +$ +21.3 +$ +48.5 +$ +101.6 +$ +— +$ +171.4 +A-39 +Table of Contents +WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES +Consolidated Condensed Statements of Cash Flow +For the fiscal year ended December 31, 2011 +(In millions) +Parent +Subsidiary +Guarantors +Non-Guarantor +Subsidiaries +Eliminations +Consolidated +Net cash provided by operating activities +$ +32.8 +$ +9.7 +$ +36.3 +$ +— +$ +78.8 +Investing activities +Additions to property, plant and equipment +(4.6 +) +(7.1 +) +(7.7 +) +— +(19.4 +) +Proceeds from sale of property, plant and equipment +— +— +0.1 +— +0.1 +Other +(3.3 +) +— +— +— +(3.3 +) +Net cash used in investing activities +(7.9 +) +(7.1 +) +(7.6 +) +— +(22.6 +) +Financing activities +Net borrowings under revolver +11.0 +— +— +— +11.0 +Payments of long-term debt +— +— +(0.5 +) +— +(0.5 +) +Cash dividends paid +(22.7 +) +— +— +— +(22.7 +) +Purchase of common stock for treasury +(67.5 +) +— +— +— +(67.5 +) +Proceeds from shares issued under stock incentive plans +14.1 +— +— +— +14.1 +Excess tax benefits from stock-based compensation +3.3 +— +— +— +3.3 +Net cash used in financing activities +(61.8 +) +— +(0.5 +) +— +(62.3 +) +Effect of foreign exchange rate changes +— +— +(4.3 +) +— +(4.3 +) +(Decrease) increase in cash and cash equivalents +(36.9 +) +2.6 +23.9 +— +(10.4 +) +Cash and cash equivalents at beginning of the year +38.4 +0.4 +111.6 +— +150.4 +Cash and cash equivalents at end of the year +$ +1.5 +$ +3.0 +$ +135.5 +$ +— +$ +140.0 +A-40 +Table of Contents +14. +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 fiscal quarters and a 16- or 17-week period for the fiscal fourth quarter. The fourth quarter of fiscal 2013 and fiscal 2012 consists of 16 weeks. The aggregate quarterly earnings per share amounts disclosed in the table below may not equal the annual per share amounts due to rounding and the fact that results for each quarter are calculated independently of the full fiscal year. The Company’s unaudited quarterly results of operations are as follows: +2013 +(In millions, except per share data) +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Revenue +$ +645.9 +$ +587.8 +$ +716.6 +$ +740.8 +Gross profit +262.1 +241.1 +286.0 +275.3 +Net earnings (loss) attributable to Wolverine World Wide, Inc. +29.8 +17.9 +54.4 +(1.7 +) +Net earnings (loss) per share (1) : +Basic +$ +0.30 +$ +0.18 +$ +0.55 +$ +(0.02 +) +Diluted +0.30 +0.18 +0.54 +(0.02 +) +2012 +(In millions, except per share data) +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter (2) +Revenue +$ +322.8 +$ +312.7 +$ +353.1 +$ +652.2 +Gross profit +132.2 +118.1 +138.6 +239.3 +Net earnings (loss) attributable to Wolverine World Wide, Inc. +31.2 +20.5 +32.7 +(3.7 +) +Net earnings (loss) per share (1) : +Basic +$ +0.33 +$ +0.21 +$ +0.34 +$ +(0.04 +) +Diluted +0.32 +0.21 +0.33 +(0.04 +) +(1) +Earnings per share amounts are based on each quarter's calculation and may not equal the amount calculated for the year. +(2) +The results for the fourth quarter of fiscal 2012 reflect the inclusion of the PLG business, acquired in the fourth quarter of fiscal 2012. +A-41 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Shareholders of Wolverine World Wide, Inc. +We have audited the accompanying consolidated balance sheets of Wolverine World Wide, Inc. and subsidiaries as of December 28, 2013 and December 29, 2012, and the related consolidated statements of operations, comprehensive income, cash flows and stockholders’ equity for each of the three fiscal years in the period ended December 28, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). 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 December 28, 2013 and December 29, 2012, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 28, 2013, 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), Wolverine World Wide, Inc.’s internal control over financial reporting as of December 28, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2014 expressed an unqualified opinion thereon. +/s/ Ernst & Young LLP +Grand Rapids, Michigan +February 25, 2014 +A-42 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Shareholders of Wolverine World Wide, Inc. +We have audited Wolverine World Wide, Inc.’s internal control over financial reporting as of December 28, 2013, based on criteria established in Internal Control - Integrated Framework (1992) 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 included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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, Wolverine World Wide, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 28, 2013, based on the COSO criteria. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Wolverine World Wide, Inc. and subsidiaries as of December 28, 2013 and December 29, 2012, and the related consolidated statements of operations, comprehensive income, cash flows and stockholders’ equity for each of the three fiscal years in the period ended December 28, 2013, and our report dated February 25, 2014 expressed an unqualified opinion thereon. +/s/ Ernst & Young LLP +Grand Rapids, Michigan +February 25, 2014 +A-43 +Table of Contents +APPENDIX B +Schedule II - Valuation and Qualifying Accounts +Wolverine World Wide, Inc. and Subsidiaries +Column A +Column B +Column C +Column D +Column E +Additions +(In millions) +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 December 28, 2013 +Deducted from asset accounts: +Allowance for doubtful accounts +$ +10.1 +$ +21.1 +— +$ +12.9 +(A) +$ +18.3 +Allowance for sales returns +11.4 +74.6 +— +70.6 +(B) +15.4 +Allowance for cash discounts +5.2 +19.2 +— +20.3 +(C) +4.1 +Inventory valuation allowances +12.5 +11.3 +— +9.8 +(D) +14.0 +Total +$ +39.2 +$ +126.2 +— +$ +113.6 +$ +51.8 +Fiscal year ended December 29, 2012 +Deducted from asset accounts: +Allowance for doubtful accounts +$ +4.8 +$ +8.7 +— +$ +3.4 +(A) +$ +10.1 +Allowance for sales returns +5.2 +53.9 +— +47.7 +(B) +11.4 +Allowance for cash discounts +2.7 +11.8 +— +9.3 +(C) +5.2 +Inventory valuation allowances +10.3 +7.8 +— +5.6 +(D) +12.5 +Total +$ +23.0 +$ +82.2 +— +$ +66.0 +$ +39.2 +Fiscal year ended December 31, 2011 +Deducted from asset accounts: +Allowance for doubtful accounts +$ +5.8 +$ +6.0 +— +$ +7.0 +(A) +$ +4.8 +Allowance for sales returns +4.5 +48.5 +— +47.8 +(B) +5.2 +Allowance for cash discounts +1.2 +10.1 +— +8.6 +(C) +2.7 +Inventory valuation allowances +8.6 +8.7 +— +7.0 +(D) +10.3 +Total +$ +20.1 +$ +73.3 +— +$ +70.4 +$ +23.0 +(A) +Accounts charged off, net of recoveries. +(B) +Actual customer returns. +(C) +Discounts given to customers. +(D) +Adjustment upon disposal of related inventories. +B-1 +Table of Contents +EXHIBIT INDEX +Exhibit Number +Document +2.1 +Agreement and Plan of Merger, dated as of May 1, 2012, by and among WBG-PSS Holdings LLC, WBG-PSS Merger Sub Inc., Collective Brands, Inc. and Wolverine World Wide, Inc. Previously filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 4, 2012. Here incorporated by reference. +3.1 +Restated Certificate of Incorporation. Previously filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the period ended December 30, 2006. Here incorporated by reference. +3.2 +Amended and Restated By-laws. Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 11, 2013. Here incorporated by reference. +4.1 +Senior Notes Indenture, dated October 9, 2012, among Wolverine World Wide, Inc., the guarantors named therein, and Wells Fargo Bank, National Association. Previously filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on October 9, 2012. Here incorporated by reference. +4.2 +Form of 6.125% Senior Note due 2020. Previously filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on October 9, 2012. Here incorporated by reference. +4.3 +Registration Rights Agreement, dated October 9, 2012, among the Wolverine World Wide, Inc., the guarantors named therein and J.P. Morgan Securities LLC, as representative of the several initial purchasers. Previously filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on October 9, 2012. Here incorporated by reference. +10.1 +Amended and Restated 1995 Stock Incentive Plan.* Previously filed as Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. Here incorporated by reference. +10.2 +Amended and Restated 1997 Stock Incentive Plan.* Previously filed as Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. Here incorporated by reference. +10.3 +Amended and Restated Stock Incentive Plan of 1999.* Previously filed as Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. Here incorporated by reference. +10.4 +Amended and Restated Stock Incentive Plan of 2001.* Previously filed as Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. Here incorporated by reference. +10.5 +Amended and Restated Stock Incentive Plan of 2003.* Previously filed as Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. Here incorporated by reference. +10.6 +Amended and Restated Stock Incentive Plan of 2005.* Previously filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. Here incorporated by reference. +10.7 +Amended and Restated Directors’ Stock Option Plan.* Previously filed as Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. Here incorporated by reference. +10.8 +Amended and Restated Outside Directors’ Deferred Compensation Plan.* Previously filed as Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007. Here incorporated by reference. +10.9 +Amended and Restated Executive Short-Term Incentive Plan (Annual Bonus Plan).* Previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 20, 2012. Here incorporated by reference. +10.10 +Amended and Restated Executive Long-Term Incentive Plan (3-Year Bonus Plan).* Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 20, 2012. Here incorporated by reference. +10.11 +Amended and Restated Stock Option Loan Program.* Previously filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007. Here incorporated by reference. +10.12 +Executive Severance Agreement.* Previously filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 17, 2008. Here incorporated by reference. A participant schedule of current executive officers who are parties to this agreement is attached as Exhibit 10.12. +10.13 +Executive Severance Agreement.* Previously filed as Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Here incorporated by reference. A participant schedule of current executive officers who are parties to this agreement is attached as Exhibit 10.13. +10.14 +Form of Indemnification Agreement.* The Company has entered into an Indemnification Agreement with each director and with Messrs. Grimes, Jeppesen, Krueger and Zwiers and Ms. Linton. Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 25, 2007. Here incorporated by reference. +E-1 +Table of Contents +Exhibit Number +Document +10.15 +Amended and Restated Benefit Trust Agreement dated April 25, 2007.* Previously filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on April 25, 2007. Here incorporated by reference. +10.16 +Employees’ Pension Plan (Restated as amended through January 1, 2013).* Previously filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2012. Here incorporated by reference. +10.17 +Form of Incentive Stock Option Agreement.* Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 15, 2005. Here incorporated by reference. +10.18 +Form of Non-Qualified Stock Option Agreement for Blake W. Krueger and Timothy J. O’Donovan.* Previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 15, 2005. Here incorporated by reference. +10.19 +Form of Non-Qualified Stock Option Agreement for executive officers other than those to whom Exhibit 10.19 applies.* Previously filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 15, 2005. Here incorporated by reference. +10.20 +Form of Restricted Stock Agreement.* Previously filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 15, 2005. Here incorporated by reference. +10.21 +Form of Incentive Stock Option Agreement.* Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 17, 2006. Here incorporated by reference. +10.22 +Form of Non-Qualified Stock Option Agreement for Blake W. Krueger and Timothy J. O’Donovan.* Previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 17, 2006. Here incorporated by reference. +10.23 +Form of Non-Qualified Stock Option Agreement for executive officers other than those to whom Exhibit 10.23 applies.* Previously filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 17, 2006. Here incorporated by reference. +10.24 +Form of Restricted Stock Agreement.* Previously filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 17, 2006. Here incorporated by reference. +10.25 +Form of Restricted Stock Agreement.* Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 16, 2012. Here incorporated by reference. +10.26 +Form of Stock Option Agreement for non-employee directors.* Previously filed as Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2005. Here incorporated by reference. +10.27 +2009 Form of Non-Qualified Stock Option Agreement for Donald T. Grimes, Blake W. Krueger, Pamela L. Linton and James D. Zwiers.* Previously filed as Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. Here incorporated by reference. +10.28 +2009 Form of Non-Qualified Stock Option Agreement for executive officers other than those to whom Exhibit 10.28 applies.* Previously filed as Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. Here incorporated by reference. +10.29 +Form of Performance Share Award Agreement (2012 – 2014 performance period).* Previously filed as Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Here incorporated by reference. +10.30 +Form of Performance Share Award Agreement (2013 - 2015 performance period).* Previously filed as Exhibit 10.32 to the Company's Form 10-K for the fiscal year ended December 29, 2012. Here incorporated by reference. +10.31 +Form of Performance Share Award Agreement (2014 - 2016 performance period).* +10.32 +Separation Agreement between Wolverine World Wide, Inc. and Blake W. Krueger, dated as of March 13, 2008, as amended.* Previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended March 22, 2008. Here incorporated by reference. +10.33 +First Amendment to Separation Agreement between Wolverine World Wide, Inc. and Blake W. Krueger, dated as of December 11, 2008.* Previously filed as Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. Here incorporated by reference. +E-2 +Table of Contents +Exhibit Number +Document +10.34 +409A Supplemental Executive Retirement Plan.* Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 17, 2008. Here incorporated by reference. A participant schedule of current executive officers who participate in this plan is attached as Exhibit 10.35. +10.35 +Form of 409A Supplemental Retirement Plan Participation Agreement with Blake W. Krueger.* Previously filed as Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. Here incorporated by reference. +10.36 +Outside Directors’ Deferred Compensation Plan.* Previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 17, 2008. Here incorporated by reference. +10.37 +Stock Incentive Plan of 2010.* Previously filed as Exhibit 10.1 to the Company’s Registration Statement on Form S-8 filed on March 4, 2010. Here incorporated by reference. +10.38 +Amended and Restated Stock Incentive Plan of 2013.* +10.39 +Limited Guarantee, dated as of May 1, 2012, entered into by Wolverine World Wide, Inc. in favor of Collective Brands, Inc. Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 4, 2012. Here incorporated by reference. +10.40 +Purchase Agreement, dated as of May 1, 2012, by and between Open Water Ventures, LLC and WBG-PSS Holdings LLC. Previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 4, 2012. Here incorporated by reference +10.41 +Interim Agreement, dated as of May 1, 2012, by and among Wolverine World Wide, Inc., WBG-PSS Holdings LLC, WBG-PSS Merger Sub Inc., Golden Gate Capital Opportunity Fund, L.P. and Blum Strategic Partners IV, L.P. Previously filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on May 4, 2012. Here incorporated by reference. +10.42 +Separation Agreement, dated as of May 1, 2012, by and between Wolverine World Wide, Inc. and WBG-PSS Holdings LLC. Previously filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 4, 2012. Here incorporated by reference. +10.43 +Amendment No. 1 to Separation Agreement, dated as of October 9, 2012, by and between the Company and WBG–PSS Holdings LLC. Previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 9, 2012. Here incorporated by reference. +10.44 +Amendment No. 1 to Purchase Agreement, dated as of October 9, 2012, by and between Open Water Ventures, LLC and WBG–PSS Holdings LLC. Previously filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the period ended September 8, 2012. Here incorporated by reference. +10.45 +Credit Agreement, dated as of July 31, 2012, by and among Wolverine World Wide, Inc., as borrower, JPMorgan Chase Bank, N.A., as administrative agent and as a lender, J.P. Morgan Europe Limited, as foreign currency agent, Wells Fargo Bank, National Association, as syndication agent and as a lender, Fifth Third Bank as documentation agent and as a lender, and PNC Bank, National Association, as documentation agent and as a lender. Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 1, 2012. Here incorporated by reference. +10.46 +First Amendment to Credit Agreement, dated as of September 28, 2012, by and among Wolverine World Wide, Inc., as borrower, JPMorgan Chase Bank, N.A., as administrative agent and as a lender, J.P. Morgan Europe Limited, as foreign currency agent, Wells Fargo Bank, National Association, as syndication agent and as a lender, Fifth Third Bank as documentation agent and as a lender, and PNC Bank, National Association, as documentation agent and as a lender. Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 4, 2012. Here incorporated by reference. +10.47 +Second Amendment to the Credit Agreement, dated as of October 8, 2012, among Wolverine World Wide, Inc., as borrower, JPMorgan Chase Bank, N.A., as administrative agent and as a lender, J.P. Morgan Europe Limited, as foreign currency agent, Wells Fargo Bank, National Association, as syndication agent and as a lender, Fifth Third Bank, as documentation agent and as a lender, and PNC Bank, National Association, as documentation agent and as a lender. Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 9, 2012. Here incorporated by reference. +10.48 +Replacement Facility Amendment, dated as of October 10, 2013, among Wolverine World Wide, Inc., the lenders party thereto, and JPMorgan Chase Bank, N.A. as administrative agent. Previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on October 11, 2013. Here incorporated by reference. +21 +Subsidiaries of Registrant. +E-3 +Table of Contents +Exhibit Number +Document +23 +Consent of Ernst & Young LLP. +24 +Powers of Attorney. +31.1 +Certification of Chairman, Chief Executive Officer and President under Section 302 of the Sarbanes-Oxley Act of 2002. +31.2 +Certification of Senior 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. +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema Document +101.CAL +XBRL Taxonomy Extension Calculation Linkbase Document +101.DEF +XBRL Taxonomy Extension Definition Linkbase Document +101.LAB +XBRL Taxonomy Extension Label Linkbase Document +101.PRE +XBRL Taxonomy Extension Presentation Linkbase Document +* +Management contract or compensatory plan or arrangement. +E-4 \ No newline at end of file diff --git a/raw/filings/0000110471/2013/0000110471-14-000003/filing_metadata.csv b/raw/filings/0000110471/2013/0000110471-14-000003/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..d849ed8afdc7d9014171ed4152608bf279df6ac1 --- /dev/null +++ b/raw/filings/0000110471/2013/0000110471-14-000003/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000110471,WWW,WOLVERINE WORLD WIDE INC /DE/,10-K,2014-02-25,2013-12-28,2014-02-25T19:09:49.000Z,0000110471-14-000003,wolverineform10-k2013.htm,FORM 10-K,25481918,1,0,https://www.sec.gov/Archives/edgar/data/110471/000011047114000003/wolverineform10-k2013.htm,https://www.sec.gov/Archives/edgar/data/110471/000011047114000003/,2013,2013,1 diff --git a/raw/filings/0000110471/2013/0000110471-14-000003/item1.txt b/raw/filings/0000110471/2013/0000110471-14-000003/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..5156c89356ca640253bc9a1d9383442b508db3b7 --- /dev/null +++ b/raw/filings/0000110471/2013/0000110471-14-000003/item1.txt @@ -0,0 +1,100 @@ +Item 1. +Business +General +Wolverine World Wide, Inc. (the “Company”) is a leading designer, manufacturer and marketer of a broad range of quality casual footwear and apparel, performance outdoor and athletic footwear and apparel, children’s footwear, industrial work boots and apparel, and uniform shoes and boots. 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. +The Company sources and markets a broad range of footwear styles, including shoes, boots and sandals under many recognizable brand names including Bates ® , Cat ® , Chaco ® , Cushe ® , Harley-Davidson ® , Hush Puppies ® , HyTest ® , Keds ® , Merrell ® , Patagonia ® , Saucony ® , Sebago ® , Soft Style ® , Sperry Top-Sider ® , Stride Rite ® and Wolverine ® . Cat ® is a registered trademark of Caterpillar, Inc., Harley-Davidson ® is a registered trademark of H-D U.S.A., LLC and Patagonia ® is a registered trademark of Patagonia, Inc. The Company’s products generally feature contemporary styling with proprietary technologies designed to provide maximum comfort and performance. The Company believes that its primary competitive advantages are its well-recognized brand names, its patented proprietary designs, its diverse product offerings and comfort technologies, its wide range of distribution channels and its diversified manufacturing and sourcing base. The Company combines quality materials and skilled workmanship to produce footwear according to its specifications at both Company-owned and third-party manufacturing facilities. The Company also markets Merrell ® , Saucony ® , Sebago ® , Sperry Top-Sider ® and Wolverine ® brand apparel and accessories and licenses some of its brands for use on non-footwear products, including Hush Puppies ® apparel, eyewear, watches, socks, handbags and plush toys, Wolverine ® brand eyewear and gloves, Keds ® apparel, Saucony ® apparel , Sperry Top-Sider ® apparel , and Stride Rite ® apparel. +The Company’s brands are sold at various price points targeting a wide range of consumers of casual, work, outdoor and athletic footwear and apparel. During the first quarter of fiscal 2013, the Company reorganized its portfolio of 16 brands, including brands acquired as part of the fiscal 2012 PLG acquisition, into the following three operating segments, which the Company has determined are reportable operating segments: +• +Lifestyle Group , consisting of Sperry Top-Sider ® footwear and apparel, Stride Rite ® footwear and apparel, Hush Puppies ® footwear and apparel, Keds ® footwear and apparel, and Soft Style ® footwear; +• +Performance Group , consisting of Merrell ® footwear and apparel, Saucony ® footwear and apparel, Chaco ® footwear, Patagonia ® footwear, and Cushe ® footwear; and +• +Heritage Group , consisting of Wolverine ® footwear and apparel, Cat ® footwear, Bates ® uniform footwear, Sebago ® footwear and apparel, Harley-Davidson ® footwear, and HyTest ® Safety footwear. +The operating segments are engaged in designing, manufacturing, sourcing, marketing, licensing and distributing branded footwear, apparel and accessories. Revenue of the operating segments includes revenue from the sale of branded footwear, apparel and accessories to third-party customers; royalty income from the licensing of the Company’s trademarks; revenue from distribution arrangements with third-party distributors; and revenue from the Company’s mono-branded consumer direct businesses, including revenue from eCommerce websites. Prior year results have been restated to reflect the operating segment reorganization. +The Company also reports an Other and Corporate category. The Other category consists of the Company’s multi-brand consumer direct business, leather marketing operations, and sourcing operations that include third-party commission revenues. The Corporate category consists of unallocated corporate expenses including acquisition-related transaction and integration costs and restructuring costs. The Company’s operating segments are determined on the basis of how the Company internally reports and evaluates financial information used to make operating decisions. +The Company’s Global Operations Group is responsible for manufacturing, sourcing, distribution, logistics and customer support. The Company directly sells its products in the United States ("U.S."), Canada and certain countries in Europe to a wide range of retail customers, including department stores, national chains, catalog retailers, specialty retailers, mass merchants and Internet retailers, and to governments and municipalities. The Company’s products are marketed worldwide in approximately 200 countries and territories through Company-owned wholesale and consumer direct operations and through third-party licensees and distributors. +For financial information regarding the Company, see the consolidated financial statements and the accompanying notes, which are attached as Appendix A to this Annual Report on Form 10-K. As described above, the Company has three reportable segments and the Other and Corporate categories. Financial information regarding the Company’s reportable segments and other operating categories and financial information by geographic area is found in Note 10 to the consolidated financial statements of the Company that are attached as Appendix A to this Annual Report on Form 10-K. +4 +Table of Contents +The Company's operating segments and related brands for fiscal 2013 are described in more detail below. +1. +Lifestyle Group - The Lifestyle Group consists of Sperry Top-Sider ® footwear and apparel, Stride Rite ® footwear and apparel, Hush Puppies ® footwear and apparel, Keds ® footwear and apparel, and Soft Style ® footwear. +Sperry Top-Sider ® : Sperry Top-Sider ® is a leading nautical performance and lifestyle brand offering footwear, apparel and accessories to a broad range of consumers. The brand has been an American favorite since 1935 with the advent of the industry’s first boat shoe. Today, Sperry Top-Sider ® remains the unquestioned leader in the boat shoe category, but has also expanded its business into casuals, dress casuals, wet weather, boots and vulcanized product categories. Sperry Top-Sider ® has evolved into a well-balanced, multi-category and year-round lifestyle brand for men, women and children. In addition to its lifestyle products, Sperry Top-Sider ® also offers sport-specific and athlete-tested performance footwear solutions for sailors, boaters, anglers and multi-water sports enthusiasts. The Advance Water Technologies ™ product collection featuring A SV™ (Anti-Shock and Vibration) , Grip X3 Technology ® and SON-R Technology ® has allowed Sperry Top-Sider ® to reinforce its position as an innovation leader in these categories. The brand is primarily distributed through leading premium and better lifestyle retailers, as well as through its own Company-owned specialty retail stores. +Stride Rite ® : With a history dating back to 1919, Stride Rite ® is an industry leader in children's footwear technology and innovation. Stride Rite ® is focused on delivering the best possible footwear across a range of categories for kids under 9 years of age. All Stride Rite ® products are created from an in-depth knowledge and understanding of how children walk and grow, every new material and component is rigorously tested to ensure safety, proper fit and durability for kids. Stride Rite’s ® RITE STEPs ™ program, featuring the brand’s proprietary Sensory Response Technology ™ , is a full footwear solution that meets children's needs from pre-walkers to pre-schoolers. Stride Rite ® sells product under its own namesake brand, as well as children's footwear offerings from Saucony ® , Sperry Top-Sider ® , Keds ® , Merrell ® and select other footwear brands, through a network of mall-based specialty retail stores and a consumer direct website. Stride Rite ® also distributes children's footwear through better department stores, independent retailers, sporting goods chains, mall specialty retailers, online retailers and national family footwear stores. +Hush Puppies ® : Since 1958, the Hush Puppies ® brand has been a leader in casual footwear. The brand offers shoes, sandals and boots for men, women and children. The brand’s modern styling is complemented by a variety of comfort features and proprietary technologies that have earned the brand its reputation for comfort, style and value. In addition, the Company licenses the Hush Puppies ® brand for use on certain non-footwear products, including apparel, eyewear, handbags, socks, watches and plush toys. +Keds ® : The Keds ® brand is an authentic casual lifestyle brand with a foundation in canvas footwear. This iconic American brand was founded in 1916 with the introduction of the Champion ® sneaker. The simple and chic design ignited a style revolution, capturing the hearts of girls everywhere from fashion icons to the girl next door. Today, Keds ® is a head-to-toe fashion brand fueled by a passion for imagination, inspiring a new generation of girls to stay authentic, optimistic and brave. The brand targets teen girl consumers through an extensive collection of Champion ® originals, as well as a wide assortment of fashion sneakers and slip-ons. The brand’s product architecture consists of both core offerings and seasonal iterations featuring updated prints, patterns, materials and constructions. +Soft Style ® : The Soft Style ® product line consists primarily of women’s dress and casual footwear. +2. +Performance Group - The Performance Group consists of Merrell ® footwear and apparel, Saucony ® footwear and apparel, Chaco ® footwear, Patagonia ® footwear, and Cushe ® footwear. +Merrell ® : Merrell ® footwear is designed to inspire and encourage participation in the outdoors. Known for quality, durability and comfort, Merrell ® uses a variety of proprietary designs and technologies to create footwear with distinctive styling, performance and comfort features for use on the trail or in town. Merrell ® footwear products offer a wide range of styles from technical hiking, multi-sport footwear and the minimalist Merrell ® Barefoot Collection, to versatile lifestyle products for more casual outdoor adventures for men, women and kids. Merrell ® footwear products are sold primarily through outdoor specialty retailers, sporting goods chains, department stores, online retailers and catalog retailers. The Merrell ® apparel line extends the Merrell ® commitment to an active outdoor lifestyle with a versatile line of apparel built for the summit or the street. The apparel line features stylized lifestyle silhouettes built with the technical, high performance, weather fighting materials that consumers expect from an outdoor brand. In addition to apparel, Merrell ® markets accessories for men and women, including packs, bags and luggage. +5 +Table of Contents +Saucony ® : Saucony ® is a leading global performance running brand with roots dating back to 1898. Saucony ® targets elite, dedicated and casual runners through best-in-class design, innovation and performance technology. The brand is focused on meeting the biomechanical needs of runners while maximizing comfort and protection, bringing to market innovations such as: PowerGrid™ midsole technology; Sauc-Fit ® , ComfortLite Sock Liner™ and HydraMAX™ upper technologies; and iBR+™ and XT-900™ outsole material innovations. Saucony ® offers five categories of footwear product—technical, natural motion, race, trail and lifestyle originals, as well as a complete line of performance running apparel. Through the Find Your Strong ™ brand platform, Saucony ® is strengthening connections with consumers and elevating the position of the brand globally. The brand’s products are distributed primarily through leading run specialty and sporting goods retailers. +Chaco ® : The Chaco ® footwear line focuses primarily on performance sandals and closed-toe products for the outdoor enthusiast. +Patagonia ® Footwear: Pursuant to an agreement with Lost Arrow Corporation, the Company has the exclusive footwear marketing and distribution rights under Patagonia ® and other trademarks. The Patagonia ® footwear line focuses primarily on casual and outdoor performance footwear. Patagonia ® is a registered trademark of Patagonia, Inc. +Cushe ® : Cushe ® focuses on relaxed, design-led footwear for active men and women. The Cushe ® footwear business targets younger adult consumers and with products ranging from sport casual footwear to sandals sold through better-grade retailers. +3. +Heritage Group - The Heritage Group consists of Wolverine ® footwear and apparel, Cat ® footwear, Bates ® uniform footwear, Sebago ® footwear and apparel, Harley-Davidson ® footwear, and HyTest ® Safety footwear. +Wolverine ® : The Wolverine ® brand offers high-quality boots and shoes that incorporate innovative technologies to deliver comfort and durability. The Wolverine ® brand, in existence since 1883, markets footwear in three categories: (i) work and industrial; (ii) outdoor sport; and (iii) rugged casual. The development of DuraShocks ® , MultiShox ® , Wolverine Fusion ® and Wolverine Compressor ® technologies, as well as the development of the Contour Welt ® line, allows the Wolverine ® brand to offer a broad line of work footwear with a focus on comfort. The Wolverine ® work product line targets industrial workers and features work boots and shoes with protective features such as toe caps, metatarsal guards and electrical hazard protection. The Wolverine ® rugged casual and outdoor sport product lines incorporate DuraShocks ® , Wolverine iCS ® and other technologies and comfort features into products designed for casual and outdoor sport use. The target consumers for the rugged casual line products have active lifestyles. The outdoor sport line is designed to meet the needs of hunters, fishermen and other active outdoor sports enthusiasts. The Heritage Group markets a line of work and rugged casual Wolverine ® brand apparel. In addition, the Company licenses its Wolverine ® brand for use on eyewear and gloves. +Cat ® Footwear: Pursuant to a license arrangement with Caterpillar, Inc., the Company has exclusive footwear marketing and distribution rights under Caterpillar ® , Cat ® , Cat & Design, Walking Machines ® and other trademarks. The Company's association with Cat ® equipment encourages customers to view the footwear as rugged, durable and of high quality. Cat ® brand footwear products include work boots and shoes, sport boots, rugged casual and lifestyle footwear, including lines of work and casual footwear featuring iTechnology ™ and Hidden Tracks ® comfort features. Cat ® footwear targets work and industrial users and active lifestyle users. Cat ® , Caterpillar ® , Cat & Design and Walking Machines ® are registered trademarks of Caterpillar, Inc. +Bates ® Uniform Footwear: The Bates ® brand is a leader in supplying footwear to military and civilian uniform wearers. Bates ® utilizes DuraShocks ® , DuraShocks SR ™ , Wolverine iCS ® and other proprietary comfort technologies in the design of its boots and oxford shoes. Bates ® supplies military footwear to the U.S. Department of Defense and the military branches of several foreign countries. Civilian uniform users include police officers; security, postal and restaurant workers; and others in industrial occupations. Bates ® products are also distributed through specialty retailers and catalog retailers. +Sebago ® : The Sebago ® product line has been marketed since 1946 and consists primarily of performance nautical and American-inspired casual footwear for men and women, such as boat shoes and hand sewn loafers. Highly recognized Sebago ® line extensions include Sebago Docksides ® , Drysides ® and Triwater ™ . The Sebago ® manufacturing and design tradition of quality components, durability, comfort and “Americana” heritage is further supported by targeted distribution to better-grade independent, marine and department store retailers throughout the world. +6 +Table of Contents +Harley-Davidson ® Footwear: Pursuant to a license arrangement with the Harley-Davidson Motor Company, the Company has footwear marketing and distribution rights for Harley-Davidson ® branded footwear. Harley-Davidson ® branded 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 and other retail outlets. Harley-Davidson ® is a registered trademark of H-D U.S.A., LLC. +HyTest ® Safety Footwear: The HyTest ® product line consists primarily of high-quality work boots and shoes that incorporate various specialty safety features designed to protect against hazards of the workplace, including steel toe, composite toe, metatarsal guards, electrical hazard protection, static dissipating and conductive footwear. 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. +Other Businesses +In addition to its reportable segments, the Company also operates a multi-brand consumer direct business and a performance leathers business. +Multi-brand Consumer Direct - The multi-brand consumer direct division includes brick and mortar and eCommerce operations which sell and distribute footwear and apparel from the Company's brand portfolio. +Wolverine Leathers Division - The Wolverine Leathers Division markets pigskin leather for use primarily in the footwear industry. The Company believes pigskin leather offers superior performance and other advantages over cowhide leather. The Company’s waterproof and stain resistant leathers are featured in some of the Company’s footwear lines and sold to external footwear brands. +Marketing +The Company’s marketing strategy is to develop brand-specific plans and related promotional materials for U.S. and international markets to foster a consistent message for each of the Company’s core brands. Each brand operating group has dedicated marketing personnel who develop the marketing strategy for brands within that group. Marketing campaigns and strategies vary by brand, but are generally designed to target wholesale and retail customers in order to increase awareness of, and affinity for, the Company’s brands. The Company’s advertisements typically emphasize fashion, comfort, quality, durability, functionality and other performance and lifestyle attributes of the Company’s products. Components of the brand-specific marketing plans vary and may include print, radio and television advertising, search engine optimization, social networking sites, event sponsorships, in-store point-of-purchase displays, promotional materials and sales and technical assistance. +In addition to the Company’s internal marketing efforts, each brand provides its third-party licensees and distributors with creative direction, brand images and other materials to convey globally consistent brand messaging, including (i) direction on the categories of footwear and apparel 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 services regarding retail store layout and design. The Company believes its brand names represent a competitive advantage, and the Company, along with its licensees and distributors, make significant marketing investments to promote and enhance the position of its products and enhance brand awareness. +Domestic Sales and Distribution +The Company targets a variety of domestic distribution channels for its branded products: +• +The Company uses a dedicated sales force and customer service team, third party sales representatives, advertising and point-of-purchase materials to support domestic sales. +• +The Company maintains core in-stock inventories to service department stores, national chains, specialty retailers, catalog retailers, independent retailers, uniform outlets and its own consumer direct business. +• +Volume direct programs ship products directly to the retail customer without going through a Company distribution center and provide products at competitive prices with limited marketing support. The Company uses these programs to service major retail, catalog, mass merchant and government customers. +• +A network of independent Shoemobile ® distribution outlets distributes certain of the Company’s work and occupational footwear brands at industrial facilities. +• +The Company solicits all branches of the U.S. military and submits bids for contracts to supply specific footwear products. Such contracts typically contain future purchase options that may or may not be exercised. +7 +Table of Contents +In addition to its wholesale activities, the Company also operates a mono- and multi-brand consumer direct distribution channel, as described above. The Company continues to develop new programs, both independently and in conjunction with its retail customers, for the distribution of its products. +A broad distribution base insulates the Company from dependence on any one customer. No single customer accounted for more than 10% of the Company’s consolidated revenue in fiscal 2013 . +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 Company’s fiscal fourth quarter versus the 12 weeks included in each of the first three fiscal quarters). The Company expects current seasonal sales patterns to continue in future years. The Company also experiences some fluctuation in its levels of working capital, typically including an increase in net working capital requirements near the end of the first and third fiscal quarters. The Company meets its working capital requirements through internal free cash flow and, as needed, the Revolving Credit Facility, as discussed in more detail under the caption "Liquidity and Capital Resources" in Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations". +International Operations and Global Licensing +The Company’s foreign-sourced revenue is generated from a combination of (i) sales of branded footwear and apparel through the Company’s owned operations in Canada, the United Kingdom and certain countries in continental Europe, (ii) sales to third-party distributors for certain markets and businesses, (iii) income from a network of third-party licensees and distributors, and (iv) income from joint ventures that market the Company’s branded products in certain countries in South America and Asia. The Company’s international owned operations are located in markets where the Company believes it can gain a strategic advantage by directly controlling the sale of its products into retail accounts. License and distribution arrangements enable the Company to generate sales in other markets without the capital commitment required to maintain related foreign operations, employees, inventories or localized marketing programs. The Company has formed joint ventures to market and distribute footwear and apparel in Colombia and India. The Company believes that these joint ventures will provide it with a more meaningful ownership stake and near-term brand impact in these fast-growing markets than its traditional licensee and distributor arrangements. +The Company continues to develop its international network of third-party licensees and distributors to market its branded products. The Company assists its licensees in designing products that are appropriate to each foreign market, but consistent with the global brand positioning. Pursuant to distribution or license agreements, third-party licensees and distributors either purchase goods directly from the Company and authorized third-party manufacturers or manufacture branded products themselves, consistent with Company standards. Distributors and licensees are responsible for independently marketing and distributing the Company’s branded products in their respective territories, with product and marketing support from the Company. +Manufacturing and Sourcing +The Company directly controls the majority of the units of footwear and apparel manufactured or sourced under the Company’s brand names. The Company’s licensees directly control the balance. A substantial majority of the units sourced or manufactured by the Company are procured from third parties, with the remainder produced at Company-owned facilities. The Company sources a majority of its footwear from numerous third-party manufacturers in Asia Pacific and South America. The Company maintains offices in the Asia Pacific region to facilitate and develop strategies for the sourcing and importation of quality footwear and apparel. The Company has established guidelines for each of its third-party manufacturers in order to monitor product quality, labor practices and financial viability. The Company has adopted “Engagement Criteria for Partners & Sources,” a policy that requires the Company’s domestic and foreign manufacturers, licensees and distributors to use ethical business standards, comply with all applicable health and safety laws and regulations, commit to use environmentally safe practices, treat employees fairly with respect to wages, benefits and working conditions and not use child or prison labor. The Company’s third-party sourcing strategy allows the Company to (i) benefit from lower manufacturing costs and state-of-the-art manufacturing facilities, (ii) source high quality raw materials from around the world, and (iii) avoid capital expenditures necessary for additional owned factories. The Company believes that its overall global manufacturing strategy provides the flexibility to properly balance the need for timely shipments, high quality products and competitive pricing. Footwear produced by the Company is manufactured at a Company-operated facility located in Michigan. During the fourth quarter of 2013, the Company substantially completed a restructuring of its manufacturing operations in the Dominican Republic that resulted in the closure of one facility and the sale to a third party of a second facility. +The Company’s principal required raw material is quality leather, which it purchases from a select group of domestic and foreign suppliers. The global availability of common upper materials and specialty leathers eliminates any reliance by the Company on a sole supplier. +The Company currently purchases all of the raw pigskins used for its Wolverine Leathers Division from one domestic source, which has been a reliable and consistent supplier to the Company for over 40 years. Alternative sources of raw pigskin are available, but the Company believes these sources offer less advantageous pricing, quality and compatibility with the Company’s processing +8 +Table of Contents +method. The Company purchases all of its other raw materials and component parts from a variety of sources and does not believe that any of these sources are 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, tariffs and duties, 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, but that a sustained disruption of such sources of supply could have an adverse impact on the Company’s results of operations and financial position. +Trademarks, Licenses and Patents +The Company holds a significant portfolio of registered and common law trademarks that identify its branded products and technologies. The Company’s owned trademarks include Hush Puppies ® , Dog Likeness (registered design trademark), Wolverine ® , Bates ® , Cushe ® , Chaco ® , Soft Style ® , Wolverine Fusion ® , DuraShocks ® , MultiShox ® , Wolverine Compressor ® , Wolverine ICS ® , Hidden Tracks ® , iTechnology ™ , Bounce ® , Comfort Curve ® , HyTest ® , Merrell ® , M Circle Design (registered design trademark), Continuum ® , Sebago ® , Q Form ® , Sperry Top-Sider ® , Saucony ® , Stride Rite ® and Keds ® . The Company’s Wolverine Leathers Division markets its pigskin leathers under the trademarks Wolverine Warrior Leather ® , Weather Tight ® and All Season Weather Leathers™ . The Company has footwear marketing and distribution rights under the Cat ® , Harley-Davidson ® and Patagonia ® trademarks pursuant to license arrangements with the respective trademark owners. The Cat ® and Patagonia ® licenses extend for five or more years and the Harley-Davidson ® license has a term through December 31, 2015. All three licenses are subject to early termination for breach. +The Company believes that consumers identify its products by the Company’s trademarks and that its trademarks are valuable assets. The Company is not aware of any third-party infringing uses or any prior claims of ownership of its trademarks that could materially affect its current business. The Company has a policy of registering its primary trademarks and vigorously defending its trademarks against infringement or other threats whenever practicable. The Company also holds many design and utility patents, copyrights and various other proprietary rights. The Company vigorously protects its proprietary rights under applicable laws. +Order Backlog +At February 8, 2014, the Company had an order backlog of approximately $1,005 million compared to an order backlog of approximately $1,000 million at February 9, 2013, determined on a consistent basis. The majority of the backlog relates to orders for products expected to ship in 2014 . Orders in the backlog are subject to cancellation by customers and to changes in planned customer demand or at-once orders. The backlog at any 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 predictive of eventual actual shipments. +Competition +The Company markets its footwear and apparel lines in a highly competitive and fragmented environment. The Company competes with numerous domestic and international footwear marketers, some of which are larger and have greater resources than the Company. The Company has a significant number of major competitors for its brands of footwear and apparel. Product performance and quality, including technological improvements, product identity, competitive pricing and ability to control costs and the ability to adapt to style changes are all important elements of competition in the footwear and apparel markets served by the Company. The footwear and apparel industries are subject to changes in consumer preferences. The Company strives to maintain its competitive position through promotions designed to increase brand awareness, manufacturing and sourcing efficiencies, 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 competitive position in the overall footwear and apparel industries. Market shares in the non-athletic footwear and apparel 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 activities related to the development of new production techniques and to the improvement of the function, performance, reliability and quality of its branded footwear and other products. For example, the Company’s continuing relationship with the Biomechanics Evaluation Laboratory at Michigan State University has helped validate and refine specific biomechanical design concepts, such as Bounce ® , DuraShocks ® and Hidden Tracks ® comfort technologies that have been incorporated into the Company’s footwear. The Company also utilizes the research and testing capabilities of the Saucony ® human performance and +9 +Table of Contents +innovation lab as well as research funded at university labs, including the University of Colorado and the University of Delaware, with a particular focus on quantifying the interaction between footwear and runners’ strides. While the Company expects to continue to be a leading developer of footwear innovations, research and development costs do not represent a material portion of operating expenses. +Environmental Matters +Compliance with foreign and domestic federal, state and local requirements regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, have not had, nor are they expected to have, any material effect on the capital expenditures, earnings or competitive position of the Company. The Company uses and generates certain substances and wastes that are regulated or may be deemed hazardous to the environment under certain federal, state and local regulations. The Company works with domestic and foreign federal, state and local agencies from time to time to resolve cleanup issues at various sites and other regulatory issues. +Employees +As of December 28, 2013 , the Company had approximately 7,274 domestic and foreign production, office and sales employees. Approximately 57 employees were covered by a single union contract that expires on March 31, 2015. 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, Finance Committee Charter, and Governance Committee Charter, is available at its website at www.wolverineworldwide.com/investor-relations/corporate-governance . Printed copies of the documents listed above are available upon request, without charge, by writing to the Company at 9341 Courtland Drive, N.E., Rockford, Michigan 49351, Attention: General Counsel. +The Company also makes available on or through its website at www.wolverineworldwide.com/investor-relations , 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 . \ No newline at end of file diff --git a/raw/filings/0000110471/2013/0000110471-14-000003/item13.txt b/raw/filings/0000110471/2013/0000110471-14-000003/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..a9e8cbe589396b86495dbb8a282b10a9b6362029 --- /dev/null +++ b/raw/filings/0000110471/2013/0000110471-14-000003/item13.txt @@ -0,0 +1,3 @@ +Item 13. +Certain Relationships and Related Transactions, and Director Independence +The information contained under the caption “Related Party Matters” under the subheadings “Certain Relationships and Related Transactions” and “Related Person Transactions Policy” contained in the Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 23, 2014 , is incorporated herein by reference. The information contained under the caption “Corporate Governance” under the subheading “Director Independence” contained in the Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 23, 2014 , is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000110471/2013/0000110471-14-000003/item9a.txt b/raw/filings/0000110471/2013/0000110471-14-000003/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..de849593318105f600822c882be99650b1fe23d1 --- /dev/null +++ b/raw/filings/0000110471/2013/0000110471-14-000003/item9a.txt @@ -0,0 +1,9 @@ +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 Annual Report on Form 10-K. +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 management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of internal control over financial reporting as of December 28, 2013 , based on the framework in the Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that internal control over financial reporting was effective as of December 28, 2013 . +The effectiveness of the Company’s internal control over financial reporting as of December 28, 2013 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report, which is included in Appendix A of this Annual Report on Form 10-K and is incorporated herein by reference. +Changes in Internal Control Over Financial Reporting +During the sixteen-week period ended December 28, 2013, the Company converted certain PLG legacy operating systems related to consumer direct operations to the Company's existing enterprise resource planning software system. The Company took the necessary steps to monitor and maintain appropriate internal controls while the legacy systems were being converted. These steps included procedures to preserve the integrity of the data converted and a review by management to validate the data converted. Additionally, the Company provided training related to this system to individuals using the system to carry out their job responsibilities. The Company anticipates that the conversion of this legacy system will strengthen the Company's overall system of internal controls due to enhanced automation and integration of related processes. The system change was undertaken to integrate systems and consolidate information and was not undertaken in response to any actual or perceived deficiencies in the Company's internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000110471/2013/0000110471-14-000003/rp_note.txt b/raw/filings/0000110471/2013/0000110471-14-000003/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000110471/2013/0000110471-14-000003/rpt_disclosure.txt b/raw/filings/0000110471/2013/0000110471-14-000003/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..335985ff734170805465ebbe918a51a082474e96 --- /dev/null +++ b/raw/filings/0000110471/2013/0000110471-14-000003/rpt_disclosure.txt @@ -0,0 +1,25 @@ +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS +Wolverine Worldwide has entered into agreements with Grimoldi S.A., an Argentinean corporation of which Mr. Alberto L. Grimoldi, a director of Wolverine Worldwide, is chairman and a 35% shareholder. The agreements grant Grimoldi, S.A. the exclusive rights to distribute and sell footwear products in Argentina under the Hush Puppies®, Caterpillar®, and Patagonia® brand names, and footwear and apparel under the Merrell® brand name. Grimoldi S.A. or its subsidiary purchases products, samples, footwear components, advertising materials and miscellaneous items from Wolverine Worldwide or pays Wolverine Worldwide royalties and certain sublicense fees based on sales or purchases of products in Argentina. Grimoldi S.A. was obligated to pay Wolverine Worldwide purchase prices, royalties, sublicense fees, service fees and interest relating to purchases made or royalties and fees incurred in fiscal year 2013 totaling $5,660,001. All of the transactions described above occurred pursuant to continuing contractual arrangements between Wolverine Worldwide and Grimoldi S.A. Wolverine Worldwide expects similar transactions to occur between Grimoldi S.A. and Wolverine Worldwide and its subsidiaries during fiscal year 2014. The Governance Committee reviewed and approved or ratified each of these transactions in accordance with Wolverine Worldwide’s related person transactions policy, as described below. +RELATED PERSON TRANSACTIONS POLICY +Wolverine Worldwide’s Board adopted written policies and procedures regarding related person transactions. They require the Governance Committee to review and either approve or disapprove the Company entering into any Interested Transactions (defined below). If advance approval is not feasible, then the Governance Committee must review and ratify the Interested Transaction at its next meeting. +Interested Transaction +Any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including any indebtedness or guarantee of indebtedness) in which: +(1) +the aggregate amount involved is or is expected to exceed $50,000 since the beginning of Wolverine Worldwide’s last completed fiscal year; +(2) +Wolverine Worldwide is a participant; and +(3) +any Related Person (defined below) has or will have a direct or indirect interest (other than solely as a result of being a director or less than ten percent beneficial owner of another entity or a limited partner in a partnership in which a Related Person, together with all other Related Persons, has an interest of less than ten percent). +Related Person +Any: +(a) +person who is or was at any point during the last fiscal year for which Wolverine Worldwide filed an Annual Report on Form 10-K and proxy statement, an executive officer, director or nominee for election as a director; +(b) +greater than five percent beneficial owner of Wolverine Worldwide’s common stock; or +(c) +immediate family member * of any of the foregoing. +* Immediate family member includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, and brothers- and sisters-in-law and anyone residing in such person’s home (other than a tenant or employee). +The Governance Committee considers whether the Interested Transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances, the extent of the Related Person’s interest in the transaction, and other factors that it deems relevant. No director participates in any discussion or approval of an Interested Transaction for which he or she is a Related Person, except to provide all material information to the Governance Committee. +Wolverine Worldwide Notice of 2014 Annual Meeting of Stockholders and Proxy Statement +| Page 73 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000913241/2003/0001019056-04-000364/filing.txt b/raw/filings/0000913241/2003/0001019056-04-000364/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..1ec27a3b94d173181157b8bdf01be0860619d751 --- /dev/null +++ b/raw/filings/0000913241/2003/0001019056-04-000364/filing.txt @@ -0,0 +1,2835 @@ +10-K +1 +smadden_k2003.txt +FORM 10-K +UNITED STATES +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 +[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE +SECURITIES AND EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2003 Commission File Number 0-23702 +STEVEN MADDEN, LTD. +(Exact name of registrant as specified in its charter) +Delaware 13-3588231 +(State or other jurisdiction of (I.R.S. employer identification no.) +incorporation or organization) +52-16 Barnett Avenue, Long Island City, New York 11104 +(Address of principal executive offices) (Zip Code) +(718) 446-1800 +(Registrant's Telephone Number, Including Area Code) +Securities Registered Pursuant to Section 12(b) of the Act: None +Securities Registered Pursuant to Section 12(g) of the Act: +Common Stock, par value $.0001 per share +Preferred Stock Purchase Rights +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 common equity held by non-affiliates of +the registrant (assuming for these purposes, but without conceding, that all +executive officers and Directors are "affiliates" of the registrant) as of June +30, 2003, the last business day of the registrant's most recently completed +second fiscal quarter, was approximately $281,283,263 (based on the closing sale +price of the registrant's common stock on that date as reported on The Nasdaq +National Market). +The number of outstanding shares of the registrant's common stock as of +March 9, 2004 was 13,323,905 shares. +DOCUMENTS INCORPORATED BY REFERENCE: +PART III INCORPORATES CERTAIN INFORMATION BY REFERENCE FROM THE +REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS +SCHEDULED FOR MAY 21, 2004. +TABLE OF CONTENTS +Page +---- +ITEM 1 BUSINESS..........................................................1 +ITEM 2 PROPERTIES........................................................8 +ITEM 3 LEGAL PROCEEDINGS.................................................9 +ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............10 +PART II +ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED +STOCKHOLDER MATTERS........................ ...................10 +ITEM 6 SELECTED FINANCIAL DATA..........................................12 +ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION +AND RESULTS OF OPERATIONS......................................13 +ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......24 +ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................24 +ITEM 9 CHANGES IN AND DISAGREEMENTs WITH ACCOUNTANTS ON +ACCOUNTING AND FINANCIAL DISCLOSURE............................24 +ITEM 9A CONTROLS AND PROCEDURES..........................................24 +PART III +ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............25 +ITEM 11 EXECUTIVE COMPENSATION...........................................25 +ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND +MANAGEMENT and Related Stockholder Matters.....................25 +ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................25 +ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................25 +PART IV +ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON +FORM 8-K......................................................25 +-i- +ITEM 1 BUSINESS +Steven Madden, Ltd. (together with its subsidiaries, the "Company") +designs, sources, markets and sells fashion-forward footwear brands for women, +men and children. The Company distributes products through its retail stores, +its e-commerce website, department and specialty stores throughout the United +States and Canada and through special distribution arrangements in Europe and in +Central and South America. The Company's product line includes core products, +which are sold year-round, complemented by a broad range of updated styles which +are designed to establish or capitalize on market trends. +The Company's business is comprised of three (3) distinct segments +(wholesale, retail and private label). The wholesale division includes seven (7) +brands: Steve Madden(R), Steven(R), l.e.i.(R), Candie's(R), Stevies(R), +Unionbay(R) and the Steve Madden Mens brand. Steven Madden Retail, Inc., the +Company's wholly-owned retail subsidiary, operates Steve Madden, Steven and Shoe +Biz retail stores as well as the Company's outlet store and e-commerce website. +The Company's wholly-owned private label subsidiary, Adesso-Madden, Inc., +designs and sources footwear products under private labels for many of the +country's large mass merchandisers. The Company also licenses its Steve +Madden(R) trademark for several accessory and apparel categories. +Steven Madden, Ltd., was incorporated as a New York corporation on July 9, +1990 and reincorporated under the same name in Delaware in November 1998. The +Company has established a reputation for its creative designs, popular styles +and quality products at accessible price points. The Company completed its +initial public offering in December 1993 and its shares of Common Stock +currently trade on The Nasdaq National Market under the symbol "SHOO". +The Company maintains its principal executive offices at 52-16 Barnett +Avenue, Long Island City, NY 11104, telephone number (718) 446-1800. +The Company's website is http://www.stevemadden.com. This website primarily +operates as an internet store where the Company's customers can purchase +numerous styles of the Company's Steve Madden and Steve Madden Mens footwear +products. At this time, the Company's Annual Reports on Form 10-K; Quarterly +Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such +reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities +Exchange Act of 1934, as amended, are not made available on the Company's +website because the website is not equipped to make such filings available. The +Company is looking into alternatives which will enable it to make such filings +available on its website. The Company will provide paper copies of such filings +free of charge upon request. +Wholesale Divisions +Madden Women's Wholesale +The Steve Madden(R) Women's Wholesale Division ("Madden Women's Wholesale") +designs, produces, sources, sells and markets the Company's Steve Madden(R) +brand to major department stores, better specialty stores, and shoe stores +throughout the United States. The Steve Madden(R) product line has become a +leading footwear brand in the fashion conscious junior marketplace. To serve its +customers (primarily women ages 16 to 25), Madden Women's Wholesale creates and +markets fashion forward footwear designed to appeal to customers seeking +exciting, new footwear designs at affordable prices. +As the Company's largest division, Madden Women's Wholesale accounted for +$109,285,000 of net sales in 2003, or approximately 34% of the Company's total +sales. Many newly created styles of Madden Women's Wholesale are test marketed +at the Company's retail stores. Within a few days, the Company can determine if +the test product appeals to customers. This enables the Company to use its +flexible sourcing model to rapidly respond to changing preferences which the +Company believes is essential for success in the fashion footwear marketplace. +l.e.i.(R) - Wholesale Division +Pursuant to the Company's license agreement with Jones Investment Company, +Inc., the Company has the right to use the l.e.i.(R) trademark in connection +with the sale and marketing of footwear. The l.e.i.(R) trademark is well +-1- +known for jeanswear in the junior marketplace sold nationally through department +and specialty stores. The Company's l.e.i.(R) footwear products are targeted to +attract girls and young women ages 6 to 20 years old, a majority of which are +younger than the typical Steve Madden(R) brand customer. The l.e.i. Wholesale +Division generated net sales of $60,623,000 for the year ended December 31, +2003, or approximately 19% of the Company's total revenues. +Madden Men's Wholesale +The Steve Madden Men's Wholesale Division ("Madden Men's Wholesale") +markets a full collection of directional young men's shoes through major +department stores, better specialty stores and independent shoe stores +throughout the United States. Price points range from $70 to $100 at retail, +targeted at men ages 18 to 44 years old. +Madden Men's Wholesale accounted for $34,881,000 of net sales in 2003, or +approximately 11% of the Company's total sales. Madden Men's Wholesale, which is +primarily produced in China, maintains open stock inventory positions in select +patterns to serve the replenishment programs of its wholesale customers. +Candie's Footwear +On May 12, 2003 the Company entered into a long-term license agreement with +Candie's, Inc. to design, manufacture, and distribute Candie's(R) branded +footwear for women and children worldwide through the Company's Candie's(R) +division. The Candie's(R) footwear line has been an important resource for +fashion and casual footwear primarily for young women and girls for over two +decades. The Candie's(R) division, which began shipping product in the fourth +quarter of 2003, generated net sales of $938,000 for the year ended December 31, +2003. +Diva Acquisition Corp. - Steven(R) Wholesale Division +Diva Acquisition Corp. ("Steven") designs and markets women's fashion +footwear under the "Steven(R)" trademark through major department and better +footwear specialty stores and one (1) Company owned retail shoe store located in +New York, New York. Priced a tier above the Steve Madden(R) brand, Steven's +products are designed to appeal principally to fashion conscious women, ages 26 +to 45, who shop at department stores and footwear boutiques. The Company +recorded wholesale sales from the Steven(R) brand of $12,519,000 for the year +ended December 31, 2003, or approximately 4% of the Company's total net sales. +Stevies Inc. - Wholesale Division +The Company's Stevies Wholesale Division ("Stevies Wholesale") generated +net sales of $10,120,000 for the year ended December 31, 2003, or approximately +3% of the Company's total net sales. Stevies(R) products are marketed through +department stores such as May Department Stores, Belk, Limited Too, as well as +independent children's stores throughout the country. +Unionbay Men's Footwear +On January 7, 2003, the Company entered into a long-term license with +Seattle Pacific Industries, Inc., under which the Company has the right to use +the Unionbay(R) trademark in connection with the sale and marketing of footwear +for men and boys. Unionbay(R) is known for casual apparel in the young men, +junior and children's marketplace and is distributed nationally through +department and specialty stores. The Unionbay(R) division, which began shipping +product in the third quarter of 2003, generated net sales of $320,000 for the +year ended December 31, 2003. +Steven Madden Retail, Inc. - Retail Division +As of December 31, 2003, the Company owned and operated seventy-six (76) +retail shoe stores under the Steve Madden(R) name, one (1) under the Steven(R) +name, five (5) outlet stores and one (1) Internet store (through the +www.stevemadden.com website). In 2003, the Company opened six (6) new stores and +closed three (3) under-performing stores. Most of the Steve Madden stores are +located in major shopping malls in Arizona, California, Colorado, Connecticut, +District of Columbia, Florida, Georgia, Illinois, Louisiana, Maryland, +Massachusetts, +-2- +Michigan, Minnesota, Nevada, New Jersey, New York, Ohio, Pennsylvania, Puerto +Rico, Rhode Island, Texas, Virginia and Wisconsin. The retail stores generated +annual sales in excess of $644 per square foot. Sales are primarily from the +sale of the Company's Steve Madden(R) product line. Comparative store sales +decreased 4% in 2003 compared to 2002 while growth in sales was generated by new +stores. Total sales for the retail division were $95,518,000 for 2003. Sales +from the retail division for the year ended December 31, 2003 were approximately +29% of the Company's net sales. +The Company believes that the retail division will continue to enhance +overall sales and profits of the Company while building equity in the Steve +Madden brand. The Company plans to add eight to ten (8-10) new retail stores +during 2004. The expansion of the retail division enables the Company to test +and react to new products and classifications which, in turn, strengthens the +product development efforts of the Steve Madden wholesale division. +The Adesso-Madden, Inc. - Private Label Division +In September 1995, the Company incorporated Adesso-Madden, Inc. as a wholly +owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to mass +market merchandisers, shoe store chains and other value-priced retailers in +connection with their procurement of private label shoes. As a buying agent, A-M +arranges for shoe manufacturers to produce private label shoes to the +specifications of its clients. The Company believes that by operating in the +private label, mass merchandising market, the Company is able to maximize +additional non-branded sales opportunities. This leverages the Company's overall +sourcing and design capabilities. Currently, this division serves as a buying +agent for the procurement of women's, men's and children's footwear for large +retailers including Sears, Payless, Wal-Mart and Target. A-M receives buying +agent's commissions from its clients. The private label division generated +commission income of $5,056,000 for the year ended December 31, 2003. +Licensing +As of December 31, 2003, the Company licensed its Steve Madden trademark +for use in connection with the manufacturing, marketing and sale of outerwear +(including leather outerwear), belts, sunglasses, eyewear and hosiery. Each +license agreement requires the licensee to pay to the Company a royalty based on +net sales, a minimum royalty in the event that specified net sales targets are +not achieved and a percentage of sales for advertising of the Steve Madden(R) +brand. +Design +The Company has established a reputation for its creative designs, popular +styles and quality products at affordable price points. The Company believes +that its future success will depend in substantial part on its ability to +continue to anticipate and react to changing consumer demands in a timely +manner. To meet this objective, the Company has developed a unique design +process that allows it to recognize and act quickly to changing consumer +demands. The Company's design team works together to create designs which they +believe fit the Company's image, reflect current or future trends and can be +manufactured in a timely and cost-effective manner. Once the initial design is +complete, a prototype is developed, which is reviewed and refined prior to the +commencement of limited production. Most new Steve Madden designs are then +tested in the Steve Madden(R) retail stores. Designs that prove popular are then +offered to wholesale and retail distribution nationwide. The Company believes +that its unique design and testing process and flexible sourcing model is a +significant competitive advantage allowing the Company to mitigate the risk of +the costly production and distribution of unpopular designs. +Product Sourcing and Distribution +The Company sources each of its product lines separately based on the +individual design, styling and quality specifications of such products. The +Company does not own or operate any manufacturing facility and sources its +branded products through independently owned manufacturers in Brazil, China, +Italy, Mexico, Spain, Taiwan and the United States. The Company has established +relationships with a number of manufacturers in each country. Although the +Company has not entered into any long-term manufacturing or supply contracts, +the Company believes that a sufficient number of alternative sources exist for +the manufacture of its products. The principal materials used in the Company's +footwear are available from any number of sources, both within the United States +and in foreign countries. +-3- +The Company's design and distribution processes are intended to be +flexible, allowing the Company to respond to and accommodate changing consumer +demand. The Company's production staff tracks warehouse inventory on a regular +basis, monitors sell-through data and incorporates input on product demand from +wholesale customers. The Company can use product feedback to adjust production +or manufacture new products in as little as five weeks. Constant inventory +tracking allows the Company to manage inventory on a continuous flow basis with +the goal of optimizing inventory turns. +The Company distributes its products from two (2) third party distribution +warehouse centers located in California and New Jersey. The Company also +distributes its Internet shipments from a third party fulfillment center located +in Michigan. By utilizing distribution facilities that specialize in +distributing products to certain customers (wholesale accounts, Steve Madden +retail stores and Internet fulfillment), the Company believes that its customers +are better served. +Customers +The Company's customers consist principally of department stores and +specialty stores, including shoe boutiques. Presently, the Company sells +approximately forty-one percent (41%) of its products at wholesale to department +stores, including Federated Department Stores (Bloomingdale's, Bon Marche, +Burdines, Macy's and Rich's), May Department Stores (Famous Barr, Filene's, +Foley's, Hecht's, Lord and Taylor and Robinsons May), Dillard's, Marshall +Field's and Nordstrom; and approximately forty percent (40%) to specialty +stores, including Journeys, Limited Too and Mandees; and catalog retailers, +including Victoria's Secret and Fingerhut. For the year ended December 31, 2003, +May Department Stores and Federated Department Stores accounted for +approximately fourteen percent (14%) and thirteen percent (13%) of the Company's +wholesale sales, respectively. +Distribution Channels +The Company sells its products principally through its Company-owned retail +stores, department stores, specialty shoe stores and discount stores in the +United States and abroad. For the year 2003, retail stores and wholesale sales +accounted for approximately twenty-nine percent (29%) and seventy-one percent +(71%) of total sales, respectively. The following paragraphs describe each of +these distribution channels. +Steve Madden and Steven Retail Stores +As of December 31, 2003, the Company operated seventy-seven (77) +Company-owned retail stores (including one Internet store) under the Steve +Madden(R) name and one (1) under the Steven(R) name. The Company believes that +its retail stores will continue to enhance overall sales, profitability, and its +ability to react to changing consumer trends. The stores are also a marketing +tool which allows the Company to strengthen brand recognition and to showcase +selected items from its full line of branded and licensed products. Furthermore, +the retail stores provide the Company with a venue to test and introduce new +products and merchandising strategies. Specifically, the Company often tests new +designs at its Steve Madden(R) retail stores before scheduling them for mass +production and wholesale distribution. In addition to these test marketing +benefits, the Company has been able to leverage sales information gathered at +Steve Madden(R) retail stores to assist its wholesale accounts in order +placement and inventory management. +A typical Steve Madden(R) store is approximately 1,400 to 1,600 square feet +and is located in malls and street locations which attract the highest +concentration of the Company's core demographic -- style-conscious young women +ages 16 to 25 years old. The Steven(R) store has a more sophisticated design and +format styled to appeal to its more mature target audience. In addition to +carefully analyzing mall demographics, the Company also sets profitability +guidelines for each potential store site. Specifically, the Company targets +sites at which the demographics fit the consumer profile, the positioning of the +site is well trafficked and the projected fixed annual rent expense does not +exceed a specified percentage of sales over the life of the lease. By setting +these standards, the Company believes that each store will contribute to the +Company's overall profits both in the near- and longer-terms. +-4- +Outlet Stores +Shoe Biz, Inc., a wholly owned subsidiary of the Company ("Shoe Biz"), +operates five (5) outlet stores in New Jersey and New York, four (4) of which +operate under the Shoe Biz name and one (1) of which operates as a Steve Madden +Outlet store. Shoe Biz sells many product lines, including Steve Madden, Steven, +Stevies and l.e.i.(R) footwear, at a price lower than typically charged by other +"full price" retailers. +Department Stores +The Company currently sells to over 2,750 doors of twenty-two (22) +department stores throughout the United States and Canada. The Company's major +accounts include Federated Department Stores (Macy's, Bloomingdale's, Bon +Marche, Burdine's and Rich's), May Department Stores (Filene's, Hecht's, Famous +Barr, Foley's, Lord and Taylor and Robinsons May), Nordstrom, Dillard's and +Marshall Field's. +The Company provides merchandising support to its department store +customers which includes in-store fixtures and signage, supervision of displays +and merchandising of the Company's various product lines. The Company's +wholesale merchandising effort includes the creation of in-store concept shops, +where a broader collection of the Company's branded products are showcased. +These in-store concept shops create an environment that is consistent with the +Company's image and enable the retailer to display and stock a greater volume of +the Company's products per square foot of retail space. In addition, these +in-store concept shops encourage longer term commitment by the retailer to the +Company's products and enhance consumer brand awareness. +In addition to merchandising support, the Company's senior account +executives maintain weekly communications with their accounts to guide them in +placing orders and to assist them in managing inventory, assortment and retail +sales. The Company leverages its sell-through data gathered at its retail stores +to assist department stores in allocating their open-to-buy dollars to the most +popular styles in the product line and to phase out styles with weaker +sell-throughs. +Specialty Stores/Catalog Sales +The Company currently sells to specialty store locations throughout the +United States and Canada. The Company's major specialty store accounts include +Journeys, Limited Too and Mandees. The Company offers its specialty store +accounts the same merchandising, sell-through and inventory tracking support +offered to its department store accounts. Sales of the Company's products are +also made through various catalogs, such as Victoria's Secret. +Internet Sales +The Company operates one (1) Internet website: www.stevemadden.com. +Customers can purchase numerous styles of the Company's Steve Madden, Steven and +Steve Madden Mens footwear, accessory and clothing products. Sales derived from +the Company's Internet store increased 8% to $5,200,000 in 2003 from $4,800,000 +in 2002. +Distribution Agreements +In June 2002, the Company and Dabsan International, S.A. ("Dabsan") entered +into an agreement whereby the Company granted Dabsan the exclusive right to sell +Steve Madden products in certain Central and South American countries and the +right to develop Steve Madden retail stores in certain Central and South +American countries. Under the terms of the agreement, Dabsan is required to open +two (2) Steve Madden stores by October 31, 2004 and is also required to purchase +certain minimum amounts of Steve Madden shoes. +In February 2003, the Company and F.E.E.T. sas ("FEET") entered into a +distribution and license agreement whereby the Company granted FEET the +exclusive right to sell Steve Madden products in certain European countries with +a provision that expands the territory covered to include certain additional +European countries and in North Africa. Under the terms of the agreement, FEET +is required to purchase certain minimum amounts of Steve Madden shoes. +-5- +Competition +The fashion footwear industry is highly competitive. The Company's +competitors include specialty shoe companies as well as companies with +diversified footwear product lines. The recent substantial growth in the sales +of fashion footwear has encouraged the entry of many new competitors and +increased competition from established companies. Most of these competitors, +including Diesel, Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may +have significantly greater financial and other resources than the Company. The +Company believes effective advertising and marketing, fashionable styling, high +quality and value are the most important competitive factors and intends to +continue to employ these elements as it develops its products. +In 2001, the Company launched the Steve Madden Mens brand which competes +with several brands that are more established with greater consumer awareness, +including Kenneth Cole, Skechers Collection, Tommy Hilfiger and Dr. Martin. +Marketing and Sales +Prior to 1997, the Company's marketing plans relied heavily on its few +Steve Madden(R) retail store locations and word-of-mouth referrals. In 1998, the +Company focused on creating a more integrated brand building program to +establish Steve Madden as the leading designer of fashion footwear for +style-conscious young women. As a result, the Company developed a national +advertising campaign for lifestyle and fashion magazines which was also used in +regional marketing programs such as radio advertisements, television +commercials, outdoor media, college event sponsorship and live online chat +forums. The Company also continues to promote its website (www.stevemadden.com) +where consumers can purchase Steve Madden(R), Steven and Steve Madden Mens +products and interact with both the Company and other customers. +The Company commenced a marketing campaign for the Stevies brand with +separate marketing, advertising, promotional events and in-store displays +targeting the Stevies customer. As for Steve Madden Mens, the Company supported +the brand's roll-out with strategic marketing and advertising initiatives. +In order to service its wholesale accounts, the Company retains a sales +force of eighteen independent sales representatives. These sales representatives +work on a commission basis and are responsible for placing the Company's +products with its principal customers, including department and specialty +stores. The sales representatives are supported by the Company's senior +executives, a staff of fifteen account executives, one merchandise coordinator +and twenty-seven customer service representatives who continually cultivate +relationships with wholesale customers. This group of professionals assist +accounts in merchandising and assessing customer preferences and inventory +requirements, which ultimately serves to increase sales and profitability. +Management Information Systems (MIS) Operations +Sophisticated information systems are essential to the Company's ability to +maintain its competitive position and to support continued growth. The Company +operates on a dual AS/400 system which provides system support for all aspects +of its business including manufacturing purchase orders; customer purchase +orders; order allocations; invoicing; accounts receivable management; real time +inventory management; quick response replenishment; point-of-sale support; and +financial and management reporting functions. The Company has a PKMS bar coded +warehousing system which is integrated with the wholesale system in order to +provide accurate inventory positions and quick response size replenishment for +its customers. In addition, the Company has installed an EDI system which +provides a computer link between the Company and certain wholesale customers +that enables both the customer and the Company to monitor purchases, shipments +and invoicing. The EDI system also improves the Company's ability to respond to +customer inventory requirements on a weekly basis. +Receivables Financing; Line of Credit +Under the terms of a factoring agreement with Capital Factors, Inc., the +Company is permitted to draw down 80% of its invoiced receivables at an interest +rate of two points below the Prime Rate (as defined in such agreement). The +agreement provides that Capital Factors is not required to purchase all the +Company's receivables and requires the Company to pay an unused line fee of .25% +of the average daily unused portion of the maximum amount of the credit line. On +September 1, 1998, the Company and Capital Factors amended its Factoring +-6- +Agreement to, among other things, provide the Company with a credit line of up +to $15,000,000, subject to certain limitations. The Company has not recently +borrowed funds under its credit line with Capital Factors. The agreement with +Capital Factors was renewed for the period beginning June 30, 2002 through +December 31, 2004. Capital Factors maintains a lien on all of the Company's +inventory and receivables and assumes the credit risk for all assigned accounts +approved by it. +Trademarks and Service Marks +The STEVE MADDEN and STEVE MADDEN plus Design trademarks and service marks +have been registered in numerous International Classes (Int'l Cl. 25 for +clothing and footwear; Int'l Cl. 18 for leather goods, such as handbags and +wallets; Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry; Int'l Cl. 3 for +cosmetics and fragrances; Int'l Cl. 20 for picture frames and furniture; Int'l +Cl. 16 for paper goods; Int'l Cl. 24 for bedding; and Int'l Cl. 35 for retail +store services) in the United States. The Company also has trademark +registrations in the United States for the marks EYESHADOWS BY STEVE MADDEN +(Int'l Cl. 9 for eyewear), ICE TEE (Int'l Cl. 25 for clothing and footwear), +SOHO COBBLER (Int'l. Cl. 9 for eyewear; and Int'l Cl. 25 for clothing and +footwear), SHOE BIZ By STEVE MADDEN (Int'l Cl. 25 for clothing and footwear; and +Int'l Cl. 35 for retail store services) and STEVEN M. (Int'l Class 25 for +clothing and footwear). Additionally, the Company has several pending trademark +and service mark applications in the United States for various marks, including +a stylized "H" Design (Int'l Cl. 25 for clothing and footwear), TEST & REACT +(Int'l Cl. 42 for services consisting of conducting market studies), STEVEN +(Int'l Cl. 25 for clothing and footwear) and TORCH STRIPE (Int'l Cl. 25 for +footwear). The Company also has pending trademark and service mark applications +in China and the 15 cooperating countries in Europe for TORCH STRIPE (Int'l Cl. +25 for footwear). +The Company further owns registrations for the STEVE MADDEN and STEVE +MADDEN plus Design trademarks and service marks in various International Classes +in Argentina, Australia, Bahrain, Brazil, Canada, Chile, China, Colombia, Hong +Kong, Israel, Italy, Japan, Korea, Lebanon, Mexico, the Netherlands, Panama, +Saudi Arabia, South Africa, Taiwan, the 15 cooperating countries of Europe and +the Benelux countries and has pending applications for registration of the STEVE +MADDEN and STEVE MADDEN plus Design trademarks and service marks in Bahrain, +Belize, Costa Rica, El Salvador, Guatemala, Honduras, Korea, Kuwait, Lebanon, +Malaysia, Oman, Peru, Qatar, Saudi Arabia, Turkey, the United Arab Emirates and +Venezuela. Additionally, the Company owns registrations for the STEVEN trademark +and service mark in various International Classes in Hong Kong, Lebanon and +Japan and has pending applications for registration of the STEVEN trademark and +service mark in Canada, China, Israel, Italy, Japan, Korea, Malaysia, Oman, +Qatar, South Africa, Saudi Arabia, Taiwan, Thailand, Turkey, the United Arab +Emirates and the United States. There can be no assurance, however, that the +Company will be able to effectively obtain rights to the STEVE MADDEN mark +throughout all of the countries of the world. Moreover, no assurance can be +given that others will not assert rights in, or ownership of, trademarks and +other proprietary rights of the Company or that the Company will be able to +successfully resolve such conflicts. The failure of the Company to protect such +rights from unlawful and improper appropriation may have a material adverse +effect on the Company's business and financial condition. +Additionally, the Company, through its Diva Acquisition Corp. subsidiary, +owns registrations for the DAVID AARON trademark and service mark in various +International Classes in the United States (Int'l Cl. 25 for clothing and +footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets; and +Int'l Cl. 35 for retail store services), Australia, Canada, Hong Kong, Japan, +South Africa and the 15 cooperating countries in Europe and for its D. AARON +trademark in Spain. Also, the Company own registrations for the DAVID AARON +trademark in International Class 3 for perfume and cosmetics; International +Class 9 for eyewear; International Class 14 for jewelry; International Class 16 +for paper goods; International Class 18 for bags; International Class 24 for bed +and bath products; International Class 25 for clothing and footwear and +International Class 26 hair accessories in Korea. The Company believes that the +DAVID AARON trademark has a significant value and is important to the marketing +of the Company's products. +The Company, through its Stevies, Inc. subsidiary, also owns various +registrations for the STEVIES and STEVIES plus Design trademark and service mark +in a number of International Classes in the United States (Int'l Cl. 18 for +leather goods, such as handbags and wallets; Int'l Cl. 9 for eyewear; +International Class 35 for retail store services and, International Class 26 for +hair accessories) and for its STEVIES plus Design mark for various goods in +Argentina, Bahrain, China, Hong Kong, Israel, Japan, Korea, Lebanon, Mexico, +Taiwan and the 15 cooperating countries in Europe. Additionally Stevies, Inc. +has several pending trademark and service mark applications for +-7- +registration of the STEVIES and STEVIES plus Design marks in various +International Classes in the United States (Int'l Cl. 25 for clothing and +footwear; Int'l Cl. 14 for jewelry; Int'l Cl. 28 for toys; Int'l Cl. 26 for hair +accessories; International Class 16 for paper goods; International Class 3 for +perfume and cosmetics and, International Class 9 for CDs and eyewear) and in +Brazil, Canada, Colombia, Indonesia, Kuwait, Malaysia, Mexico, Oman, Panama, +Peru, Qatar, Saudi Arabia, South Africa, Thailand, Turkey, the United Arab +Emirates and Venezuela. Finally, Stevies, Inc. also owns several pending +trademark and service mark applications for registration of the STEVIES BY STEVE +MADDEN mark in various International Classes in the United States (Int'l Cl. 25 +for clothing and footwear; Int'l Cl. 14 for jewelry; Int'l Cl. 18 for leather +goods, such as handbags and wallets; Int'l Cl. 16 for paper goods; Int'l Cl. 3 +for cosmetics and fragrances; Int'l Cl. 9 for eyewear; Int'l Cl. 26 for hair +accessories; Int'l Cl. 28 for toys; and Int'l Cl. 35 for retail store services). +Employees +On March 4, 2004, the Company employed approximately 1,150 employees, of +whom approximately 500 work on a full-time basis and approximately 650 work on a +part-time basis. The management of the Company considers relations with its +employees to be good. +ITEM 2 PROPERTIES +The Company maintains approximately 33,000 square feet for its executive +offices and sample production facilities at 52-16 Barnett Avenue, Long Island +City, NY 11104. The lease for the Company's headquarters expires on June 30, +2008. +The Company's showroom is located at 1370 Avenue of the Americas, New York, +NY. All of the Company's brands are displayed for sale from this 3,762 square +foot space. The lease for the Company's showroom expires on February 28, 2013. +The Company also maintains a 1,080 square foot showroom located at 2300 +Stemmons Freeway, Dallas, Texas. The lease for this showroom expires on +September 30, 2004. +Currently, the Company engages three independent distributors to warehouse +and distribute its products. +The Company's private label division, Adesso Madden, maintains +approximately 3,120 square feet of office and showroom space at 99 Seaview +Boulevard, Port Washington, N.Y. The lease for Adesso Madden expires on May 31, +2006. +All of the Company's retail stores are leased pursuant to leases that +extend for terms which average ten years in length. A majority of the leases +include clauses that provide for contingent rental payments if gross sales +exceed certain targets. In addition, a majority of the leases enable the Company +and/or the landlord to terminate the lease in the event that the Company's gross +sales do not achieve certain minimum levels during a prescribed period. Many of +the leases contain rent escalation clauses to compensate for increases in +operating costs and real estate taxes. +The current terms of the Company's retail store leases expire as follows: +Years Lease Terms Expire Number of Stores +------------------------ ---------------- +2004 2 +2005 4 +2006 2 +2007 6 +2008 12 +2009 10 +2010 11 +2011 15 +2012 9 +2013 11 +-8- +ITEM 3 LEGAL PROCEEDINGS +Except as set forth below, no material legal proceedings are pending to +which the Company or any of its property is subject. +Class Action +Between June and August 2000, eight putative securities fraud class action +lawsuits have been commenced in the United States District Court for the Eastern +District of New York against the Company, Steven Madden and, in five of the +actions, Rhonda J. Brown (the former President and a former director of the +Company) and Arvind Dharia. These actions are captioned: Wilner v. Steven +Madden, Ltd., et al., 00 CV 3676 (filed June 21, 2000); Connor v. Steven Madden, +et al., 00 CV 3709 (filed June 22, 2000); Blumenthal v. Steven Madden, Ltd., et +al., 00 CV 3709 (filed June 23, 2000); Curry v. Steven Madden, Ltd., et al., 00 +CV 3766 (filed June 26, 2000); Dempster v. Steven Madden Ltd., et al., 00 CV +3702 (filed June 30, 2000); Salafia v. Steven Madden, Ltd., et al., 00 CV 4289 +(filed July 24, 2000); Fahey v. Steven Madden, Ltd., et al., 00 CV 4712 (filed +August 11, 2000); Process Engineering Services, Inc. v. Steven Madden, Ltd., et +al., 00 CV 5002 (filed August 22, 2000). By Order dated December 8, 2000, the +Court consolidated these eight actions, appointed Process Engineering, Inc., +Michael Fasci and Mark and Libby Adams as lead plaintiffs and approved their +selection of lead counsel. On February 26, 2001, Plaintiffs served a +Consolidated Amended Complaint. On or about October 31, 2001, plaintiffs filed a +Second Consolidated Amended Class Action Complaint. The pleading names the +Company, Steven Madden, Rhonda J. Brown and Arvind Dharia as defendants. It +principally alleges that the Company and the individual defendants violated +Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 +promulgated under the 1934 Act by issuing false and misleading statements, and +failing to disclose material adverse information, generally relating to matters +arising from Mr. Madden's June 2000 indictment. The plaintiffs seek an +unspecified amount of damages, costs and expenses on behalf of themselves and +all other purchasers of the Company's common stock during the period June 21, +1997 through June 20, 2000. On November 30, 2001, all of the defendants served +motions to dismiss the Consolidated Amended Complaint. The motions were fully +briefed on January 14, 2002. Since that time, an agreement has been reached to +resolve all claims in this action, subject to notices to the putative class +members, a hearing and approval by the District Court. The tentative settlement +is within the limits of the Company's insurance coverage. +Shareholder Derivative Actions +On or about September 26, 2000, a putative shareholders derivative action +was commenced in the United States District Court for the Eastern District of +New York, captioned Herrera v. Steven Madden and Steven Madden, Ltd., 00 CV 5803 +(JG). The Company is named as a nominal defendant in the action. The complaint +seeks to recover alleged damages on behalf of the Company from Mr. Madden +arising from his June 2000 indictment and to require him to disgorge certain +profits, bonuses and stock option grants he received. On January 3, 2001, +plaintiff filed an Amended Shareholder's Derivative Complaint. On February 2, +2001, both the Company and Mr. Madden filed motions to dismiss the Amended +Complaint because of plaintiff's failure to make a pre-litigation demand upon +the Company's board of directors. On October 1, 2001, plaintiff filed a Second +Amended Complaint. On November 2, 2001, the Company filed a motion to dismiss +this pleading on grounds that plaintiff had failed to make a pre-litigation +demand upon the Company's board of directors. On February 7, 2002, the +Magistrate Judge filed a Report recommending that the Company's motion to +dismiss be denied. The Company filed its objections to the Report on March 4, +2002. On March 22, 2002, the District Judge entered an order adopting the +Magistrate Judge's report and recommendation in full. Since that time, an +agreement has been reached to resolve all claims in this action, subject to such +notice to the Company's shareholders (if any) as may be required by the District +Court, a hearing and approval by the District Court. The Company believes, after +consultation with counsel, that its defense costs and certain attorneys fees in +connection with this action will be subject to coverage by the Company's +insurance. +On or about November 28, 2001, a purported shareholder derivative complaint +was filed in the United States District Court for the Eastern District of New +York, captioned Herrera v. Karson, et al., 00 CV 7868. Named as defendants +therein are the Company (as nominal defendant) and certain of the Company's +present and/or former directors. The complaint alleges that the individual +defendants breached their fiduciary duties to the Company in connection with a +decision by the Board of Directors of the Company to enter into an employment +agreement with Mr. Steven Madden in or about May 2001. The complaint seeks +declaratory and other equitable relief, as well as an unspecified amount of +compensatory damages, costs and expenses. On or about February 1, 2002, +plaintiff filed an +-9- +Amended Shareholder Derivative Complaint (the "Amended Complaint"). The Amended +Complaint contains substantially the same allegations and names the same +defendants as the original complaint. Since that time, an agreement has been +reached to resolve all claims in this action, subject to such notice to the +Company's shareholders (if any) as may be required by the District Court, a +hearing and approval by the District Court. The Company believes, after +consultation with counsel, that its defense costs and certain attorneys fees in +connection with this action will be subject to coverage by the Company's +insurance. +Other Actions +The Company and certain of the Company's present and/or former directors +have been named in an action commenced in the United States District Court for +the Eastern District of New York by the Safeco Surplus Lines Insurance Company +captioned, Safeco Surplus Lines Ins. Co. v. Steven Madden Ltd., et al., 02 CV +1151 (JG). The complaint principally seeks rescission of the excess insurance +policy issued by Safeco to the Company for the February 4, 2000 to June 13, 2001 +period and an order declaring that Safeco does not owe any indemnity obligation +to the Company or any of its officers and directors in connection with the +putative shareholder class action and derivative cases described in the Form 10Q +filed by the Company for the quarter ended March 31, 2002. The parties have +agreed to a resolution of Safeco's claims, the implementation of which is +conditioned upon judicial approval of the settlements of the shareholder class +action and derivative claims discussed above. +On or about June 6, 2003, an action was commenced in the United States +District Court for the Central District of California, captioned Global Brand +Marketing, Inc. v. Steve Madden LTD., Case Number 03-4029. The complaint seeks +injunctive relief and unspecified monetary damages for infringement of two +separate patents. The Company believes it has substantial defenses to the claims +asserted in the lawsuit. The parties are currently involved in settlement +negotiations. +ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS +No matters were submitted to a vote of the holders of the Company's Common +Stock during the last quarter of its fiscal year ended December 31, 2003. +PART II +ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER +MATTERS +The Company's shares of common stock trade on The Nasdaq National Market. +The following table sets forth the range of high and low bid quotations for the +Company's Common Stock for the two year period ended December 31, 2003 as +reported by The Nasdaq National Market. The quotes represent inter-dealer prices +without adjustment or mark-ups, mark-downs or commissions and may not +necessarily represent actual transactions. The trading volume of the Company's +securities fluctuates and may be limited during certain periods. As a result, +the liquidity of an investment in the Company's securities may be adversely +affected. +-10- +Common Stock +High Low High Low +------ ------ ------ ------ +2003 2002 +Quarter ended 19.35 14.83 Quarter ended 17.79 13.32 +March 31, 2003 March 29, 2002 +Quarter ended 22.35 15.27 Quarter ended 20.25 15.79 +June 30, 2003 June 28, 2002 +Quarter ended 22.34 18.76 Quarter ended 19.79 13.43 +September 30, September 30, +2003 2002 +Quarter ended 22.65 18.98 Quarter ended 18.85 13.59 +December 31, December 31, +2003 2002 +On March 10, 2004, the final quoted price as reported by The Nasdaq +National Market was $19.52 for each share of common stock. As of March 2, 2004, +there were 13,223,905 shares of Common Stock outstanding, held of record by 65 +record holders and approximately 3,254 beneficial owners. +Absence of Dividends. The Company did not declare or pay cash dividends +during the two year period ended December 31, 2003. The Company anticipates that +all of its earnings in the foreseeable future will be retained to finance the +continued growth and expansion of its business and has no current intention to +pay cash dividends. +Equity Compensation Plans. Information regarding our equity compensation +plans as of December 31, 2003 is disclosed in Item 12. "Security Ownership of +Certain Beneficial Owners and Management and Related Stockholder Matters." +-11- +ITEM 6 SELECTED FINANCIAL DATA +The following selected financial data has been derived from the Company's +audited financial statements. The Income Statement Data relating to 2003, 2002, +2001, 2000 and 1999 and the Balance Sheet Data as of December 31, 2003, 2002, +2001, 2000 and 1999 should be read in conjunction with the Company's audited +consolidated financial statements and notes thereto appearing elsewhere herein. +Year Ended December 31, +---------------------------------------------------------------------------- +2003 2002 2001 2000 1999 +------------ ------------ ------------ ------------ ------------ +INCOME STATEMENT DATA: +Net sales $324,204,000 $326,136,000 $243,391,000 $205,113,000 $163,036,000 +Cost of sales 198,185,000 199,453,000 143,518,000 115,495,000 94,536,000 +Gross profit 126,019,000 126,683,000 99,873,000 89,618,000 68,500,000 +Commissions and licensing fee 7,894,000 6,603,000 5,911,000 4,847,000 3,367,000 +Operating expenses (100,287,000) (100,074,000) (79,472,000) (68,833,000) (52,946,000) +Cost of loss mitigation coverage (6,950,000) +Income from operations 33,626,000 33,212,000 19,362,000 25,632,000 18,921,000 +Interest income 1,611,000 1,166,000 1,344,000 1,744,000 909,000 +Interest expense (54,000) (16,000) (66,000) (102,000) (90,000) +Gain on sale of marketable +securities 136,000 66,000 71,000 230,000 +Income before provision for +income taxes 35,319,000 34,428,000 20,711,000 27,504,000 19,740,000 +Provision for income taxes 14,865,000 14,587,000 8,595,000 11,461,000 8,274,000 +Net Income 20,454,000 19,841,000 12,116,000 16,043,000 11,466,000 +Basic income per share $ 1.58 $ 1.58 $ 1.04 $ 1.42 $ 1.06 +Diluted income per share $ 1.45 $ 1.45 $ 0.94 $ 1.26 $ 0.92 +Basic weighted average common +shares outstanding 12,985,265 12,594,861 11,617,862 11,310,130 10,831,250 +Effect of potential common shares +from exercise of options and +warrants 1,153,246 1,115,018 1,330,002 1,387,244 1,634,102 +Diluted weighted average common +shares outstanding 14,138,511 13,709,879 12,947,864 12,697,374 12,465,352 +BALANCE SHEET DATA +Total assets 177,870,000 150,500,000 121,862,000 91,733,000 78,135,000 +Working capital 105,140,000 86,461,000 82,633,000 57,207,000 48,076,000 +Noncurrent liabilities 1,828,000 1,532,000 1,313,000 1,130,000 980,000 +Stockholders' equity 159,187,000 130,075,000 102,360,000 76,566,000 62,435,000 +-12- +ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND +RESULTS OF OPERATIONS +The following discussion of the Company's financial condition and results +of operations should be read in conjunction with the Financial Statements and +Notes thereto appearing elsewhere in this document. +Statements in this "Management's Discussion and Analysis of Financial +Condition and Results of Operations" and elsewhere in this document as well as +statements made in press releases and oral statements that may be made by the +Company or by officers, directors or employees of the Company acting on the +Company's behalf that are not statements of historical or current fact +constitute "forward-looking statements" within the meaning of the Private +Securities Litigation Reform Act of 1995. Such forward-looking statements +involve known and unknown risks, uncertainties and other unknown factors that +could cause the actual results of the Company to be materially different from +the historical results or from any future results expressed or implied by such +forward-looking statements. In addition to statements which explicitly describe +such risks and uncertainties, readers are urged to consider statements labeled +with the terms "believes", "belief", "expects", "intends", "anticipates" or +"plans" to be uncertain forward-looking statements. The forward-looking +statements contained herein are also subject generally to other risks and +uncertainties that are described from time to time in the Company's reports and +registration statements filed with the Securities and Exchange Commission. +The following table sets forth information on operations for the periods +indicated: +Selected Financial Information +------------------------------ +Year Ended +---------- +December 31 +----------- +($ in thousands) +2003 2002 2001 +--------------- --------------- --------------- +Consolidated: +------------- +Net Sales $324,204 100% $326,136 100% $243,391 100% +Cost of Sales 198,185 61 199,453 61 143,518 59 +Gross Profit 126,019 39 126,683 39 99,873 41 +Other Operating Income 7,894 2 6,603 2 5,911 3 +Operating Expenses 100,287 31 100,074 31 79,472 33 +Cost of Loss Mitigation Coverage -- -- -- -- 6,950 3 +Income from Operations 33,626 10 33,212 10 19,362 8 +Interest and Other Income Net 1,693 1 1,216 1 1,349 1 +Income Before Income Taxes 35,319 11 34,428 11 20,711 9 +Net Income 20,454 6 19,841 6 12,116 5 +-13- +Selected Financial Information +------------------------------ +Year Ended +---------- +December 31 +----------- +($ in thousands) +2003 2002 2001 +---------------- ---------------- ---------------- +By Segment +WHOLESALE DIVISIONS: +-------------------- +Steven Madden, Ltd. (Madden Womens): +------------------------------------ +Net Sales $ 109,285 100% $ 108,577 100% $ 92,413 100% +Cost of Sales 77,313 71 75,080 69 60,052 65 +Gross Profit 31,972 29 33,497 31 32,361 35 +Other Operating Income 2,827 3 1,736 2 1,462 2 +Operating Expenses 27,630 25 27,714 26 24,929 27 +Cost of Loss Mitigation Coverage -- -- -- -- 6,950 8 +Income from Operations 7,169 7 7,519 7 1,944 2 +l.e.i. Footwear: +---------------- +Net Sales $ 60,623 100% $ 55,665 100% $ 42,592 100% +Cost of sales 38,016 63 35,368 64 26,859 63 +Gross Profit 22,607 37 20,297 36 15,733 37 +Operating Expenses 13,658 22 14,165 25 9,833 23 +Income from Operations 8,949 15 6,132 11 5,900 14 +Madden Mens: +------------ +Net Sales $ 34,881 100% $ 45,153 100% $ 10,461 100% +Cost of sales 22,803 65 29,022 64 6,737 64 +Gross Profit 12,078 35 16,131 36 3,724 36 +Operating Expenses 8,277 24 10,330 23 3,340 32 +Income from Operations 3,801 11 5,801 13 384 4 +Candie's Footwear: +------------------ +Net Sales $ 938 100% -- -- -- -- +Cost of sales 532 57 -- -- -- -- +Gross Profit 406 43 -- -- -- -- +Operating Expenses 748 80 -- -- -- -- +Loss from Operations (342) (37) -- -- -- -- +Diva Acquisition Corp. (Steven): +-------------------------------- +Net Sales $ 12,519 100% $ 11,194 100% $ 7,454 100% +Cost of sales 8,031 64 8,117 73 5,384 72 +Gross Profit 4,488 36 3,077 27 2,070 28 +Operating Expenses 3,360 27 2,645 23 1,796 24 +Income from Operations 1,128 9 432 4 274 4 +Stevies Inc.: +------------- +Net Sales $ 10,120 100% $ 13,664 100% $ 10,984 100% +Cost of sales 6,611 65 8,777 64 7,014 64 +Gross Profit 3,509 35 4,887 36 3,970 36 +Other Operating Income 11 0 97 1 249 2 +Operating Expenses 2,262 22 3,205 24 2,626 24 +Income from Operations 1,258 13 1,779 13 1,593 14 +-14- +Selected Financial Information +------------------------------ +Year Ended +---------- +December 31 +----------- +($ in thousands) +2003 2002 2001 +--------------- --------------- --------------- +By Segment (Continued) +WHOLESALE DIVISIONS (Continued) +------------------------------- +Unionbay Men's Footwear: +------------------------ +Net Sales $ 320 100% -- -- -- -- +Cost of Sales 213 67 -- -- -- -- +Gross Profit 107 33 -- -- -- -- +Operating Expenses 481 150 -- -- -- -- +Loss from Operations (374) (117) -- -- -- -- +STEVEN MADDEN RETAIL INC.: +-------------------------- +Net Sales $ 95,518 100% $ 91,883 100% $ 79,487 100% +Cost of Sales 44,666 47 43,089 47 37,472 47 +Gross Profit 50,852 53 48,794 53 42,015 53 +Operating Expenses 41,719 44 39,793 43 34,992 44 +Income from Operations 9,133 9 9,001 10 7,023 9 +Number of Stores 83 80 73 +ADESSO MADDEN INC.: +------------------- +(FIRST COST) +Other Operating Revenue $ 5,056 100% $ 4,770 100% $ 4,200 100% +Operating Expenses 2,152 43 2,222 47 1,956 47 +Income from Operations 2,904 57 2,548 53 2,244 53 +RESULTS OF OPERATIONS +($ in thousands) +Year Ended December 31, 2003 vs. Year Ended December 31, 2002 +Consolidated: +------------- +Total net sales for the year ended December 31, 2003 decreased to $324,204 +from $326,136 for the year ended December 31, 2002. The decrease was primarily +due to a decline in net sales from the Madden Men's and the Stevies, Inc. +Wholesale Divisions and the sustained promotional environment. The Company +maintained a substantial portion of the sales and market share gains that it +achieved in the prior year. During the year 2002, the Company generated a 34% +growth in total net sales over the previous year. Gross profit as a percentage +of sales remained the same as last year at 39%. +Operating expenses remained virtually unchanged ($100,287 in 2003 as +compared to $100,074 in 2002). Total operating expenses as a percentage of sales +remained at 31% in 2003, the same as 2002. The increase in dollars resulted from +the Company's opening of six additional retail stores and costs associated with +the addition of +-15- +Candie's and Unionbay Wholesale Divisions as well as an increase in licensing +fees paid by the Company. These increases were partially offset by various cost +reductions. +Income from operations for 2003 was $33,626, which represents an increase +of $414 or 1% from $33,212 in 2002. Net income increased by 3% to $20,454 in +2003 from $19,841 in 2002. The increase in net income primarily resulted from +the increase in interest and other income. +Wholesale Divisions: +-------------------- +Steven Madden Ltd. (Madden Womens, l.e.i., Madden Mens and Candie's +Footwear): +Sales from the Madden Womens Wholesale Division ("Madden Womens") accounted +for $109,285 or 34%, and $108,577 or 33%, of total sales in 2003 and 2002, +respectively. The increase in sales was driven by first quarter sales of key +styles including the Hi-Jo boot and wood bottom sandals. Gross profit as a +percentage of sales decreased to 29% in 2003 from 31% in 2002 primarily due to +the fourth quarter closeout of slower moving styles and the support to our +wholesale customers' initiatives to clear products at retail. Operating expenses +decreased to $27,630 in 2003 from $27,714 in 2002. Income from operations for +Madden Womens was $7,169 in 2003 compared to $7,519 in 2002. +Sales from the l.e.i. Footwear Wholesale Division ("l.e.i.") accounted for +$60,623 or 19%, and $55,665 or 17%, of total sales in 2003 and 2002, +respectively. The increase in sales was principally due to additional doors with +retailers, such as Kohl's and the Saks Group. Gross profit as a percentage of +sales increased to 37% in 2003 from 36% in 2002 primarily due to changes in +product mix and improved inventory management. Operating expenses decreased to +$13,658 in 2003 from $14,165 in 2002 due to the Company successfully leveraging +its infrastructure while continuing to grow its business. Income from operations +for l.e.i. was $8,949 in 2003 compared to $6,132 in 2002. +Sales from the Madden Mens Wholesale Division ("Madden Mens") accounted for +$34,881 or 11%, and $45,153 or 14%, of total sales in 2003 and 2002, +respectively. The sales decrease resulted from two primary factors. First, the +downturn in sell-throughs at retail in the young men's fashion casual and sports +casual business created substantial inventory and margin challenges. Second, +there was a strong downturn in the casual business, the largest category of +Madden Mens, as consumer demand and trends shifted more toward dressy and dress +casual classifications. Gross profit as a percentage of sales decreased to 35% +in 2003 from 36% in 2002 primarily due to an increase in markdown allowances +caused by higher levels of promotional activities at retail. Operating expenses +decreased to $8,277 in 2003 from $10,330 in 2002, due to decreases in selling +and related expenses. Income from operations for Madden Mens was $3,801 in 2003 +compared to $5,801 in 2002. +Candie's Footwear, which began shipping for the first time in the fourth +quarter of 2003, generated net sales of $938. The line was well received by both +retailers and consumers and the Company anticipates that the brand will continue +to infiltrate the market place during 2004. +Diva Acquisition Corp. ("Steven"): +Sales from Steven accounted for $12,519 or 4%, and $11,194 or 3%, of total +sales in 2003 and 2002, respectively. The increase in sales was principally due +to the addition of new retail doors, including Dillards and Macy's West. Gross +profit as a percentage of sales increased to 36% in 2003 from 27% in 2002, +primarily the result of cost effective sourcing and improved inventory +management. Operating expenses increased to $3,360 in 2003 from $2,645 in 2002 +due to increases in selling, designing, marketing and advertising expenses. +Income from operations for Steven was $1,128 in 2003 compared to $432 in 2002. +Stevies Inc. ("Stevies"): +Sales from Stevies accounted for $10,120 or 3%, and $13,664 or 4%, of total +sales in 2003 and 2002, respectively. The decrease in sales was due to +diminished reorder demand. Also, the decrease in sales was partly anticipated +when Meldisco, the lease operator of the Federated Department Store children's +departments and a division of Footstar, experienced temporary credit issues +relating to its K-Mart business. This led to shipping delays and some +cancellations. Gross profit as a percentage of sales decreased to 35% in 2003 +from 36% in 2002, +-16- +primarily due to an increase in promotional activity. Operating expenses +decreased to $2,262 in 2003 from $3,205 in 2002 due to decreases in selling and +selling-related expenses. Income from operations for Stevies was $1,258 in 2003 +compared to $1,779 in 2002. +Unionbay Men's Footwear ("Unionbay"): +Unionbay Men's Footwear, the Company's new license generated net sales of +$320 in the second half of 2003. The product placed consists primarily of test +quantities. +Retail Division: +---------------- +Sales from the Retail Division accounted for $95,518 or 29% and $91,883 or +28% of total sales in 2003 and 2002, respectively. The increase in sales was due +to the increase in number of Steve Madden retail stores. During 2003, the +Company opened six (6) new retail stores and closed three (3) of its +under-performing stores. As of December 31, 2003, there were 83 retail stores +compared to 80 retail stores as of December 31, 2002. Comparable store sales for +the year ended December 31, 2003 decreased 4% over the same period of 2002. This +decrease in sales was partially caused by the popularity of sneakers. These +offerings were available at $49.99 and below, pressuring the higher priced +casual closed shoe category. Gross profit as a percentage of sales remained at +53% in 2003, the same as in 2002. Operating expenses for the Retail Division +were $41,719 in 2003 and $39,793 in 2002. This increase was due to higher costs +associated with the opening of the six (6) additional stores during 2003. Income +from operations for the Retail Division was $9,133 in 2003 compared to $9,001 in +2002. +Adesso-Madden Division: +----------------------- +Adesso-Madden, Inc. generated commission revenues of $5,056 for the year +ended December 31, 2003, which represents a 6% increase over commission revenues +of $4,770 for the same period in 2002. This increase was primarily the result of +growth in discount retail accounts. Income from operations for Adesso-Madden was +$2,904 in 2003 compared to $2,548 in 2002. +Year Ended December 31, 2002 vs. Year Ended December 31, 2001 +Consolidated: +------------- +Sales for the year ended December 31, 2002 were $326,136 or 34% higher than +the $243,391 for the year ended December 31, 2001. The increase in sales was due +in part to a $34,692 increase in sales from Madden Mens, double-digit percentage +gains in each of our other Wholesale Divisions and sales gains of $12,396 or 16% +in our Retail Division. Sales gains were attributable to greater acceptance of +the Company's product offerings and to an increase in the Company's brand +recognition as well as the Company's opening of ten additional retail stores. +Consolidated gross profit as a percentage of sales decreased to 39% in 2002 +from 41% in 2001. The decrease was primarily due to sluggish business +conditions, which required increased markdowns, selling and advertising +allowances to facilitate sales in 2002 vs. 2001. +Total operating expenses increased to $100,074 in 2002 from $79,472 in +2001. Such increase resulted from expenses related to the first full year of +operations of Madden Mens, growth in other segments of business and provision +for management incentives. Advertising and marketing related expenses increased +to $7,451 in 2002 from $6,596 in 2001 because of the Company's increased focus +in this area. Selling, design and licensing expenses also increased to $18,346 +in 2002 from $12,499 in 2001 because of overall growth in sales and the +Company's concentration in its design and licensing areas. Additionally, +remaining operating expenses increased to $20,007 in 2002 from $16,845 primarily +because the Company opened 10 additional retail stores during 2002. Also, total +legal expenses in 2002 increased to $2,650 from $922 in 2001 because of +incremental legal and defense costs. +Income from operations for 2002 was $33,212, which represents an increase +of $13,850 or 72% over income from operations of $19,362 in 2001. Net income +increased by 64% to $19,841 in 2002 from $12,116 in 2001. The increase in income +resulted from the growth in sales and absorption of overhead by the growth in +business. Also contributing to the increase in net income was the fact that in +2001, the Company had a non-recurring charge in the amount of $6,950 in +connection with the purchase of loss mitigation insurance coverage. +-17- +Wholesale Divisions: +-------------------- +Steven Madden Ltd. (Madden Womens, l.e.i. and Madden Mens): +Sales from Madden Womens accounted for $108,577 or 33%, and $92,413 or 38%, +of total sales in 2002 and 2001, respectively. The increase in sales was driven +by the sales of key styles including euro casuals, open stock dress sandals and +classic platform round toe boots. Gross profit as a percentage of sales +decreased to 31% in 2002 from 35% in 2001 primarily due to earlier action by the +division to sell off slow moving styles to create open-to-buy for new best +sellers. In addition higher markdowns were taken by the division due to the +general softness in the economy. Operating expenses increased to $27,714 in 2002 +from $24,929 in 2001 due to increases in employee incentives and performance +related expenses. Additionally, selling and designing expenses increased due to +an increase in sales in 2002. Income from operations for Madden Womens was +$7,519 in 2002 compared to $1,944 in 2001. Income from operations in 2001 +included a pretax charge of $6,950 in connection with the purchase of a loss +mitigation policy. +Sales from l.e.i. accounted for $55,665 or 17%, and $42,592 or 17%, of +total sales in 2002 and 2001, respectively. The increase in sales was +principally due to the addition of new accounts with retailers including The Bon +Marche, Dayton Hudson, Stage Stores and Foot Action and higher sales of key +styles such as euro casual and lug bottom casuals. Gross profit as a percentage +of sales decreased to 36% in 2002 from 37% in 2001 primarily due to an increase +in markdown allowances caused by higher levels of promotional activities at +retail and general softness in the economy in the year 2002. Operating expenses +increased to $14,165 in 2002 from $9,833 in 2001 due to increased sales +commission, freight out and licensing costs as well as employee incentives and +performance related expenses. Income from operations for l.e.i. was $6,132 in +2002 compared to $5,900 in 2001. +Sales from Madden Mens, which commenced shipping in the first quarter of +2001, accounted for $45,153 or 14%, and $10,461 or 4%, of total sales in 2002 +and 2001, respectively. The sales increase resulted from doubling the number of +Madden Mens doors and wider acceptance of Madden Mens products throughout the +department store distribution channels. Sales were driven by key styles +including euro casual and the sport-active look. Gross profit as a percentage of +sales remained at 36% in 2002, the same as 2001. Operating expenses increased to +$10,330 in 2002 from $3,340 in 2001 due to increases in payroll and other +payroll-related expenses, which were due to growth in the business, and the fact +that year 2002 was the first full year of operation for this product line. +Additionally, selling and designing expenses increased due to the increase in +sales in 2002. Madden Mens income from operations increased to $5,801 in 2002 +compared to $384 in 2001. +Diva Acquisition Corp. ("Diva"): +Sales from Diva accounted for $11,194 or 3%, and $7,454 or 3%, of total +sales in 2002 and 2001, respectively. The increase in sales was achieved partly +through the third quarter inclusion of sales of products from the newly +introduced Steven brand (which had net sales of $860 in 2002) within the Diva +division. The increase in sales was also driven by key styles including pointy +toe dress shoes, sport active shoes, driving moccasins and mid-heel dress shoes. +Gross profit as a percentage of sales decreased to 27% in 2002 from 28% in 2001, +primarily due to an increase in markdown allowances, resulting from higher +levels of promotional activities caused by general softness in the economy in +2002. Operating expenses increased to $2,645 in 2002 from $1,796 in 2001 due to +increases in payroll and other payroll-related expenses due to the growth in the +business. Additionally, selling and related expenses increased due to the +increase in sales in 2002. Diva's income from operations increased to $432 in +2002 compared to $274 in 2001. +Stevies Inc. +Sales from Stevies accounted for $13,664 or 4%, and $10,984 or 5%, of total +sales in 2002 and 2001, respectively. The increase in sales was driven by the +addition of new accounts with retailers including Meldisco children's +departments, Zutopia, and the Wet Seals' children's division. This increase in +sales was also due to the growth in accounts such as Limited Too, Journey's +Kidz, Nordstrom and Filenes. Gross profit as a percentage of sales remained at +36% in 2002 same as 2001. Operating expenses increased to $3,205 in 2002 from +$2,626 in 2001 due to increases in payroll and other payroll-related expenses. +Additionally, selling and related expenses increased due to an increase in sales +in the current period. Stevies income from operations increased to $1,779 in +2002 compared to $1,593 in 2001. +-18- +Retail Division: +---------------- +Sales from the Retail Division accounted for $91,883 or 28% and $79,487 or +33% of total sales in 2002 and 2001, respectively. This increase in sales was +due to the increase in the number of Steve Madden retail stores as well as an +increase in comparable store sales. During 2002, the Company opened ten (10) new +stores and closed three (3) of its low performing stores. As of December 31, +2002, there were 80 retail stores compared to 73 stores as of December 31, 2001. +Comparable store sales for the year ended December 31, 2002 increased 6% over +such sales in 2001. This increase was achieved through the early delivery of +fresh products to the Company's stores and the prompt replenishment of inventory +in season. Additionally the increase in sales was driven by key styles including +women's dress and casual shoes as well as an increase in the sale of men's +footwear in the Company's retail stores. Gross profit as a percentage of sales +remained at 53% in 2002, the same as 2001. Operating expenses for the Retail +Division increased to $39,793 or 43% of sales in 2002 from $34,992 or 44% of +sales in 2001. This increase primarily resulted from the addition of new stores. +Income from operations for the Retail Division was $9,001 in 2002 compared to +$7,023 in 2001. +Adesso-Madden Division: +----------------------- +Adesso-Madden, Inc. generated commission revenues of $4,770 for the year +ended December 31, 2002, which represents a 14% increase over commission +revenues of $4,200 in 2001. This increase was primarily due to the growth in +accounts such as Wal-Mart, Target, JC Penney and Mervyn's and the addition of +children's products to the assortment mix. Operating expenses increased to +$2,222 in 2002 from $1,956 in 2001 due to increases in payroll and other +payroll-related expenses. Income from operations for Adesso-Madden was $2,548 in +2002 compared to $2,244 in 2001. +LICENSE AGREEMENTS +Revenues from licensing increased to $2,838 in 2003 from $1,833 in 2002. +Revenue from the license product increased resulting in higher royalty income. +As of December 31, 2003, the Company had six license partners covering six +product categories of its Steve Madden brand. The product categories include +handbags, hosiery, sunglasses, eyewear, belts and outerwear. +LIQUIDITY AND CAPITAL RESOURCES +The Company had working capital of $105,140 at December 31, 2003 compared +to $86,461 of working capital at December 31, 2002, representing an increase of +$18,679. The Company's 2003 net income was the primary contributor to the +increase in working capital. The Company believes that based upon its financial +position and available cash and marketable securities, it will meet all of its +financial commitments and operating needs for at least the next twelve months. +Under the terms of a factoring agreement with Capital Factors, Inc., the +Company is eligible to draw down 80% of its invoiced receivables at an interest +rate of two points below the Prime Rate (as defined in such agreement). The +agreement with Capital Factors expires December 31, 2004. Capital Factors +maintains a lien on all of the Company's inventory and receivables and assumes +the credit risk for all assigned accounts approved by them. Under the agreement, +the Company has a credit line of $15 million dollars. The Company did not use +any portion of the credit line during 2003. +As of December 31, 2003 the Company had invested approximately $32,659 in +marketable securities consisting of corporate bonds, U.S. Treasury notes and +government asset-backed securities. +OPERATING ACTIVITIES +During the year ended December 31, 2003, net cash provided by operating +activities was $7,903. Uses of cash was caused primarily by an increase in +factored accounts receivable of $6,583, an increase in prepaid expenses, prepaid +taxes, deposits and others of $5,535 and a decrease in accrued incentive +compensation of $2,234. In addition, inventory increased by $4,413 principally +due to the early receipt of spring 2004 merchandise. Sources of cash were +provided principally by net income of $20,454. +-19- +At December 31, 2003, the Company had un-negotiated open letters of credit +for the purchase of imported merchandise of approximately $7,458. +The Company has an employment agreement with Steve Madden, its Creative and +Design Chief, which provides for an annual salary of $700,000 through June 30, +2011. The agreement also provides for an annual performance bonus, an annual +option grant at exercise prices equal to the market price on the date of grant +and a non-accountable expense allowance. +The Company has employment agreements with certain executives, which +provide for the payment of compensation aggregating approximately $1,818 in +2004, $1,060 in 2005 and $234 in 2006. In addition, such employment agreements +provide for incentive compensation based on various performance criteria as well +as other benefits. +Significant portions of the Company's products are produced at overseas +locations, the majority of which are located in Brazil, China, Italy and Spain. +The Company has not entered into any long-term manufacturing or supply contracts +with any of these foreign companies. The Company believes that a sufficient +number of alternative sources exist outside of the United States for the +manufacture of its products. In addition, the Company currently makes +approximately ninety-seven percent (97%) of its purchases in U.S. dollars. +INVESTING ACTIVITIES +During the year ended December 31, 2003, the Company invested $47,059 in +marketable securities and received $36,785 from maturities and sales of +securities. In addition, the Company incurred capital expenditures of $6,061 +principally for leasehold improvements to its corporate office space, the +addition of six (6) new stores and computer systems upgrades. +FINANCING ACTIVITIES +During the year ended December 31, 2003, the Company received $4,805 in +connection with the exercise of stock options. +INFLATION +The Company does not believe that the relatively low rates of inflation +experienced over the last few years in the United States, where it primarily +competes, have had a significant effect on sales, expenses or profitability. +CONTRACTUAL OBLIGATIONS +The Company's contractual obligations as of December 31, 2003 were as +follows: +------------------------------------------------------ +Payment due by period (in thousands) +----------------------------------------------------------------------------------------------------------------- +Less than 1-3 3-5 More than +Contractual Obligations Total 1 year years years 5 years +----------------------------------------------------------------------------------------------------------------- +Long-Term Debt Obligations $ 0 $ 0 $ 0 $ 0 $ 0 +----------------------------------------------------------------------------------------------------------------- +Capital Lease Obligations 1 1 0 0 0 +----------------------------------------------------------------------------------------------------------------- +Operating Lease Obligations 61,259 9,386 18,406 16,015 17,452 +----------------------------------------------------------------------------------------------------------------- +Purchase Obligations 7,458 7,458 0 0 0 +----------------------------------------------------------------------------------------------------------------- +Other Long-Term Liabilities (future minimum royalty payments) 23,030 240 9,490 8,750 4,550 +----------------------------------------------------------------------------------------------------------------- +Total $91,748 $17,085 $27,896 $24,765 $22,002 +----------------------------------------------------------------------------------------------------------------- +-20- +OTHER CONSIDERATIONS +Fashion Industry Risks: The success of the Company will depend in +significant part upon its ability to anticipate and respond to product and +fashion trends as well as to anticipate, gauge and react to changing consumer +demands in a timely manner. There can be no assurance that the Company's +products will correspond to the changes in taste and demand or that the Company +will be able to successfully market products that respond to such trends. If the +Company misjudges the market for its products, it may be faced with significant +excess inventories for some products and missed opportunities with others. In +addition, misjudgments in merchandise selection could adversely affect the +Company's image with its customers resulting in lower sales and increased +markdown allowances for customers which could have a material adverse effect on +the Company's business, financial condition and results of operations. +The industry in which the Company operates is cyclical, with purchases +tending to decline during recessionary periods when disposable income is low. +Purchases of contemporary shoes and accessories tend to decline during +recessionary periods and also may decline at other times. While the Company has +fared well in recent years in a difficult retail environment, there can be no +assurance that the Company will be able to return to its historical rate of +growth in revenues and earnings, or remain profitable in the future. A recession +in the national or regional economies or uncertainties regarding future economic +prospects, among other things, could affect consumer-spending habits and have a +material adverse effect on the Company's business, financial condition and +results of operations. +In recent years, the retail industry has experienced consolidation and +other ownership changes. In the future, retailers in the United States and in +foreign markets may consolidate, undergo restructurings or reorganizations, or +realign their affiliations, any of which could decrease the number of stores +that carry the Company's products or increase the ownership concentration within +the retail industry. While such changes in the retail industry to date have not +had a material adverse effect on the Company's business or financial condition, +there can be no assurance as to the future effect of any such changes. +Inventory Management: The fashion-oriented nature of the Company's products +and the rapid changes in customer preferences leave the Company vulnerable to an +increased risk of inventory obsolescence. Thus, the Company's ability to manage +its inventories properly is an important factor in its operations. Inventory +shortages can adversely affect the timing of shipments to customers and diminish +sales and brand loyalty. Conversely, excess inventories can result in lower +gross margins due to the excessive discounts and markdowns that might be +necessary to reduce inventory levels. The inability of the Company to +effectively manage its inventory would have a material adverse effect on the +Company's business, financial condition and results of operations. +Dependence Upon Customers and Risks Related to Extending Credit to +Customers: The Company's customers consist principally of department stores and +specialty stores, including shoe boutiques. Certain of the Company's department +store customers, including some under common ownership, account for significant +portions of the Company's wholesale business. +The Company generally enters into a number of purchase order commitments +with its customers for each of its lines every season and does not enter into +long-term agreements with any of its customers. Therefore, a decision by a +significant customer of the Company, whether motivated by competitive +conditions, financial difficulties or otherwise, to decrease the amount of +merchandise purchased from the Company or to change its manner of doing business +could have a material adverse effect on the Company's business, financial +condition and results of operations. The Company sells its products primarily to +retail stores across the United States and extends credit based on an evaluation +of each customer's financial condition, usually without collateral. While +various retailers, including some of the Company's customers, have experienced +financial difficulties in the past few years which increased the risk of +extending credit to such retailers, the Company's losses due to bad debts have +been limited. Pursuant to the Factoring Agreement between Capital Factors and +the Company, Capital Factors currently assumes the credit risk related to +approximately 95% of the Company's accounts receivables. However, financial +difficulties of a customer could cause the Company to curtail business with such +customer or require the Company to assume more credit risk relating to such +customer's account receivable. +Impact of Foreign Manufacturers: Substantial portions of the Company's +products are currently sourced outside the United States through arrangements +with a number of foreign manufacturers in four different countries. +-21- +During the year ended December 31, 2003, approximately 85% of the Company's +products were purchased from sources outside the United States, primarily from +China, Brazil, Italy and Spain. +Risks inherent in foreign operations include work stoppages, transportation +delays and interruptions, changes in social, political and economic conditions +which could result in the disruption of trade from the countries in which the +Company's manufacturers or suppliers are located, the imposition of additional +regulations relating to imports, the imposition of additional duties, taxes and +other charges on imports, significant fluctuations of the value of the dollar +against foreign currencies, or restrictions on the transfer of funds, any of +which could have a material adverse effect on the Company's business, financial +condition and results of operations. The Company does not believe that any such +economic or political condition will materially affect the Company's ability to +purchase products, since a variety of materials and alternative sources are +available. The Company cannot be certain, however, that it will be able to +identify such alternative sources without delay (if ever) or without greater +cost to the Company. The Company's inability to identify and secure alternative +sources of supply in this situation would have a material adverse effect on the +Company's business, financial condition and results of operations. +The Company's imported products are also subject to United States customs +duties. The United States and the countries in which the Company's products are +produced or sold, from time to time, impose new quotas, duties, tariffs, or +other restrictions, or may adversely adjust prevailing quota, duty or tariff +levels, any of which could have a material adverse effect on the Company's +business, financial condition and results of operations. +Possible Adverse Impact of Unaffiliated Manufacturers' Inability to +Manufacture in a Timely Manner, Meet Quality Standards or to Use Acceptable +Labor Practices: As is common in the footwear industry, the Company contracts +for the manufacture of a majority of its products to its specifications through +foreign manufacturers. The Company does not own or operate any manufacturing +facilities and is therefore dependent upon independent third parties for the +manufacture of all of its products. The Company's products are manufactured to +its specifications by both domestic and international manufacturers. The +inability of a manufacturer to ship orders of the Company's products in a timely +manner or to meet the Company's quality standards could cause the Company to +miss the delivery date requirements of its customers for those items, which +could result in cancellation of orders, refusal to accept deliveries or a +reduction in purchase prices, any of which could have a material adverse effect +on the Company's business, financial condition and results of operations. +Although the Company enters into a number of purchase order commitments +each season specifying a time frame for delivery, method of payment, design and +quality specifications and other standard industry provisions, the Company does +not have long-term contracts with any manufacturer. As a consequence, any of +these manufacturing relationships may be terminated, by either party, at any +time. Although the Company believes that other facilities are available for the +manufacture of the Company's products, both within and outside of the United +States, there can be no assurance that such facilities would be available to the +Company on an immediate basis, if at all, or that the costs charged to the +Company by such manufacturers will not be greater than those presently paid. +The Company requires its licensing partners and independent manufacturers +to operate in compliance with applicable laws and regulations. While the Company +promotes ethical business practices and the Company's staff periodically visits +and monitors the operations of its independent manufacturers, the Company does +not control such manufacturers or their labor practices. The violation of labor +or other laws by an independent manufacturer of the Company or by one of the +Company's licensing partners, or the divergence of an independent manufacturer's +or licensing partner's labor practices from those generally accepted as ethical +in the United States, could have a material adverse effect on the Company's +business, financial condition and results of operations. +Intense Industry Competition: The fashion footwear industry is highly +competitive and barriers to entry are low. The Company's competitors include +specialty companies as well as companies with diversified product lines. The +recent market growth in the sales of fashionable footwear has encouraged the +entry of many new competitors and increased competition from established +companies. Most of these competitors, including Diesel, Kenneth Cole, Nine West, +DKNY, Skechers, Nike and Guess, may have significantly greater financial and +other resources than the Company and there can be no assurance that the Company +will be able to compete successfully with other fashion footwear companies. +Increased competition could result in pricing pressures, increased marketing +expenditures and loss of market share, and could have a material adverse effect +on the Company's business, financial condition and results of operations. The +Company believes effective advertising and marketing, branding of the Steve +Madden name, fashionable styling, high quality and value are the most important +competitive factors and plans to continually +-22- +employ these elements as it develops its products. The Company's inability to +effectively advertise and market its products could have a material adverse +effect on the Company's business, financial condition and results of operations. +Expansion of Retail Business: The Company's continued growth depends to a +significant degree on further developing the Steve Madden(R), Stevies, Steven, +Steve Madden Mens, l.e.i.(R) , Unionbay(R) and Candie's(R) brands, creating new +product categories and businesses and operating Company-owned stores on a +profitable basis. During the year ended December 31, 2003 the Company opened six +(6) Steve Madden retail stores and has plans to open approximately eight to ten +(8-10) additional stores in the year 2004. The Company's recent and planned +expansion includes the opening of stores in new geographic markets as well as +strengthening existing markets. New markets have in the past presented, and will +continue to present, competitive and merchandising challenges that are different +from those faced by the Company in its existing markets. There can be no +assurance that the Company will be able to open new stores, and if opened, that +such new stores will be able to achieve sales and profitability levels +consistent with management's expectations. The Company's retail expansion is +dependent on a number of factors, including the Company's ability to locate and +obtain favorable store sites, the performance of the Company's wholesale and +retail operations, and the ability of the Company to manage such expansion and +hire and train personnel. Past comparable store sales results may not be +indicative of future results, and there can be no assurance that the Company's +comparable store sales results can be maintained or will increase in the future. +In addition, there can be no assurance that the Company's strategies to increase +other sources of revenue, which may include expansion of its licensing +activities, will be successful or that the Company's overall sales or +profitability will increase or not be adversely affected as a result of the +implementation of such retail strategies. +The Company's operations have increased and will continue to increase +demand on the Company's managerial, operational and administrative resources. +The Company has recently invested significant resources in, among other things, +its management information systems and hiring and training new personnel. +However, in order to manage currently anticipated levels of future demand, the +Company may be required to, among other things, expand its distribution +facilities, establish relationships with new manufacturers to produce its +products, and continue to expand and improve its financial, management and +operating systems. There can be no assurance that the Company will be able to +manage future growth effectively and a failure to do so could have a material +adverse effect on the Company's business, financial condition and results of +operations. +Seasonal and Quarterly Fluctuations: The Company's results may fluctuate +quarter to quarter as a result of the timing of holidays, weather, the timing of +larger shipments of footwear, market acceptance of the Company's products, the +mix, pricing and presentation of the products offered and sold, the hiring and +training of additional personnel, inventory write downs, the cost of materials, +the product mix between wholesale and licensing businesses, the incurrence of +other operating costs and factors beyond the Company's control, such as general +economic conditions and actions of competitors. In addition, the Company expects +that its sales and operating results may be significantly impacted by the +opening of new retail stores and the introduction of new products. Accordingly, +the results of operations in any quarter will not necessarily be indicative of +the results that may be achieved for a full fiscal year or any future quarter. +Trademark and Service Mark Protection: The Company believes that its +trademarks and service marks and other proprietary rights are important to its +success and its competitive position. Accordingly, the Company devotes +substantial resources to the establishment and protection of its trademarks on a +worldwide basis. Nevertheless, there can be no assurance that the actions taken +by the Company to establish and protect its trademarks and other proprietary +rights will be adequate to prevent imitation of its products by others or to +prevent others from seeking to block sales of the Company's products on the +basis that they violate the trademarks and proprietary rights of others. +Moreover, no assurance can be given that others will not assert rights in, or +ownership of, trademarks and other proprietary rights of the Company or that the +Company will be able to successfully resolve such conflicts. In addition, the +laws of certain foreign countries may not protect proprietary rights to the same +extent as do the laws of the United States. The failure of the Company to +establish and then protect such proprietary rights from unlawful and improper +utilization could have a material adverse effect on the Company's business, +financial condition and results of operations. +Foreign Currency Fluctuations: The Company generally purchases its products +in U.S. dollars. However, the Company sources substantially all of its products +overseas and, as such, the cost of these products may be affected by changes in +the value of the relevant currencies. Changes in currency exchange rates may +also affect the relative +-23- +prices at which the Company and foreign competitors sell their products in the +same market. There can be no assurance that foreign currency fluctuations will +not have a material adverse effect on the Company's business, financial +condition and results of operations. +Outstanding Options: As of March 4, 2004 the Company had outstanding +options to purchase an aggregate of approximately 2,274,475 shares of Common +Stock. Holders of such options are likely to exercise them when, in all +likelihood, the market price of the Company's stock is significantly higher than +the exercise price of the options. Further, while its options are outstanding, +they may adversely affect the terms on which the Company could obtain additional +capital, if required. +Economic and Political Risks: The present economic condition in the United +States and concern about uncertainties could significantly reduce the disposable +income available to the Company's customers for the purchase of our products. In +addition, current unstable political conditions, including the potential or +actual conflicts in Iraq, North Korea or elsewhere, or the continuation or +escalation of terrorism, could have an adverse effect on the Company's business, +financial condition and results of operations. +ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +The Company does not engage in the trading of market risk sensitive +instruments in the normal course of business. Financing arrangements for the +Company are subject to variable interest rates primarily based on the prime +rate. An analysis of the Company's credit agreement with Capital Factors, Inc. +can be found in Note C. "Due From Factor" to the Consolidated Financial +Statements included in the Company's Annual Report on Form 10-K for the fiscal +year ended December 31, 2003. On December 31, 2003 and December 31, 2002, there +were no direct borrowings outstanding under the credit agreement. +As of December 31, 2003, the Company had investments in marketable +securities valued at $32,659, which consists principally of federal and state +obligations. These obligations have various maturities through December 2008. +These investments are subject to interest rate risk and will decrease in value +if market interest rates increase. The Company currently has the ability to hold +these investments until maturity. Should there be a significant increase in +interest rates, the value of these investments would be negatively affected +unless they were held to maturity. In addition, any further decline in interest +rates would reduce the Company's interest income. +ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +See financial statements following Item 15 of this Annual Report on Form +10-K. +ITEM 9 CHANGES IN AND DISAGREEMENTs WITH ACCOUNTANTS ON ACCOUNTING +AND FINANCIAL DISCLOSURE +None. +ITEM 9A CONTROLS AND PROCEDURES +As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the +"Exchange Act"), the Company's management, including the Company's Chief +Executive Officer and Chief Financial Officer, has evaluated the effectiveness +of its disclosure controls and procedures as of the end of the fiscal year +covered by this annual report. Based on that evaluation, the Chief Executive +Officer and Chief Financial Officer have concluded that the Company's disclosure +controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) +were effective as of the end of the fiscal year covered by this annual report. +As required by Rule 13a-15(d) under the Exchange Act, the Company's management, +including the Company's Chief Executive Officer and Chief Financial Officer, has +evaluated the Company's internal controls over financial reporting to determine +whether any changes occurred during the fourth quarter of 2003 that have +materially affected, or are reasonably likely to materially affect, the +Company's internal control over financial reporting. Based on that evaluation, +there has been no such change during the fourth quarter of 2003. +-24- +PART III +ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT +The other information required to be furnished pursuant to this item will +be set forth in the Company's proxy statement for the 2004 Annual Meeting of +Stockholders, and is incorporated herein by reference. +ITEM 11 EXECUTIVE COMPENSATION +The information required to be furnished pursuant to this item will be set +forth in the Company's proxy statement for the 2004 Annual Meeting of +Stockholders, and is incorporated herein by reference. +ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT +AND RELATED STOCKHOLDER MATTERS +The information required to be furnished pursuant to this item will be set +forth in the Company's proxy statement for the 2004 Annual Meeting of +Stockholders, and is incorporated herein by reference. +ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS +The information required to be furnished pursuant to this item will be set +forth in the Company's proxy statement for the 2004 Annual Meeting of +Stockholders, and is incorporated herein by reference. +ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES +The information required to be furnished pursuant to this item will be set +forth in the Company's proxy statement for the 2004 Annual Meeting of +Stockholders, and is incorporated herein by reference. +PART IV +ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K +(a)(1) Financial Statements +The following consolidated financial statements of Steven Madden, Ltd. and +subsidiaries are included in Item 8: +-25- +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Contents +Page +---- +Consolidated Financial Statements +Independent auditors' report F-2 +Balance sheets as of December 31, 2003 and 2002 F-3 +Statements of income for the years ended December 31, 2003, 2002 +and 2001 F-4 +Statements of changes in stockholders' equity for the years +ended December 31, 2003, 2002 and 2001 F-5 +Statements of cash flows for the years ended December 31, +2003, 2002 and 2001 F-7 +Notes to financial statements F-8 +F-1 +INDEPENDENT AUDITORS' REPORT +To the Board of Directors and Stockholders +Steven Madden, Ltd. +New York, New York +We have audited the accompanying consolidated balance sheets of Steven Madden, +Ltd. and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the +related consolidated statements of income, changes in stockholders' equity and +cash flows for each of the years in the three-year period ended December 31, +2003. These financial statements are the responsibility of the Company's +management. Our responsibility is to express an opinion on these financial +statements based on our audits. +We conducted our audits in accordance with auditing standards generally accepted +in the United States of America. Those standards require that we plan and +perform the audits 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 enumerated above present fairly, in all +material respects, the consolidated financial position of Steven Madden, Ltd. +and subsidiaries as of December 31, 2003 and 2002, and the consolidated results +of their operations and their consolidated cash flows for each of the years in +the three-year period ended December 31, 2003 in conformity with accounting +principles generally accepted in the United States of America. +Eisner LLP +New York, New York +February 10, 2004 +F-2 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Balance Sheets +December 31, +------------------------------ +2003 2002 +------------- ------------- +ASSETS +Current assets: +Cash and cash equivalents $ 53,073,000 $ 56,713,000 +Accounts receivable - net of allowances of $452,000 and $497,000 4,281,000 3,039,000 +Due from factor - net of allowances of $1,926,000 and $1,718,000 28,748,000 22,373,000 +Inventories 23,858,000 19,445,000 +Marketable securities - available for sale 3,229,000 500,000 +Prepaid expenses and other current assets 2,844,000 1,651,000 +Prepaid taxes 4,270,000 +Deferred taxes 1,692,000 1,633,000 +------------- ------------- +Total current assets 121,995,000 105,354,000 +Property and equipment, net 18,391,000 17,073,000 +Deferred taxes 5,618,000 3,699,000 +Deposits and other 370,000 298,000 +Marketable securities - available for sale 29,430,000 22,010,000 +Cost in excess of fair value of net assets acquired - net of accumulated +amortization of $714,000 2,066,000 2,066,000 +------------- ------------- +$ 177,870,000 $ 150,500,000 +============= ============= +LIABILITIES +Current liabilities: +Capital lease obligations $ 1,000 $ 14,000 +Accounts payable 11,087,000 9,044,000 +Accrued expenses 5,300,000 7,134,000 +Accrued incentive compensation 467,000 2,701,000 +------------- ------------- +Total current liabilities 16,855,000 18,893,000 +Deferred rent 1,828,000 1,532,000 +------------- ------------- +18,683,000 20,425,000 +------------- ------------- +Commitments, contingencies and other +STOCKHOLDERS' EQUITY +Preferred stock - $.0001 par value, 5,000,000 shares authorized; none issued +Series A Junior Participating preferred stock - $.0001 par value, 60,000 +shares authorized; none issued +Common stock - $.0001 par value, 60,000,000 shares authorized, 14,459,109 +and 14,016,059 shares issued, 13,213,905 and 12,770,855 shares +outstanding at December 31, 2003 and 2002, respectively 1,000 1,000 +Additional paid-in capital 79,136,000 70,683,000 +Retained earnings 91,176,000 70,722,000 +Unearned compensation (3,008,000) (3,476,000) +Other comprehensive gain (loss): +Unrealized (loss) gain on marketable securities (net of taxes) (127,000) 136,000 +Treasury stock - 1,245,204 shares at cost (7,991,000) (7,991,000) +------------- ------------- +159,187,000 130,075,000 +------------- ------------- +$ 177,870,000 $ 150,500,000 +============= ============= +See notes to financial statements +F-3 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements of Income +Year Ended December 31, +----------------------------------------------- +2003 2002 2001 +------------- ------------- ------------- +Net sales: +Wholesale $ 228,686,000 $ 234,253,000 $ 163,904,000 +Retail 95,518,000 91,883,000 79,487,000 +------------- ------------- ------------- +324,204,000 326,136,000 243,391,000 +------------- ------------- ------------- +Cost of sales: +Wholesale 153,519,000 156,364,000 106,046,000 +Retail 44,666,000 43,089,000 37,472,000 +------------- ------------- ------------- +198,185,000 199,453,000 143,518,000 +------------- ------------- ------------- +Gross profit 126,019,000 126,683,000 99,873,000 +Commission and licensing fee income 7,894,000 6,603,000 5,911,000 +Operating expenses (100,287,000) (100,074,000) (79,472,000) +Cost of loss mitigation coverage (6,950,000) +------------- ------------- ------------- +Income before other income (expenses) and provision +for income taxes 33,626,000 33,212,000 19,362,000 +Other income (expenses): +Interest income 1,611,000 1,166,000 1,344,000 +Interest expense (54,000) (16,000) (66,000) +Gain on sale of marketable securities 136,000 66,000 71,000 +------------- ------------- ------------- +Income before provision for income taxes 35,319,000 34,428,000 20,711,000 +Provision for income taxes 14,865,000 14,587,000 8,595,000 +------------- ------------- ------------- +Net income $ 20,454,000 $ 19,841,000 $ 12,116,000 +============= ============= ============= +Basic income per share $ 1.58 $ 1.58 $ 1.04 +============= ============= ============= +Diluted income per share $ 1.45 $ 1.45 $ 0.94 +============= ============= ============= +Basic weighted average common shares outstanding 12,985,265 12,594,861 11,617,862 +Effect of dilutive securities - options 1,153,246 1,115,018 1,330,002 +------------- ------------- ------------- +Diluted weighted average common shares outstanding 14,138,511 13,709,879 12,947,864 +============= ============= ============= +See notes to financial statements +F-4 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements of Changes in Stockholders' Equity +Common Stock Additional +------------------------- Paid-in Retained Unearned +Shares Amount Capital Earnings Compensation +----------- ----------- ----------- ----------- ----------- +Balance - December 31, 2000 12,306,684 $ 1,000 $46,688,000 $38,765,000 $ (897,000) +Exercise of stock options 1,122,336 8,998,000 +Tax benefit from exercise of options 2,765,000 +Compensation in connection with +issuance of stock options 2,004,000 (810,000) +Compensation in connection with +issuance of restricted stock 10,000 188,000 +Net income 12,116,000 +Amortization of unearned compensation 533,000 +----------- ----------- ----------- ----------- ----------- +Balance - December 31, 2001 13,439,020 1,000 60,643,000 50,881,000 (1,174,000) +Exercise of stock options 567,039 4,364,000 +Tax benefit from exercise of options 1,146,000 +Deferred compensation in connection +with issuance of stock options and +restricted stock 3,930,000 (3,930,000) +Compensation in connection with +issuance of stock options 412,000 +Compensation in connection with +issuance of restricted stock 10,000 188,000 +Amortization of unearned compensation 1,628,000 +Unrealized holding gain on marketable +securities (net of taxes) +Net income 19,841,000 +Comprehensive income +----------- ----------- ----------- ----------- ----------- +Balance - December 31, 2002 14,016,059 1,000 70,683,000 70,722,000 (3,476,000) +Exercise of stock options 443,050 4,805,000 +Tax benefit from exercise of options 1,239,000 +Deferred compensation in connection +with issuance of stock options and +restricted stock 2,409,000 (2,409,000) +Amortization of unearned compensation 2,877,000 +Unrealized holding loss on marketable +securities (net of taxes of +$190,000) +Net income 20,454,000 +Comprehensive income +----------- ----------- ----------- ----------- ----------- +Balance - December 31, 2003 14,459,109 $ 1,000 $79,136,000 $91,176,000 $(3,008,000) +=========== =========== =========== =========== =========== +See notes to financial statements +F-5 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements of Changes in Stockholders' Equity (Continued) +Accumulated +Other Treasury Stock Total +Comprehensive ----------------------------- Stockholders' Comprehensive +Gain (Loss) Shares Amount Equity Income +------------- ------------- ------------- ------------- ------------- +Balance - December 31, 2000 1,245,204 $ (7,991,000) $ 76,566,000 +Exercise of stock options 8,998,000 +Tax benefit from exercise of options 2,765,000 +Compensation in connection with +issuance of stock options 1,194,000 +Compensation in connection with +issuance of restricted stock 188,000 +Net income 12,116,000 +Amortization of unearned compensation 533,000 +------------- ------------- ------------- ------------- ------------- +Balance - December 31, 2001 1,245,204 (7,991,000) 102,360,000 +Exercise of stock options 4,364,000 +Tax benefit from exercise of options 1,146,000 +Deferred compensation in connection +with issuance of stock options and +restricted stock 0 +Compensation in connection with +issuance of stock options 412,000 +Compensation in connection with +issuance of restricted stock 188,000 +Amortization of unearned compensation 1,628,000 +Unrealized holding gain on marketable +securities (net of taxes) $ 136,000 136,000 $ 136,000 +Net income 19,841,000 19,841,000 +------------- +Comprehensive income $ 19,977,000 +------------- ------------- ------------- ------------- ============= +Balance - December 31, 2002 136,000 1,245,204 (7,991,000) 130,075,000 +Exercise of stock options 4,805,000 +Tax benefit from exercise of options 1,239,000 +Deferred compensation in connection +with issuance of stock options and +restricted stock +Amortization of unearned compensation 2,877,000 +Unrealized holding loss on marketable +securities (net of taxes of $190,000) (263,000) (263,000) $ (263,000) +Net income 20,454,000 20,454,000 +------------- +Comprehensive income $ 20,191,000 +------------- ------------- ------------- ------------- ============= +Balance - December 31, 2003 $ (127,000) 1,245,204 $ (7,991,000) $ 159,187,000 +============= ============= ============= ============= +See notes to financial statements +F-6 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements of Cash Flows +Year Ended December 31, +-------------------------------------------- +2003 2002 2001 +------------ ------------ ------------ +Cash flows from operating activities: +Net income $ 20,454,000 $ 19,841,000 $ 12,116,000 +Adjustments to reconcile net income to net cash provided by +operating activities: +Equity-based compensation 2,877,000 2,228,000 1,915,000 +Depreciation and amortization 4,743,000 3,706,000 3,447,000 +Deferred taxes (1,978,000) (1,090,000) (480,000) +Tax benefit from exercise of options 1,239,000 1,146,000 2,765,000 +Provision for doubtful accounts and chargebacks 163,000 571,000 219,000 +Deferred rent expense 296,000 233,000 225,000 +Realized gain on sale of marketable securities (136,000) (66,000) (71,000) +Changes in: +Accounts receivable (1,196,000) (1,207,000) 862,000 +Due from factor (6,583,000) 79,000 (8,364,000) +Inventories (4,413,000) (3,627,000) 6,000 +Prepaid expenses, prepaid taxes, deposits and other assets (5,535,000) 7,046,000 (7,484,000) +Accounts payable and accrued expenses 206,000 (1,556,000) 4,054,000 +Accrued incentive compensation (2,234,000) 2,289,000 183,000 +------------ ------------ ------------ +Net cash provided by operating activities 7,903,000 29,593,000 9,393,000 +------------ ------------ ------------ +Cash flows from investing activities: +Purchase of property and equipment (6,061,000) (5,072,000) (3,415,000) +Purchases of marketable securities (47,059,000) (26,349,000) (54,000) +Maturity/sale of marketable securities 36,785,000 4,041,000 125,000 +------------ ------------ ------------ +Net cash used in investing activities (16,335,000) (27,380,000) (3,344,000) +------------ ------------ ------------ +Cash flows from financing activities: +Proceeds from exercise of stock options 4,805,000 4,364,000 8,998,000 +Payments of lease obligations (13,000) (43,000) (127,000) +------------ ------------ ------------ +Net cash provided by financing activities 4,792,000 4,321,000 8,871,000 +------------ ------------ ------------ +Net (decrease) increase in cash and cash equivalents (3,640,000) 6,534,000 14,920,000 +Cash and cash equivalents - beginning of year 56,713,000 50,179,000 35,259,000 +------------ ------------ ------------ +Cash and cash equivalents - end of year $ 53,073,000 $ 56,713,000 $ 50,179,000 +============ ============ ============ +Supplemental disclosures of cash flow information: +Cash paid during the year for: +Interest $ 54,000 $ 16,000 $ 66,000 +Income taxes $ 18,700,000 $ 6,522,000 $ 14,389,000 +See notes to financial statements +F-7 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2003 and 2002 +NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +[1] Organization: +Steven Madden, Ltd., a Delaware corporation, designs and sources women's, +girl's and men's shoes, for sale through its wholesale and retail +channels under the Steve Madden, Steven, Stevies, Madden Mens, Lei (under +license), Candie's (under license) and Unionbay (under license) brand +names. Revenue is generated predominately through the sale of the +Company's brand name merchandise and certain licensed products. At +December 31, 2003 and 2002, the Company operated 83 and 80 retail stores +(including its website as a store), respectively. Such revenue is subject +to seasonal fluctuations. See Note K for operating segment information. +[2] Principles of consolidation: +The consolidated financial statements include the accounts of Steven +Madden, Ltd. and its wholly owned subsidiaries Steven Madden Retail, +Inc., Diva Acquisition Corp., Adesso-Madden, Inc., Unionbay Men's +Footwear, Inc. and Stevies, Inc. (collectively referred to as the +"Company"). All significant intercompany balances and transactions have +been eliminated. +[3] Use of estimates: +The preparation of financial statements in conformity with accounting +principles generally accepted in the United States of America requires +management to make estimates and assumptions that affect the reported +amounts of assets and liabilities and disclosure of contingent assets and +liabilities at the date of the financial statements and the reported +amounts of revenue and expenses during the reporting period. Actual +results could differ from those estimates. +[4] Cash equivalents: +Cash equivalents at December 31, 2003 and 2002, amounted to approximately +$44,829,000 and $46,024,000, respectively, and consist of money market +accounts, certificates of deposit and commercial paper. The Company +considers all highly liquid instruments with an original maturity of +three months or less to be cash equivalents. +[5] Marketable securities: +Marketable securities consist primarily of corporate bonds, U.S. treasury +notes and government asset-backed securities with maturities greater than +three months up to 5 years at the time of purchase. These securities, +which are classified as available for sale, are carried at fair value, +with unrealized gains and losses, net of any tax effect, reported in +stockholders' equity as accumulated other comprehensive income, and are +held at an investment bank in the schedule of maturities as follows: +Maturities +------------------------------- +1 Year or Less 1 to 5 Years +-------------- -------------- +Schedule of maturities: +Municipal bonds $ 154,000 $ 14,229,000 +US Government and Federal agency bonds 2,560,000 6,507,000 +Corporate bonds (domestic) 6,606,000 +Corporate bonds (international) 515,000 2,088,000 +-------------- -------------- +$ 3,229,000 $ 29,430,000 +============== ============== +F-8 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2003 and 2002 +NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) +[6] Inventories: +Inventories, which consist of finished goods, are stated at the lower of +cost (first-in, first-out method) or market. +[7] Property and equipment: +Property and equipment are stated at cost less accumulated depreciation +and amortization. Depreciation is computed utilizing the straight-line +method based on estimated useful lives ranging from three to ten years. +Leasehold improvements are amortized utilizing the straight-line method +over the shorter of their estimated useful lives or the remaining lease +term. Depreciation and amortization include amounts relating to property +and equipment under capital leases. +Impairment losses are recognized for long-lived assets, including certain +intangibles, used in operations when indicators of impairment are present +and the undiscounted cash flows estimated to be generated by those assets +are not sufficient to recover the assets' carrying amount. Impairment +losses are measured by comparing the fair value of the assets to their +carrying amount. No impairment losses have been incurred for the years +presented. +[8] Cost in excess of fair value of net assets acquired: +Cost in excess of fair value of net assets acquired relates to two +acquisitions, and through December 31, 2001 was being amortized over 20 +years. +During 2002, the Company adopted SFAS No. 142, "Goodwill and Other +Intangible Assets" ("FAS 142"). Amortization of indefinite lived +intangible assets was no longer allowed under FAS 142, however these +identified assets are subject to annual impairment tests. The Company has +determined that such goodwill is allocable to the wholesale segment and +the carrying amount of these assets is not impaired at December 31, 2003. +[9] Net income per share: +Basic income per share is based on the weighted average number of common +shares outstanding during the year. Diluted income per share reflects the +potential dilution assuming common shares were issued upon the exercise +of outstanding in-the-money options and the proceeds (including the +amount of compensation cost, if any, attributed to future services and +not yet recognized and the amount of tax benefits, if any, that would be +credited to additional paid-in capital assuming exercise of the options) +thereof were used to purchase treasury stock at the average market price +during the period. For the years ended December 31, 2003 and 2002, +options exercisable into approximately 100,000 and 741,000 shares of +common stock, respectively, have not been included in the calculation of +diluted income per share as the result would have been antidilutive. +[10] Advertising costs: +The Company expenses costs of print, radio and billboard advertisements +as of the first date the advertisements take place. Advertising expense +included in operating expenses amounted to approximately $7,666,000 in +2003, $7,451,000 in 2002 and $6,596,000 in 2001. +[11] Fair value of financial instruments: +The carrying value of the Company's financial instruments approximate +fair value due to their short-term nature or their underlying terms. +Marketable securities are carried at quoted market prices which represent +fair value. +F-9 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2003 and 2002 +NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) +[12] Stock-based compensation: +At December 31, 2003, the Company had various stock option plans, which +are described more fully in Note D. The Company has elected to continue +to follow the intrinsic value method in accounting for its stock-based +employee compensation arrangements. The following table illustrates the +effect on net income and earnings per share if the company had applied +the fair value recognition provisions of SFAS No. 123 to stock-based +employee compensation. +Year Ended December 31, +-------------------------------------------------- +2003 2002 2001 +-------------- -------------- -------------- +Reported net income $ 20,454,000 $ 19,841,000 $ 12,116,000 +Stock-based employee compensation included in +reported net income, net of tax 412,000 932,000 935,000 +Stock-based employee compensation determined +under the fair value based method, net of tax (2,838,000) (2,663,000) (2,272,000) +-------------- -------------- -------------- +Pro forma net income $ 18,028,000 $ 18,110,000 $ 10,779,000 +============== ============== ============== +Basic income per share: +As reported $ 1.58 $ 1.58 $ 1.04 +Pro forma $ 1.39 $ 1.44 $ 0.93 +Diluted income per share: +As reported $ 1.45 $ 1.45 $ 0.94 +Pro forma $ 1.28 $ 1.32 $ 0.83 +The weighted average fair value of options granted in 2003, 2002 and 2001 +was approximately $10.62, $10.60 and $9.44, respectively, using the +Black-Scholes option-pricing model with the following assumptions: +2003 2002 2001 +------------ ------------- ------------- +Volatility 71% 73% 75% +Risk free interest rate 2.18% - 3.0% 2.60% - 4.15% 3.56% - 4.98% +Expected life in years 4 4 4 +Dividend yield 0 0 0 +[13] Revenue recognition: +Wholesale revenue is recognized upon shipment. Allowances for estimated +discounts and allowances are recognized when sales are recorded. +Commission revenue is recognized when title of product transfers to the +customer. Retail sales are recognized when the payment is received from +customers and are recorded net of returns. Licensing revenue is +recognized on the basis of net sales reported by the licensees or, if +greater, minimum guaranteed royalties when received. +F-10 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2003 and 2002 +NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) +[14] Impairment of long-lived assets: +During fiscal 2002, the Company adopted SFAS No. 144, "Accounting for the +Impairment or Disposal of Long-Lived Assets" ("FAS 144"). If facts and +circumstances indicate that the Company's long-lived assets might be +impaired, the estimated future undiscounted cash flows associated with +the long-lived asset would be compared to its carrying amounts to +determine if a write-down to fair value is necessary. If a write-down is +required, the amount is determined by estimation of the present value of +net discounted cash flows in accordance with FAS 144. +[15] 401(k) Plan: +The Company maintains a tax-qualified, 401(k) plan which is available to +each of the Company's eligible employees who elect to participate after +meeting certain length-of-service requirements. The Company makes +discretionary matching contributions of 25% of employees' contributions +up to a maximum of 6% of employees' compensation, which vest to the +employees over a period of time. Total matching contributions to the plan +for 2003, 2002 and 2001 were approximately $162,000, $142,000 and +$120,000, respectively. +[16] Recently issued accounting standards: +SFAS No. 150, "Accounting for Certain Financial Instruments with +Characteristics of Both Liabilities and Equity," which was issued in May +2003, will require redeemable preferred stock to be classified, in +certain circumstances, as a liability, upon adoption by a public company +at the beginning of the first interim period beginning after June 15, +2003. SFAS No. 150 provides that mandatorily redeemable preferred stock +should be classified as a liability if it embodies an unconditional +obligation requiring the issuer to redeem the shares by transferring its +assets at a specified or determinable date or upon an event certain to +occur. The Company does not currently have any financial instruments with +these characteristics. SFAS No. 150 had no effect on the Company's +results of operations and financial position. +In November 2002, the FASB issued Interpretation No. 45, "Guarantor's +Accounting and Disclosures Requirements for Guarantees, Including +Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 +requires that upon issuance of a guarantee, the guarantor must recognize +a liability for the fair value of the obligation it assumes under that +guarantee. FIN 45 is effective on a prospective basis to guarantees +issued or modified after December 15, 2002, but has certain disclosure +requirements effective for financial statements of interim or annual +periods ending after December 15, 2002. The Company does not currently +have any guarantees. The adoption of the disclosure requirements of FIN +45 had no effect on its financial position or results of operations of +the Company. +In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable +Interest Entities" ("FIN 46"). FIN 46 relates to certain entities in +which equity investors do not have the characteristics of a controlling +financial interest or do not have sufficient capital at risk for the +entity to finance its activities without additional subordinated +financial support from other parties. Under certain circumstances, an +enterprise may be required to consolidate such an entity if it will +absorb a majority of the entity's expected losses, receive a majority of +the entity's residual returns, or both. FIN 46 became effective for +variable interest entities created after January 31, 2003, and had no +effect on the Company's financial position as of December 31, 2003, and +its results of operations for the year then ended. +F-11 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2003 and 2002 +NOTE B - PROPERTY AND EQUIPMENT +The major classes of assets and accumulated depreciation and amortization are as +follows: +December 31, +---------------------------- +2003 2002 +------------ ------------ +Leasehold improvements $ 22,005,000 $ 19,478,000 +Machinery and equipment 730,000 719,000 +Furniture and fixtures 3,885,000 3,157,000 +Computer equipment 4,767,000 3,959,000 +Equipment under capital lease 194,000 +------------ ------------ +31,387,000 27,507,000 +Less accumulated depreciation and amortization (12,996,000) (10,434,000) +------------ ------------ +Property and equipment - net $ 18,391,000 $ 17,073,000 +============ ============ +NOTE C - DUE FROM FACTOR +Under the terms of its factoring agreement, as amended, the Company may request +advances from the factor up to 80% of aggregate receivables purchased by the +factor at an interest rate of prime minus 2%. The Company also pays a fee equal +to 0.45% of the gross invoice amount of each receivable purchased. In addition, +the factor charges an annual unused line fee of .25% of the average daily unused +portion of the Company's $15,000,000 credit line. The Company sells and assigns +a substantial portion of its receivables, principally without recourse, to the +factor. At December 31, 2003 and 2002, $512,000 and $865,000 of factored +receivables were sold by the Company with recourse. The factor assumes the +credit risk of all assigned accounts approved by it, but maintains liens on all +inventory, trade receivables (whether or not assigned) and the goods represented +thereby. +NOTE D - STOCK OPTIONS +The Company established various stock option plans under which options to +purchase shares of common stock may be granted to employees, directors, +officers, agents, consultants and independent contractors. The plans provide +that the option price shall not be less than the fair market value of the common +stock on the date of grant and that no portion of the option may be exercised +beyond ten years from that date. No incentive stock option can be granted and +exercised beyond five years to a stockholder owning 10% or more of the Company's +outstanding common stock. Options granted under the plans during the three years +ended December 31, 2003 vest on the date of grant or up to three years from such +date. +F-12 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2003 and 2002 +NOTE D - STOCK OPTIONS (CONTINUED) +The Company has several stock option plans. The 1993 Incentive Stock Option +Plan, The 1995 Stock Plan, The 1996 Stock Plan and The 1997 Stock Plan provide +for options to be granted to employees and directors. +The 1993 Incentive Stock Option Plan expired in 2003. +In June 1999, the Company adopted The 1999 Stock Plan which authorized the +issuance of up to 400,000 shares. In May 2000, the stockholders approved an +amendment to this Plan to increase the maximum number of shares to be issued +under the Plan to 975,000 shares. In July 2001, the stockholders approved an +amendment to this Plan to increase the maximum number of shares to be issued +under the Plan to 1,600,000 shares. In May 2002, the stockholders approved a +further amendment to this Plan to increase the maximum number of shares to be +issued under the Plan to 2,280,000. In 2003, the stockholders approved a further +amendment to this Plan to increase the maximum number of shares to be issued +under the Plan to 2,920,000. Terms of the 1999 Stock Plan are not materially +different from the various existing stock option plans. +Through December 31, 2003, 2,643,000 options had been granted under The 1999 +Stock Plan, as amended, and as of such date 277,000 shares were available for +grant. +In connection with the amended employment agreement of the former Chief +Executive Officer ("CEO"), who is now the Company's Creative and Design Chief, +the Company issued options to purchase 500,000 shares of its common stock. The +options, which vested in August 1998, have an exercise price of $3.31 and are +exercisable over 10 years expiring in March 2005. Unearned compensation was +recorded in the amount of $1,345,000 which represented the difference between +the exercise price and the fair value of the stock on the date of grant, and is +classified as a component of stockholders' equity. The unearned compensation is +being amortized over the ten-year term of the amended agreement. Accordingly, +$128,000 in each year has been charged to operations for 2003, 2002 and 2001. +In connection with the Chief Operating Officer's employment agreement (the "COO +Agreement"), the Company issued options to purchase 75,000 shares of its common +stock. The options which vested quarterly through December 31, 2001, have an +exercise price of $8.00. The market value of the stock on the date of grant was +$18.80 per share. Unearned compensation was recorded in the amount of $810,000, +which represented the difference between the exercise price and the fair value +of the stock on the date of grant, and is classified as a component of +stockholders' equity. The unearned compensation was amortized over the two-year +term of the employment agreement. Accordingly, $405,000 has been charged to +operations in each year 2002 and 2001. As an amendment to the COO Agreement +dated July 1, 2002, the Company issued 20,000 restricted shares of its common +stock, which vest quarterly through January 1, 2005. The market value of the +stock on the date of grant was $18.74 per share. Unearned compensation was +recorded in the amount of $375,000 and is classified as a component of +stockholders' equity. The unearned compensation is being amortized over the 2 +1/2-year term of the employment agreement. Accordingly, $225,000 has been +charged to operations in 2003. +F-13 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2003 and 2002 +NOTE D - STOCK OPTIONS (CONTINUED) +Activity relating to stock options granted under the Company's plans and outside +the plans during the three years ended December 31, 2003 is as follows: +2003 2002 2001 +------------------------ ------------------------ ------------------------ +Weighted Weighted Weighted +Number Average Number Average Number Average +of Exercise of Exercise of Exercise +Shares Price Shares Price Shares Price +---------- ---------- ---------- ---------- ---------- ---------- +Outstanding at January 1 2,345,000 $ 10.14 2,231,000 $ 7.25 2,749,000 $ 6.36 +Granted 403,000 17.81 696,000 17.53 614,000 12.68 +Exercised (443,000) 10.79 (567,000) 7.70 (1,122,000) 8.02 +Cancelled (31,000) 11.87 (15,000) 16.71 (10,000) 9.98 +---------- ---------- ---------- +Outstanding at December 31 2,274,000 11.35 2,345,000 10.14 2,231,000 7.25 +========== ========== ========== +Exercisable at December 31 1,885,000 10.33 1,813,000 8.01 2,131,000 7.22 +========== ========== ========== +The following table summarizes information about stock options at December 31, +2003: +Options Outstanding Options Exercisable +------------------------------------------- -------------------------- +Weighted +Average +Remaining Weighted Weighted +Contractual Average Average +Number Life Exercise Number Exercise +Range of Exercise Price Outstanding (in Years) Price Exercisable Price +----------------------------- ------------- ------------- ---------- ------------- ---------- +$ 1.75 to $ 3.31 820,000 2.1 $ 2.36 820,000 $ 2.36 +$ 5.50 to $ 7.00 89,000 3.7 5.76 89,000 5.76 +$ 8.00 to $ 9.12 125,000 7.4 8.97 125,000 8.97 +$ 9.55 to $12.00 42,000 7.6 9.68 42,000 9.68 +$13.50 to $17.41 211,000 9.0 14.48 121,000 19.72 +$18.00 to $20.98 987,000 8.5 19.02 688,000 19.05 +------------- ------------- +2,274,000 6.0 11.35 1,885,000 10.33 +============= ============= +In May 2003, the Company granted 100,000 options to a director exercisable at +$13.50 per share which vest over one year on a quarterly basis. The difference +between the market price of $19.00 per share and the option exercise price has +been reflected as unearned compensation to be amortized over the one-year +vesting period. In addition, the Company issued 303,000 options exercisable at +the market price of the underlying common stock on the date of grant which +principally vest over one year. +NOTE E - RESTRICTED STOCK AWARDS +Restricted stock awards have been granted to certain key executives in +management. These awards vest on various dates between January 2004 and January +2006. Awards of 101,000 shares, 190,000 and 20,000 shares were granted in 2003, +2002 and 2001, respectively. The average market price on the date of grant for +awards granted in 2003, 2002 and 2001 as $18.41, $17.15 and $18.80, +respectively. Restricted stock compensation charged to expense was $842,000, +$871,000 and $188,000 for 2003, 2002 and 2001, respectively. +F-14 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2003 and 2002 +NOTE F - PREFERRED STOCK +The Company has authorized 5,000,000 shares of preferred stock. The Board of +Directors have designated 60,000 shares of such preferred stock as Series A +Junior Participating Preferred Stock ("Series A Preferred"). Holders of the +shares of Series A Preferred are entitled to dividends equal to 1,000 times +dividends declared or paid on the Company's common stock. Each share of Series A +preferred entitles the holder to 1,000 votes on all matters submitted to the +holders of common stock. The Series A Preferred has a liquidation preference of +a $1,000 per share, and is not redeemable by the Company. No preferred shares +have been issued. +NOTE G - RIGHTS AGREEMENT +On October 30, 2001, the Company declared a dividend distribution of one +preferred stock purchase right (a "Right") for each outstanding share of common +stock. Each Right entitles the holder to purchase from the Company one +one-thousandth (1/1,000) of a share of Series A Preferred at a price of $75 per +one one-thousandth (1/1,000) of a share. Initially, the Rights will not be +exercisable and will automatically trade with the common stock. The Rights +become exercisable, in general, ten days following the announcement of a person +or group acquiring beneficial ownership of at least 15% of the outstanding +voting stock of the Company. +NOTE H - OPERATING LEASES +The Company leases office, showroom and retail facilities under noncancelable +operating leases with terms expiring at various times through 2013. Future +minimum annual lease payments under noncancelable operating leases consist of +the following at December 31: +2004 $ 9,386,000 +2005 9,161,000 +2006 9,245,000 +2007 8,814,000 +2008 7,201,000 +Thereafter 17,452,000 +-------------- +$ 61,259,000 +============== +A majority of the retail store leases provide for contingent rental payments if +gross sales exceed certain targets. In addition, many of the leases contain rent +escalation clauses to compensate for increases in operating costs and real +estate taxes. +Rent expense for the years ended December 31, 2003, 2002 and 2001 was +approximately $12,340,000, $10,795,000 and $9,142,000, respectively. Included in +such amounts are contingent rents of $99,465, $151,000 and $125,000 in 2003, +2002 and 2001, respectively. +Pursuant to certain leases, rent expense charged to operations differs from rent +paid because of scheduled rent increases. Accordingly, the Company has recorded +deferred rent. Rent expense is calculated by allocating total rental payments, +including those attributable to scheduled rent increases, on a straight-line +basis, over the lease term. +F-15 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2003 and 2002 +NOTE I - INCOME TAXES +The income tax provision (benefit) consists of the following: +2003 2002 2001 +------------ ------------ ------------ +Current: +Federal $ 12,183,000 $ 11,411,000 $ 6,899,000 +State and local 4,660,000 4,266,000 2,176,000 +------------ ------------ ------------ +16,843,000 15,677,000 9,075,000 +------------ ------------ ------------ +Deferred: +Federal (1,648,000) (793,000) (365,000) +State and local (330,000) (297,000) (115,000) +------------ ------------ ------------ +(1,978,000) (1,090,000) (480,000) +------------ ------------ ------------ +$ 14,865,000 $ 14,587,000 $ 8,595,000 +============ ============ ============ +A reconciliation between taxes computed at the federal statutory rate and the +effective tax rate is as follows: +December 31, +------------------------------- +2003 2002 2001 +------- ------- ------- +Income taxes at federal statutory rate 35.0% 35.0% 35.0% +State income taxes - net of federal +income tax benefit 8.3 8.3 6.5 +Nondeductible items 0.1 0.1 0.3 +Other (1.3) (1.0) (0.3) +------- ------- ------- +Effective rate 42.1% 42.4% 41.5% +======= ======= ======= +The Company applies the liability method of accounting for income taxes. Under +this method, deferred tax assets and liabilities are determined based on +differences between financial reporting and tax bases of assets and liabilities +and are measured using the enacted tax rates and laws that are expected to be in +effect when the differences are expected to reverse. +The components of deferred tax assets and liabilities are as follows: +December 31, +------------------------ +2003 2002 +---------- ---------- +Current deferred tax assets: +Receivable allowances $1,007,000 $ 930,000 +Inventory 685,000 703,000 +---------- ---------- +1,692,000 1,633,000 +---------- ---------- +Non-current deferred tax assets: +Depreciation 3,169,000 2,242,000 +Deferred compensation 1,682,000 813,000 +Deferred rent 767,000 644,000 +---------- ---------- +5,618,000 3,699,000 +---------- ---------- +Deferred tax assets $7,310,000 $5,332,000 +========== ========== +F-16 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2003 and 2002 +NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER +[1] Indictment: +On June 20, 2000, Steven Madden, the Company's former Chairman and Chief +Executive Officer, was indicted in the United States District Courts for +the Southern District and Eastern District of New York. The indictments +alleged that Mr. Madden engaged in securities fraud and money laundering +activities. In addition, the Securities and Exchange Commission filed a +complaint in the United States District Court for the Eastern District of +New York alleging that Mr. Madden violated Section 17(a) of the +Securities Exchange Act of 1934, as amended. On May 21, 2001, Steven +Madden entered into a plea agreement with the U.S. Attorney's Office, +pursuant to which he pled guilty to four of the federal charges filed +against him. In addition, Mr. Madden reached a separate settlement +agreement with the Securities and Exchange Commission regarding the +allegations contained in its complaint. As a result, Mr. Madden resigned +as the Company's Chief Executive Officer and as a member of the Company's +Board of Directors effective July 1, 2001. Mr. Madden has agreed to serve +as the Company's Creative and Design Chief, a non-executive position. On +April 4, 2002, Mr. Madden was sentenced in the United States District +Court for the Southern District of New York to forty-one (41) months' +imprisonment in connection with two of the federal charges to which he +pled guilty. On May 3, 2002, Mr. Madden was sentenced in the United +States District Court for the Eastern District of New York to forty-one +(41) months' imprisonment in connection with the remaining two charges to +which he pled guilty. The sentences will run concurrently. Under the +settlement agreement with the Securities and Exchange Commission, Mr. +Madden has agreed to not serve as an officer or director of a publicly +traded company for 7 years. Neither the indictments nor the Securities +and Exchange Commission complaint allege any wrongdoing by the Company or +its other officers and directors. Mr. Madden began serving his sentence +in September of 2002. +In December 2001, the Company purchased a loss mitigation policy to cover +costs arising out of lawsuits related to the June 2000 federal indictment +of Steven Madden described above. The policy covers the Company's +anticipated damages and legal costs in connection with such lawsuits. The +Company is obligated to pay for damages and costs in excess of the policy +limits. The cost of the policy was $6,950,000. +[2] Class action litigation: +Between June and August 2000 several class action lawsuits were +commenced in the United States District Court for the Eastern District of +New York against the Company, Steven Madden personally, and, in some of +the actions, the Company's then President and its Chief Financial +Officer. +A settlement in principle of these actions has been reached, subject +to execution of definitive settlement documentation, notices to class +members, a hearing and approval by the District Court. The tentative +settlement is within the limits of insurance coverage described above. +[3] Shareholder derivative actions: +On or about September 26, 2000, a shareholder derivative action was +commenced in the United States District Court for the Eastern District of +New York, captioned, Herrera v. Steven Madden and Steven Madden, Ltd. An +agreement in principle has been reached to resolve all claims in this +action, subject to execution of definitive documentation, such notice to +the Company's shareholders (if any) as may be required by the District +Court, and approval by the District Court. The Company believes, after +consultation with counsel, that its defense costs and certain attorneys' +fees in connection with this action will be subject to coverage by the +Company's insurance as supplemented by the loss mitigation policy +described above. +F-17 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2003 and 2002 +NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED) +[3] Shareholder derivative actions: (continued) +On or about November 28, 2001, a shareholder derivative complaint was +filed in the United States District Court for the Eastern District of New +York, captioned Herrera v. Karson, et al. Named as defendants therein are +the Company and certain of the Company's present and/or former directors. +An agreement in principle has been reached to resolve all claims in this +action, subject to execution of definitive documentation, such notice to +the Company's shareholders (if any) as may be required by the District +Court, and approval by the District Court. The Company believes, after +consultation with counsel, that its defense costs and certain attorneys' +fees in connection with this action will be subject to coverage by the +Company's insurance as supplemented by the loss mitigation policy +described above. +The Company and certain of the Company's present and/or former directors +have been named in an action commenced in the United States District +Court for the Eastern District of New York by the Safeco Surplus Lines +Insurance Company captioned, Safeco Surplus Lines Ins. Co. v. Steven +Madden Ltd., et al. The complaint principally seeks rescission of the +excess insurance policy issued by Safeco to the Company for the February +4, 2000 to June 13, 2001 period and an order declaring that Safeco does +not owe any indemnity obligation to the Company or any of its officers +and directors in connection with the shareholder class action and +derivative cases referred to above. The parties have agreed to a +resolution of Safeco's claims, the implementation of which is conditional +upon judicial approval of the settlements of the shareholder class action +and shareholder derivative actions discussed above. +[4] Other actions: +(a) On or about January 22, 2002, an action was commenced against the +Company in the United States District Court for the District of +Oregon, captioned Adidas America, Inc. and Adidas Salomon AG v. +Steven Madden, Ltd. and Steven Madden Retail, Inc. The complaint +sought injunctive relief and unspecified monetary damages for +trademark infringement, trademark dilution, unfair competition and +deceptive trade practices arising from the Company's use of four +stripes as a design element on footwear. On or about September 3, +2002, Adidas commenced a second action against the Company in the +United States District Court for the District of Oregon, captioned +Adidas America, Inc. and Adidas Salomon AG v. Steven Madden, Ltd. +and Steven Madden Retail, Inc. The second complaint sought the +same injunctive relief and unspecified monetary damages for +various trademark infringement claims arising from the Company's +use of two stripes as a design element on footwear. In August +2003, the Company settled this litigation. The amount of +settlement was previously covered in an accrual made with respect +to this matter. The settlement did not have a material effect on +the Company's financial position or results of operations. +(b) On October 4, 2002, Skechers U.S.A., Inc. and Skechers U.S.A., +Inc. II filed suit against Steven Madden Ltd. and R.S.V. Sport, +Inc. in the United States District Court for the Central District +of California. Skechers alleged claims for patent infringement, +federal unfair competition, federal antidilution violation, +California unfair competition, California antidilution violation, +and common law unfair competition. Skechers asked for unspecified +monetary damages. In April 2003, the Company settled this +litigation. The amount of settlement was previously covered in an +accrual made with respect to this matter. The settlement did not +have a material effect on the Company's financial position or +results of operations. +F-18 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2003 and 2002 +NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED) +[4] Other actions: (continued) +(c) In 2003, an action was commenced in the United States District +Court for the Central District of California, against Steve Madden +Ltd. The complaint seeks injunctive relief and unspecified +monetary damages for infringement of two separate patents. The +Company believes it has substantial defenses to the claims +asserted in the lawsuit. The parties are currently involved in +settlement negotiations. +(d) The Company has been named as a defendant in various other +lawsuits in the normal course of business. In the opinion of +management, after consulting with legal counsels, the liabilities, +if any, resulting from these matters should not have a material +effect on the Company's financial position or results of +operations. +[5] Employment agreements: +The Company has an employment agreement with Steve Madden, its former CEO +and President, to serve as the Company's Creative and Design Chief. The +employment agreement, as amended, provides for an annual salary of +$700,000 through June 30, 2011. The agreement also provides for an annual +performance bonus, an annual option grant at exercise prices equal to the +market price on the date of grant and a non-accountable expense +allowance. +The Company has employment agreements with other executives (the +"executives") which expire between June 1, 2004 and December 31, 2005. +These agreements provide for cash bonuses based upon a percentage of year +to year increases in earnings before interest taxes depreciation and +amortization, option grants and non-accountable expense allowances as +defined. Base salary commitments for these executives are as follows: +2004 $ 1,818,000 +2005 1,060,000 +2006 234,000 +------------- +$ 3,112,000 +============= +In connection with their employment agreements, two executives are +entitled to receive an aggregate of 40,000 shares of restricted common +stock from the Company. The restricted shares vest equally each quarter +over the period of their employment agreements through December 2005. +Accordingly, the Company has recorded a charge to operations in the +amount of $324,000 and $188,000 for the 19,000 and 10,000 shares that +vested during the years ended December 31, 2003 and 2002, respectively. +Further, one executive received 100,000 stock options exercisable at +$19.00 per share, the market price on the date of grant. 20,000 of these +options vested on June 30, 2003 and the balance vest equally, each +quarter, through June 30, 2005. +In addition, the Company accrued an aggregate of approximately $300,000 +for bonuses under these agreements for 2003. +[6] Letters of credit: +At December 31, 2003 and 2002, the Company had open letters of credit for +the purchase of imported merchandise of approximately $7,458,000 and +$10,066,000, respectively. +F-19 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2003 and 2002 +NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED) +[7] Royalty agreements: +The Company entered into two license agreements to sell "Candie's" and +"Unionbay" brand name shoes. The licenses expire in December 2009 and +December 2006, respectively. Aggregate minimum future royalties under +these agreements are as follows: +Year Ending +December 31, +2004 $ 240,000 +2005 4,200,000 +2006 5,290,000 +2007 4,200,000 +2008 4,550,000 +Thereafter 4,550,000 +------------- +$ 23,030,000 +============= +[8] Concentrations: +The Company maintains cash and cash equivalents with various major +financial institutions which at times are in excess of the amount +insured. In addition, the Company's marketable securities and a money +account are principally held at one brokerage company. +During the year ended December 31, 2003, the Company purchased +approximately 13% of its merchandise from a supplier in Brazil. Total +inventory purchases for the year ended December 31, 2003 from Brazil was +approximately 19%. The Company also purchased inventory during the year +ended December 31, 2003 from two vendors in China totaling approximately +32%. +During the year ended December 31, 2002, the Company purchased +approximately 29% of its merchandise from a supplier in Brazil and 18% +and 16% of their merchandise from two suppliers in China, respectively. +Total inventory purchases for the year ended December 31, 2002 from +Brazil and China were approximately 30% and 54%, respectively. +During the year ended December 31, 2001, the Company purchased +approximately 28% and 21% of its inventory from a supplier in China and +Brazil, respectively. Total inventory purchases for the year ended +December 31, 2001 from Brazil and China were approximately 28% and 53%, +respectively. +Sales to two customers accounted for 10% and 11% of total net sales for +the year ended December 31, 2003. These customers each represented 17% of +accounts receivable at December 31, 2003, respectively. +Sales to two customers accounted for 13% and 10% of total net sales for +the year ended December 31, 2002. These customers represented 17% and 10% +of accounts receivable at December 31, 2002, respectively. +Sales to two customers accounted for 13% and 11% of total net sales for +the year ended December 31, 2001. These customers represented 18% and 15% +of accounts receivable at December 31, 2001, respectively. +Sales to such customers are included in the wholesale segment (see Note +K). Purchases are made primarily in United States dollars. +F-20 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2003 and 2002 +NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED) +[9] Valuation and qualifying accounts: +The following is a summary of the allowance for doubtful accounts related +to accounts receivable and the allowance for chargebacks related to the +amount Due from Factor for the years ended December 31: +2003 2002 2001 +------------ ------------ ------------ +Balance at beginning of year $ 2,215,000 $ 1,644,000 $ 1,640,000 +Charged to expense 163,000 630,000 219,000 +Uncollectible accounts written off, net of recoveries (59,000) (215,000) +------------ ------------ ------------ +Balance at end of year $ 2,378,000 $ 2,215,000 $ 1,644,000 +============ ============ ============ +The following is a summary of property and equipment and the related +accounts of accumulated depreciation and amortization for the years ended +December 31: +2003 2002 2001 +------------ ------------ ------------ +Cost basis +Balance at beginning of year $ 27,507,000 $ 27,512,000 $ 24,097,000 +Additions 6,061,000 5,072,000 3,415,000 +Write-off of fully depreciated assets (2,181,000) (5,077,000) +------------ ------------ ------------ +Balance at end of year 31,387,000 27,507,000 27,512,000 +------------ ------------ ------------ +Accumulated depreciation and amortization +Balance at beginning of year 10,434,000 11,805,000 8,497,000 +Depreciation and amortization 4,743,000 3,706,000 3,308,000 +Write-off of fully depreciated assets (2,181,000) (5,077,000) +------------ ------------ ------------ +Balance at end of year 12,996,000 10,434,000 11,805,000 +------------ ------------ ------------ +Property and equipment, net $ 18,391,000 $ 17,073,000 $ 15,707,000 +============ ============ ============ +The following is a summary of cost in excess of fair value of net assets +acquired and the related accumulated amortization for the years ended +December 31: +2003 2002 2001 +------------ ------------ ------------ +Cost basis +Balance at beginning and end of year $ 2,780,000 $ 2,780,000 $ 2,780,000 +------------ ------------ ------------ +Accumulated amortization +Balance at beginning of year 714,000 714,000 575,000 +Amortization 0 0 139,000 +------------ ------------ ------------ +Balance at end of year 714,000 714,000 714,000 +------------ ------------ ------------ +Cost in excess of fair value of net assets acquired $ 2,066,000 $ 2,066,000 $ 2,066,000 +============ ============ ============ +F-21 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2003 and 2002 +NOTE K - OPERATING SEGMENT INFORMATION +The Company's reportable segments are primarily based on methods used to +distribute its products. The wholesale and retail segments derive revenue from +sales of women's, men's, girl's and children's footwear. The wholesale segment, +through sales to department and specialty stores, and the retail segment, +through our operation of retail stores, derive revenue from sales of branded +women's, men's, girl's and children's footwear. In addition, the wholesale +segment has a licensing program that extends the Steve Madden and Stevies brands +to accessories and ready-to-wear apparel. The other segment represents +activities of a subsidiary which earns commissions for serving as a buying agent +to mass-market merchandisers, shoe chains and other off-price retailers with +respect to their purchase of private label shoes. +The accounting policies of the segments are the same as those described in the +summary of significant accounting policies. The Company evaluates performance +based on profit or loss from operations before other income (expense) and the +provision for income taxes. The following is information for the Company's +reportable segments: +Wholesale Retail Other Consolidated +------------- ------------- ------------- ------------- +Year ended December 31, 2003: +Net sales to external customers (a) $ 228,686,000 $ 95,518,000 $ 324,204,000 +Gross profit 75,167,000 50,852,000 126,019,000 +Commissions and licensing fees 2,838,000 $ 5,056,000 7,894,000 +Income from operations 21,589,000 9,133,000 2,904,000 33,626,000 +Depreciation and amortization 1,136,000 3,604,000 3,000 4,743,000 +Other significant items: +Deferred compensation 2,877,000 2,877,000 +Deferred rent expense 33,000 262,000 1,000 296,000 +Provision for doubtful accounts 163,000 163,000 +Segment assets (b) 139,625,000 37,828,000 417,000 177,870,000 +Capital expenditures 2,667,000 3,394,000 6,061,000 +Year ended December 31, 2002: +Net sales to external customers (a) 234,253,000 91,883,000 326,136,000 +Gross profit 77,889,000 48,794,000 126,683,000 +Commissions and licensing fees 1,833,000 4,770,000 6,603,000 +Income from operations 21,664,000 9,000,000 2,548,000 33,212,000 +Depreciation and amortization 739,000 2,966,000 1,000 3,706,000 +Other significant items: +Deferred compensation 2,228,000 2,228,000 +Deferred rent expense (reversal) (14,000) 243,000 4,000 233,000 +Provision for doubtful accounts 570,000 1,000 571,000 +Segment assets (b) 113,477,000 36,166,000 857,000 150,500,000 +Capital expenditures 1,246,000 3,826,000 5,072,000 +Year ended December 31, 2001: +Net sales to external customers (a) 163,904,000 79,487,000 243,391,000 +Gross profit 57,858,000 42,015,000 99,873,000 +Commissions and licensing fees 1,711,000 4,200,000 5,911,000 +Income from operations (c) 10,095,000 7,023,000 2,244,000 19,362,000 +Depreciation and amortization 869,000 2,577,000 1,000 3,447,000 +Other significant items: +Deferred compensation 533,000 533,000 +Deferred rent expense (reversal) (21,000) 249,000 (3,000) 225,000 +Provision for doubtful accounts 219,000 219,000 +Segment assets (b) 90,061,000 30,922,000 879,000 121,862,000 +Capital expenditures 551,000 2,864,000 3,415,000 +(a) Attributed to the United States, based on the location in which the sale +originated. +(b) All long-lived assets, consisting of property and equipment and cost in +excess of fair value of net assets acquired, are located in the United +States. +(c) Loss mitigation coverage expense of $6,950,000 is reflected in the +wholesale segment. +F-22 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2003 and 2002 +NOTE L - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) +The following is a summary of the quarterly results of operations for the years +ended December 31, 2003 and 2002 (000's omitted): +March 31, June 30, September 30, December 31, +------------- ------------- ------------- ------------- +2003: +Wholesale, net $ 57,592 $ 63,335 $ 65,601 $ 42,158 +Retail, net 21,106 22,409 23,062 28,941 +------------- ------------- ------------- ------------- +Net sales 78,698 85,744 88,663 71,099 +Cost of sales 47,733 53,436 53,067 43,949 +Gross profit 30,965 32,308 35,596 27,150 +Commissions and licensing fee income 1,690 2,145 2,205 1,854 +Net income 5,049 5,780 7,073 2,552 +Net income per share: +Basic 0.39 0.45 0.54 0.20 +Diluted 0.36 0.41 0.50 0.18 +2002: +Wholesale, net $ 47,835 $ 65,742 $ 70,742 $ 49,934 +Retail, net 18,776 22,369 22,276 28,462 +------------- ------------- ------------- ------------- +Net sales 66,611 88,111 93,018 78,396 +Cost of sales 40,070 55,127 56,763 47,493 +Gross profit 26,541 32,984 36,255 30,903 +Commissions and licensing fee income 1,244 1,574 1,819 1,966 +Net income 4,093 5,262 6,268 4,218 +Net income per share: +Basic 0.33 0.42 0.49 0.33 +Diluted 0.30 0.38 0.46 0.31 +F-23 +(b) Reports on Form 8-K +During the fourth quarter of 2003, the Company filed the following +Current Reports on Form 8-K. +(i) A Current Report on Form 8-K dated October 28, 2003 and filed on +November 3, 2003, pertaining to the Company's financial results +for the three months ended September 30, 2003. +(c) Exhibits. +EXHIBITS +3.01* Certificate of Incorporation of the Company. +3.02* Amended & Restated By-Laws of the Company. +4.01* Specimen Certificate for shares of Common Stock. +4.02* Rights Agreement between the Company and American Stock Transfer and +Trust Company. +10.07* Employment Agreement of Arvind Dharia. +10.08* Employment Agreement of Richard Olicker. +10.09* Second Amended Employment Agreement between the Company and Steven +Madden. +10.10* Employment Agreement of Jamieson Karson. +10.11* Amendment No. 1 to Employment Agreement of Arvind Dharia. +10.12* Employment Agreement between Adesso-Madden, Inc. and Gerald +Mongeluzo. +10.13* Employment Agreement between Steven Madden Retail, Inc. and Mark +Jankowski. +10.14* Amendment No. 1 to Employment Agreement of Richard Olicker. +10.15* Amendment No. 2 to Employment Agreement of Arvind Dharia. +10.16 Amendment No. 1 to Employment Agreement of Jamieson Karson. +21.01* Subsidiaries of Registrant. +23.01 Consent of Eisner LLP. +31.01 Certification of Chief Executive Officer pursuant to Rule 13a-14 or +15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to +Section 302 of the Sarbanes-Oxley Act of 2002 +31.02 Certification of Chief Financial Officer pursuant to Rule 13a-14 or +15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to +Section 302 of the Sarbanes-Oxley Act of 2002 +32.01 Certification of Chief Executive Officer pursuant to 18 U.S.C. +Section 1350, as adopted pursuant to Section 906 of the +Sarbanes-Oxley Act of 2002 +32.02 Certification of Chief Financial Officer pursuant to 18 U.S.C. +Section 1350, as adopted pursuant to Section 906 of the +Sarbanes-Oxley Act of 2002 +* Previously filed with the Securities and Exchange Commission. +SIGNATURE +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. +Dated: New York, New York +March 12, 2004 +STEVEN MADDEN, LTD. +By: /s/ JAMIESON KARSON +--------------------------------- +Jamieson Karson +Chief Executive 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 in the capacities and on the dates indicated. +Signature Title Date +---------------------------- ------------------------------------------------------ ----------------- +/s/ CHARLES KOPPELMAN Chairman of the Board March 12, 2004 +---------------------------- +Charles Koppelman +/s/ JAMIESON KARSON Chief Executive Officer and Vice Chairman of the Board March 12, 2004 +---------------------------- +Jamieson Karson +/s/ ARVIND DHARIA Chief Financial Officer and Director March 12, 2004 +---------------------------- +Arvind Dharia +/s/ JEFFREY BIRNBAUM Director March 12, 2004 +---------------------------- +Jeffrey Birnbaum +/s/ MARC COOPER Director March 12, 2004 +---------------------------- +Marc Cooper +/s/ ROGER GLADSTONE Director March 12, 2004 +---------------------------- +Roger Gladstone +/s/ JOHN L. MADDEN Director March 12, 2004 +---------------------------- +John L. Madden +/s/ PETER MIGLIORINI Director March 12, 2004 +---------------------------- +Peter Migliorini +/s/ GERALD MONGELUZO Director March 12, 2004 +---------------------------- +Gerald Mongeluzo +/s/ AWADHESH SINHA Director March 12, 2004 +---------------------------- +Awadhesh Sinha +STEVEN MADDEN, LTD. +FORM 10-K +EXHIBIT INDEX +Exhibit No Description +---------- ----------- +10.16 Amendment No. 1 to Employment Agreement of +Jamieson Karson. +23.1 Independent Auditors' Consen +31.1 Certification of Chief Executive Officer pursuant +to Rule 13a-14 or 15d-14 of the Securities +Exchange Act of 1934, as adopted pursuant to +Section 302 of the Sarbanes-Oxley Act of 2002 +31.2 Certification of Chief Financial Officer pursuant +to Rule 13a-14 or 15d-14 of the Securities +Exchange Act of 1934, as adopted pursuant to +Section 302 of the Sarbanes-Oxley Act of 2002 +32.1 Certification of Chief Executive Officer pursuant +to 18 U.S.C. Section 1350, as adopted pursuant to +Section 906 of the Sarbanes-Oxley Act of 2002 +32.2 Certification of Chief Financial Officer pursuant +to 18 U.S.C. Section 1350, as adopted pursuant to +Section 906 of the Sarbanes-Oxley Act of 2002 \ No newline at end of file diff --git a/raw/filings/0000913241/2003/0001019056-04-000364/filing_metadata.csv b/raw/filings/0000913241/2003/0001019056-04-000364/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..952ca9fc55b75384bf5423009b8c1906a035e728 --- /dev/null +++ b/raw/filings/0000913241/2003/0001019056-04-000364/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000913241,SHOO,"STEVEN MADDEN, LTD.",10-K,2004-03-12,2003-12-31,2004-03-12T21:34:20.000Z,0001019056-04-000364,smadden_k2003.txt,FORM 10-K,220823,0,0,https://www.sec.gov/Archives/edgar/data/913241/000101905604000364/smadden_k2003.txt,https://www.sec.gov/Archives/edgar/data/913241/000101905604000364/,2003,2003,1 diff --git a/raw/filings/0000913241/2003/0001019056-04-000364/item1.txt b/raw/filings/0000913241/2003/0001019056-04-000364/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..742174f481560d1738f634162bc91ebf1abacb96 --- /dev/null +++ b/raw/filings/0000913241/2003/0001019056-04-000364/item1.txt @@ -0,0 +1,464 @@ +ITEM 1 BUSINESS +Steven Madden, Ltd. (together with its subsidiaries, the "Company") +designs, sources, markets and sells fashion-forward footwear brands for women, +men and children. The Company distributes products through its retail stores, +its e-commerce website, department and specialty stores throughout the United +States and Canada and through special distribution arrangements in Europe and in +Central and South America. The Company's product line includes core products, +which are sold year-round, complemented by a broad range of updated styles which +are designed to establish or capitalize on market trends. +The Company's business is comprised of three (3) distinct segments +(wholesale, retail and private label). The wholesale division includes seven (7) +brands: Steve Madden(R), Steven(R), l.e.i.(R), Candie's(R), Stevies(R), +Unionbay(R) and the Steve Madden Mens brand. Steven Madden Retail, Inc., the +Company's wholly-owned retail subsidiary, operates Steve Madden, Steven and Shoe +Biz retail stores as well as the Company's outlet store and e-commerce website. +The Company's wholly-owned private label subsidiary, Adesso-Madden, Inc., +designs and sources footwear products under private labels for many of the +country's large mass merchandisers. The Company also licenses its Steve +Madden(R) trademark for several accessory and apparel categories. +Steven Madden, Ltd., was incorporated as a New York corporation on July 9, +1990 and reincorporated under the same name in Delaware in November 1998. The +Company has established a reputation for its creative designs, popular styles +and quality products at accessible price points. The Company completed its +initial public offering in December 1993 and its shares of Common Stock +currently trade on The Nasdaq National Market under the symbol "SHOO". +The Company maintains its principal executive offices at 52-16 Barnett +Avenue, Long Island City, NY 11104, telephone number (718) 446-1800. +The Company's website is http://www.stevemadden.com. This website primarily +operates as an internet store where the Company's customers can purchase +numerous styles of the Company's Steve Madden and Steve Madden Mens footwear +products. At this time, the Company's Annual Reports on Form 10-K; Quarterly +Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such +reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities +Exchange Act of 1934, as amended, are not made available on the Company's +website because the website is not equipped to make such filings available. The +Company is looking into alternatives which will enable it to make such filings +available on its website. The Company will provide paper copies of such filings +free of charge upon request. +Wholesale Divisions +Madden Women's Wholesale +The Steve Madden(R) Women's Wholesale Division ("Madden Women's Wholesale") +designs, produces, sources, sells and markets the Company's Steve Madden(R) +brand to major department stores, better specialty stores, and shoe stores +throughout the United States. The Steve Madden(R) product line has become a +leading footwear brand in the fashion conscious junior marketplace. To serve its +customers (primarily women ages 16 to 25), Madden Women's Wholesale creates and +markets fashion forward footwear designed to appeal to customers seeking +exciting, new footwear designs at affordable prices. +As the Company's largest division, Madden Women's Wholesale accounted for +$109,285,000 of net sales in 2003, or approximately 34% of the Company's total +sales. Many newly created styles of Madden Women's Wholesale are test marketed +at the Company's retail stores. Within a few days, the Company can determine if +the test product appeals to customers. This enables the Company to use its +flexible sourcing model to rapidly respond to changing preferences which the +Company believes is essential for success in the fashion footwear marketplace. +l.e.i.(R) - Wholesale Division +Pursuant to the Company's license agreement with Jones Investment Company, +Inc., the Company has the right to use the l.e.i.(R) trademark in connection +with the sale and marketing of footwear. The l.e.i.(R) trademark is well +-1- +known for jeanswear in the junior marketplace sold nationally through department +and specialty stores. The Company's l.e.i.(R) footwear products are targeted to +attract girls and young women ages 6 to 20 years old, a majority of which are +younger than the typical Steve Madden(R) brand customer. The l.e.i. Wholesale +Division generated net sales of $60,623,000 for the year ended December 31, +2003, or approximately 19% of the Company's total revenues. +Madden Men's Wholesale +The Steve Madden Men's Wholesale Division ("Madden Men's Wholesale") +markets a full collection of directional young men's shoes through major +department stores, better specialty stores and independent shoe stores +throughout the United States. Price points range from $70 to $100 at retail, +targeted at men ages 18 to 44 years old. +Madden Men's Wholesale accounted for $34,881,000 of net sales in 2003, or +approximately 11% of the Company's total sales. Madden Men's Wholesale, which is +primarily produced in China, maintains open stock inventory positions in select +patterns to serve the replenishment programs of its wholesale customers. +Candie's Footwear +On May 12, 2003 the Company entered into a long-term license agreement with +Candie's, Inc. to design, manufacture, and distribute Candie's(R) branded +footwear for women and children worldwide through the Company's Candie's(R) +division. The Candie's(R) footwear line has been an important resource for +fashion and casual footwear primarily for young women and girls for over two +decades. The Candie's(R) division, which began shipping product in the fourth +quarter of 2003, generated net sales of $938,000 for the year ended December 31, +2003. +Diva Acquisition Corp. - Steven(R) Wholesale Division +Diva Acquisition Corp. ("Steven") designs and markets women's fashion +footwear under the "Steven(R)" trademark through major department and better +footwear specialty stores and one (1) Company owned retail shoe store located in +New York, New York. Priced a tier above the Steve Madden(R) brand, Steven's +products are designed to appeal principally to fashion conscious women, ages 26 +to 45, who shop at department stores and footwear boutiques. The Company +recorded wholesale sales from the Steven(R) brand of $12,519,000 for the year +ended December 31, 2003, or approximately 4% of the Company's total net sales. +Stevies Inc. - Wholesale Division +The Company's Stevies Wholesale Division ("Stevies Wholesale") generated +net sales of $10,120,000 for the year ended December 31, 2003, or approximately +3% of the Company's total net sales. Stevies(R) products are marketed through +department stores such as May Department Stores, Belk, Limited Too, as well as +independent children's stores throughout the country. +Unionbay Men's Footwear +On January 7, 2003, the Company entered into a long-term license with +Seattle Pacific Industries, Inc., under which the Company has the right to use +the Unionbay(R) trademark in connection with the sale and marketing of footwear +for men and boys. Unionbay(R) is known for casual apparel in the young men, +junior and children's marketplace and is distributed nationally through +department and specialty stores. The Unionbay(R) division, which began shipping +product in the third quarter of 2003, generated net sales of $320,000 for the +year ended December 31, 2003. +Steven Madden Retail, Inc. - Retail Division +As of December 31, 2003, the Company owned and operated seventy-six (76) +retail shoe stores under the Steve Madden(R) name, one (1) under the Steven(R) +name, five (5) outlet stores and one (1) Internet store (through the +www.stevemadden.com website). In 2003, the Company opened six (6) new stores and +closed three (3) under-performing stores. Most of the Steve Madden stores are +located in major shopping malls in Arizona, California, Colorado, Connecticut, +District of Columbia, Florida, Georgia, Illinois, Louisiana, Maryland, +Massachusetts, +-2- +Michigan, Minnesota, Nevada, New Jersey, New York, Ohio, Pennsylvania, Puerto +Rico, Rhode Island, Texas, Virginia and Wisconsin. The retail stores generated +annual sales in excess of $644 per square foot. Sales are primarily from the +sale of the Company's Steve Madden(R) product line. Comparative store sales +decreased 4% in 2003 compared to 2002 while growth in sales was generated by new +stores. Total sales for the retail division were $95,518,000 for 2003. Sales +from the retail division for the year ended December 31, 2003 were approximately +29% of the Company's net sales. +The Company believes that the retail division will continue to enhance +overall sales and profits of the Company while building equity in the Steve +Madden brand. The Company plans to add eight to ten (8-10) new retail stores +during 2004. The expansion of the retail division enables the Company to test +and react to new products and classifications which, in turn, strengthens the +product development efforts of the Steve Madden wholesale division. +The Adesso-Madden, Inc. - Private Label Division +In September 1995, the Company incorporated Adesso-Madden, Inc. as a wholly +owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to mass +market merchandisers, shoe store chains and other value-priced retailers in +connection with their procurement of private label shoes. As a buying agent, A-M +arranges for shoe manufacturers to produce private label shoes to the +specifications of its clients. The Company believes that by operating in the +private label, mass merchandising market, the Company is able to maximize +additional non-branded sales opportunities. This leverages the Company's overall +sourcing and design capabilities. Currently, this division serves as a buying +agent for the procurement of women's, men's and children's footwear for large +retailers including Sears, Payless, Wal-Mart and Target. A-M receives buying +agent's commissions from its clients. The private label division generated +commission income of $5,056,000 for the year ended December 31, 2003. +Licensing +As of December 31, 2003, the Company licensed its Steve Madden trademark +for use in connection with the manufacturing, marketing and sale of outerwear +(including leather outerwear), belts, sunglasses, eyewear and hosiery. Each +license agreement requires the licensee to pay to the Company a royalty based on +net sales, a minimum royalty in the event that specified net sales targets are +not achieved and a percentage of sales for advertising of the Steve Madden(R) +brand. +Design +The Company has established a reputation for its creative designs, popular +styles and quality products at affordable price points. The Company believes +that its future success will depend in substantial part on its ability to +continue to anticipate and react to changing consumer demands in a timely +manner. To meet this objective, the Company has developed a unique design +process that allows it to recognize and act quickly to changing consumer +demands. The Company's design team works together to create designs which they +believe fit the Company's image, reflect current or future trends and can be +manufactured in a timely and cost-effective manner. Once the initial design is +complete, a prototype is developed, which is reviewed and refined prior to the +commencement of limited production. Most new Steve Madden designs are then +tested in the Steve Madden(R) retail stores. Designs that prove popular are then +offered to wholesale and retail distribution nationwide. The Company believes +that its unique design and testing process and flexible sourcing model is a +significant competitive advantage allowing the Company to mitigate the risk of +the costly production and distribution of unpopular designs. +Product Sourcing and Distribution +The Company sources each of its product lines separately based on the +individual design, styling and quality specifications of such products. The +Company does not own or operate any manufacturing facility and sources its +branded products through independently owned manufacturers in Brazil, China, +Italy, Mexico, Spain, Taiwan and the United States. The Company has established +relationships with a number of manufacturers in each country. Although the +Company has not entered into any long-term manufacturing or supply contracts, +the Company believes that a sufficient number of alternative sources exist for +the manufacture of its products. The principal materials used in the Company's +footwear are available from any number of sources, both within the United States +and in foreign countries. +-3- +The Company's design and distribution processes are intended to be +flexible, allowing the Company to respond to and accommodate changing consumer +demand. The Company's production staff tracks warehouse inventory on a regular +basis, monitors sell-through data and incorporates input on product demand from +wholesale customers. The Company can use product feedback to adjust production +or manufacture new products in as little as five weeks. Constant inventory +tracking allows the Company to manage inventory on a continuous flow basis with +the goal of optimizing inventory turns. +The Company distributes its products from two (2) third party distribution +warehouse centers located in California and New Jersey. The Company also +distributes its Internet shipments from a third party fulfillment center located +in Michigan. By utilizing distribution facilities that specialize in +distributing products to certain customers (wholesale accounts, Steve Madden +retail stores and Internet fulfillment), the Company believes that its customers +are better served. +Customers +The Company's customers consist principally of department stores and +specialty stores, including shoe boutiques. Presently, the Company sells +approximately forty-one percent (41%) of its products at wholesale to department +stores, including Federated Department Stores (Bloomingdale's, Bon Marche, +Burdines, Macy's and Rich's), May Department Stores (Famous Barr, Filene's, +Foley's, Hecht's, Lord and Taylor and Robinsons May), Dillard's, Marshall +Field's and Nordstrom; and approximately forty percent (40%) to specialty +stores, including Journeys, Limited Too and Mandees; and catalog retailers, +including Victoria's Secret and Fingerhut. For the year ended December 31, 2003, +May Department Stores and Federated Department Stores accounted for +approximately fourteen percent (14%) and thirteen percent (13%) of the Company's +wholesale sales, respectively. +Distribution Channels +The Company sells its products principally through its Company-owned retail +stores, department stores, specialty shoe stores and discount stores in the +United States and abroad. For the year 2003, retail stores and wholesale sales +accounted for approximately twenty-nine percent (29%) and seventy-one percent +(71%) of total sales, respectively. The following paragraphs describe each of +these distribution channels. +Steve Madden and Steven Retail Stores +As of December 31, 2003, the Company operated seventy-seven (77) +Company-owned retail stores (including one Internet store) under the Steve +Madden(R) name and one (1) under the Steven(R) name. The Company believes that +its retail stores will continue to enhance overall sales, profitability, and its +ability to react to changing consumer trends. The stores are also a marketing +tool which allows the Company to strengthen brand recognition and to showcase +selected items from its full line of branded and licensed products. Furthermore, +the retail stores provide the Company with a venue to test and introduce new +products and merchandising strategies. Specifically, the Company often tests new +designs at its Steve Madden(R) retail stores before scheduling them for mass +production and wholesale distribution. In addition to these test marketing +benefits, the Company has been able to leverage sales information gathered at +Steve Madden(R) retail stores to assist its wholesale accounts in order +placement and inventory management. +A typical Steve Madden(R) store is approximately 1,400 to 1,600 square feet +and is located in malls and street locations which attract the highest +concentration of the Company's core demographic -- style-conscious young women +ages 16 to 25 years old. The Steven(R) store has a more sophisticated design and +format styled to appeal to its more mature target audience. In addition to +carefully analyzing mall demographics, the Company also sets profitability +guidelines for each potential store site. Specifically, the Company targets +sites at which the demographics fit the consumer profile, the positioning of the +site is well trafficked and the projected fixed annual rent expense does not +exceed a specified percentage of sales over the life of the lease. By setting +these standards, the Company believes that each store will contribute to the +Company's overall profits both in the near- and longer-terms. +-4- +Outlet Stores +Shoe Biz, Inc., a wholly owned subsidiary of the Company ("Shoe Biz"), +operates five (5) outlet stores in New Jersey and New York, four (4) of which +operate under the Shoe Biz name and one (1) of which operates as a Steve Madden +Outlet store. Shoe Biz sells many product lines, including Steve Madden, Steven, +Stevies and l.e.i.(R) footwear, at a price lower than typically charged by other +"full price" retailers. +Department Stores +The Company currently sells to over 2,750 doors of twenty-two (22) +department stores throughout the United States and Canada. The Company's major +accounts include Federated Department Stores (Macy's, Bloomingdale's, Bon +Marche, Burdine's and Rich's), May Department Stores (Filene's, Hecht's, Famous +Barr, Foley's, Lord and Taylor and Robinsons May), Nordstrom, Dillard's and +Marshall Field's. +The Company provides merchandising support to its department store +customers which includes in-store fixtures and signage, supervision of displays +and merchandising of the Company's various product lines. The Company's +wholesale merchandising effort includes the creation of in-store concept shops, +where a broader collection of the Company's branded products are showcased. +These in-store concept shops create an environment that is consistent with the +Company's image and enable the retailer to display and stock a greater volume of +the Company's products per square foot of retail space. In addition, these +in-store concept shops encourage longer term commitment by the retailer to the +Company's products and enhance consumer brand awareness. +In addition to merchandising support, the Company's senior account +executives maintain weekly communications with their accounts to guide them in +placing orders and to assist them in managing inventory, assortment and retail +sales. The Company leverages its sell-through data gathered at its retail stores +to assist department stores in allocating their open-to-buy dollars to the most +popular styles in the product line and to phase out styles with weaker +sell-throughs. +Specialty Stores/Catalog Sales +The Company currently sells to specialty store locations throughout the +United States and Canada. The Company's major specialty store accounts include +Journeys, Limited Too and Mandees. The Company offers its specialty store +accounts the same merchandising, sell-through and inventory tracking support +offered to its department store accounts. Sales of the Company's products are +also made through various catalogs, such as Victoria's Secret. +Internet Sales +The Company operates one (1) Internet website: www.stevemadden.com. +Customers can purchase numerous styles of the Company's Steve Madden, Steven and +Steve Madden Mens footwear, accessory and clothing products. Sales derived from +the Company's Internet store increased 8% to $5,200,000 in 2003 from $4,800,000 +in 2002. +Distribution Agreements +In June 2002, the Company and Dabsan International, S.A. ("Dabsan") entered +into an agreement whereby the Company granted Dabsan the exclusive right to sell +Steve Madden products in certain Central and South American countries and the +right to develop Steve Madden retail stores in certain Central and South +American countries. Under the terms of the agreement, Dabsan is required to open +two (2) Steve Madden stores by October 31, 2004 and is also required to purchase +certain minimum amounts of Steve Madden shoes. +In February 2003, the Company and F.E.E.T. sas ("FEET") entered into a +distribution and license agreement whereby the Company granted FEET the +exclusive right to sell Steve Madden products in certain European countries with +a provision that expands the territory covered to include certain additional +European countries and in North Africa. Under the terms of the agreement, FEET +is required to purchase certain minimum amounts of Steve Madden shoes. +-5- +Competition +The fashion footwear industry is highly competitive. The Company's +competitors include specialty shoe companies as well as companies with +diversified footwear product lines. The recent substantial growth in the sales +of fashion footwear has encouraged the entry of many new competitors and +increased competition from established companies. Most of these competitors, +including Diesel, Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may +have significantly greater financial and other resources than the Company. The +Company believes effective advertising and marketing, fashionable styling, high +quality and value are the most important competitive factors and intends to +continue to employ these elements as it develops its products. +In 2001, the Company launched the Steve Madden Mens brand which competes +with several brands that are more established with greater consumer awareness, +including Kenneth Cole, Skechers Collection, Tommy Hilfiger and Dr. Martin. +Marketing and Sales +Prior to 1997, the Company's marketing plans relied heavily on its few +Steve Madden(R) retail store locations and word-of-mouth referrals. In 1998, the +Company focused on creating a more integrated brand building program to +establish Steve Madden as the leading designer of fashion footwear for +style-conscious young women. As a result, the Company developed a national +advertising campaign for lifestyle and fashion magazines which was also used in +regional marketing programs such as radio advertisements, television +commercials, outdoor media, college event sponsorship and live online chat +forums. The Company also continues to promote its website (www.stevemadden.com) +where consumers can purchase Steve Madden(R), Steven and Steve Madden Mens +products and interact with both the Company and other customers. +The Company commenced a marketing campaign for the Stevies brand with +separate marketing, advertising, promotional events and in-store displays +targeting the Stevies customer. As for Steve Madden Mens, the Company supported +the brand's roll-out with strategic marketing and advertising initiatives. +In order to service its wholesale accounts, the Company retains a sales +force of eighteen independent sales representatives. These sales representatives +work on a commission basis and are responsible for placing the Company's +products with its principal customers, including department and specialty +stores. The sales representatives are supported by the Company's senior +executives, a staff of fifteen account executives, one merchandise coordinator +and twenty-seven customer service representatives who continually cultivate +relationships with wholesale customers. This group of professionals assist +accounts in merchandising and assessing customer preferences and inventory +requirements, which ultimately serves to increase sales and profitability. +Management Information Systems (MIS) Operations +Sophisticated information systems are essential to the Company's ability to +maintain its competitive position and to support continued growth. The Company +operates on a dual AS/400 system which provides system support for all aspects +of its business including manufacturing purchase orders; customer purchase +orders; order allocations; invoicing; accounts receivable management; real time +inventory management; quick response replenishment; point-of-sale support; and +financial and management reporting functions. The Company has a PKMS bar coded +warehousing system which is integrated with the wholesale system in order to +provide accurate inventory positions and quick response size replenishment for +its customers. In addition, the Company has installed an EDI system which +provides a computer link between the Company and certain wholesale customers +that enables both the customer and the Company to monitor purchases, shipments +and invoicing. The EDI system also improves the Company's ability to respond to +customer inventory requirements on a weekly basis. +Receivables Financing; Line of Credit +Under the terms of a factoring agreement with Capital Factors, Inc., the +Company is permitted to draw down 80% of its invoiced receivables at an interest +rate of two points below the Prime Rate (as defined in such agreement). The +agreement provides that Capital Factors is not required to purchase all the +Company's receivables and requires the Company to pay an unused line fee of .25% +of the average daily unused portion of the maximum amount of the credit line. On +September 1, 1998, the Company and Capital Factors amended its Factoring +-6- +Agreement to, among other things, provide the Company with a credit line of up +to $15,000,000, subject to certain limitations. The Company has not recently +borrowed funds under its credit line with Capital Factors. The agreement with +Capital Factors was renewed for the period beginning June 30, 2002 through +December 31, 2004. Capital Factors maintains a lien on all of the Company's +inventory and receivables and assumes the credit risk for all assigned accounts +approved by it. +Trademarks and Service Marks +The STEVE MADDEN and STEVE MADDEN plus Design trademarks and service marks +have been registered in numerous International Classes (Int'l Cl. 25 for +clothing and footwear; Int'l Cl. 18 for leather goods, such as handbags and +wallets; Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry; Int'l Cl. 3 for +cosmetics and fragrances; Int'l Cl. 20 for picture frames and furniture; Int'l +Cl. 16 for paper goods; Int'l Cl. 24 for bedding; and Int'l Cl. 35 for retail +store services) in the United States. The Company also has trademark +registrations in the United States for the marks EYESHADOWS BY STEVE MADDEN +(Int'l Cl. 9 for eyewear), ICE TEE (Int'l Cl. 25 for clothing and footwear), +SOHO COBBLER (Int'l. Cl. 9 for eyewear; and Int'l Cl. 25 for clothing and +footwear), SHOE BIZ By STEVE MADDEN (Int'l Cl. 25 for clothing and footwear; and +Int'l Cl. 35 for retail store services) and STEVEN M. (Int'l Class 25 for +clothing and footwear). Additionally, the Company has several pending trademark +and service mark applications in the United States for various marks, including +a stylized "H" Design (Int'l Cl. 25 for clothing and footwear), TEST & REACT +(Int'l Cl. 42 for services consisting of conducting market studies), STEVEN +(Int'l Cl. 25 for clothing and footwear) and TORCH STRIPE (Int'l Cl. 25 for +footwear). The Company also has pending trademark and service mark applications +in China and the 15 cooperating countries in Europe for TORCH STRIPE (Int'l Cl. +25 for footwear). +The Company further owns registrations for the STEVE MADDEN and STEVE +MADDEN plus Design trademarks and service marks in various International Classes +in Argentina, Australia, Bahrain, Brazil, Canada, Chile, China, Colombia, Hong +Kong, Israel, Italy, Japan, Korea, Lebanon, Mexico, the Netherlands, Panama, +Saudi Arabia, South Africa, Taiwan, the 15 cooperating countries of Europe and +the Benelux countries and has pending applications for registration of the STEVE +MADDEN and STEVE MADDEN plus Design trademarks and service marks in Bahrain, +Belize, Costa Rica, El Salvador, Guatemala, Honduras, Korea, Kuwait, Lebanon, +Malaysia, Oman, Peru, Qatar, Saudi Arabia, Turkey, the United Arab Emirates and +Venezuela. Additionally, the Company owns registrations for the STEVEN trademark +and service mark in various International Classes in Hong Kong, Lebanon and +Japan and has pending applications for registration of the STEVEN trademark and +service mark in Canada, China, Israel, Italy, Japan, Korea, Malaysia, Oman, +Qatar, South Africa, Saudi Arabia, Taiwan, Thailand, Turkey, the United Arab +Emirates and the United States. There can be no assurance, however, that the +Company will be able to effectively obtain rights to the STEVE MADDEN mark +throughout all of the countries of the world. Moreover, no assurance can be +given that others will not assert rights in, or ownership of, trademarks and +other proprietary rights of the Company or that the Company will be able to +successfully resolve such conflicts. The failure of the Company to protect such +rights from unlawful and improper appropriation may have a material adverse +effect on the Company's business and financial condition. +Additionally, the Company, through its Diva Acquisition Corp. subsidiary, +owns registrations for the DAVID AARON trademark and service mark in various +International Classes in the United States (Int'l Cl. 25 for clothing and +footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets; and +Int'l Cl. 35 for retail store services), Australia, Canada, Hong Kong, Japan, +South Africa and the 15 cooperating countries in Europe and for its D. AARON +trademark in Spain. Also, the Company own registrations for the DAVID AARON +trademark in International Class 3 for perfume and cosmetics; International +Class 9 for eyewear; International Class 14 for jewelry; International Class 16 +for paper goods; International Class 18 for bags; International Class 24 for bed +and bath products; International Class 25 for clothing and footwear and +International Class 26 hair accessories in Korea. The Company believes that the +DAVID AARON trademark has a significant value and is important to the marketing +of the Company's products. +The Company, through its Stevies, Inc. subsidiary, also owns various +registrations for the STEVIES and STEVIES plus Design trademark and service mark +in a number of International Classes in the United States (Int'l Cl. 18 for +leather goods, such as handbags and wallets; Int'l Cl. 9 for eyewear; +International Class 35 for retail store services and, International Class 26 for +hair accessories) and for its STEVIES plus Design mark for various goods in +Argentina, Bahrain, China, Hong Kong, Israel, Japan, Korea, Lebanon, Mexico, +Taiwan and the 15 cooperating countries in Europe. Additionally Stevies, Inc. +has several pending trademark and service mark applications for +-7- +registration of the STEVIES and STEVIES plus Design marks in various +International Classes in the United States (Int'l Cl. 25 for clothing and +footwear; Int'l Cl. 14 for jewelry; Int'l Cl. 28 for toys; Int'l Cl. 26 for hair +accessories; International Class 16 for paper goods; International Class 3 for +perfume and cosmetics and, International Class 9 for CDs and eyewear) and in +Brazil, Canada, Colombia, Indonesia, Kuwait, Malaysia, Mexico, Oman, Panama, +Peru, Qatar, Saudi Arabia, South Africa, Thailand, Turkey, the United Arab +Emirates and Venezuela. Finally, Stevies, Inc. also owns several pending +trademark and service mark applications for registration of the STEVIES BY STEVE +MADDEN mark in various International Classes in the United States (Int'l Cl. 25 +for clothing and footwear; Int'l Cl. 14 for jewelry; Int'l Cl. 18 for leather +goods, such as handbags and wallets; Int'l Cl. 16 for paper goods; Int'l Cl. 3 +for cosmetics and fragrances; Int'l Cl. 9 for eyewear; Int'l Cl. 26 for hair +accessories; Int'l Cl. 28 for toys; and Int'l Cl. 35 for retail store services). +Employees +On March 4, 2004, the Company employed approximately 1,150 employees, of +whom approximately 500 work on a full-time basis and approximately 650 work on a +part-time basis. The management of the Company considers relations with its +employees to be good. \ No newline at end of file diff --git a/raw/filings/0000913241/2003/0001019056-04-000364/item13.txt b/raw/filings/0000913241/2003/0001019056-04-000364/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..ef171aefe731ac6cc0b63dced7939f7c554bc4da --- /dev/null +++ b/raw/filings/0000913241/2003/0001019056-04-000364/item13.txt @@ -0,0 +1,4 @@ +ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS +The information required to be furnished pursuant to this item will be set +forth in the Company's proxy statement for the 2004 Annual Meeting of +Stockholders, and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000913241/2003/0001019056-04-000364/item9a.txt b/raw/filings/0000913241/2003/0001019056-04-000364/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..637420ffee58bdf0ddf1d048558c1531619fd849 --- /dev/null +++ b/raw/filings/0000913241/2003/0001019056-04-000364/item9a.txt @@ -0,0 +1,18 @@ +ITEM 9A CONTROLS AND PROCEDURES +As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the +"Exchange Act"), the Company's management, including the Company's Chief +Executive Officer and Chief Financial Officer, has evaluated the effectiveness +of its disclosure controls and procedures as of the end of the fiscal year +covered by this annual report. Based on that evaluation, the Chief Executive +Officer and Chief Financial Officer have concluded that the Company's disclosure +controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) +were effective as of the end of the fiscal year covered by this annual report. +As required by Rule 13a-15(d) under the Exchange Act, the Company's management, +including the Company's Chief Executive Officer and Chief Financial Officer, has +evaluated the Company's internal controls over financial reporting to determine +whether any changes occurred during the fourth quarter of 2003 that have +materially affected, or are reasonably likely to materially affect, the +Company's internal control over financial reporting. Based on that evaluation, +there has been no such change during the fourth quarter of 2003. +-24- +PART III \ No newline at end of file diff --git a/raw/filings/0000913241/2003/0001019056-04-000364/rp_note.txt b/raw/filings/0000913241/2003/0001019056-04-000364/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000913241/2003/0001019056-04-000364/rpt_disclosure.txt b/raw/filings/0000913241/2003/0001019056-04-000364/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..82898cd243d3e477b4709030e2ded2e2db3b3453 --- /dev/null +++ b/raw/filings/0000913241/2003/0001019056-04-000364/rpt_disclosure.txt @@ -0,0 +1,42 @@ +Certain Relationships and Related Transactions +In July 2001, the Company entered into a consulting agreement with +Peter J. Solomon & Company, a financial advisory firm of which Marc Cooper, one +of the Company's directors, is a managing director. Under this agreement, the +firm provided financial advisory and investment banking services to the Company. +Pursuant to this agreement, the Company paid fees to Peter J. Solomon & Company +in the amount of $75,000 during 2001 and $150,000 during 2002. During 2003, the +Company paid $32,866 to Peter J. Solomon & Company for research and other +expenses. This agreement was amended in March 2004. Under the amended agreement, +the Company will pay fees to Peter J. Solomon & Company in the amount of +$200,000 during 2004. +The Company and Jeffrey Birnbaum, one of the Company's directors, have +entered into an agreement whereby Mr. Birnbaum provides design consultation +services to the Company. Pursuant to this agreement, Mr. Birnbaum received a fee +of $200,000 from the Company in 2003. +The Company paid John Madden, one of the Company's directors, $15,000 +in 2003 for investment consulting advice provided by Mr. Madden to the Company +in 2002. In addition, in January 2004 the Company entered into an agreement with +JLM Consultants, a company wholly-owned by Mr. Madden, whereby JLM Consultants +will provide consulting services with respect to the development of +international sales of the Company. Pursuant to this agreement, JLM Consultants +will receive a monthly fee of $16,000. +The Company had an agreement with Charles Koppelman, its Chairman, +which expired on June 30, 2003. See "Agreement with the Chairman of the Board." +The Company has an agreement with Steven Madden, a beneficial holder of +more than 10% of the Company's outstanding shares of common stock. See +"Agreement with Steven Madden." +Compensation Committee Report On Executive Compensation +The Compensation Committee is responsible for reviewing and approving +the Company's compensation policies and the compensation paid to its executive +officers, including the Chief Executive Officer and the other named executive +officers. During 2003, the Compensation Committee was comprised of directors +Peter Migliorini (chairman) and Roger Gladstone. Each member of the Compensation +Committee was a non-employee director of the Company during 2003. +The Compensation Committee's goal is to develop executive compensation +policies and practices that are consistent with and linked to the Company's long +term goal of maximizing stockholder value. The program is designed to facilitate +the long-term success and growth of the Company through the attraction, +motivation, and retention of outstanding executives. +-21- +The objectives of the Company's executive compensation programs are to: +(i) attract and retain the highest quality executives, (ii) inspire and motivate \ No newline at end of file diff --git a/raw/filings/0000913241/2004/0001019056-05-000307/filing.txt b/raw/filings/0000913241/2004/0001019056-05-000307/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..1871ab53a934fbb311a8e5d4ded1614fd04c5e86 --- /dev/null +++ b/raw/filings/0000913241/2004/0001019056-05-000307/filing.txt @@ -0,0 +1,3273 @@ +10-K +1 +smadden_k2004.txt +FORM 10-K +UNITED STATES +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 +[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE +SECURITIES AND EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2004 Commission File Number 0-23702 +STEVEN MADDEN, LTD. +(Exact name of registrant as specified in its charter) +Delaware 13-3588231 +(State or other jurisdiction of (I.R.S. employer identification no.) +incorporation or organization) +52-16 Barnett Avenue, Long Island City, New York 11104 +(Address of principal executive offices) (Zip Code) +(718) 446-1800 +(Registrant's Telephone Number, Including Area Code) +Securities Registered Pursuant to Section 12(b) of the Act: None +Securities Registered Pursuant to Section 12(g) of the Act: +Common Stock, par value $.0001 per share +Preferred Stock Purchase Rights +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 common equity held by non-affiliates of the +registrant (assuming for these purposes, but without conceding, that all +executive officers and Directors are "affiliates" of the registrant) as of June +30, 2004, the last business day of the registrant's most recently completed +second fiscal quarter, was approximately $248,171,284 (based on the closing sale +price of the registrant's common stock on that date as reported on The Nasdaq +National Market). +The number of outstanding shares of the registrant's common stock as of March +14, 2005 was 13,255,617 shares. +DOCUMENTS INCORPORATED BY REFERENCE: +PART III INCORPORATES CERTAIN INFORMATION BY REFERENCE FROM THE REGISTRANT'S +DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS SCHEDULED TO +BE HELD ON OR ABOUT MAY 27, 2005. +TABLE OF CONTENTS +PART I +ITEM 1 BUSINESS...............................................................1 +ITEM 2 PROPERTIES.............................................................8 +ITEM 3 LEGAL PROCEEDINGS......................................................9 +ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................9 +PART II +ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER +MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES...................10 +ITEM 6 SELECTED FINANCIAL DATA...............................................11 +ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION +AND RESULTS OF OPERATIONS...........................................11 +ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............26 +ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................26 +ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING +AND FINANCIAL DISCLOSURE............................................26 +ITEM 9A CONTROLS AND PROCEDURES...............................................26 +ITEM 9B OTHER INFORMATION.....................................................26 +PART III +ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................27 +ITEM 11 EXECUTIVE COMPENSATION................................................27 +ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND +MANAGEMENT AND RELATED STOCKHOLDER MATTERS..........................27 +ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................27 +ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES................................27 +PART IV +ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES............................27 +PART I +ITEM 1 BUSINESS +Steven Madden, Ltd. (together with its subsidiaries, the "Company") designs, +sources, markets and sells fashion-forward footwear brands for women, men and +children. The Company distributes products through its retail stores, its +e-commerce website, department and specialty stores throughout the United States +and Canada and through special distribution arrangements in Europe, Central and +South America, Australia and Indonesia. The Company's product line includes core +products, which are sold year-round, complemented by a broad range of updated +styles which are designed to establish or capitalize on market trends. +The Company's business is comprised of three (3) distinct segments +(wholesale, retail and private label). The wholesale division includes seven (7) +brands: Steve Madden(R), Steven(R), l.e.i.(R), Candie's(R), Stevies(R), +Unionbay(R) and Steve Madden Mens. Steven Madden Retail, Inc., the Company's +wholly-owned retail subsidiary, operates Steve Madden, Steven and Shoe Biz +retail stores as well as the Company's outlet stores and e-commerce website. The +Company's wholly-owned private label subsidiary, Adesso-Madden, Inc., designs +and sources footwear products under private labels for many of the country's +large mass merchandisers. The Company also licenses its Steve Madden(R) +trademark for several accessory and apparel categories. +Steven Madden, Ltd., was incorporated as a New York corporation on July 9, +1990 and reincorporated under the same name in Delaware in November 1998. The +Company has established a reputation for its creative designs, popular styles +and quality products at accessible price points. The Company completed its +initial public offering in December 1993 and its shares of Common Stock +currently trade on The Nasdaq National Market under the symbol "SHOO". +The Company maintains its principal executive offices at 52-16 Barnett +Avenue, Long Island City, NY 11104, telephone number (718) 446-1800. +The Company's website is http://www.stevemadden.com. The Company makes +available free of charge on its website its Annual Reports on Form 10-K, +Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments +to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the +Securities Exchange Act of 1934, as amended (the "Exchange Act"), as soon as +reasonably practicable after such material is electronically filed with, or +furnished to, the Securities and Exchange Commission (the "Commission"). The +Company will provide paper copies of such filings free of charge upon request. +Wholesale Divisions +Madden Womens Wholesale +The Steve Madden(R) Womens Wholesale Division ("Madden Womens Wholesale") +designs, produces, sources, sells and markets the Company's Steve Madden(R) +brand to major department stores, better specialty stores, and shoe stores +throughout the United States. The Steve Madden(R) product line has become a +leading footwear brand in the fashion conscious junior marketplace. To serve its +customers (primarily women ages 16 to 25), Madden Womens Wholesale creates and +markets fashion forward footwear designed to appeal to customers seeking +exciting, new footwear designs at affordable prices. +As the Company's largest division, Madden Womens Wholesale accounted for +$114,000,000 of net sales in 2004, or approximately 34% of the Company's total +net sales. Many newly created styles of Madden Womens Wholesale are test +marketed at the Company's retail stores. Within a few days, the Company can +determine if the test product appeals to customers. This enables the Company to +use its flexible sourcing model to rapidly respond to changing preferences which +the Company believes is essential for success in the fashion footwear +marketplace. +l.e.i.(R) - Wholesale Division +Pursuant to the Company's license agreement with Jones Investment Company, +Inc., the Company has the right to use the l.e.i.(R) trademark in connection +with the sale and marketing of footwear through September 30, 2006. The +l.e.i.(R) trademark is well known for jeanswear in the junior marketplace sold +nationally through department and +specialty stores. The Company's l.e.i.(R) footwear products are targeted to +attract girls and young women ages 6 to 20 years old, a majority of which are +younger than the typical Steve Madden(R) brand customer. The l.e.i. Wholesale +Division generated net sales of $38,000,000 for the year ended December 31, +2004, or approximately 11% of the Company's total net sales. +Madden Mens Wholesale +The Steve Madden Mens Wholesale Division ("Madden Mens Wholesale") markets a +full collection of directional young men's shoes through major department +stores, better specialty stores and independent shoe stores throughout the +United States. Price points range from $70 to $100 at retail, targeted at men +ages 18 to 44 years old. +Madden Mens Wholesale accounted for $31,000,000 of net sales in 2004, or +approximately 9% of the Company's total net sales. Madden Mens Wholesale, which +is primarily produced in China, maintains open stock inventory positions in +select patterns to serve the replenishment programs of its wholesale customers. +Candie's Footwear +Pursuant to the Company's license agreement with Candie's, Inc., ("Candie's") +the Company designs, manufactures, and distributes Candie's(R) branded footwear +for women and children worldwide through the Company's Candie's Wholesale +Division ("Candie's Wholesale Division"). The Candie's(R) Wholesale Division +generated net sales of $16,000,000 for the year ended December 31, 2004, or +approximately 5% of the Company's total net sales. +On December 6, 2004, the license agreement with Candie's was amended to +reflect Candie's decision to name Kohl's Corporation as the exclusive provider +of a new line of Candie's apparel. Pursuant to the amendment, commencing on +January 1, 2007, the Company will no longer have the exclusive right to market +Candie's branded footwear and will be permitted to sell Candie's branded +footwear only to Kohl's. Under the terms of the amendment, Candie's has +guaranteed that the Company will achieve minimum sales levels with Kohl's during +the term of the agreement. In the event such minimum sales levels are not +achieved, Candie's is required to compensate the Company in an amount based on a +percentage of the sales shortfall. +Diva Acquisition Corp. - Steven(R) Wholesale Division +Diva Acquisition Corp. ("Steven(R) Wholesale Division") designs and markets +women's fashion footwear under the "Steven(R)" trademark through major +department and better footwear specialty stores and one (1) Company-owned retail +shoe store located in New York City. Priced a tier above the Steve Madden(R) +brand, Steven(R) products are designed to appeal principally to fashion +conscious women, ages 26 to 45, who shop at department stores and footwear +boutiques. Steven(R) Wholesale Division generated net sales of $21,000,000 for +the year ended December 31, 2004, or approximately 6% of the Company's total net +sales. +Stevies Inc. - Wholesale Division +The Company's Stevies(R) wholesale division ("Stevies(R) Wholesale Division") +generated net sales of $10,000,000 for the year ended December 31, 2004, or +approximately 3% of the Company's total net sales. Stevies(R) products are +marketed through department stores such as May Department Stores, Belk, Limited +Too, as well as independent children's stores throughout the country. +Unionbay Men's Footwear +Pursuant to the Company's license agreement with Seattle Pacific Industries, +Inc., the Company has the right to use the Unionbay(R) trademark in connection +with the sale and marketing of footwear for men and boys. Unionbay(R) is known +for casual apparel in the young men, junior and children's marketplace and is +distributed nationally through department and specialty stores. The Company's +Unionbay(R) wholesale division generated net sales of $600,000 for the year +ended December 31, 2004, or approximately .2% of the Company's total net sales. +Steven Madden Retail, Inc. - Retail Division +As of December 31, 2004, the Company owned and operated eighty-five (85) +retail shoe stores under the Steve Madden(R) name, one (1) under the Steven(R) +name, four (4) outlet stores and one (1) Internet store (through the +2 +www.stevemadden.com website). In 2004, the Company opened ten (10) new stores +and closed two (2) under-performing stores. Most of the Steve Madden stores are +located in major shopping malls in Alabama, Arizona, California, Colorado, +Connecticut, Delaware, Florida, Georgia, Illinois, Kansas, Louisiana, Maryland, +Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, +North Carolina, Ohio, Pennsylvania, Puerto Rico, Rhode Island, Texas, Virginia, +Wisconsin and the District of Columbia. The retail stores generated annual sales +in excess of $694 per square foot. Sales are primarily from the sale of the +Company's Steve Madden(R) product line. Comparative store sales increased 8.2% +in 2004 compared to 2003 while growth in sales was generated by new stores. Net +sales for the retail division were $108,000,000 for 2004. Net sales from the +retail division for the year ended December 31, 2004 were approximately 32% of +the Company's total net sales. +The Company believes that the retail division will continue to enhance +overall sales and profits of the Company while building equity in the Steve +Madden brand. The Company plans to add twelve to fifteen (12 - 15) new retail +stores during 2005. The expansion of the retail division enables the Company to +test and react to new products and classifications which, in turn, strengthens +the product development efforts of the Steve Madden wholesale division. +The Adesso-Madden, Inc. - Private Label Division +In September 1995, the Company incorporated Adesso-Madden, Inc. as a wholly +owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to mass +market merchandisers, shoe store chains and other value-priced retailers in +connection with their procurement of private label shoes. As a buying agent, A-M +arranges for shoe manufacturers to produce private label shoes to the +specifications of its clients. The Company believes that by operating in the +private label, mass merchandising market, the Company is able to maximize +additional non-branded sales opportunities. This leverages the Company's overall +sourcing and design capabilities. Currently, this division serves as a buying +agent for the procurement of women's, men's and children's footwear for large +retailers including Sears, Payless, Wal-Mart and Target. A-M receives buying +agent's commissions from its clients. The private label division generated +commission income of $4,500,000 for the year ended December 31, 2004. +Licensing +As of December 31, 2004, the Company licensed its Steve Madden trademark for +use in connection with the manufacturing, marketing and sale of outerwear +including leather outerwear, belts, sunglasses, eyewear and hosiery. Each +license agreement requires the licensee to pay to the Company a royalty based on +net sales, a minimum royalty in the event that specified net sales targets are +not achieved and a percentage of sales for advertising of the Steve Madden(R) +brand. Licensing income was $2,310,000 for the year ended December 31, 2004. +Design +The Company has established a reputation for its creative designs, popular +styles and quality products at affordable price points. The Company believes +that its future success will depend in substantial part on its ability to +continue to anticipate and react to changing consumer demands in a timely +manner. To meet this objective, the Company has developed a unique design +process that allows it to recognize and act quickly to changing consumer +demands. The Company's design team strives to create designs which it believes +fit the Company's image, reflect current or future trends and can be +manufactured in a timely and cost-effective manner. Once the initial design is +complete, a prototype is developed, which is reviewed and refined prior to the +commencement of limited production. Most new Steve Madden designs are then +tested in the Steve Madden(R) retail stores. Designs that prove popular are then +offered to wholesale and retail distribution nationwide. The Company believes +that its unique design and testing process and flexible sourcing model is a +significant competitive advantage allowing the Company to mitigate the risk of +the costly production and distribution of unpopular designs. +Product Sourcing and Distribution +The Company sources each of its product lines separately based on the +individual design, styling and quality specifications of the products in such +product lines. The Company does not own or operate manufacturing facilities; +rather, it sources its branded products through independently owned +manufacturers in Brazil, China, Italy, Mexico, Spain, Portugal and the United +States. The Company has established relationships with a number of manufacturers +in each of these countries. Although the Company has not entered into any +long-term manufacturing or supply contracts, the Company believes that a +sufficient number of alternative sources exist for the manufacture of its +3 +products. The principal materials used in the Company's footwear are available +from a number of sources, both within the United States and in foreign +countries. +The Company's design and distribution processes are intended to be flexible, +allowing the Company to respond to and accommodate changing consumer demand. The +Company's production staff tracks warehouse inventory on a regular basis, +monitors sell-through data and incorporates input on product demand from +wholesale customers. The Company can use product feedback to adjust production +or manufacture new products in as little as five weeks. +The Company distributes its products from two (2) third party distribution +warehouse centers located in California and New Jersey. The Company also +distributes its Internet shipments from a third party fulfillment center located +in Michigan. By utilizing distribution facilities that specialize in +distributing products to certain customers wholesale accounts, Steve Madden +retail stores and Internet fulfillment, the Company believes that its customers +are better served. +Customers +The Company's wholesale customers consist principally of department stores +and specialty stores, including shoe boutiques. Presently, the Company sells +approximately fifty-five percent (55%) of its products at wholesale to +department and specialty stores, including Federated Department Stores +(Bloomingdale's, Bon Marche, and Macy's), May Department Stores (Famous Barr, +Filene's, Foley's, Hecht's, Lord and Taylor and Robinsons May), Dillard's, +Marshall Field's and Nordstrom, Journeys, Limited Too and Mandees; and catalog +retailers, including Victoria's Secret and Fingerhut. For the year ended +December 31, 2004, May Department Stores and Federated Department Stores +accounted for approximately $35,000,000 (15%) and $40,000,000 (17%) of the +Company's wholesale net sales, respectively. +Distribution Channels +The Company sells its products principally through its Company-owned retail +stores and through department stores, specialty shoe stores and discount stores +in the United States and abroad. For the year 2004, net sales from the Company's +Retail Division and the Company's Wholesale Division accounted for approximately +$108,000,000 (32%) and $230,000,000 (68%) of the Company's total net sales, +respectively. The following paragraphs describe each of these distribution +channels. +Steve Madden and Steven Retail Stores +As of December 31, 2004, the Company operated eighty six (86) Company-owned +retail stores (including one Internet store) under the Steve Madden(R) name and +one (1) under the Steven(R) name. The Company believes that its retail stores +will continue to enhance overall sales, profitability, and its ability to react +to changing consumer trends. The stores are also a marketing tool which allows +the Company to strengthen brand recognition and to showcase selected items from +its full line of branded and licensed products. Furthermore, the retail stores +provide the Company with a venue to test and introduce new products and +merchandising strategies. Specifically, the Company often tests new designs at +its Steve Madden(R) retail stores before scheduling them for mass production and +wholesale distribution. In addition to these test marketing benefits, the +Company has been able to leverage sales information gathered at Steve Madden(R) +retail stores to assist its wholesale accounts in order placement and inventory +management. +A typical Steve Madden(R) store is approximately 1,400 to 1,600 square feet +and is located in malls and street locations which attract the highest +concentration of the Company's core demographic - style-conscious young women +ages 16 to 25 years old. The Steven(R) store has a more sophisticated design and +format styled to appeal to its more mature target audience. In addition to +carefully analyzing mall demographics, the Company also sets profitability +guidelines for each potential store site. Specifically, the Company targets well +trafficked sites at which the demographics fit the Company's consumer profile +and seeks to model new locations such that the projected fixed annual rent +expense does not exceed a specified percentage of projected sales over the life +of the lease. By setting these standards, the Company believes that each store +will contribute to the Company's overall profits both in the near- and +longer-terms. +4 +Outlet Stores +Shoe Biz, Inc., a wholly owned subsidiary of the Company ("Shoe Biz"), +operates three (3) outlet stores in New Jersey and New York, two (2) of which +operate under the Shoe Biz name and one (1) of which operates as a Steve Madden +Outlet store. Shoe Biz sells many product lines, including Steve Madden, Steven, +Stevies and l.e.i.(R) footwear, at a price lower than typically charged by other +"full price" retailers. +Department Stores +The Company currently sells to over 3,204 doors of twenty-two (22) department +stores throughout the United States and Canada. The Company's major accounts +include Federated Department Stores (Macy's, Bloomingdale's and Bon Marche), May +Department Stores (Filene's, Hecht's, Famous Barr, Foley's, Lord and Taylor and +Robinsons May and Marshall Fields'), Nordstrom and Dillard's. +The Company provides merchandising support to its department store customers +which includes in-store fixtures and signage, supervision of displays and +merchandising of the Company's various product lines. The Company's wholesale +merchandising effort includes the creation of in-store concept shops, where a +broader collection of the Company's branded products are showcased. These +in-store concept shops create an environment that is consistent with the +Company's image and enable the retailer to display and stock a greater volume of +the Company's products per square foot of retail space. In addition, these +in-store concept shops encourage longer term commitment by the retailer to the +Company's products and enhance consumer brand awareness. +In addition to merchandising support, the Company's key account executives +maintain weekly communications with their accounts to guide them in placing +orders and to assist them in managing inventory, assortment and retail sales. +The Company leverages its sell-through data gathered at its retail stores to +assist department stores in allocating their open-to-buy dollars to the most +popular styles in the product line and to phase out styles with weaker +sell-throughs. +Specialty Stores/Catalog Sales +The Company currently sells to specialty store locations throughout the +United States and Canada. The Company's major specialty store accounts include +Journeys, Mandees, Famous footwear and DSW. The Company offers its specialty +store accounts the same merchandising, sell-through and inventory tracking +support offered to its department store accounts. Sales of the Company's +products are also made through various catalogs, such as Victoria's Secret. +Internet Sales +The Company operates one (1) Internet website: www.stevemadden.com. Customers +can purchase numerous styles of the Company's Steve Madden(R), Steven and Steve +Madden Mens footwear, accessory and clothing products. Sales derived from the +Company's Internet website were $5,200,000 in 2004. +Distribution Agreements +In June 2002, the Company and Dabsan International, S.A. ("Dabsan") entered +into an agreement whereby the Company granted Dabsan the exclusive right to sell +Steve Madden products in certain Central and South American countries and the +right to develop Steve Madden retail stores in certain Central and South +American countries. Under the terms of the agreement, Dabsan was required to +purchase certain minimum amounts of Steve Madden shoes. Dabsan was also required +to open two (2) Steven Madden stores by October 31, 2004. However, in November +2004, Dabsan and the Company mutually agreed that it was not practicable to +enforce this requirement. +In February 2003, the Company and F.E.E.T. sas ("FEET") entered into a +distribution and license agreement whereby the Company granted FEET the +exclusive right to sell Steve Madden products in certain European countries with +a provision that expands the territory covered to include certain additional +European countries and North Africa. Under the terms of the agreement, FEET is +required to purchase certain minimum amounts of Steve Madden shoes. FEET is +currently in default of its minimum purchase requirements and the parties are in +discussion relating to the possible modification of the original terms of the +agreement. +5 +In May 2004, the Company and Les Importations Gelati Inc. ("Gelati") entered +into a retail sales agreement whereby the Company granted Gelati the exclusive +right to establish and operate Steve Madden retail stores in Canada. Under the +terms of the agreement Gelati is required to pay the Company a minimum annual +royalty for each store in operation in addition to a royalty for each pair of +footwear sold in the stores. Gelati is required to open one store per year in +2004, 2005 and 2006. +In June 2004, the Company and Steve Madden (Aust) Pty Ltd ("Madden +Australia") entered into a distribution agreement whereby the Company granted +Madden Australia the exclusive right to sell certain Steve Madden products in +Australia and New Zealand. Under the terms of the agreement, Madden Australia is +required to purchase certain minimum amounts of Steve Madden shoes and received +a right of first refusal with regard to the distribution of new licenses, +products or trademarks in the territory. The term of the contract is three years +(with an option to renegotiate certain terms after two years) plus one option +for an additional five (5) years if certain minimum purchase requirements are +met. +Competition +The fashion footwear industry is highly competitive. The Company's +competitors include specialty shoe companies as well as companies with +diversified footwear product lines. Many of these competitors, including Diesel, +Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may have greater +financial and other resources than the Company. The Company believes effective +advertising and marketing, fashionable styling, high quality and value are the +most important competitive factors and intends to continue to employ these +elements as it develops its products. +Marketing and Sales +The Company has focused on creating an integrated brand building program to +establish Steve Madden as the leading designer of fashion footwear for +style-conscious young women and men. As a result, the Company developed a +national advertising campaign for lifestyle and fashion magazines which was also +used in regional marketing programs such as radio advertisements, television +commercials, outdoor media, college event sponsorship and live online chat +forums. The Company also continues to promote its website (www.stevemadden.com) +where customers can purchase Steve Madden(R), Steven and Steve Madden Mens +products and interact with both the Company and other customers. +In order to service its wholesale accounts, the Company retains a sales force +of eighteen independent sales representatives. These sales representatives work +on a commission basis and are responsible for placing the Company's products +with its principal customers, including department and specialty stores. The +sales representatives are supported by the Company's senior executives, a staff +of twelve account executives, two merchandise coordinator and twenty customer +service representatives who continually cultivate relationships with wholesale +customers. This group of professionals assist accounts in merchandising and +assessing customer preferences and inventory requirements, which ultimately +serves to increase sales and profitability. +Management Information Systems (MIS) Operations +Sophisticated information systems are essential to the Company's ability to +maintain its competitive position and to support continued growth. The Company +operates on a dual AS/400 system which provides system support for all aspects +of its business including manufacturing purchase orders; customer purchase +orders; order allocations; invoicing; accounts receivable management; real time +inventory management; quick response replenishment; point-of-sale support; and +financial and management reporting functions. The Company has a PKMS bar coded +warehousing system which is integrated with the wholesale system in order to +provide accurate inventory positions and quick response size replenishment for +its customers. In addition, the Company has installed an EDI system which +provides a computer link between the Company and certain wholesale customers +that enables both the customer and the Company to monitor purchases, shipments +and invoicing. The EDI system also improves the Company's ability to respond to +customer inventory requirements on a weekly basis. +6 +Receivables Financing; Line of Credit +Under the terms of a factoring agreement with Capital Factors, Inc., the +Company is permitted to draw down 80% of its invoiced receivables at an interest +rate of one point below the Prime Rate (as defined in such agreement). The +agreement provides that Capital Factors is not required to purchase all the +Company's receivables and requires the Company to pay an unused line fee of .25% +of the average daily unused portion of the maximum amount of the credit line. On +September 1, 1998, the Company and Capital Factors amended its Factoring +Agreement to, among other things, provide the Company with a credit line of up +to $15,000,000, subject to certain limitations. The Company has not recently +borrowed funds under its credit line with Capital Factors. The agreement with +Capital Factors will continue in full force until terminated by either party +upon sixty days notice. Capital Factors maintains a lien on all of the Company's +receivables and assumes the credit risk for all assigned accounts approved by +it. +Trademarks and Service Marks +The STEVE MADDEN and STEVE MADDEN plus Design trademarks and service marks +have been registered in numerous International Classes (Int'l Cl. 25 for +clothing and footwear; Int'l Cl. 18 for leather goods, such as handbags and +wallets; Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry; Int'l Cl. 3 for +cosmetics and fragrances; Int'l Cl. 20 for picture frames and furniture; Int'l +Cl. 16 for paper goods; Int'l Cl. 24 for bedding; and Int'l Cl. 35 for retail +store services) in the United States. The Company also has trademark +registrations in the United States for the marks EYESHADOWS BY STEVE MADDEN +(Int'l Cl. 9 for eyewear), ICE TEE (Int'l Cl. 25 for clothing and footwear), +SHOE BIZ By STEVE MADDEN (Int'l Cl. 25 for clothing and footwear; and Int'l Cl. +35 for retail store services) and STEVEN M. (Int'l Class 25 for clothing and +footwear). Additionally, the Company has several pending trademark and service +mark applications in the United States for various marks, including a stylized +"H" Design (Int'l Cl. 25 for clothing and footwear), and STEVEN (Int'l Cl. 25 +for clothing and footwear). The Company also has pending trademark and service +mark applications in China and the 25 cooperating countries in Europe for TORCH +STRIPE (Int'l Cl. 25 for footwear). +The Company further owns registrations for the STEVE MADDEN and STEVE MADDEN +plus Design trademarks and service marks in various International Classes in +Argentina, Australia, Bahrain, Brazil, Canada, Chile, China, Colombia, Hong +Kong, Israel, Italy, Japan, Korea, Mexico, Panama, Saudi Arabia, South Africa, +Taiwan, the 25 cooperating countries of Europe and the Benelux countries and has +pending applications for registration of the STEVE MADDEN and STEVE MADDEN plus +Design trademarks and service marks in Bahrain, Belize, Costa Rica, El Salvador, +Guatemala, Honduras, Korea, Kuwait, Lebanon, Malaysia, Oman, Peru, Qatar, Saudi +Arabia, Turkey, the United Arab Emirates and Venezuela. Additionally, the +Company owns registrations for the STEVEN trademark and service mark in various +International Classes in Hong Kong, Lebanon and Japan and has pending +applications for registration of the STEVEN trademark and service mark in China, +Israel, Italy, Japan, Korea, Malaysia, Oman, Qatar, South Africa, Saudi Arabia, +Taiwan, Thailand, Turkey, the United Arab Emirates and the United States. There +can be no assurance, however, that the Company will be able to effectively +obtain rights to the STEVE MADDEN mark throughout all of the countries of the +world. Moreover, no assurance can be given that others will not assert rights +in, or ownership of, trademarks and other proprietary rights of the Company or +that the Company will be able to successfully resolve such conflicts. The +failure of the Company to protect such rights from unlawful and improper +appropriation may have a material adverse effect on the Company's business and +financial condition. +Additionally, the Company, through its Diva Acquisition Corp. subsidiary, +owns registrations for the DAVID AARON trademark and service mark in various +International Classes in the United States (Int'l Cl. 25 for clothing and +footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets; and +Int'l Cl. 35 for retail store services), Australia, Canada, Hong Kong, Japan, +Korea, South Africa and the 25 cooperating countries in Europe and for its D. +AARON trademark in Spain. Also, the Company own registrations for the DAVID +AARON trademark in International Class 3 for perfume and cosmetics; +International Class 9 for eyewear; International Class 14 for jewelry; +International Class 16 for paper goods; International Class 18 for bags; +International Class 24 for bed and bath products; International Class 25 for +clothing and footwear and International Class 26 hair accessories in Korea. The +Company believes that the DAVID AARON trademark has a significant value and is +important to the marketing of the Company's products. +The Company, through its Stevies, Inc. subsidiary, also owns various +registrations for the STEVIES and STEVIES plus Design trademark and service mark +in a number of International Classes in the United States (Int'l Cl. 18 for +7 +leather goods, such as handbags and wallets; Int'l Cl. 9 for eyewear; +International Class 35 for retail store services and, International Class 26 for +hair accessories) and for its STEVIES plus Design mark for various goods in +Argentina, Bahrain, China, Hong Kong, Israel, Japan, Korea, Lebanon, Mexico, +Taiwan and the 25 cooperating countries in Europe. Additionally Stevies, Inc. +has several pending trademark and service mark applications for registration of +the STEVIES and STEVIES plus Design marks in various International Classes in +the United States (Int'l Cl. 25 for clothing and footwear; Int'l Cl. 14 for +jewelry; Int'l Cl. 28 for toys; Int'l Cl. 26 for hair accessories; International +Class 16 for paper goods; International Class 3 for perfume and cosmetics and, +International Class 9 for CDs and eyewear) and in Brazil, Canada, Colombia, +Indonesia, Kuwait, Malaysia, Mexico, Oman, Panama, Peru, Qatar, Saudi Arabia, +South Africa, Thailand, Turkey, the United Arab Emirates and Venezuela. Finally, +Stevies, Inc. also owns several pending trademark and service mark applications +for registration of the STEVIES BY STEVE MADDEN mark in various International +Classes in the United States (Int'l Cl. 25 for clothing and footwear; Int'l Cl. +14 for jewelry; Int'l Cl. 18 for leather goods, such as handbags and wallets; +Int'l Cl. 16 for paper goods; Int'l Cl. 3 for cosmetics and fragrances; Int'l +Cl. 9 for eyewear; Int'l Cl. 26 for hair accessories; Int'l Cl. 28 for toys; and +Int'l Cl. 35 for retail store services). +Employees +On February 17, 2005, the Company employed approximately 1,510 employees, of +whom approximately 490 work on a full-time basis and approximately 1,020 work on +a part-time basis. The management of the Company considers relations with its +employees to be good. +ITEM 2 PROPERTIES +The Company maintains approximately 33,000 square feet for its executive +offices and sample production facilities at 52-16 Barnett Avenue, Long Island +City, NY 11104. The lease for the Company's headquarters expires on June 30, +2008 and can be extended, at the option of the Company, through June 30, 2013. +The Company's showroom is located at 1370 Avenue of the Americas, New York, +NY. All of the Company's brands are displayed for sale from this 9,917 square +foot space. The lease for the Company's showroom expires on February 28, 2013. +The Company also maintains a 807 square foot showroom located at Fashion +Center Dallas in the World Trade Center, Dallas, Texas. The lease for this +showroom expires on April 30, 2007. +The Company also currently engages three independent distributors to +warehouse and distribute its products. +The Company's private label division, Adesso Madden, maintains approximately +3,120 square feet of office and showroom space at 99 Seaview Boulevard, Port +Washington, N.Y. The lease for Adesso Madden expires on May 31, 2006. +All of the Company's retail stores are leased pursuant to leases that under +their original term extend for an average of ten years in length. A majority of +the leases include clauses that provide for contingent rental payments if gross +sales exceed certain targets. In addition, a majority of the leases enable the +Company and/or the landlord to terminate the lease in the event that the +Company's gross sales do not achieve certain minimum levels during a prescribed +period. Many of the leases contain rent escalation clauses to compensate for +increases in operating costs and real estate taxes +8 +The current terms of the Company's retail store leases expire as follows: +Years Lease Terms Expire Number of Stores +------------------------------- ----------------------- +2005 4 +2006 1 +2007 6 +2008 12 +2009 11 +2010 11 +2011 14 +2012 9 +2013 11 +2014 11 +ITEM 3 LEGAL PROCEEDINGS +Except as set forth below, no material legal proceedings are pending to which +the Company or any of its property is subject. +On December 15, 2003, the Company commenced an action against La Rue +Distributors, Inc. ("LaRue") in the United States District Court for the +Southern District of New York. The Company seeks a declaratory judgment that the +Company properly terminated a license agreement with LaRue and monetary damages +for breach of the license agreement and trademark infringement by LaRue. On +January 20, 2004, LaRue served an answer and counterclaim alleging that the +license agreement was improperly terminated by the Company and seeking +$9,900,000 in compensatory damages, as well as additional punitive damages. The +parties have served cross-motions for summary judgment which were submitted to +the court on February 28, 2005. If either side prevails on its motion the court +will likely order an assessment of damages. If neither motion is granted, a +trial will be scheduled for later in 2005. The Company believes that it has +substantial defenses to the counterclaims asserted by LaRue. The Company has +retained an expert which has calculated the damages to LaRue, assuming LaRue +prevails on its claim of improper termination of the license agreement, to be +less than $1,000,000. +On or about July 9, 2004, an action was filed in the United States District +Court for the Southern District of New York against the Company by Robert Marc +for trademark infringement, captioned Robert Marc v. Steve Madden, Ltd., Case +No. 04 CV 5354 (JGK). In the action Robert Marc claims trademark infringement in +connection with a "bar and dot" design on the sides of certain eyewear. The +alleged infringing eyeglasses are manufactured and sold by the Company's +licensee for eyewear, Colors in Optics, which is also a defendant in the action. +Colors in Optics assumed responsibility for the defense of this action. The +matter was settled with no payment of money by Steven Madden. Steven Madden Ltd. +signed the settlement papers on or about February 10, 2005 and a dismissal +should be filed shortly. +On or about December 20, 2004, an action was filed in the United States +District Court for the Central District of California against the Company by +Global Brand Marketing Inc. (GBMI) for patent infringement, captioned Global +Brand Marketing Inc. v. Steven Madden Ltd., Case No. CV04-10339 (RJK-AJW (RZx)). +In the action GBMI claims infringement of a design patent in connection with a +shoe sold by Steven Madden referred to as the "Ronan." The parties are in the +process of discussing settlement. The Company believes that this action will not +have a material effect on the Company's financial position. +On April 26, 2004, the Commission sent the Company a letter requesting +information and documents relating to, among other things, Steven Madden's +employment with the Company. The Company has responded to this request. +ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS +No matters were submitted to a vote of the holders of the Company's Common +Stock during the last quarter of its fiscal year ended December 31, 2004. +9 +PART II +ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER +MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +The Company's shares of common stock trade on The Nasdaq National Market. The +following table sets forth the range of high and low closing sales prices for +the Company's Common Stock during each fiscal quarter during the two-year period +ended December 31, 2004 as reported by The Nasdaq National Market. The quotes +represent inter-dealer prices without adjustment or mark-ups, mark-downs or +commissions and may not necessarily represent actual transactions. The trading +volume of the Company's securities fluctuates and may be limited during certain +periods. As a result, the liquidity of an investment in the Company's securities +may be adversely affected. +Common Stock +High Low High Low +---------- ---------- ---------- ---------- +2004 2003 +Quarter ended Quarter ended +March 31, March 31, +2004 21.61 17.75 2003 19.35 14.83 +Quarter ended Quarter ended +June 30, June 30, +2004 20.70 17.66 2003 22.35 15.27 +Quarter ended Quarter ended +September 30, September 30, +2004 20.24 15.59 2003 22.34 18.76 +Quarter ended Quarter ended +December 31, December 31, +2004 19.79 15.79 2003 22.65 18.98 +On March 14, 2005, the final quoted price as reported by The Nasdaq National +Market was $16.89 for each share of common stock. As of March 14, 2005, there +were 13,255,617 shares of Common Stock outstanding and 72 record holders. +Dividends. The Company did not declare or pay cash dividends during the +two-year period ended December 31, 2004. Pursuant to an agreement reached on +February 2, 2005 with an 8% shareholder, the Company has agreed to commit $25 +million in 2005 and $10 million in 2006 to a combination of share repurchases +and/or dividends, such programs to be implemented at such time and such manner +as the board of directors shall determine in its sole discretion. +Equity Compensation Plans. Information regarding our equity compensation +plans as of December 31, 2004 is disclosed in Item 12. "Security Ownership of +Certain Beneficial Owners and Management and Related Stockholder Matters." +Issuer Repurchases of Equity Securities. The following table provides +information as of December 31, 2004 with respect to the shares of common stock +repurchased by the Company during the fourth quarter of fiscal 2004: +Maximum Dollar +Total Number of Amount of Shares +Shares Purchased that May Yet Be +Total Number as Part of Publicly Purchased Under the +of Shares Average Price Announced Plans Plans or Programs +Period Purchased Paid per Share or Programs (1) (1) +------------------- ---------- -------------- ------------------- ------------------- +10/1/04 - 10/31/04 116,800 17.23 116,800 $12,745,392 +11/1/04 - 11/30/04 145,400 16.82 145,400 $10,299,846 +12/1/04 - 12/31/04 0 +---------- -------------- ------------------- ------------------- +Total 262,200 17.00 262,200 $10,299,846 +10 +----------------- +(1) The Company's previously announced share repurchase program, effective as +of January 1, 2004, provides for share repurchases in the aggregate amount +of $20 million and has no set expiration or termination date. +ITEM 6 SELECTED FINANCIAL DATA +The following selected financial data has been derived from the Company's +audited financial statements. The Income Statement Data relating to 2004, 2003, +2002, 2001 and 2000 and the Balance Sheet Data as of December 31, 2004, 2003, +2002, 2001 and 2000 should be read in conjunction with the Company's audited +consolidated financial statements and notes thereto appearing elsewhere herein. +Year Ended December 31, +--------------------------------------------------------------------------------- +2004 2003 2002 2001 2000 +------------- ------------- ------------- ------------- ------------- +INCOME STATEMENT DATA: +Net sales $ 338,144,000 $ 324,204,000 $ 326,136,000 $ 243,391,000 $ 205,113,000 +Cost of sales 215,475,000 198,185,000 199,453,000 143,518,000 115,495,000 +Gross profit 122,669,000 126,019,000 126,683,000 99,873,000 89,618,000 +Commissions and licensing fee 6,806,000 7,894,000 6,603,000 5,911,000 4,847,000 +Operating expenses (110,494,000) (100,287,000) (100,074,000) (79,472,000) (68,833,000) +Cost of loss mitigation coverage (6,950,000) +Income from operations 18,981,000 33,626,000 33,212,000 19,362,000 25,632,000 +Interest income 2,009,000 1,611,000 1,166,000 1,344,000 1,744,000 +Interest expense (68,000) (54,000) (16,000) (66,000) (102,000) +Gain on sale of marketable +securities 32,000 136,000 66,000 71,000 230,000 +Income before provision for income +taxes 20,954,000 35,319,000 34,428,000 20,711,000 27,504,000 +Provision for income taxes 8,679,000 14,865,000 14,587,000 8,595,000 11,461,000 +Net Income 12,275,000 20,454,000 19,841,000 12,116,000 16,043,000 +Basic income per share $ 0.93 $ 1.58 $ 1.58 $ 1.04 $ 1.42 +Diluted income per share $ 0.86 $ 1.45 $ 1.45 $ 0.94 $ 1.26 +Basic weighted average common +shares outstanding 13,148,869 12,985,265 12,594,861 11,617,862 11,310,130 +Effect of potential common +shares from exercise of +options and warrants 1,074,080 1,153,246 1,115,018 1,330,002 1,387,244 +Diluted weighted average common +shares outstanding 14,222,949 14,138,511 13,709,879 12,947,864 12,697,374 +BALANCE SHEET DATA +Total assets 186,430,000 177,870,000 150,500,000 121,862,000 91,733,000 +Working capital 101,417,000 105,140,000 86,461,000 82,633,000 57,207,000 +Noncurrent liabilities 2,088,000 1,828,000 1,532,000 1,313,000 1,130,000 +Stockholders' equity 164,665,000 159,187,000 130,075,000 102,360,000 76,566,000 +ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND +RESULTS OF OPERATIONS +The following discussion of the Company's financial condition and results of +operations should be read in conjunction with the audited Financial Statements +and Notes thereto appearing elsewhere in this document. +Statements in this "Management's Discussion and Analysis of Financial +Condition and Results of Operations" and elsewhere in this document as well as +statements made in press releases and oral statements that may be made by the +Company or by officers, directors or employees of the Company acting on the +Company's behalf that are not statements of historical or current fact +constitute "forward-looking statements" within the meaning of the Private +Securities Litigation Reform Act of 1995. Such forward-looking statements +involve known and unknown risks, uncertainties and other unknown factors that +11 +could cause the actual results of the Company to be materially different from +the historical results or from any future results expressed or implied by such +forward-looking statements. In addition to statements which explicitly describe +such risks and uncertainties, readers are urged to consider statements labeled +with the terms "believes," "belief," "expects," "intends," "anticipates," +"projects," or "plans" to be uncertain forward-looking statements. The +forward-looking statements contained herein are also subject generally to other +risks and uncertainties that are described from time to time in the Company's +reports and registration statements filed with the Securities and Exchange +Commission. +Overview +($ in thousands, except retail sales data per square foot) +Several initiatives implemented by the Company during the past year helped to +solidify the Company's position as a major footwear resource for both retailers +and consumers. One such initiative was the diversification of the Company's core +brand. The evolution of the Steve Madden Womens brand from its traditional +casual base into broader categories (such as dress, tailored and at-once trend +items) resulted in improved sales performance for the division. Net sales for +Steve Madden Womens increased 4% to $113,879 in 2004 compared to $109,285 in +2003. +Another initiative of the Company was to broaden its demographic reach by +growing the Steven Shoes by Steve Madden label, and by the addition of two new +divisions. The Steven brand is priced a tier above the Steve Madden brand and is +designed to attract a new customer, principally fashion conscious women, ages 26 +to 45, who shop at department stores and footwear boutiques. Net sales of that +division increased 68% to $21,039 in 2004 compared to $12,519 in 2003 while +income from operations increased 110% to $2,367 in 2004 compared to $1,128 in +2003. One of the Company's new licenses, Candie's footwear, is designed for +young women and girls who are generally younger than the typical Steve Madden +customer. In its first full year of operation, the Candie's division had net +sales of $15,584. The Unionbay Men's division, designed to give the Company +entry into the young men's market, first full year of operation proved to be +disappointing and resulted in net sales of $578. +Finally, the Company continued its strategy of growing the Retail Division by +opening ten new stores while closing two underperforming stores. Net sales in +the retail division increased 13% to $107,797 in 2004 from $95,518 in 2003. Same +store sales (sales in stores that were in operation throughout all of 2003 and +2004) increased 8% while sales per square foot increased to $694 per square foot +compared to $644 per square foot last year. The Company is planning to open +twelve to fifteen (12-15) new stores in 2005. +The Company faced many difficult challenges during the past year. Sales in +the l.e.i. division decreased 37% to $38,391 this year from $60,623 last year +while income from operations decreased 94% to $580 in 2004 from $8,949 in 2003. +The decrease in sales was due to a reduction in consumer demand for casual +styles and stiff wholesale customer resistance to the evolution of l.e.i. into a +sizeable dress shoe resource. Management anticipates that 2005 will continue to +present challenges for this division in sales volume. +The Company's gross profit decreased to 36% this year from 39% last year. +Several issues impact the Company's gross profit. The Company has expanded its +presence in several product classifications in which Steve Madden is not the +dominant brand. In those segments, the consumer price parameter is being set by +the broader market, forcing the Company to adapt its pricing strategy to remain +competitive, which frequently results in lower margins. The sluggish performance +of l.e.i. resulted in a decrease of gross profit in that division of $11,791, +which adversely affected the consolidated gross profit of the Company. +Additionally, a difficult markdown environment in 2004 depressed gross profit +margins by increasing markdowns and allowances as a percentage of sales by 1% of +gross sales. The Company expects gross profit margin pressure in both the +wholesale and retail businesses to continue throughout 2005. +The Company's inventory turnover decreased to 7.4 times in 2004 compared to +9.2 times in 2003, reflecting an increase in inventory levels to $34,384 this +year compared with $23,858 last year. The increase in inventory is partially due +to the broader assortment of SKUs required for new product classifications, the +additional inventory required to support Mens open stock, and the addition of +the Candie's division. Additionally, the retail inventory increased due to the +net addition of eight stores. The Company's accounts receivable average +collection days increased to 64 days from 52 days a year ago. The slowdown in +collecting receivables is due to an increase in business with mass merchant +retailers who typically receive extended payment terms. +12 +As of December 31, 2004, the Company has approximately $79,977 in cash, cash +equivalents and investment securities, no short or long term debt, and total +stockholders equity of $164,665. Working capital decreased from $105,140 in 2003 +to $101,417 in 2004, reflecting management's decision to move a portion of +excess cash into long-term marketable securities. The Company repurchased +545,100 shares of common stock this year in the total amount of $9,700, +reflecting management's continued confidence in the Company's long-term +prospects and its commitment to enhance shareholder value. +13 +The following tables set forth information on operations for the periods +indicated: +Selected Financial Information +Years Ended +December 31 +($ in thousands) +2004 2003 2002 +---------------------- ---------------------- --------------------- +Consolidated: +------------ +Net Sales $ 338,144 100% $ 324,204 100% $ 326,136 100% +Cost of Sales 215,475 64 198,185 61 199,453 61 +Gross Profit 122,669 36 126,019 39 126,683 39 +Other Operating Income 6,806 2 7,894 2 6,603 2 +Operating Expenses 110,494 33 100,287 31 100,074 31 +Income from Operations 18,981 5 33,626 10 33,212 10 +Interest and Other 1,973 1 1,693 1 1,216 1 +Income Net +Income Before Income 20,954 6 35,319 11 34,428 11 +Taxes +Net Income 12,275 4 20,454 6 19,841 6 +By Segment: +WHOLESALE DIVISIONS: +------------------- +Steven Madden, Ltd. (Madden Womens): +----------------------------------- +Net Sales $ 113,879 100% $ 109,285 100% $ 108,577 100% +Cost of Sales 82,414 72 77,313 71 75,080 69 +Gross Profit 31,465 28 31,972 29 33,497 31 +Other Operating Income 2,310 2 2,827 3 1,736 2 +Operating Expenses 28,828 25 27,630 25 27,714 26 +Income from Operations 4,947 5 7,169 7 7,519 7 +l.e.i. Footwear: +--------------- +Net Sales $ 38,391 100% $ 60,623 100% $ 55,665 100% +Cost of sales 27,575 72 38,016 63 35,368 64 +Gross Profit 10,816 28 22,607 37 20,297 36 +Operating Expenses 10,236 27 13,658 22 14,165 25 +Income from Operations 580 1 8,949 15 6,132 11 +Madden Mens: +----------- +Net Sales $ 31,301 100% $ 34,881 100% $ 45,153 100% +Cost of sales 21,525 69 22,803 65 29,022 64 +Gross Profit 9,776 31 12,078 35 16,131 36 +Operating Expenses 8,742 28 8,277 24 10,330 23 +Income from Operations 1,034 3 3,801 11 5,801 13 +Candie's Footwear: +----------------- +Net Sales $ 15,584 100% $ 938 100% -- -- +Cost of sales 11,535 74 532 57 -- -- +Gross Profit 4,049 26 406 43 -- -- +Operating Expenses 4,357 28 748 80 -- -- +Loss from Operations (308) (2) (342) (37) -- -- +14 +Selected Financial Information +Years Ended +December 31 +($ in thousands) +2004 2003 2002 +---------------------- ---------------------- --------------------- +By Segment (Continued) +WHOLESALE DIVISIONS (Continued): +------------------------------- +Diva Acquisition Corp. (Steven): +------------------------------- +Net Sales $ 21,039 100% $ 12,519 100% $ 11,194 100% +Cost of Sales 13,398 64 8,031 64 8,117 73 +Gross Profit 7,641 36 4,488 36 3,077 27 +Operating Expenses 5,274 25 3,360 27 2,645 23 +Income from Operations 2,367 11 1,128 9 432 4 +Stevies Inc.: +------------ +Net Sales $ 9,575 100% $ 10,120 100% $ 13,664 100% +Cost of sales 6,623 69 6,611 65 8,777 64 +Gross Profit 2,952 31 3,509 35 4,887 36 +Other Operating Income -- -- 11 0 97 1 +Operating Expenses 2,746 29 2,262 22 3,205 24 +Income from Operations 206 2 1,258 13 1,779 13 +Unionbay Men's Footwear: +----------------------- +Net Sales $ 578 100% $ 320 100% -- -- +Cost of Sales 528 91 213 67 -- -- +Gross Profit 50 9 107 33 -- -- +Operating Expenses 604 105 481 150 -- -- +Loss from Operations (554) (96) (374) (117) -- -- +RETAIL DIVISION: +--------------- +Steven Madden Retail Inc.: +------------------------- +Net Sales $ 107,797 100% $ 95,518 100% $ 91,883 100% +Cost of Sales 51,877 48 44,666 47 43,089 47 +Gross Profit 55,920 52 50,852 53 48,794 53 +Operating Expenses 47,489 44 41,719 44 39,793 43 +Income from Operations 8,431 8 9,133 9 9,001 10 +Number of Stores 91 83 80 +ADESSO MADDEN INC.: +------------------ +(FIRST COST) +Other Operating Revenue $ 4,496 100% $ 5,056 100% $ 4,770 100% +Operating Expenses 2,218 49 2,152 43 2,222 47 +Income from Operations 2,278 51 2,904 57 2,548 53 +15 +RESULTS OF OPERATIONS +($ in thousands) +Year Ended December 31, 2004 vs. Year Ended December 31, 2003 +Consolidated: +------------ +Total net sales for the year ended December 31, 2004 increased by 4% to $338,144 +in 2004 from $324,404 for the comparable period of 2003. Sales increases from +the Retail Division, the new Candie's Wholesale Division, Steven Wholesale +Division and the Madden Womens Wholesale Division were offset by declines in the +l.e.i., Madden Mens and Stevies Wholesale Divisions. +Gross profit as a percentage of sales decreased to 36% in 2004 from 39% in 2003. +This was primarily due to an increase in cost of sales due to higher inventory +costs associated with the utilization of product sourcing that provided shorter +delivery times combined with pricing pressure from our wholesale customers. +Additionally, the poor performance of the l.e.i. and Candie's Wholesale +Divisions at retail, necessitated high level inventory markdowns which resulted +in lower than expected margins. Finally, the liquidation of slow moving +inventory combined with heavy and persistent promotional activity throughout the +year negatively affected the Company's gross profit. +Operating expenses increased to $110,494 in 2004 from $100,287 in 2003. This +increase resulted from increased professional fees incurred by the Company in +complying with the rules and regulations adopted pursuant to the Sarbanes-Oxley +Act of 2002, higher payroll and payroll related expenses and occupancy expenses +associated with the operation of an additional eight retail stores (net), an +increase in advertising expenditures in support of the brand, a reclassification +of warehouse expenses and the costs associated with the launch of the Candie's +and Unionbay Wholesale Divisions. +Commission and licensing fee income was $6,806 in 2004 compared to $7,894 in +2003. Income from operations was $18,981 in 2004 compared to $33,626 in 2003. +Net income was $12,275 in 2004 compared to $20,454 in 2003. The decrease in +income was primarily due to the lower margins and increased expenses described +directly above. +Wholesale Divisions: +------------------- +Steven Madden, Ltd. (Madden Womens, l.e.i. Footwear, Madden Mens and Candie's +Footwear): +Sales from the Madden Womens Wholesale Division ("Madden Womens") accounted for +$113,879 or 34%, and $109,285 or 34%, of total sales in 2004 and 2003, +respectively. Gross profit as a percentage of sales decreased to 28% in 2004 +from 29% in 2003, primarily due to the liquidation of slow moving inventory and +an increase in markdowns and allowances caused by higher levels of promotional +activities at retail in the third and fourth quarters of 2004. Operating +expenses increased to $28,828 in 2004 from $27,630 in 2003, due to an increase +in advertising expenditures in support of the brand and increases in selling and +related expenses. Income from operations for Madden Womens was $4,947 in 2004 +compared to $7,169 in 2003. +Sales from the l.e.i. Footwear Wholesale Division ("l.e.i.") accounted for +$38,391 or 11%, and $60,623 or 19%, of total sales in 2004 and 2003, +respectively. This decrease in sales resulted from a reduction in consumer +demand for casual classifications combined with a disappointing performance at +retail. Gross profit as a percentage of sales decreased to 28% in 2004 from 37% +in 2003, primarily due to the liquidation of slow moving inventory and higher +inventory markdowns and clearance at retail. Operating expenses decreased to +$10,236 in 2004 from $13,658 in 2003 due to decreases in payroll and payroll +related expenses and selling and marketing expenses. Income from operations for +l.e.i. was $580 in 2004 compared to $8,949 in 2003. +Sales from the Madden Mens Wholesale Division ("Madden Mens") accounted for +$31,301 or 9%, and $34,881 or 11%, of total sales in 2004 and 2003, +respectively. This sales decrease was the result of a downturn in the Men's +casual fashion footwear segment during the first half of the year. The Company +broadened and repositioned the fall line resulting in an increase in sales in +the fourth quarter of 2004 of 61% to $10,951 compared to $6,816 in the same +period of 2003. Gross profit as a percentage of sales decreased to 31% in 2004 +from 35% in 2003, primarily due to the liquidation of slow moving inventory and +an increase in markdowns and allowances caused by higher levels of promotional +16 +activities at retail. Operating expenses increased to $8,742 in 2004 from $8,277 +in 2003. Income from operations for Madden Mens was $1,034 in 2004 compared to +$3,801 in 2003. +Sales from the Candie's Wholesale Division ("Candie's") which was launched in +the fourth quarter of 2003, generated net sales of $15,584 in 2004. Heavy +promotional activity combined with several challenges in product design resulted +in a lower than anticipated gross profit as a percentage of sales of 26%. +Operating expenses were $4,357 or 28% of net sales in 2004. Loss from operations +for Candie's was $308 in 2004 compared to $342 in 2003. +Diva Acquisition Corp. ("Steven"): +Sales from Steven accounted for $21,039 or 6%, and $12,519 or 4%, of total sales +in 2004 and 2003, respectively. This 68% increase in sales was principally due +to the success of key styles including woods, jeweled sandals and dress mocs. +Also, Steven added new retail doors, including Dillards, Macy's West and +Parisians, and initiated a replenishment program during the first quarter of +2004, enabling retailers to generate weekly reorders with improved turn and +profitability. Gross profit as a percentage of sales remained the same as last +year at 36%. Operating expenses increased to $5,274 in 2004 from $3,360 in 2003, +due to increases in selling, designing, marketing and advertising expenses. +Income from operations for Steven was $2,367 in 2004, compared to $1,128 in +2003. +Stevies Inc. ("Stevies"): +Sales from Stevies accounted for $9,575 or 3%, and $10,120 or 3%, of total sales +in 2004 and 2003, respectively. The decrease in sales was due to the +disappointing performance in boot, slipper and athletic classification in the +fourth quarter of 2004. Gross profit as a percentage of sales decreased to 31% +in 2004 from 35% in 2003, primarily due to pricing pressures and the liquidation +of slow moving inventory. Operating expenses increased to $2,746 in 2004 from +$2,262 in 2003 due to increases in payroll and payroll related expenses and +marketing and advertising expenses. Income from operations for Stevies was $206 +in 2004 compared to $1,258 in 2003. +Unionbay Men's Footwear ("Unionbay"): +Unionbay, which launched in the fall of 2003, generated net sales of $578 for +the year 2004. The consumer acceptance of the fall 2003 line was less than +anticipated. As a result, the Company changed product direction, which caused +the Company to forgo shipments of spring 2004 Unionbay products. +Retail Division: +--------------- +Sales from the Retail Division accounted for $107,797 or 32% and $95,518 or 29% +of total sales in 2004 and 2003, respectively. As of December 31, 2004, there +were 91 retail stores compared to 83 retail stores as of December 31, 2003. +Comparable store sales (sales of those stores that were open for all of 2003 and +2004) for the year ended December 31, 2004 increased 8% over the same period of +2003. This increase was achieved through management's immediate reaction to +at-once demand for boots early in the first quarter of 2004. Gross profit as a +percentage of sales decreased to 52% in 2004 from 53% in 2003, primarily due to +an increase in promotional activity in 2004. Operating expenses for the Retail +Division were $47,489 in 2004 and $41,719 in 2003. This increase was primarily +due to increased payroll and payroll related expenses and higher occupancy +expenses associated with the operation of an additional eight stores (net) in +the current period and higher advertising expenditures in support of the brand. +Despite increases in sales, income from operations for the Retail Division +decreased to $8,431 in 2004 compared to $9,133 in 2003, due to the lower margins +and the Company's investment in the brand through higher advertising costs. +Adesso-Madden Division: +---------------------- +Adesso-Madden, Inc. generated commission revenues of $4,496 in 2004, compared to +$5,056 in 2003. This decrease was the result of a major customer sharply +reducing its purchases in order to reduce inventory levels in its stores. Income +from operations for Adesso-Madden was $2,278 in 2004 compared to $2,904 in 2003. +17 +Year Ended December 31, 2003 vs. Year Ended December 31, 2002 +Consolidated: +------------ +Total net sales for the year ended December 31, 2003, decreased to $324,204 from +$326,136 for the year ended December 31, 2002. The decrease was primarily due to +a decline in net sales from the Madden Mens and the Stevies, Inc., Wholesale +Divisions and the continued promotional environment. The Company maintained a +substantial portion of the sales and market share growth that it achieved in the +prior year. During the year 2002, the Company generated a 34% growth in total +net sales over 2001. Gross profit as a percentage of sales remained the same as +2002 at 39%. +Operating expenses remained virtually unchanged ($100,287 in 2003 as compared to +$100,074 in 2002). Total operating expenses as a percentage of sales remained at +31% in 2003, the same as 2002. The increase in operating expenses resulted from +the Company's opening of six additional retail stores and costs associated with +the addition of Candie's and Unionbay Wholesale Divisions as well as an increase +in licensing fees paid by the Company. These increases were partially offset by +various cost reductions. +Income from operations for 2003 was $33,626, which represents an increase of +$414 or 1% from $33,212 in 2002. Net income increased by 3% to $20,454 in 2003 +from $19,841 in 2002. The increase in net income primarily resulted from the +increase in interest and other income. +Wholesale Divisions: +------------------- +Steven Madden Ltd. (Madden Womens, l.e.i., Madden Mens and Candie's Footwear): +Sales from the Madden Womens Wholesale Division accounted for $109,285 or 34%, +and $108,577 or 33%, of total sales in 2003 and 2002, respectively. The increase +in sales was driven by first quarter sales of key styles including the Hi-Jo +boot and wood bottom sandals. Gross profit as a percentage of sales decreased to +29% in 2003 from 31% in 2002, primarily due to the fourth quarter closeout of +slower moving styles and the support to our wholesale customers' initiatives to +clear products at retail. Operating expenses decreased to $27,630 in 2003 from +$27,714 in 2002. Income from operations for Madden Womens was $7,169 in 2003 +compared to $7,519 in 2002. +Sales from the l.e.i. Footwear Wholesale Division accounted for $60,623 or 19%, +and $55,665 or 17%, of total sales in 2003 and 2002, respectively. The increase +in sales was principally due to additional doors with retailers, such as Kohl's +and the Saks Group. Gross profit as a percentage of sales increased to 37% in +2003 from 36% in 2002 primarily due to changes in product mix and improved +inventory management. Operating expenses decreased to $13,658 in 2003 from +$14,165 in 2002 due to the Company successfully leveraging its infrastructure +while continuing to grow its business. Income from operations for l.e.i. was +$8,949 in 2003 compared to $6,132 in 2002. +Sales from the Madden Mens Wholesale Division accounted for $34,881 or 11%, and +$45,153 or 14%, of total sales in 2003 and 2002, respectively. The sales +decrease resulted from two primary factors. First, the downturn in sell-throughs +at retail in the young men's fashion casual and sports casual business which +created substantial inventory and margin challenges. Second, there was a strong +downturn in the casual business, the largest category of Madden Mens, as +consumer demand and trends shifted more toward dressy and dress casual +classifications. Gross profit as a percentage of sales decreased to 35% in 2003 +from 36% in 2002, primarily due to an increase in markdown allowances caused by +higher levels of promotional activities at retail. Operating expenses decreased +to $8,277 in 2003 from $10,330 in 2002, due to decreases in selling and related +expenses. Income from operations for Madden Mens was $3,801 in 2003 compared to +$5,801 in 2002. +Candie's Footwear, which began shipping for the first time in the fourth quarter +of 2003, generated net sales of $938. +Diva Acquisition Corp. ("Steven"): +Sales from Steven accounted for $12,519 or 4%, and $11,194 or 3%, of total sales +in 2003 and 2002, respectively. The increase in sales was principally due to the +addition of new retail doors, including Dillards and Macy's West. Gross profit +as a percentage of sales increased to 36% in 2003 from 27% in 2002, primarily +the result of cost effective sourcing and improved inventory management. +18 +Operating expenses increased to $3,360 in 2003 from $2,645 in 2002 due to +increases in selling, designing, marketing and advertising expenses. Income from +operations for Steven was $1,128 in 2003 compared to $432 in 2002. +Stevies Inc. ("Stevies"): +Sales from Stevies accounted for $10,120 or 3%, and $13,664 or 4%, of total +sales in 2003 and 2002, respectively. The decrease in sales was due to +diminished reorder demand. Also, the decrease in sales was partly anticipated +when Meldisco, the lease operator of the Federated Department Store children's +departments and a division of Footstar, experienced temporary credit issues +relating to its K-Mart business. This led to shipping delays and some +cancellations. Gross profit as a percentage of sales decreased to 35% in 2003 +from 36% in 2002, primarily due to an increase in promotional activity. +Operating expenses decreased to $2,262 in 2003 from $3,205 in 2002 due to +decreases in selling and selling-related expenses. Income from operations for +Stevies was $1,258 in 2003 compared to $1,779 in 2002. +Unionbay Men's Footwear ("Unionbay"): +Unionbay Men's Footwear, generated net sales of $320 in the second half of 2003. +The product placed consisted primarily of test quantities. +Retail Division: +--------------- +Sales from the Retail Division accounted for $95,518 or 29% and $91,883 or 28% +of total sales in 2003 and 2002, respectively. The increase in sales was due to +the increase in number of Steve Madden retail stores. During 2003, the Company +opened six (6) new retail stores and closed three (3) of its underperforming +stores. As of December 31, 2003, there were 83 retail stores, compared to 80 +retail stores as of December 31, 2002. Comparable store sales for the year ended +December 31, 2003, decreased 4% over the same period of 2002. This decrease in +sales was partially caused by the popularity of sneakers. These offerings were +available at $49.99 and below, pressuring the higher priced casual closed shoe +category. Gross profit as a percentage of sales remained at 53% in 2003, the +same as in 2002. Operating expenses for the Retail Division were $41,719 in 2003 +and $39,793 in 2002. This increase was due to higher costs associated with the +opening of the six (6) additional stores during 2003. Income from operations for +the Retail Division was $9,133 in 2003 compared to $9,001 in 2002. +Adesso-Madden Division: +---------------------- +Adesso-Madden, Inc. generated commission revenues of $5,056 for the year ended +December 31, 2003, which represented a 6% increase over commission revenues of +$4,770 for the same period in 2002. This increase was primarily the result of +growth in discount retail accounts. Income from operations for Adesso-Madden was +$2,904 in 2003 compared to $2,548 in 2002. +LICENSE AGREEMENTS +Revenues from licensing decreased to $2,310 in 2004 from $2,838 in 2003. This +decrease resulted from the termination by the Company of its handbag license +agreement with La Rue Distribution Inc. As of December 31, 2004, the Company had +five license partners covering five product categories of its Steve Madden +brand. The product categories include hosiery, sunglasses, eyewear, belts and +outerwear. +LIQUIDITY AND CAPITAL RESOURCES +The Company had working capital of $101,417 at December 31, 2004 compared to +$105,140 at December 31, 2003. The decrease was primarily the result of +management's decision to move a portion of excess cash into long-term marketable +securities, as well as the repurchase of 545,100 shares of common stock this +year in the total amount of $9,700, reflecting management's continued confidence +in the Company's long-term prospects and its commitment to enhance shareholder +value. +Under the terms of a factoring agreement with Capital Factors, Inc., the Company +is eligible to draw down 80% of its invoiced receivables at an interest rate of +one point below the Prime Rate (as defined in such agreement). The agreement +19 +with Capital Factors will continue in full force until terminated by either +party upon sixty days notice. Capital Factors maintains a lien on all of the +Company's receivables and assumes the credit risk for all assigned accounts +approved by them. Under the agreement, the Company has a credit line of $15 +million. As of December 31, 2004 the Company did not use any portion of the +credit line. +As of December 31, 2004 the Company had invested $49,124 in marketable +securities consisting of corporate bonds, U.S. Treasury notes, government +asset-backed securities and equities. +The Company believes that based upon its current financial position and +available cash and marketable securities, it will meet all of its financial +commitments and operating needs for at least the next twelve months. +OPERATING ACTIVITIES +During the year ended December 31, 2004, net cash provided by operating +activities was $12,863. Usage of cash was caused primarily by an increase in +factored accounts receivable of $5,417, primarily caused by a sales increase to +mid-tier customers who typically have longer payment terms, an increase in +inventories of $10,526 partially due to the addition of eight retail stores +(net) during the current period and the working capital required by new +divisions. Sources of cash were provided principally by net income of $12,275, a +decrease in prepaid expenses, prepaid taxes, deposits and other assets of $3,507 +and an increase in accounts payable and other accrued expenses of $2,870. +At December 31, 2004, the Company had un-negotiated open letters of credit for +the purchase of imported merchandise of approximately $9,808. +The Company has an employment agreement with Steve Madden, its Creative and +Design Chief, which provides for an annual base salary of $700 through June 30, +2011. Mr. Madden is entitled to receive base salary payments during periods that +he is not actively engaged in the duties of Creative and Design Chief. The +agreement also provides for an annual performance bonus, an annual option grant +at exercise prices equal to the market price on the date of grant and a +non-accountable expense allowance. However, the Company is not required to pay +the bonus for any fiscal year that Mr. Madden is not actively engaged in the +duties of Creative and Design Chief for at least six months, the Company is not +required to grant an annual option if Mr. Madden is not actively engaged in the +duties of Creative and Design Chief for at least six months out of the twelve +months immediately preceding the grant date for such annual option and the +Company is not required to pay the expense allowance for any month during which +Mr. Madden is not actively engaged in the duties of Creative and Design Chief. +The Company has employment agreements with certain executives, which provide for +the payment of compensation aggregating approximately $1,060 in 2005 and $234 in +2006. In addition, such employment agreements provide for incentive compensation +based on various performance criteria as well as other benefits. +Significant portions of the Company's products are produced at overseas +locations, the majority of which are located in Brazil, China, Italy and Spain. +The Company has not entered into any long-term manufacturing or supply contracts +with any of these foreign companies. The Company believes that a sufficient +number of alternative sources exist outside of the United States for the +manufacture of its products. The Company currently makes approximately 94% of +its purchases in U.S. dollars. +INVESTING ACTIVITIES +During the year ended December 31, 2004, the Company invested $27,779 in +marketable securities and received $9,708 from maturities and sales of +securities. In addition, the Company incurred capital expenditures of $7,387 +principally for leasehold improvements for the ten additional retail stores that +were opened during the period and computer systems upgrades. +FINANCING ACTIVITIES +During the year ended December 31, 2004, the Company repurchased 545,100 shares +of the Company's common stock at a total cost of $9,700. +20 +INFLATION +The Company does not believe that the relatively low rates of inflation +experienced over the last few years in the United States, where it primarily +competes, have had a significant effect on sales, expenses or profitability. +CONTRACTUAL OBLIGATIONS +The Company's contractual obligations as of December 31, 2004 were as follows: +Payment due by period (in thousands) +Less than More than +Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years +------------------------- ---------- ---------- ---------- ---------- ---------- +Long-Term Debt +Obligations $ 0 $ 0 $ 0 $ 0 $ 0 +Capital Lease Obligations 0 0 0 0 0 +Operating Lease +Obligations 71,960 11,004 22,384 17,512 21,060 +Purchase Obligations 9,808 9,808 0 0 0 +Other Long-Term +Liabilities (future +minimum royalty +payments) 5,433 2,740 2,693 0 0 +---------- ---------- ---------- ---------- ---------- +Total $ 87,201 $ 23,552 $ 25,077 $ 17,512 $ 21,060 +========== ========== ========== ========== ========== +CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES +Management's Discussion and Analysis of Financial Condition and Results of +Operations is based upon our audited consolidated financial statements, which +have been prepared in accordance with accounting principles generally accepted +in the United States. The preparation of these financial statements requires us +to make estimates and judgments that affect the reported amounts of assets, +liabilities, sales and expenses, and related disclosure of contingent assets and +liabilities. Estimates by their nature are based on judgments and available +information. The estimates that we make are based upon historical factors, +current circumstances and the experience and judgment of our management. We +evaluate our assumptions and estimates on an ongoing basis and may employ +outside experts to assist in our evaluations. Therefore, actual results could +materially differ from those estimates under different assumptions and +conditions. We believe the following critical accounting estimates are affected +by more significant judgments used in the preparation of our consolidated +financial statements: sales and accounts receivable valuation allowances, +inventory reserves, valuation of intangible assets and litigation reserves. +Allowances for bad debts, returns, and customer chargebacks. We provide reserves +against our trade accounts receivables for future customer chargebacks, co-op +advertising allowances, discounts, returns and other miscellaneous deductions +that relate to the current period. The reserve against our non-factored trade +receivables also includes estimated losses that may result from our customers' +inability to pay. We determine the amount of the reserve by analyzing our aged +receivables, current economic conditions, the prevailing retail environment and +historical dilution levels for customers. Failure to correctly estimate the +amount of the reserve could materially impact our results of operation and +financial position. +Inventory reserves. Inventories are stated at lower of cost or market, on a FIFO +basis. We review our inventory on a regular basis for excess and slow moving +inventory. Our review is based on an analysis of inventory on hand, prior sales, +and our expected net realizable value through future sales. Our analysis +21 +includes a review of inventory quantities on hand at period-end in relation to +year-to-date sales and projections for sales in the foreseeable future. We +consider quantities on hand in excess of estimated future sales to be at risk +for market impairment. The net realizable value, or market value, is determined +based on our estimate of sales prices of such inventory through off-price or +discount store channels. The likelihood of any material inventory write-down is +dependent primarily on our expectation of future consumer demand for our +product. A misinterpretation or misunderstanding of future consumer demand for +our product or the economy, or other failure to estimate correctly, could result +in inventory valuation changes, either favorably or unfavorably, compared to the +valuation determined to be appropriate as of the balance sheet date. +Valuation of intangible assets. SFAS No. 142, which was adopted by the Company +on January 1, 2002, requires that goodwill and intangible assets with indefinite +lives no longer be amortized, but rather be tested for impairment at least +annually. This pronouncement also requires that intangible assets with finite +lives be amortized over their respective lives to their estimated residual +values, and reviewed for impairment in accordance with SFAS No. 144. In +accordance with SFAS No. 144, long-lived assets, such as property, equipment, +leasehold improvements and goodwill subject to amortization, are reviewed for +impairment annually or whenever events or changes in circumstances indicate that +the carrying amount of an asset may not be recoverable. Recoverability of assets +to be held and used is measured by a comparison of the carrying amount of an +asset to the estimated undiscounted future cash flows expected to be generated +by the asset. If the carrying amount of an asset exceeds its estimated future +cash flows, an impairment charge is recognized by the amount by which the +carrying amount of the asset exceeds the fair value of the asset. +Litigation reserves. Estimated amounts for litigation claims that are probable +and can be reasonably estimated are recorded as liabilities in our consolidated +balance sheets. The likelihood of a material change in these estimated reserves +would be dependent on new claims as they may arise and the favorable or +unfavorable events of a particular litigation. As additional information becomes +available, we assess the potential liability related to our pending litigation +and revise our estimates. Such revisions in our estimates of the contingent +liability could materially impact our results of operations and financial +position. +Cost of Goods Sold. All costs incurred to bring finished products to our +warehouse are included in the cost of sales line item of the Company's +Consolidated Statement of Operations. These include purchase commissions, letter +of credit fees, f.o.b. costs, sample expenses, custom duty, inbound freight, +labels and product packaging. All warehouse and distribution costs are included +in the operating expenses line item of the Company's Consolidated Statement of +Operations. The Company classifies all shipping costs to customers as operating +expenses. The Company's gross margins may not be comparable to other companies +in the industry because some companies may include warehouse and distribution +costs as a component of cost of sales, while other companies may include them in +operating expenses. +OTHER CONSIDERATIONS +Fashion Industry Risks. The success of the Company will depend in significant +part upon its ability to anticipate and respond to product and fashion trends as +well as to anticipate, gauge and react to changing consumer demands in a timely +manner. There can be no assurance that the Company's products will correspond to +the changes in taste and demand or that the Company will be able to successfully +market products that respond to such trends. If the Company misjudges the market +for its products, it may be faced with significant excess inventories for some +products and missed opportunities for others. In addition, misjudgments in +merchandise selection could adversely affect the Company's image with its +customers resulting in lower sales and increased markdown allowances for +customers which could have a material adverse effect on the Company's business, +financial condition and results of operations. +The industry in which the Company operates is cyclical, with purchases tending +to decline during recessionary periods when disposable income is low. Purchases +of contemporary shoes and accessories tend to decline during recessionary +periods and also may decline at other times. While the Company has fared well in +recent years in a difficult retail environment, there can be no assurance that +the Company will be able to return to its historical rate of growth in revenues +and earnings, or remain profitable in the future. A recession in the national or +regional economies or uncertainties regarding future economic prospects, among +other things, could affect consumer-spending habits and have a material adverse +effect on the Company's business, financial condition and results of operations. +22 +In recent years, the retail industry has experienced consolidation and other +ownership changes. In the future, retailers in the United States and in foreign +markets may consolidate, undergo restructurings or reorganizations, or realign +their affiliations, any of which could decrease the number of stores that carry +the Company's products or increase the ownership concentration within the retail +industry. While such changes in the retail industry to date have not had a +material adverse effect on the Company's business or financial condition, there +can be no assurance as to the future effect of any such changes. +Inventory Management. The fashion-oriented nature of the Company's products and +the rapid changes in customer preferences leave the Company vulnerable to an +increased risk of inventory obsolescence. Thus, the Company's ability to manage +its inventories properly is an important factor in its operations. Inventory +shortages can adversely affect the timing of shipments to customers and diminish +sales and brand loyalty. Conversely, excess inventories can result in lower +gross margins due to the excessive discounts and markdowns that might be +necessary to reduce inventory levels. The inability of the Company to +effectively manage its inventory would have a material adverse effect on the +Company's business, financial condition and results of operations. +Dependence upon Customers and Risks Related to Extending Credit to Customers. +The Company's customers consist principally of department stores and specialty +stores, including shoe boutiques. Certain of the Company's department store +customers, including some under common ownership, account for significant +portions of the Company's wholesale business. +The Company generally enters into a number of purchase order commitments with +its customers for each of its lines every season and does not enter into +long-term agreements with any of its customers. Therefore, a decision by a +significant customer of the Company, whether motivated by competitive +conditions, financial difficulties or otherwise, to decrease the amount of +merchandise purchased from the Company or to change its manner of doing business +could have a material adverse effect on the Company's business, financial +condition and results of operations. The Company sells its products primarily to +retail stores across the United States and extends credit based on an evaluation +of each customer's financial condition, usually without collateral. While +various retailers, including some of the Company's customers, have experienced +financial difficulties in the past few years which increased the risk of +extending credit to such retailers, the Company's losses due to bad debts have +been limited. Pursuant to the Factoring Agreement between Capital Factors and +the Company, Capital Factors currently assumes the credit risk related to +approximately 95% of the Company's accounts receivables. However, financial +difficulties of a customer could cause the Company to curtail business with such +customer or require the Company to assume more credit risk relating to such +customer's account receivable. +Impact of Foreign Manufacturers. Substantial portions of the Company's products +are currently sourced outside the United States through arrangements with a +number of foreign manufacturers in four different countries. During the +twelve-month period ended December 31, 2004, approximately 87% of the Company's +products were purchased from sources outside the United States, primarily from +China, Brazil, Italy and Spain. +Risks inherent in foreign operations include work stoppages, transportation +delays and interruptions, changes in social, political and economic conditions +which could result in the disruption of trade from the countries in which the +Company's manufacturers or suppliers are located, the imposition of additional +regulations relating to imports, the imposition of additional duties, taxes and +other charges on imports, significant fluctuations of the value of the dollar +against foreign currencies, or restrictions on the transfer of funds, any of +which could have a material adverse effect on the Company's business, financial +condition and results of operations. The Company does not believe that any such +economic or political condition will materially affect the Company's ability to +purchase products, since a variety of materials and alternative sources are +available. The Company cannot be certain, however, that it will be able to +identify such alternative sources without delay (if ever) or without greater +cost to the Company. The Company's inability to identify and secure alternative +sources of supply in this situation would have a material adverse effect on the +Company's business, financial condition and results of operations. +The Company's imported products are also subject to United States customs +duties. The United States and the countries in which the Company's products are +produced or sold, from time to time, impose new quotas, duties, tariffs, or +23 +other restrictions, or may adversely adjust prevailing quota, duty or tariff +levels, any of which could have a material adverse effect on the Company's +business, financial condition and results of operations. +Possible Adverse Impact of Unaffiliated Manufacturers' Inability to Manufacture +in a Timely Manner, Meet Quality Standards or to Use Acceptable Labor Practices. +As is common in the footwear industry, the Company contracts for the manufacture +of a majority of its products to its specifications through foreign +manufacturers. The Company does not own or operate any manufacturing facilities +and is therefore dependent upon independent third parties for the manufacture of +all of its products. The Company's products are manufactured to its +specifications by both domestic and international manufacturers. The inability +of a manufacturer to ship orders of the Company's products in a timely manner or +to meet the Company's quality standards could cause the Company to miss the +delivery date requirements of its customers for those items, which could result +in cancellation of orders, refusal to accept deliveries or a reduction in +purchase prices, any of which could have a material adverse effect on the +Company's business, financial condition and results of operations. +Although the Company enters into a number of purchase order commitments each +season specifying a time frame for delivery, method of payment, design and +quality specifications and other standard industry provisions, the Company does +not have long-term contracts with any manufacturer. As a consequence, any of +these manufacturing relationships may be terminated, by either party, at any +time. Although the Company believes that other facilities are available for the +manufacture of the Company's products, both within and outside of the United +States, there can be no assurance that such facilities would be available to the +Company on an immediate basis, if at all, or that the costs charged to the +Company by such manufacturers will not be greater than those presently paid. +The Company requires its licensing partners and independent manufacturers to +operate in compliance with applicable laws and regulations. While the Company +promotes ethical business practices and the Company's staff periodically visits +and monitors the operations of its independent manufacturers, the Company does +not control such manufacturers or their labor practices. The violation of labor +or other laws by an independent manufacturer of the Company or by one of the +Company's licensing partners, or the divergence of an independent manufacturer's +or licensing partner's labor practices from those generally accepted as ethical +in the United States, could have a material adverse effect on the Company's +business, financial condition and results of operations. +Intense Industry Competition. The fashion footwear industry is highly +competitive and barriers to entry are low. The Company's competitors include +specialty companies as well as companies with diversified product lines. The +recent market growth in the sales of fashionable footwear has encouraged the +entry of many new competitors and increased competition from established +companies. Most of these competitors, including Diesel, Kenneth Cole, Nine West, +DKNY, Skechers, Nike and Guess, may have significantly greater financial and +other resources than the Company and there can be no assurance that the Company +will be able to compete successfully with other fashion footwear companies. +Increased competition could result in pricing pressures, increased marketing +expenditures and loss of market share, and could have a material adverse effect +on the Company's business, financial condition and results of operations. The +Company believes effective advertising and marketing, branding of the Steve +Madden name, fashionable styling, high quality and value are the most important +competitive factors and plans to continually employ these elements as it +develops its products. The Company's inability to effectively advertise and +market its products could have a material adverse effect on the Company's +business, financial condition and results of operations. +Expansion of Retail Business. The Company's continued growth depends to a +significant degree on further developing the Steve Madden(R), Stevies, Steven, +Steve Madden Mens, l.e.i.(R) , Unionbay(R) and Candie's(R) brands, creating new +product categories and businesses and operating Company-owned Steve Madden and +Steven stores on a profitable basis. During the year ended December 31, 2004, +the Company opened ten (10) Steve Madden retail stores and has plans to open +approximately twelve to fifteen (12-15) additional stores in the year 2005. The +Company's recent and planned expansion includes the opening of stores in new +geographic markets as well as strengthening existing markets. New markets have +in the past presented, and will continue to present, competitive and +merchandising challenges that are different from those faced by the Company in +its existing markets. There can be no assurance that the Company will be able to +open new stores, and if opened, that such new stores will be able to achieve +sales and profitability levels consistent with management's expectations. The +Company's retail expansion is dependent on a number of factors, including the +Company's ability to locate and obtain favorable store sites, the performance of +the Company's wholesale and retail operations, and the ability of the Company to +manage such expansion and hire and train personnel. Past comparable store sales +results may not be indicative of future results, and there can be no assurance +24 +that the Company's comparable store sales results can be maintained or will +increase in the future. In addition, there can be no assurance that the +Company's strategies to increase other sources of revenue, which may include +expansion of its licensing activities, will be successful or that the Company's +overall sales or profitability will increase or not be adversely affected as a +result of the implementation of such retail strategies. +The Company's operations have increased and will continue to increase demand on +the Company's managerial, operational and administrative resources. The Company +has recently invested significant resources in, among other things, its +management information systems and hiring and training new personnel. However, +in order to manage currently anticipated levels of future demand, the Company +may be required to, among other things, expand its distribution facilities, +establish relationships with new manufacturers to produce its products, and +continue to expand and improve its financial, management and operating systems. +There can be no assurance that the Company will be able to manage future growth +effectively and a failure to do so could have a material adverse effect on the +Company's business, financial condition and results of operations. +Seasonal and Quarterly Fluctuations. The Company's results may fluctuate quarter +to quarter as a result of the timing of holidays, weather, the timing of larger +shipments of footwear, market acceptance of the Company's products, the mix, +pricing and presentation of the products offered and sold, the hiring and +training of additional personnel, inventory write downs for obsolescence, the +cost of materials, the product mix between wholesale and licensing businesses, +the incurrence of other operating costs and factors beyond the Company's +control, such as general economic conditions and actions of competitors. In +addition, the Company expects that its sales and operating results may be +significantly impacted by the opening of new retail stores and the introduction +of new products. Accordingly, the results of operations in any quarter will not +necessarily be indicative of the results that may be achieved for a full fiscal +year or any future quarter. +Trademark and Service Mark Protection. The Company believes that its trademarks +and service marks and other proprietary rights are important to its success and +its competitive position. Accordingly, the Company devotes substantial resources +to the establishment and protection of its trademarks on a worldwide basis. +Nevertheless, there can be no assurance that the actions taken by the Company to +establish and protect its trademarks and other proprietary rights will be +adequate to prevent imitation of its products by others or to prevent others +from seeking to block sales of the Company's products on the basis that they +violate the trademarks and proprietary rights of others. Moreover, no assurance +can be given that others will not assert rights in, or ownership of, trademarks +and other proprietary rights of the Company or that the Company will be able to +successfully resolve such conflicts. In addition, the laws of certain foreign +countries may not protect proprietary rights to the same extent as do the laws +of the United States. The failure of the Company to establish and then protect +such proprietary rights from unlawful and improper utilization could have a +material adverse effect on the Company's business, financial condition and +results of operations. +Foreign Currency Fluctuations. The Company makes approximately 94% of its +purchases in U.S. dollars. However, the Company sources substantially all of its +products overseas and, as such, the cost of these products may be affected by +changes in the value of the relevant currencies. Changes in currency exchange +rates may also affect the relative prices at which the Company and foreign +competitors sell their products in the same market. There can be no assurance +that foreign currency fluctuations will not have a material adverse effect on +the Company's business, financial condition and results of operations. +Outstanding Options. As of March 10, 2005 there were outstanding options to +purchase an aggregate of approximately 2,013,003 shares of Common Stock. Holders +of such options are likely to exercise them when, in all likelihood, the market +price of the Company's stock is significantly higher than the exercise price of +the options. Further, while its options are outstanding, they may adversely +affect the terms on which the Company could obtain additional capital, if +required. +Economic and Political Risks. The present economic condition in the United +States and concern about uncertainties could significantly reduce the disposable +income available to the Company's customers for the purchase of our products. In +addition, current unstable political conditions, including the potential or +actual conflicts in Iraq, North Korea or elsewhere, or the continuation or +escalation of terrorism, could have an adverse effect on the Company's business, +financial condition and results of operations. +25 +ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +The Company does not engage in the trading of market risk sensitive instruments +in the normal course of business. Financing arrangements for the Company are +subject to variable interest rates based on the prime rate. An analysis of the +Company's credit agreement with Capital Factors, Inc. can be found in Note C, +"Due From Factor" to the Consolidated Financial Statements included in the +Company's Annual Report on Form 10-K for the fiscal year ended December 31, +2004. On December 31, 2004 and December 31, 2003, there were no direct +borrowings outstanding under the credit agreement. +As of December 31, 2004, the Company had investments in marketable securities +valued at $49,124,000 which consist principally of federal and state +obligations, corporate bonds and marketable equity securities that have various +maturities through December 2009. These investments are subject to interest rate +risk and will decrease in value if market interest rates increase. The Company +currently has the ability to hold these investments until maturity. Should there +be a significant increase in interest rates, the value of these investments +would be negatively affected unless they were held to maturity. In addition, any +further decline in interest rates would reduce the Company's interest income. +ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +See financial statements following Item 15 of this Annual Report on Form 10-K. +ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND +FINANCIAL DISCLOSURE +None. +ITEM 9A CONTROLS AND PROCEDURES +Disclosure Controls and Procedures +As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the +"Exchange Act"), the Company's management, including the Company's Chief +Executive Officer and Chief Financial Officer, has evaluated the effectiveness +of its disclosure controls and procedures as of the end of the fiscal year +covered by this annual report. Based on that evaluation, the Chief Executive +Officer and Chief Financial Officer have concluded that the Company's disclosure +controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) +were effective as of the end of the fiscal year covered by this annual report. +Changes in Internal Control Over Financial Reporting +As required by Rule 13a-15(d) under the Exchange Act, the Company's management, +including the Company's Chief Executive Officer and Chief Financial Officer, has +evaluated the Company's internal controls over financial reporting to determine +whether any changes occurred during the fourth quarter of 2004 that have +materially affected, or are reasonably likely to materially affect, the +Company's internal control over financial reporting. Based on that evaluation, +there has been no such material change during the fourth quarter of 2004. +Management Report on Internal Controls +As permitted by Commission Release No. 50754, the Company will include the +information required by Items 308(a) and 308(b) of Regulation S-K in a Form +10-K/A to be filed within 45 days. The Company has spent considerable time and +resources analyzing, documenting and testing its system of internal controls, +but has not yet completed its evaluation. Currently, the Company is not aware of +any material weaknesses in its internal controls over financial reporting and +related disclosures. +ITEM 9B OTHER INFORMATION +None. +26 +PART III +ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT +The other information required to be furnished pursuant to this item will be +set forth in the Company's proxy statement for the 2005 Annual Meeting of +Stockholders, and is incorporated herein by reference. +ITEM 11 EXECUTIVE COMPENSATION +The information required to be furnished pursuant to this item will be set +forth in the Company's proxy statement for the 2005 Annual Meeting of +Stockholders, and is incorporated herein by reference. +ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT +AND RELATED STOCKHOLDER MATTERS +The information required to be furnished pursuant to this item will be set +forth in the Company's proxy statement for the 2005 Annual Meeting of +Stockholders, and is incorporated herein by reference. +ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS +The information required to be furnished pursuant to this item will be set +forth in the Company's proxy statement for the 2005 Annual Meeting of +Stockholders, and is incorporated herein by reference. +ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES +The information required to be furnished pursuant to this item will be set +forth in the Company's proxy statement for the 2005 Annual Meeting of +Stockholders, and is incorporated herein by reference. +PART IV +ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a)(1) Financial Statements +The following consolidated financial statements of Steven Madden, Ltd. and +subsidiaries are included in Item 8: +27 +STEVE MADDEN, LTD. AND SUBSIDIARIES +Contents +Page +---- +Consolidated Financial Statements +Report of Independent Registered Public Accounting Firm F-2 +Balance sheets as of December 31, 2004 and 2003 F-3 +Statements of income for the years ended December 31, 2004, 2003 +and 2002 F-4 +Statements of changes in stockholders' equity for the years ended +December 31, 2004, 2003 and 2002 F-5 +Statements of cash flows for the years ended December 31, 2004, +2003 and 2002 F-7 +Notes to financial statements F-8 +F-1 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Board of Directors and Stockholders +Steven Madden, Ltd. +We have audited the accompanying consolidated balance sheets of Steven Madden, +Ltd. and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the +related consolidated statements of income, changes in stockholders' equity and +cash flows for each of the years in the three-year period ended December 31, +2004. These financial statements are the responsibility of the Company's +management. Our responsibility is to express an opinion on these financial +statements 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 enumerated above present fairly, in all +material respects, the consolidated financial position of Steven Madden, Ltd. +and subsidiaries as of December 31, 2004 and 2003, and the consolidated results +of their operations and their consolidated cash flows for each of the years in +the three-year period ended December 31, 2004 in conformity with accounting +principles generally accepted in the United States of America. +Eisner LLP +New York, New York +February 28, 2005 +F-2 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Balance Sheets +December 31, +------------------------------ +2004 2003 +------------- ------------- +ASSETS +Current assets: +Cash and cash equivalents $ 30,853,000 $ 53,073,000 +Accounts receivable - net of allowances of $536,000 and $452,000 3,322,000 4,281,000 +Due from factor - net of allowances of $2,379,000 and $1,926,000 33,711,000 28,748,000 +Inventories 34,384,000 23,858,000 +Marketable securities - available for sale 12,784,000 3,229,000 +Prepaid expenses and other current assets 1,287,000 2,844,000 +Prepaid taxes 2,255,000 4,270,000 +Deferred taxes 2,498,000 1,692,000 +------------- ------------- +Total current assets 121,094,000 121,995,000 +Property and equipment, net 20,715,000 18,391,000 +Deferred taxes 5,780,000 5,618,000 +Deposits and other 435,000 370,000 +Marketable securities - available for sale 36,340,000 29,430,000 +Cost in excess of fair value of net assets acquired - net of accumulated +amortization of $714,000 2,066,000 2,066,000 +------------- ------------- +$ 186,430,000 $ 177,870,000 +============= ============= +LIABILITIES +Current liabilities: +Accounts payable $ 13,450,000 $ 11,087,000 +Accrued expenses 5,807,000 5,301,000 +Accrued incentive compensation 420,000 467,000 +------------- ------------- +Total current liabilities 19,677,000 16,855,000 +Deferred rent 2,088,000 1,828,000 +------------- ------------- +21,765,000 18,683,000 +------------- ------------- +Commitments, contingencies and other - see note J +STOCKHOLDERS' EQUITY +Preferred stock - $.0001 par value, 5,000,000 shares authorized; none issued +Series A Junior Participating preferred stock - $.0001 par value, 60,000 +shares authorized; none issued +Common stock - $.0001 par value, 60,000,000 shares authorized, 14,608,081 +and 14,459,109 shares issued, 12,817,777 and 13,213,905 shares +outstanding at December 31, 2004 and 2003, respectively 1,000 1,000 +Additional paid-in capital 80,631,000 79,136,000 +Retained earnings 103,451,000 91,176,000 +Unearned compensation (703,000) (3,008,000) +Other comprehensive loss: +Unrealized loss on marketable securities (net of taxes) (1,024,000) (127,000) +Treasury stock - 1,790,304 and 1,245,204 shares at cost +at December 31, 2004 and 2003, respectively (17,691,000) (7,991,000) +------------- ------------- +164,665,000 159,187,000 +------------- ------------- +$ 186,430,000 $ 177,870,000 +============= ============= +See notes to financial statements +F-3 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements of Income +Year Ended December 31, +----------------------------------------------- +2004 2003 2002 +------------- ------------- ------------- +Net sales: +Wholesale $ 230,347,000 $ 228,686,000 $ 234,253,000 +Retail 107,797,000 95,518,000 91,883,000 +------------- ------------- ------------- +338,144,000 324,204,000 326,136,000 +------------- ------------- ------------- +Cost of sales: +Wholesale 163,598,000 153,519,000 156,364,000 +Retail 51,877,000 44,666,000 43,089,000 +------------- ------------- ------------- +215,475,000 198,185,000 199,453,000 +------------- ------------- ------------- +Gross profit 122,669,000 126,019,000 126,683,000 +Commission and licensing fee income 6,806,000 7,894,000 6,603,000 +Operating expenses (110,494,000) (100,287,000) (100,074,000) +------------- ------------- ------------- +Income before other income (expenses) and provision for +income taxes 18,981,000 33,626,000 33,212,000 +Other income (expenses): +Interest income 2,009,000 1,611,000 1,166,000 +Interest expense (68,000) (54,000) (16,000) +Gain on sale of marketable securities 32,000 136,000 66,000 +------------- ------------- ------------- +Income before provision for income taxes 20,954,000 35,319,000 34,428,000 +Provision for income taxes 8,679,000 14,865,000 14,587,000 +------------- ------------- ------------- +Net income $ 12,275,000 $ 20,454,000 $ 19,841,000 +============= ============= ============= +Basic income per share $ 0.93 $ 1.58 $ 1.58 +============= ============= ============= +Diluted income per share $ 0.86 $ 1.45 $ 1.45 +============= ============= ============= +Basic weighted average common shares outstanding 13,148,869 12,985,265 12,594,861 +Effect of dilutive securities - options 1,074,080 1,153,246 1,115,018 +------------- ------------- ------------- +Diluted weighted average common shares outstanding 14,222,949 14,138,511 13,709,879 +============= ============= ============= +See notes to financial statements +F-4 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements of Changes in Stockholders' Equity +Common Stock +--------------------------------- Additional Retained Unearned +Shares Amount Paid-in Capital Earnings Compensation +--------------- --------------- --------------- --------------- --------------- +Balance - December 31, 2001 13,439,020 $ 1,000 $ 60,643,000 $ 50,881,000 $ (1,174,000) +Exercise of stock options 567,039 4,364,000 +Tax benefit from exercise of options 1,146,000 +Deferred compensation in connection +with issuance of stock options +and restricted stock 3,930,000 (3,930,000) +Compensation in connection with +issuance of stock options 412,000 +Compensation in connection with +issuance of restricted stock 10,000 188,000 +Amortization of unearned +compensation 1,628,000 +Unrealized holding gain on +marketable securities +(net of taxes) +Net income 19,841,000 +Comprehensive income +--------------- --------------- --------------- --------------- --------------- +Balance - December 31, 2002 14,016,059 1,000 70,683,000 70,722,000 (3,476,000) +Exercise of stock options 443,050 4,805,000 +Tax benefit from exercise of options 1,239,000 +Deferred compensation in connection +with issuance of stock options +and restricted stock 2,409,000 (2,409,000) +Amortization of unearned +compensation 2,877,000 +Unrealized holding loss on +marketable securities (net of +taxes of $190,000) +Net income 20,454,000 +Comprehensive income +--------------- --------------- --------------- --------------- --------------- +Balance - December 31, 2003 14,459,109 1,000 79,136,000 91,176,000 (3,008,000) +Exercise of stock options 128,972 454,000 +Tax benefit from exercise of options 1,004,000 +Issuance of fully vested restricted +stock 20,000 +Forfeiture of restricted stock (183,000) 121,000 +Cash in lieu of restricted stock (378,000) +Deferred compensation in connection +with issuance of stock options +and restricted stock 598,000 (598,000) +Amortization of unearned +compensation 2,782,000 +Unrealized holding loss on +marketable securities (net of +taxes of $741,000) +Net income 12,275,000 +Comprehensive income +Balance - December 31, 2004 14,608,081 $ 1,000 $ 80,631,000 $ 103,451,000 $ (703,000) +=============== =============== =============== =============== =============== +See notes to financial statements +F-5 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements of Changes in Stockholders' Equity (Continued) +Accumulated +Other Treasury Stock Total +Comprehensive ----------------------------- Stockholders' Comprehensive +Gain (Loss) Shares Amount Equity Income +------------- ------------- ------------- ------------- ------------- +Balance - December 31, 2001 1,245,204 $ (7,991,000) $ 102,360,000 +Exercise of stock options 4,364,000 +Tax benefit from exercise of options 1,146,000 +Deferred compensation in connection with +issuance of stock options and +restricted stock 0 +Compensation in connection with issuance +of stock options 412,000 +Compensation in connection with issuance +of restricted stock 188,000 +Amortization of unearned compensation 1,628,000 +Unrealized holding gain on marketable +securities (net of taxes) $ 136,000 136,000 $ 136,000 +Net income 19,841,000 19,841,000 +------------- +Comprehensive income $ 19,977,000 +------------- ------------- ------------- ------------- ============= +Balance - December 31, 2002 136,000 1,245,204 (7,991,000) 130,075,000 +Exercise of stock options 4,805,000 +Tax benefit from exercise of options 1,239,000 +Deferred compensation in connection with +issuance of stock options and +restricted stock +Amortization of unearned compensation 2,877,000 +Unrealized holding loss on marketable +securities (net of taxes of $190,000) (263,000) (263,000) $ (263,000) +Net income 20,454,000 20,454,000 +------------- +Comprehensive income $ 20,191,000 +------------- ------------- ------------- ------------- ============= +Balance - December 31, 2003 (127,000) 1,245,204 (7,991,000) 159,187,000 +Exercise of stock options 454,000 +Tax benefit from exercise of options 1,004,000 +Issuance of fully vested restricted stock +Forfeiture of restricted stock (62,000) +Cash in lieu of restricted stock (378,000) +Deferred compensation in connection with +issuance of stock options and +restricted stock +Amortization of unearned compensation 2,782,000 +Unrealized holding loss on marketable +securities (net of taxes of $741,000) (897,000) (897,000) (897,000) +Net income 12,275,000 12,275,000 +------------- +Comprehensive income $ 11,378,000 +============= +Common stock purchased for treasury 545,100 (9,700,000) (9,700,000) +------------- ------------- ------------- ------------- +Balance - December 31, 2004 $ (1,024,000) 1,790,304 $ (17,691,000 $ 164,665,000 +============= ============= ============= ============= +See notes to financial statements +F-6 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements of Cash Flows +Year Ended December 31, +-------------------------------------------- +2004 2003 2002 +------------ ------------ ------------ +Cash flows from operating activities: +Net income $ 12,275,000 $ 20,454,000 $ 19,841,000 +Adjustments to reconcile net income to net cash provided +by operating activities: +Equity-based compensation 2,719,000 2,877,000 2,228,000 +Depreciation and amortization 5,063,000 4,743,000 3,706,000 +Deferred taxes (227,000) (1,978,000) (1,090,000) +Tax benefit from exercise of options 1,004,000 1,239,000 1,146,000 +Provision for doubtful accounts and chargebacks 537,000 163,000 571,000 +Deferred rent expense 260,000 296,000 233,000 +Realized gain on sale of marketable securities (32,000) (136,000) (66,000) +Changes in: +Accounts receivable 876,000 (1,196,000) (1,207,000) +Due from factor (5,416,000) (6,583,000) 79,000 +Inventories (10,526,000) (4,413,000) (3,627,000) +Prepaid expenses, prepaid taxes, deposits and other +assets 3,507,000 (5,535,000) 7,046,000 +Accounts payable and accrued expenses 2,870,000 206,000 (1,556,000) +Accrued incentive compensation (47,000) (2,234,000) 2,289,000 +------------ ------------ ------------ +Net cash provided by operating activities 12,863,000 7,903,000 29,593,000 +------------ ------------ ------------ +Cash flows from investing activities: +Purchase of property and equipment (7,387,000) (6,061,000) (5,072,000) +Purchases of marketable securities (27,779,000) (47,059,000) (26,349,000) +Maturity/sale of marketable securities 9,708,000 36,785,000 4,041,000 +------------ ------------ ------------ +Net cash (used in) investing activities (25,458,000) (16,335,000) (27,380,000) +------------ ------------ ------------ +Cash flows from financing activities: +Proceeds from exercise of stock options 454,000 4,805,000 4,364,000 +Cash in lieu of restricted stock (378,000) 0 0 +Common stock purchased for treasury (9,700,000) 0 0 +Payments of lease obligations (1,000) (13,000) (43,000) +------------ ------------ ------------ +Net cash (used in) provided by financing +activities (9,625,000) 4,792,000 4,321,000 +------------ ------------ ------------ +Net (decrease) increase in cash and cash equivalents (22,220,000) (3,640,000) 6,534,000 +Cash and cash equivalents - beginning of year 53,073,000 56,713,000 50,179,000 +------------ ------------ ------------ +Cash and cash equivalents - end of year $ 30,853,000 $ 53,073,000 $ 56,713,000 +============ ============ ============ +Supplemental disclosures of cash flow information: +Cash paid during the year for: +Interest $ 68,000 $ 54,000 $ 16,000 +Income taxes $ 5,855,000 $ 18,700,000 $ 6,552,000 +See notes to financial statements +F-7 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +[1] Organization: +Steven Madden, Ltd., a Delaware corporation, designs and sources women's, +girl's and men's shoes, for sale through its wholesale and retail channels +under the Steve Madden, Steven, Stevies, Madden Mens, Lei (under license), +Candie's (under license) and Unionbay (under license) brand names. Revenue +is generated predominately through the sale of the Company's brand name +merchandise and certain licensed products. At December 31, 2004 and 2003, +the Company operated 91 and 83 retail stores (including its website as a +store), respectively. Such revenue is subject to seasonal fluctuations. +See Note K for operating segment information. +[2] Principles of consolidation: +The consolidated financial statements include the accounts of Steven +Madden, Ltd. and its wholly owned subsidiaries Steven Madden Retail, Inc., +Diva Acquisition Corp., Adesso-Madden, Inc., Unionbay Men's Footwear, Inc. +and Stevies, Inc. (collectively referred to as the "Company"). All +significant intercompany balances and transactions have been eliminated. +[3] Use of estimates: +The preparation of financial statements in conformity with accounting +principles generally accepted in the United States of America requires +management to make estimates and assumptions that affect the reported +amounts of assets and liabilities and disclosure of contingent assets and +liabilities at the date of the financial statements and the reported +amounts of revenue and expenses during the reporting period. Actual +results could differ from those estimates. +[4] Cash equivalents: +Cash equivalents at December 31, 2004 and 2003, amounted to approximately +$16,428,000 and $44,829,000, respectively, and consist of money market +accounts, certificates of deposit and commercial paper. The Company +considers all highly liquid instruments with an original maturity of three +months or less when purchased to be cash equivalents. +[5] Marketable securities: +Marketable securities consist primarily of corporate bonds, U.S. treasury +notes and government asset-backed securities with maturities greater than +three months and up to five years at the time of purchase and marketable +equity securities. These securities, which are classified as available for +sale, are carried at fair value, with unrealized gains and losses net of +any tax effect, are reported in stockholders' equity as accumulated other +comprehensive income, and are held at an investment bank with the schedule +of maturities at December 31, 2004 as follows: +F-8 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) +Maturities +------------------------------- +1 to 5 +1 Year or Less Years +-------------- -------------- +Schedule of maturities: +Municipal bonds $ 1,029,000 $ 19,205,000 +US Government and Federal +agency bonds 4,523,000 6,657,000 +Corporate bonds (domestic) 1,992,000 10,478,000 +Corporate bonds(international) 1,018,000 +-------------- -------------- +8,562,000 36,340,000 +Marketable equity securities 4,222,000 +-------------- -------------- +$ 12,784,000 $ 36,340,000 +============== ============== +[6] Inventories: +Inventories, which consist of finished goods, are stated at the lower of +cost (first-in, first-out method) or market. +[7] Property and equipment: +Property and equipment are stated at cost less accumulated depreciation +and amortization. Depreciation is computed utilizing the straight-line +method based on estimated useful lives ranging from three to ten years. +Leasehold improvements are amortized utilizing the straight-line method +over the shorter of their estimated useful lives or the remaining lease +term. Depreciation and amortization include amounts relating to property +and equipment under capital leases. +Impairment losses are recognized for long-lived assets, including certain +intangibles, used in operations when indicators of impairment are present +and the undiscounted cash flows estimated to be generated by those assets +are not sufficient to recover the assets' carrying amount. Impairment +losses are measured by comparing the fair value of the assets to their +carrying amount. No impairment losses have been incurred for the years +presented. +[8] Cost in excess of fair value of net assets acquired: +Cost in excess of fair value of net assets acquired relates to two +acquisitions, and through December 31, 2001 was being amortized over 20 +years. +During 2002, the Company adopted SFAS No. 142, "Goodwill and Other +Intangible Assets" ("FAS 142"). Amortization of indefinite lived +intangible assets was no longer allowed under FAS 142, however these +identified assets are subject to annual impairment tests. The Company has +determined that such goodwill is allocable to the wholesale segment and +the carrying amount of these assets is not impaired at December 31, 2004. +F-9 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +[9] Net income per share: +Basic income per share is based on the weighted average number of common +shares outstanding during the year. Diluted income per share reflects the +potential dilution assuming common shares were issued upon the exercise of +outstanding in-the-money options and the proceeds (including the amount of +compensation cost, if any, attributed to future services and not yet +recognized and the amount of tax benefits, if any, that would be credited +to additional paid-in capital assuming exercise of the options) thereof +were used to purchase treasury stock at the average market price during +the period. For the years ended December 31, 2004 and 2003, options +exercisable into approximately 1,252,000 and 100,000 shares of common +stock, respectively, have not been included in the calculation of diluted +income per share as the result would have been antidilutive. +[10] Advertising costs: +The Company expenses costs of print, radio and billboard advertisements as +of the first date the advertisements take place. Advertising expense +included in operating expenses amounted to approximately $8,993,000 in +2004, $7,666,000 in 2003 and $7,451,000 in 2002. +[11] Fair value of financial instruments: +The carrying value of the Company's financial instruments approximates +fair value due to their short-term nature or their underlying terms. +Marketable securities are carried at quoted market prices which represent +fair value. +[12] Stock-based compensation: +At December 31, 2004, the Company had various stock option plans, which +are described more fully in Note D. The Company has elected to continue to +follow the intrinsic value method in accounting for its stock-based +employee compensation arrangements. The following table illustrates the +effect on net income and earnings per share if the company had applied the +fair value recognition provisions of SFAS No. 123 to stock-based employee +compensation. +Year Ended December 31, +-------------------------------------------------- +2004 2003 2002 +-------------- -------------- -------------- +Reported net income $ 12,275,000 $ 20,454,000 $ 19,841,000 +Stock-based employee compensation +included in reported net income, net +of tax 623,000 412,000 932,000 +Stock-based employee compensation +determined under the fair value +based method, net of tax (3,861,000) (2,838,000) (2,663,000) +-------------- -------------- -------------- +Pro forma net income $ 9,037,000 $ 18,028,000 $ 18,110,000 +============== ============== ============== +Basic income per share: +As reported $ 0.93 $ 1.58 $ 1.58 +Pro forma $ 0.69 $ 1.39 $ 1.44 +Diluted income per share: +As reported $ 0.86 $ 1.45 $ 1.45 +Pro forma $ 0.64 $ 1.28 $ 1.32 +F-10 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) +The weighted average fair value of options granted in 2004, 2003 and 2002 +was approximately $9.77, $10.62 and $10.60, respectively, using the +Black-Scholes option-pricing model with the following assumptions: +2004 2003 2002 +------------ ----------- ------------ +Volatility 65% 71% 73% +Risk free interest rate 3.32% - 3.51% 2.18% - 3.0% 2.60% - 4.15% +Expected life in years 5 4 4 +Dividend yield 0 0 0 +[13] Revenue recognition: +The Company recognizes revenue on wholesale sales when products are +shipped which, pursuant to the Company's standard terms of FOB warehouse, +is when title passes to the customer. Allowances for anticipated discounts +and allowances are recognized when sales are recorded. Customers retain +the right to replacement of the product for poor quality or improper or +short shipments, which have historically been immaterial. Retail sales are +recognized when the payment is received from customers and are recorded +net of returns. The Company earns commission income as a buying agent +through its Adesso-Madden Division by arranging to produce private label +shoes to the specifications of its clients. Commission revenue is +recognized as earned when title of product transfers from the manufacturer +to the customer and is recorded on a net basis. +The Company licenses its Steve Madden trademark for use in connection with +the manufacturing, marketing and sale of outerwear, belts, sunglasses, +eyewear and hosiery. Each license agreement requires the licensee to pay +to the Company a royalty based on net sales, a minimum royalty in the +event that specified net sales targets are not achieved and a percentage +of sales for advertising of the Steve Madden brand. Licensing revenue is +recognized on the basis of net sales reported by the licensees or, if +greater, minimum guaranteed royalties when received and earned. In +substantially all of our license agreements, the minimum guaranteed +royalty is earned and payable (due in advance on the first day of the +quarter) on a quarterly basis. +[14] Sales Deductions: +The Company supports retailers' initiatives to maximize the sales of the +Company's products on the retail floor by subsidizing the co-op +advertising programs of such retailers, providing such retailers with +inventory markdown allowances and participating in various other marketing +initiatives of such retailers. Such expenses are reflected in the +financial statements as deductions to net sales. For the years ended +December 31, 2004 and 2003 the total deduction to net sales for these +expenses was $30,027,000 and $27,859,000 respectively. +[15] Cost of sales: +All costs incurred to bring finished products to our warehouse are +included in the cost of sales line item of the Company's Consolidated +Statements of Income. These include purchase commissions, letter of credit +fees, FOB costs, sample expenses, custom duty, inbound freight, labels and +product packaging. All warehouse and distribution costs are included in +the operating expenses line item of the Company's Consolidated Statements +of Income. The Company classifies all shipping costs to customers as +operating expenses. The Company's gross margins may not be comparable to +other companies in the industry because some companies may include +warehouse and distribution costs, as well as sample costs, as a component +of cost of sales, while other companies may include them in operating +expenses. +F-11 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) +[16] Warehouse and Shipping Costs: +The Company includes all warehouse and distribution costs, including +internal transfer costs, in the Operating Expenses line in the +Consolidated Statements of Income. For the years ended December 31, 2004 +and 2003, the total Warehouse and Distribution Costs included in Operating +Expenses was $5,819,000, and $3,510,000 respectively. The Company's +standard terms of sales are "FOB Steve Madden warehouse" and thus the +Company's wholesale customers absorb most shipping costs. Shipping costs +to wholesale customers incurred by the Company are not considered +significant and are included in the Operating Expense line in the +Consolidated Statements of Income. +[17] Impairment of long-lived assets: +During fiscal 2002, the Company adopted SFAS No. 144, "Accounting for the +Impairment or Disposal of Long-Lived Assets" ("FAS 144"). If facts and +circumstances indicate that the Company's long-lived assets might be +impaired, the estimated future undiscounted cash flows associated with the +long-lived asset would be compared to its carrying amounts to determine if +a write-down to fair value is necessary. If a write-down is required, the +amount is determined by estimation of the present value of net discounted +cash flows in accordance with FAS 144. +[18] 401(k) Plan: +The Company maintains a tax-qualified, 401(k) plan which is available to +each of the Company's eligible employees who elect to participate after +meeting certain length-of-service requirements. The Company makes +discretionary matching contributions of 25% of employees' contributions up +to a maximum of 6% of employees' compensation, which vest to the employees +over a period of time. Total matching contributions to the plan for 2004, +2003 and 2002 were approximately $187,000, $162,000 and $142,000, +respectively. +[19] Recently issued accounting standards: +In December 2004, the Financial Accounting Standards Board ("FASB") issued +Statement of Financial Accounting Standards No. 123R, "Share-Based +Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for +Stock-Based Compensation," and supercedes APB Opinion No. 25, "Accounting +for Stock Issued to Employees." This statement requires that all +share-based payments to employees be recognized in the financial +statements based on their fair values on the date of grant. The Company +currently uses the intrinsic value method to measure compensation expense +for stock-based awards. Note A(12) entitled Stock-based compensation +provides a pro forma net income and earnings per share as if the Company +had used a fair-value based method provided by SFAS 123R to measure +stock-based compensation for 2004, 2003 and 2002. The Company is required +to adopt SFAS 123R in the third quarter of 2005. The Company is evaluating +the requirements of SFAS 123R and expects that its adoption will have a +material impact on the Company's results of operations and earnings per +share. +In November of 2004, the FASB issued SFAS No. 151, "Inventory Costs," +which amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," +to clarify the accounting for abnormal amounts of idle facility expense, +freight, handling costs and wasted material (spoilage). This statement +requires that those items be recognized as current-period charges +regardless of whether they meet the criterion of "so abnormal" as stated +in ARB No. 43. Additionally, SFAS 151 requires that allocation of fixed +production overheads to the costs of conversion be based on the normal +capacity of the production facilities. The Company is required to adopt +the provision of SFAS No. 151 in the first quarter of 2006. The Company +does not expect SFAS 151 to have a material impact on its consolidated +results of operation or financial condition. +F-12 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) +In December of 2004, the FASB issued SFAS No. 153, "Exchanges of +Nonmonetary Assets - An Amendment of APB Opinion No. 29" (SFAS 153). SFAS +153 eliminates the exception for nonmonetary exchanges of similar +productive assets and replaces it with a general exception for exchanges +of nonmonetary assets that do not have commercial substance. SFAS 153 is +effective for fiscal years beginning after June 15, 2005 and is required +to be adopted by the Company in the first quarter of 2006. The Company +does not believe that the adoption of SFAS 153 will have a material impact +on the Company's consolidated results of operation or financial condition. +FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" +(FIN No. 46) was originally issued in January 2003 and was subsequently +revised in December 2003. FIN No. 46 attempts to clarify the application +of Accounting Research Bulletin No. 51 "Consolidated Financial +Statements," to certain entities in which equity investors do not have the +characteristics of a controlling financial interest or do not have +sufficient equity at risk for the entity to finance its activities without +additional subordinated financial support. The Company does not believe +that it has any involvement with variable interest entities that are +required to be consolidated under FIN No. 46. +NOTE B - PROPERTY AND EQUIPMENT +The major classes of assets and accumulated depreciation and amortization +are as follows: +December 31, +---------------------------- +2004 2003 +------------ ------------ +Leasehold improvements $ 27,754,000 $ 22,005,000 +Machinery and equipment 799,000 730,000 +Furniture and fixtures 4,673,000 3,885,000 +Computer equipment 5,043,000 4,767,000 +------------ ------------ +38,269,000 31,387,000 +Less accumulated depreciation and amortization (17,554,000) (12,996,000) +------------ ------------ +Property and equipment - net $ 20,715,000 $ 18,391,000 +============ ============ +NOTE C - DUE FROM FACTOR +Under the terms of its factoring agreement, as amended, the Company may request +advances from the factor up to 80% of aggregate receivables purchased by the +factor at an interest rate of prime minus 2%. The Company also pays a fee equal +to 0.45% of the gross invoice amount of each receivable purchased. In addition, +the factor charges an annual unused line fee of .25% of the average daily unused +portion of the Company's $15,000,000 credit line. The Company sells and assigns +a substantial portion of its receivables, principally without recourse, to the +factor. At December 31, 2004 and 2003, $295,000 and $512,000 of factored +receivables, respectively, were sold by the Company with recourse. The factor +assumes the credit risk of all assigned accounts approved by it, but maintains +liens on all inventory, trade receivables (whether or not assigned) and the +goods represented thereby. +A "factored" sale (whether "with" or "without" recourse) is substantially the +same as a non-factored sale and the Company accounts for its factored +sales/receivables in the same manner as our non-factored sales/receivables. The +factor services the collection of the Company's accounts receivable. Funds +collected by the factor are applied against advances owed to the factor (if +any), and the balance is due and payable to the Company, net of any fees. The +allowance against "due from factor" is an estimated provision for markdowns, +allowances, discounts, advertising and other deductions that customers may +deduct against their payments. +F-13 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE D - STOCK OPTIONS +The Company has established various stock option plans under which options to +purchase shares of common stock may be granted to employees, directors, +officers, agents, consultants and independent contractors. The plans provide +that the option price shall not be less than the fair market value of the common +stock on the date of grant and that no portion of the option may be exercised +beyond ten years from that date. No incentive stock option can be granted and +exercised beyond five years to a stockholder owning 10% or more of the Company's +outstanding common stock. Options granted under the plans during the three years +ended December 31, 2004 vest on the date of grant or up to three years from such +date. +The Company has several stock option plans. The 1993 Incentive Stock Option +Plan, The 1995 Stock Plan, The 1996 Stock Plan and The 1997 Stock Plan provide +for options to be granted to employees and directors. +The 1993 Incentive Stock Option Plan expired in 2003. +In June 1999, the Company adopted The 1999 Stock Plan which authorized the +issuance of up to 400,000 shares. In May 2000, the stockholders approved an +amendment to this Plan to increase the maximum number of shares to be issued +under the Plan to 975,000 shares. In July 2001, the stockholders approved an +amendment to this Plan to increase the maximum number of shares to be issued +under the Plan to 1,600,000 shares. In May 2002, the stockholders approved a +further amendment to this Plan to increase the maximum number of shares to be +issued under the Plan to 2,280,000. In 2003, the stockholders approved a further +amendment to this Plan to increase the maximum number of shares to be issued +under the Plan to 2,920,000. In May of 2004, the stockholders approved a further +amendment to this Plan to increase the maximum number of shares to be issued +under the plan to 3,220,000. Terms of the 1999 Stock Plan are not materially +different from the various existing stock option plans. +Through December 31, 2004, 3,011,000 options had been granted under The 1999 +Stock Plan, as amended, and as of such date, 209,000 shares were available for +grant. +In connection with the amended employment agreement of the former Chief +Executive Officer ("CEO"), who is now the Company's Creative and Design Chief, +the Company issued options to purchase 500,000 shares of its common stock. The +options, which vested in August 1998, have an exercise price of $3.31 and are +exercisable over 10 years expiring in March 2005. Unearned compensation was +recorded in the amount of $1,345,000, which represented the difference between +the exercise price and the fair value of the stock on the date of grant, and was +classified as a component of stockholders' equity. Through December 31, 2003, +the unearned compensation was being amortized over the ten-year term of the +amended agreement. During the year ended December 31, 2004, the Company +reevaluated its policy on amortizing unearned compensation relating to the +issuance of stock options. The Company concluded that deferred compensation was +to be amortized over the shorter of the vesting period of the option or the term +of the employment agreement. Accordingly, the balance in unearned compensation +was expensed this year resulting in a charge to operations of $512,000 in 2004. +$128,000 was charged to operations for each of the years ended December 31, 2003 +and 2002. +In connection with the Chief Operating Officer's employment agreement (the "COO +Agreement"), the Company issued options to purchase 75,000 shares of its common +stock. The options, which vested quarterly through December 31, 2001, have an +exercise price of $8.00. The market value of the stock on the date of grant was +$18.80 per share. Unearned compensation was recorded in the amount of $810,000, +which represented the difference between the exercise price and the fair value +of the stock on the date of grant, and was classified as a component of +stockholders' equity. The unearned compensation was amortized over the two-year +term of the employment agreement. Accordingly, $405,000 has been charged to +operations in each year 2002 and 2001. As an amendment to the COO Agreement +dated July 1, 2002, the Company issued 20,000 restricted shares of its common +stock, which vest quarterly through January 1, 2005. The market value of the +stock on the date of grant was $18.74 per share. Unearned compensation was +recorded in the amount of $375,000 and is classified as a component of +stockholders' equity. The unearned compensation is being amortized over the +vesting period of the stock. Accordingly, $150,000 and $225,000 have been +charged to operations in 2004 and 2003, respectively. +F-14 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE D - STOCK OPTIONS (CONTINUED) +Activity relating to stock options granted under the Company's plans and outside +the plans during the three years ended December 31, 2004 is as follows: +2004 2003 2002 +-------------------------- -------------------------- -------------------------- +Weighted Weighted Weighted +Average Average Average +Number Exercise Number of Exercise Number of Exercise +of Shares Price Shares Price Shares Price +------------ ---------- ------------ ---------- ------------ ---------- +Outstanding at January 1 2,274,000 $ 11.35 2,345,000 $ 10.14 2,231,000 $ 7.25 +Granted 380,000 17.84 403,000 17.81 696,000 17.53 +Exercised (129,000) 3.25 (443,000) 10.79 (567,000) 7.70 +Cancelled (12,000) 19.00 (31,000) 11.87 (15,000) 16.71 +------------ ------------ ------------ +Outstanding at December 31 2,513,000 12.71 2,274,000 11.35 2,345,000 10.14 +============ ============ ============ +Exercisable at December 31 2,272,000 12.93 1,885,000 10.33 1,813,000 8.01 +============ ============ ============ +The following table summarizes information about stock options at December 31, +2004: +Options Outstanding Options Exercisable +---------------------------------------------- --------------------- +Weighted +Average Weighted +Remaining Weighted Average +Number Contractual Life Average Number Exercise +Range of Exercise Price Outstanding (in Years) Exercise Price Exercisable Price +--------------------------- ----------- ---------------- -------------- ----------- ----- +$1.75 to $3.31 720,000 1.2 $2.44 720,000 $2.44 +$5.50 to $7.00 81,000 2.4 5.65 81,000 5.65 +$8.00 to $9.12 125,000 6.4 8.97 125,000 8.97 +$9.55 to $12.00 24,000 6.6 9.76 24,000 9.76 +$13.50 to $16.85 311,000 8.4 14.17 261,000 14.29 +$18.00 to $20.98 1,252,000 7.9 19.13 1,061,000 19.09 +---------- ---------- +2,513,000 5.8 12.71 2,272,000 12.13 +========== ========== +The following table summarizes the amount of options authorized, the amount of +options granted (net of expired or cancelled options) and the amount of options +available for grant for each of the 1995 Plan, 1996 Plan, 1997 Plan and 1999 +Plan: +1995 Plan 1996 Plan 1997 Plan 1999 Plan +--------- --------- --------- --------- +Options authorized 330,000 375,000 1,000,000 3,220,000 +Options granted net of +expired or cancelled 288,000 373,700 997,200 3,011,000 +--------- --------- --------- --------- +Available for grant as of +December 31, 2004 42,000 1,300 2,800 209,000 +========= ========= ========= ========= +F-15 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE D - STOCK OPTIONS (CONTINUED) +In May 2003, the Company granted 100,000 options to Charles Koppelman, a +director, exercisable at $13.50 per share which vest over one year on a +quarterly basis. The difference between the market price of $19.00 per share and +the option exercise price has been reflected as unearned compensation to be +amortized over the one-year vesting period. In addition, the Company issued +303,000 options exercisable at the market price of the underlying common stock +on the date of grant which principally vest over one year. In May of 2004, +pursuant to a consulting agreement with this former director, the Company +granted 100,000 options exercisable at $13.50 per share which vest over one year +on a quarterly basis. The difference between the market price of $19.09 per +share and the option exercise price has been reflected as unearned compensation +to be amortized over the one-year vesting period. See note J(8) for a +description of the consulting agreement. +NOTE E - RESTRICTED STOCK AWARDS +Restricted stock awards have been granted to certain key executives in +management. These awards vest on various dates between January 2004 and January +2006. Awards of 101,000 shares and 190,000 shares were granted in 2003 and 2002, +respectively. The average market price on the date of grant for awards granted +in 2003 and 2002 was $18.41 and $17.15, respectively. Restricted stock +compensation charged to expense was $1,715,000, $842,000 and $871,000 for 2004, +2003 and 2002, respectively. +In July 2004, the Company and several of its salesmen mutually agreed to replace +restricted stock awards due to vest in January 2006 with cash awards to be paid +on the vesting date. No shares had been issued under the original award. The +cash awards, which total $183,000, are being charged to operations over the +vesting period and are equal to the value of the restricted stock when +originally issued. The transaction resulted in a reduction of Paid in Capital +equal to the vested award. +In August 2004, prior to his restricted stock becoming fully vested, an employee +of the Company was paid $378,000 in exchange for his restricted stock award. The +cash award which was charged to operations during the vesting period, was equal +to the value of the restricted stock when originally issued. No shares had been +issued under the original award. The transaction resulted in a reduction of Paid +in Capital equal to the vested award. +NOTE F - PREFERRED STOCK +The Company has authorized 5,000,000 shares of preferred stock. The Board of +Directors has designated 60,000 shares of such preferred stock as Series A +Junior Participating Preferred Stock ("Series A Preferred"). Holders of the +shares of Series A Preferred are entitled to dividends equal to 1,000 times +dividends declared or paid on the Company's common stock. Each share of Series A +preferred entitles the holder to 1,000 votes on all matters submitted to the +holders of common stock. The Series A Preferred has a liquidation preference of +$1,000 per share, and is not redeemable by the Company. No preferred shares have +been issued. +NOTE G - RIGHTS AGREEMENT +On October 30, 2001, the Company declared a dividend distribution of one +preferred stock purchase right (a "Right") for each outstanding share of common +stock. Each Right entitles the holder to purchase from the Company one +one-thousandth (1/1,000) of a share of Series A Preferred at a price of $75 per +one one-thousandth (1/1,000) of a share. Initially, the Rights will not be +exercisable and will automatically trade with the common stock. The Rights +become exercisable, in general, ten days following the announcement of a person +or group acquiring beneficial ownership of at least 15% of the outstanding +voting stock of the Company. +F-16 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE H - OPERATING LEASES +The Company leases office, showroom and retail facilities under noncancelable +operating leases with terms expiring at various times through 2013. Future +minimum annual lease payments under noncancelable operating leases consist of +the following at December 31: +2005 $11,004,000 +2006 11,354,000 +2007 11,030,000 +2008 9,483,000 +2009 8,029,000 +Thereafter 21,060,000 +----------- +$71,960,000 +=========== +A majority of the retail store leases provide for contingent rental payments if +gross sales exceed certain targets. In addition, many of the leases contain rent +escalation clauses to compensate for increases in operating costs and real +estate taxes. +Rent expense for the years ended December 31, 2004, 2003 and 2002 was +approximately $13,520,000, $12,340,000 and $10,795,000, respectively. Included +in such amounts are contingent rents of $105,000, $99,000 and $151,000 in 2004, +2003 and 2002, respectively. +Pursuant to certain leases, rent expense charged to operations differs from rent +paid because of scheduled rent increases. Accordingly, the Company has recorded +deferred rent. Rent expense is calculated by allocating total rental payments, +including those attributable to scheduled rent increases, on a straight-line +basis, over the lease term. +NOTE I - INCOME TAXES +The income tax provision (benefit) consists of the following: +2004 2003 2002 +------------ ------------ ------------ +Current: +Federal $ 6,422,000 $ 12,183,000 $ 11,411,000 +State and local 2,484,000 4,660,000 4,266,000 +------------ ------------ ------------ +8,906,000 16,843,000 15,677,000 +------------ ------------ ------------ +Deferred: +Federal (189,000) (1,648,000) (793,000) +State and local (38,000) (330,000) (297,000) +------------ ------------ ------------ +(227,000) (1,978,000) (1,090,000) +------------ ------------ ------------ +$ 8,679,000 $ 14,865,000 $ 14,587,000 +============ ============ ============ +A reconciliation between taxes computed at the federal statutory rate and the +effective tax rate is as follows: +December 31, +---------------------------- +2004 2003 2002 +------ ------ ------ +Income taxes at federal statutory rate 35.0% 35.0% 35.0% +State income taxes - net of federal income +tax benefit 7.6 8.3 8.3 +Nondeductible items 0.1 0.1 0.1 +Other (1.3) (1.3) (1.0) +------ ------ ------ +Effective rate 41.4% 42.1% 42.4% +====== ====== ====== +F-17 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE I - INCOME TAXES (CONTINUED) +The Company applies the liability method of accounting for income taxes. Under +this method, deferred tax assets and liabilities are determined based on +differences between financial reporting and tax bases of assets and liabilities +and are measured using the enacted tax rates and laws that are expected to be in +effect when the differences are expected to reverse. +Realization of deferred tax assets depends on generating sufficient future +taxable income. Although realization is not assured, management believes it is +more likely than not that all of the deferred tax assets will be realized. The +amount of deferred tax assets considered realizable however could be reduced in +the near term if estimates of future taxable income are reduced. +The components of deferred tax assets and liabilities are as follows: +December 31, +--------------------------- +2004 2003 +------------ ------------ +Current deferred tax assets: +Receivable allowances $ 1,232,000 $ 1,007,000 +Inventory 918,000 685,000 +Unrealized loss 286,000 +Other 62,000 +------------ ------------ +2,498,000 1,692,000 +------------ ------------ +Non-current deferred tax assets: +Depreciation 2,195,000 3,169,000 +Deferred compensation 2,253,000 1,682,000 +Deferred rent 878,000 767,000 +Unrealized loss 454,000 +------------ ------------ +5,780,000 5,618,000 +------------ ------------ +Deferred tax assets $ 8,278,000 $ 7,310,000 +============ ============ +F-18 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER +[1] Indictment: +On June 20, 2000, Steven Madden, the Company's former Chairman and Chief +Executive Officer, was indicted in the United States District Courts for +the Southern District and Eastern District of New York. The indictments +alleged that Mr. Madden engaged in securities fraud and money laundering +activities. In addition, the Securities and Exchange Commission filed a +complaint in the United States District Court for the Eastern District of +New York alleging that Mr. Madden violated Section 17(a) of the Securities +Exchange Act of 1934, as amended. On May 21, 2001, Steven Madden entered +into a plea agreement with the U.S. Attorney's Office, pursuant to which +he pled guilty to four of the federal charges filed against him. In +addition, Mr. Madden reached a separate settlement agreement with the +Securities and Exchange Commission regarding the allegations contained in +its complaint. As a result, Mr. Madden resigned as the Company's Chief +Executive Officer and as a member of the Company's Board of Directors +effective July 1, 2001. Mr. Madden has agreed to serve as the Company's +Creative and Design Chief, a non-executive position. On April 4, 2002, Mr. +Madden was sentenced in the United States District Court for the Southern +District of New York to forty-one (41) months' imprisonment in connection +with two of the federal charges to which he pled guilty. On May 3, 2002, +Mr. Madden was sentenced in the United States District Court for the +Eastern District of New York to forty-one (41) months' imprisonment in +connection with the remaining two charges to which he pled guilty. The +sentences will run concurrently. Under the settlement agreement with the +Securities and Exchange Commission, Mr. Madden has agreed to not serve as +an officer or director of a publicly traded company for 7 years. Neither +the indictments nor the Securities and Exchange Commission complaint +allege any wrongdoing by the Company or its other officers and directors. +Mr. Madden began serving his sentence in September of 2002. +In December 2001, the Company purchased a loss mitigation policy to cover +costs arising out of lawsuits related to the June 2000 federal indictment +of Steven Madden described above. The policy covers the Company's +anticipated damages and legal costs in connection with such lawsuits. The +Company is obligated to pay for damages and costs in excess of the policy +limits. The cost of the policy was $6,950,000. +[2] Class action litigation: +Between June and August 2000, several class action lawsuits were commenced +in the United States District Court for the Eastern District of New York +against the Company, Steven Madden personally, and, in some of the +actions, the Company's then President and its Chief Financial Officer. +A settlement of these actions was reached and, on May 25, 2004, the Court +entered a Final Order and Judgment pursuant to which the Court dismissed +these actions in accordance with the settlement agreement. The settlement +amounts did not have a material effect on the Company's financial +position. +[3] Shareholder derivative actions: +On or about September 26, 2000, a shareholder derivative action was +commenced in the United States District Court for the Eastern District of +New York, captioned Herrera v. Steven Madden and Steven Madden, Ltd. The +Company is named as a nominal defendant in the action. A settlement of +these actions was reached and, on June 1, 2004, the Court entered an +Amended Order and Final Judgment of Derivative Action pursuant to which +the Court dismissed these actions in accordance with the settlement +agreement. The settlement amounts did not have a material effect on the +Company's financial position. +F-19 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED) +On or about November 28, 2001, a shareholder derivative complaint was +filed in the United States District Court for the Eastern District of New +York, captioned Herrera v. Karson, et al. The Company and certain of the +Company's present and/or former directors were named as defendants in this +action. A settlement of these actions was reached and, on June 1, 2004, +the Court entered an Amended Order and Final Judgment of Derivative Action +pursuant to which the Court dismissed these actions in accordance with the +settlement agreement. The settlement amounts did not have a material +effect on the Company's financial position. +[4] Other actions: +(a) The Company and certain of the Company's present and/or former +directors have been named in an action commenced in the United +States District Court for the Eastern District of New York by the +Safeco Surplus Lines Insurance Company captioned Safeco Surplus +Lines Ins. Co. v. Steven Madden Ltd., et al., 02 CV 1151 (JG). The +complaint principally seeks rescission of the excess insurance +policy issued by Safeco to the Company for the February 4, 2000 to +June 13, 2001 period and an order declaring that Safeco does not owe +any indemnity obligation to the Company or any of its officers and +directors in connection with the putative shareholder class action +and derivative cases described in the Form 10-Q filed by the Company +for the quarter ended March 31, 2002. The parties agreed to resolve +Safeco's claims without any payment to Safeco and the case was +dismissed, with prejudice and without costs to any of the parties, +by stipulation, which stipulation was so ordered by the Court. +(b) On or about June 6, 2003, an action was commenced in the United +States District Court for the Central District of California, +captioned Global Brand Marketing, Inc. v. Steve Madden Ltd. On April +13, 2004 the parties agreed to a settlement of this action. The +settlement amount did not have a material effect on the Company's +financial position or result of operations. A stipulation of +dismissal of this action has been executed by the parties and filed +with the District Court. On April 15, 2004, the Court dismissed this +action. +(c) On December 15, 2003, the Company commenced an action against LaRue +Distributors, Inc. ("LaRue") in the United States District Court for +the Southern District of New York. The Company seeks a declaratory +judgment that the Company properly terminated a license agreement +with LaRue and monetary damages for breaches of the license +agreement and trademark infringement by LaRue. Subsequently, LaRue +served an answer and counterclaim alleging that the license +agreement was improperly terminated by the Company and seeking +compensatory and punitive damages. The Company filed an answer +denying any liability with respect to the counterclaim. The parties +submitted cross-motions for summary judgment on February 28, 2005. +If neither motion is granted, a trial will be scheduled for later in +2005. The Company believes that it has substantial defenses to the +counterclaims asserted by LaRue. Notwithstanding the Company's +assertion of its substantial defenses, the Company has retained an +expert which has calculated the damages to LaRue, assuming LaRue +prevails on its claim of improper termination of the license +agreement, to be less than $1,000,000. +(d) On or about July 9, 2004, an action was filed in the United States +District Court for the Southern District of New York against the +Company by Robert Marc for trademark infringement, captioned Robert +Marc v. Steve Madden, Ltd. Case No. 04 CV 5354 (JGK). In the action, +Robert Marc claims trademark infringement in connection with a "bar +and dot" design on the sides of certain eyewear. The alleged +infringing eyeglasses are manufactured and sold by the Company's +licensee for eyewear, Colors in Optics, which is also a defendant in +the action. Colors in Optics has assumed responsibility for the +defense of this action. The Company believes that this action will +not have a material effect on the Company's financial position. The +matter was settled with no payment of money by Steven Madden Ltd. +Steven Madden Ltd. signed the settlement papers on or about February +10th, and a dismissal should be filed shortly. +F-20 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED) +(e) On or about December 20, 2004, an action was filed in the United +States District Court for the Central District of California against +the Company by Global Brand Marketing Inc. for patent infringement, +captioned Global Brand Marketing Inc. v. Steven Madden Ltd., Case +No. CV 04-10339 (RJK-AJW (RZx)). In the action GBMI claims +infringement of a design patent in connection with a shoe sold by +Steven Madden referred to as the "Ronan." The parties are in the +process of discussing settlement. The Company believes that this +action will not have a material effect on the Company's financial +position. +(f) The Company has been named as a defendant in certain other lawsuits +in the normal course of business. In the opinion of management, +after consulting with legal counsel, the liabilities, if any, +resulting from these matters should not have a material effect on +the Company's financial position or results of operations. It is the +policy of management to disclose the amount or range of reasonably +possible losses in excess of recorded amounts. +[5] Employment agreements: +The Company has an employment agreement with Steve Madden, its former CEO +and President, to serve as the Company's Creative and Design Chief. The +employment agreement, as amended, provides for an annual salary of +$700,000 through June 30, 2011. The agreement also provides for an annual +performance bonus, an annual option grant at exercise prices equal to the +market price on the date of grant and a non-accountable expense allowance. +The Company has employment agreements with other executives (the +"executives") which expire between January 1, 2005 and June 30, 2006. +These agreements provide for cash bonuses based upon a percentage of year +to year increases in earnings before interest taxes depreciation and +amortization, option grants and non-accountable expense allowances as +defined. Base salary commitments for these executives are as follows: +2005 $1,060,000 +2006 234,000 +---------- +$1,294,000 +========== +In connection with their employment agreements, two executives are +entitled to receive an aggregate of 40,000 shares of restricted common +stock from the Company. The restricted shares vest equally each quarter +over the period of their employment agreements through December 2005. +Accordingly, the Company has recorded a charge to operations in the amount +of $254,000 and $324,000 for the 20,000 and 19,000 shares that vested +during the years ended December 31, 2004 and 2003, respectively. Further, +one executive received 100,000 stock options exercisable at $19.00 per +share, the market price on the date of grant. 20,000 of these options +vested on June 30, 2003 and the balance vest equally, each quarter, +through June 30, 2005. +In addition, the Company accrued an aggregate of approximately $155,000 +for bonuses under these agreements for 2004. +[6] Letters of credit: +At December 31, 2004 and 2003, the Company had open letters of credit for +the purchase of imported merchandise of approximately $9,808,000 and +$7,458,000, respectively. +F-21 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED) +[7] Royalty agreements: +Pursuant to the Company's license agreement with Jones Investment Company, +Inc., the Company has the right to use the l.e.i. trademark in connection +with the sale and marketing of footwear. The agreement, which expires on +September 30, 2006, requires the Company to pay a royalty equal to a +percentage of net sales and a minimum royalty in the event that specified +net sales targets are not achieved. +On January 7, 2003, the Company entered into a long-term license agreement +with Seattle Pacific Industries, Inc., under which the Company has the +right to use the Unionbay trademark in connection with the sale and +marketing of footwear for men and boys. The initial term of the agreement +expires on December 31, 2006, with four 3-year renewal terms, the last of +which will expire on December 31, 2018. The agreement requires the Company +to make royalty and advertising payments equal to a percentage of net +sales and a minimum royalty and advertising payment in the event that +specified net sales targets are not achieved. +On May 12, 2003, the Company entered into a long-term license agreement +with Candie's, Inc. to design, manufacture, and distribute Candie's +branded footwear for women and children worldwide. That agreement provided +that the initial term of the agreement expired on December 31, 2009, with +four 3-year renewal terms, the last of which expired on December 31, 2021. +The agreement required the Company to make royalty and advertising +payments equal to a percentage of net sales of licensed products and a +minimum royalty and advertising payment in the event that specified net +sales targets are not achieved. On December 6, 2004, the agreement was +amended to reflect Candie's decision to name Kohl's Corporation the +exclusive provider of a new line of Candie's apparel. The amendment +extended the initial term of the agreement to December 31, 2010, and +eliminated the renewal term options. Pursuant to the amendment, commencing +on January 1, 2007, the Company will no longer have the exclusive right to +market Candie's branded footwear and will be permitted to sell Candie's +branded footwear only to Kohl's. Under the terms of the amendment, +Candie's guarantees that the Company will achieve minimum sales levels +with Kohl's during the term of the agreement. In the event such minimum +sales levels are not achieved, Candie's is required to compensate the +Company in an amount based on a percentage of the sales shortfall. +Effective January 1, 2005, all royalty and advertising payments will be +eliminated. As an inducement to execute the amendment, the Company is +required to pay Candie's a total of $3,000,000 payable in eight equal +quarterly installments. +Royalty expenses are included in the "operating expenses" section of the +Company's Consolidated Statements of Income. Aggregate minimum future +royalties under these agreements are as follows: +Year Ending +December 31, +2005 $ 2,740,000 +2006 2,318,000 +2007 375,000 +------------ +$ 5,433,000 +============ +[8] Related Party Transactions: +In January 2004, the Company entered into an agreement with JLM +Consultants, a company wholly-owned by John Madden, one of the Company's +directors. Under this agreement, Mr. Madden provided consulting services +with respect to the development of international sales of the Company. +Pursuant to this agreement, JLM Consultants received a fee of $252,000 in +2004, besides for Mr. Madden's fees received for service to the Company as +a director. +F-22 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED) +In July 2001, the Company entered into a consulting agreement with Peter +J. Solomon & Company, a financial advisory firm of which Marc Cooper, one +of the Company's directors, is a managing director. Under this agreement, +the firm provided financial advisory and investment banking services to +the Company. This agreement was amended in March 2004. Pursuant to this +agreement, the Company paid fees and expenses to Peter J. Solomon & +Company of $161,000, $33,000 and $150,000 for 2004, 2003 and 2002 +respectively. +In July 2004, the Company entered into a consulting agreement with Charles +Koppelman, who served as a director of the Company from June 1998 through +May 2004 and as Chairman of the Board from July 2001 through May 2004. +Under this agreement, Mr. Koppelman provided consulting services that +included enhancing and promoting the Company's brands and seeking +licensing and acquisition opportunities. Pursuant to this agreement, Mr. +Koppelman received 100,000 stock options and a fee of $105,000 in 2004. +See Note D for a description of the options. This agreement expires on +June 30, 2005. +In October 2002, the Company entered into an agreement with Jeff Birnbaum, +one of the Company's directors. Under this agreement, Mr. Birnbaum +provided consulting services with respect to the designing and +manufacturing of shoes and general consulting services to the Company. +Pursuant to this agreement, Mr. Birnbaum received a fee of $250,000 in +2004 besides for fees received for service to the Company as a director. +Mr. Birnbaum has been the Product Development Manager of Dolphin Shoe +Company since August 1982. Dolphin Shoe Company is one of the Company's +domestic suppliers. In addition, Jeff Birnbaum's brother, Steven Birnbaum +owns a trading company, Bulls Eye Trading ("Bullseye") that acts as a +selling agent for the Company. Jeff Birnbaum does not own an interest in +Bullseye nor is he a director of Bullseye nor does Bullseye pay him any +compensation. +The Madden Mens division of the Company purchases a significant amount of +shoes from La Tandem International, Inc. Mr. James Chen, the brother of +Harry Chen, is the President of La Tandem International, Inc., and La +Tandem International, Inc. is owned or controlled by members of the Chen +family. Harry Chen is the chairman and lead designer of the Madden Mens +Division of the Company. +[9] Concentrations: +The Company maintains cash and cash equivalents with various major +financial institutions which at times are in excess of the amount insured. +In addition, the Company's marketable securities and a money account are +principally held at one brokerage company. +During the year ended December 31, 2004, the Company purchased +approximately 25% of its merchandise from a supplier in Brazil and 17% and +10% of its merchandise from two suppliers in China, respectively. Total +inventory purchases for the year ended December 31, 2004 from Brazil and +China were approximately 26% and 41%, respectively. +During the year ended December 31, 2003, the Company purchased +approximately 13% of its merchandise from a supplier in Brazil. Total +inventory purchases for the year ended December 31, 2003 from Brazil were +approximately 19%. The Company also purchased inventory during the year +ended December 31, 2003 from two vendors in China totaling approximately +32%. +During the year ended December 31, 2002, the Company purchased +approximately 29% of its merchandise from a supplier in Brazil and 18% and +16% of its merchandise from two suppliers in China, respectively. Total +inventory purchases for the year ended December 31, 2002 from Brazil and +China were approximately 30% and 54%, respectively. +Sales to two customers accounted for 10% and 9% of total net sales for the +year ended December 31, 2004. These customers each represented 13% of +accounts receivable at December 31, 2004. +F-23 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +Sales to two customers accounted for 10% and 11% of total net sales for +the year ended December 31, 2003. These customers each represented 17% of +accounts receivable at December 31, 2003. +Sales to two customers accounted for 13% and 10% of total net sales for +the year ended December 31, 2002. These customers represented 17% and 10% +of accounts receivable at December 31, 2002, respectively. +Sales to such customers are included in the wholesale segment (see Note +K). Purchases are made primarily in United States dollars. +F-24 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED) +[10] Valuation and qualifying accounts: +The following is a summary of the allowance for doubtful accounts related +to accounts receivable and the allowance for chargebacks related to the +amount Due from Factor for the years ended December 31: +2004 2003 2002 +------------ ------------ ------------ +Balance at beginning of year $ 2,378,000 $ 2,215,000 $ 1,644,000 +Charged to expense 537,000 163,000 630,000 +Uncollectible accounts written off, net of recoveries (59,000) +------------ ------------ ------------ +Balance at end of year $ 2,915,000 $ 2,378,000 $ 2,215,000 +============ ============ ============ +The following is a summary of the reserve for slow moving inventory for +the years ended December 31: +2004 2003 2002 +------------ ------------ ------------ +Balance at beginning of year $ 663,000 $ 877,000 $ 461,000 +Charged to reserve 58,000 214,000 0 +Increase to the reserve 0 0 416,000 +------------ ------------ ------------ +Balance at end of year $ 608,000 $ 663,000 $ 877,000 +============ ============ ============ +The following is a summary of property and equipment and the related +accounts of accumulated depreciation and amortization for the years ended +December 31: +2004 2003 2002 +------------ ------------ ------------ +Cost basis +Balance at beginning of year $ 31,387,000 $ 27,507,000 $ 27,512,000 +Additions 7,387,000 6,061,000 5,072,000 +Write-off of fully depreciated assets (505,000) (2,181,000) (5,077,000) +------------ ------------ ------------ +Balance at end of year 38,269,000 31,387,000 27,507,000 +------------ ------------ ------------ +Accumulated depreciation and amortization +Balance at beginning of year 12,996,000 10,434,000 11,805,000 +Depreciation and amortization 5,063,000 4,743,000 3,706,000 +Write-off of fully depreciated assets (505,000) (2,181,000) (5,077,000) +------------ ------------ ------------ +Balance at end of year 17,554,000 12,996,000 10,434,000 +------------ ------------ ------------ +Property and equipment, net $ 20,715,000 $ 18,391,000 $ 17,073,000 +============ ============ ============ +F-25 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED) +The following is a summary of cost in excess of fair value of net assets +acquired and the related accumulated amortization for the years ended +December 31: +2004 2003 2002 +------------ ------------ ------------ +Cost basis +Balance at beginning and end of year $ 2,780,000 $ 2,780,000 $ 2,780,000 +------------ ------------ ------------ +Accumulated amortization +Balance at beginning of year 714,000 714,000 714,000 +------------ ------------ ------------ +Cost in excess of fair value of net assets acquired $ 2,066,000 $ 2,066,000 $ 2,066,000 +============ ============ ============ +[11] Other: +Pursuant to an agreement reached on February 2, 2005 with an 8% +shareholder, the Company has agreed to commit $25 million in 2005 and $10 +million in 2006 to a combination of share repurchases and/or dividends, +such programs to be implemented at such time and such manner as the board +of directors shall determine in its sole discretion. As of February 28, +2005, the Company has repurchased 177,000 shares for $3,316,000. +NOTE K - OPERATING SEGMENT INFORMATION +The Company's reportable segments are primarily based on methods used to +distribute its products. The wholesale and retail segments derive revenue from +sales of women's, men's, girl's and children's footwear. The wholesale segment, +through sales to department and specialty stores, and the retail segment, +through our operation of retail stores and our website, derive revenue from +sales of branded women's, men's, girl's and children's footwear. In addition, +the wholesale segment has a licensing program that extends the Steve Madden and +Stevies brands to accessories and ready-to-wear apparel. The other segment +represents activities of a subsidiary which earns commissions for serving as a +buying agent to mass-market merchandisers, shoe chains and other off-price +retailers with respect to their purchase of private label shoes. +F-26 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE K - OPERATING SEGMENT INFORMATION (CONTINUED) +The accounting policies of the segments are the same as those described in the +summary of significant accounting policies. The Company evaluates performance +based on profit or loss from operations before other income (expense) and the +provision for income taxes. The following is information for the Company's +reportable segments: +Wholesale Retail Other Consolidated +------------- ------------- ------------- ------------- +Year ended December 31, 2004: +Net sales to external customers (a) $ 230,347,000 $ 107,797,000 $ 338,144,000 +Gross profit 66,749,000 55,920,000 122,669,000 +Commissions and licensing fees 2,310,000 $ 4,496,000 6,806,000 +Income from operations 8,272,000 8,431,000 2,278,000 18,981,000 +Depreciation and amortization 1,459,000 3,405,000 7,000 4,871,000 +Other significant items: +Deferred compensation 2,782,000 2,782,000 +Deferred rent expense 192,000 68,000 260,000 +Provision for doubtful accounts 191,000 191,000 +Segment assets (b) 135,362,000 44,048,000 891,000 180,301,000 +Capital expenditures 1,965,000 5,414,000 8,000 7,387,000 +Year ended December 31, 2003: +Net sales to external customers (a) $ 228,686,000 $ 95,518,000 $ 324,204,000 +Gross profit 75,167,000 50,852,000 126,019,000 +Commissions and licensing fees 2,838,000 $ 5,056,000 7,894,000 +Income from operations 21,589,000 9,133,000 2,904,000 33,626,000 +Depreciation and amortization 1,136,000 3,604,000 3,000 4,743,000 +Other significant items: +Deferred compensation 2,877,000 2,877,000 +Deferred rent expense (reversal) 33,000 262,000 1,000 296,000 +Provision for doubtful accounts 163,000 163,000 +Segment assets (b) 139,625,000 37,828,000 417,000 177,870,000 +Capital expenditures 2,667,000 3,394,000 6,061,000 +Year ended December 31, 2002: +Net sales to external customers (a) $ 234,253,000 $ 91,883,000 $ 326,136,000 +Gross profit 77,889,000 48,794,000 126,683,000 +Commissions and licensing fees 1,833,000 4,770,000 6,603,000 +Income from operations 21,664,000 9,000,000 2,548,000 33,212,000 +Depreciation and amortization 739,000 2,966,000 1,000 3,706,000 +Other significant items: +Deferred compensation 2,228,000 2,228,000 +Deferred rent expense (reversal) (14,000) 243,000 4,000 233,000 +Provision for doubtful accounts 570,000 1,000 571,000 +Segment assets (b) 113,477,000 36,166,000 857,000 150,500,000 +Capital expenditures 1,246,000 3,826,000 5,072,000 +(a) Attributed to the United States, based on the location in which the sale +originated. +(b) All long-lived assets, consisting of property and equipment and cost in +excess of fair value of net assets acquired, are located in the United +States. +F-27 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2004 and 2003 +NOTE L - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) +The following is a summary of the quarterly results of operations for the years +ended December 31, 2004 and 2003 (000's omitted): +March 31, June 30, September 30, December 31, +------------ ------------ ------------ ------------ +2004: +Wholesale, net $ 55,067 $ 59,804 $ 64,851 $ 50,625 +Retail, net 23,701 26,430 23,759 33,907 +------------ ------------ ------------ ------------ +Net sales 78,768 86,234 88,610 84,532 +Cost of sales 47,496 53,522 57,160 57,297 +------------ ------------ ------------ ------------ +Gross profit 31,272 32,712 31,450 27,235 +Commissions and licensing fee income 1,416 1,811 1,702 1,877 +Net income 4,126 4,090 3,686 373 +Net income per share: +Basic 0.31 0.31 0.28 0.03 +Diluted 0.29 0.28 0.26 0.03 +2003: +Wholesale, net $ 57,592 $ 63,335 $ 65,601 $ 42,158 +Retail, net 21,106 22,409 23,062 28,941 +------------ ------------ ------------ ------------ +Net sales 78,698 85,744 88,663 71,099 +Cost of sales 47,733 53,436 53,067 43,949 +------------ ------------ ------------ ------------ +Gross profit 30,965 32,308 35,596 27,150 +Commissions and licensing fee income 1,690 2,145 2,205 1,854 +Net income 5,049 5,780 7,073 2,552 +Net income per share: +Basic 0.39 0.45 0.54 0.20 +Diluted 0.36 0.41 0.50 0.18 +F-28 +(b) Exhibits. +3.01 Certificate of Incorporation of the Company (incorporated by reference +to Exhibit 1 to the Company's Current Report on Form 8-K filed with the +Commission on November 23, 1998). +3.02 Amended & Restated By-Laws of the Company (incorporated by reference to +Exhibit 3.02 to the Company's Annual Report on Form 10-K for its fiscal +year ended December 31. 2001). +4.01 Specimen Certificate for shares of Common Stock (incorporated by +reference to Exhibit 4.01 to the Company's Registration Statement on +Form SB-2/A filed with the Commission on September 29, 1993 (File No. +033-67162)). +4.02 Rights Agreement between the Company and American Stock Transfer and +Trust Company (incorporated by reference to Exhibit 4.1 to the +Company's Current Report on Form 8-K filed with the Commission on +November 16, 2001). +10.07 Employment Agreement of Arvind Dharia (incorporated by reference to +Exhibit 10.07 to the Company's Annual Report on Form 10-K for its +fiscal year ending December 31, 2000). +10.08 Employment Agreement of Richard Olicker (incorporated by reference to +Exhibit 10.08 to the Company's Annual Report on Form 10-K for its +fiscal year ending December 31, 2000). +10.09 Second Amended Employment Agreement between the Company and Steven +Madden (incorporated by reference to Exhibit 99.1 to the Company's +Quarterly Report on Form 10-Q for its fiscal quarter ending June 30, +2001). +10.10 Employment Agreement of Jamieson Karson (incorporated by reference to +Exhibit 99.3 to the Company's Quarterly Report on Form 10-Q for its +fiscal quarter ending June 30, 2001). +10.11 Amendment No. 1 to Employment Agreement of Arvind Dharia (incorporated +by reference to Exhibit 99.4 to the Company's Quarterly Report on Form +10-Q for its fiscal quarter ending June 30, 2001). +10.12 Employment Agreement between Adesso-Madden, Inc. and Gerald Mongeluzo +(incorporated by reference to Exhibit 99.5 to the Company's Quarterly +Report on Form 10-Q for its fiscal quarter ending June 30, 2001). +10.13 Employment Agreement between Steven Madden Retail, Inc. and Mark +Jankowski (incorporated by reference to Exhibit 99.6 to the Company's +Quarterly Report on Form 10-Q for its fiscal quarter ending June 30, +2001). +10.14 Amendment No. 1 to Employment Agreement of Richard Olicker +(incorporated by reference to Exhibit 10.15 to the Company's Quarterly +Report on Form 10-Q for its fiscal quarter ending September 30, 2002). +10.15 Amendment No. 2 to Employment Agreement of Arvind Dharia (incorporated +by reference to Exhibit 10.16 to the Company's Quarterly Report on Form +10-Q for its fiscal quarter ending September 30, 2002). +10.16 Amendment No. 1 to Employment Agreement of Jamieson Karson +(incorporated by reference to Exhibit 10.16 to the Company's Quarterly +Report on Form 10-Q for its fiscal quarter ending June 30, 2004). +21.01 Subsidiaries of Registrant (incorporated by reference to Exhibit 21.01 +to the Company's Annual Report on Form 10-K for its fiscal year ending +December 31, 2000). +23.01 Consent of Eisner LLP. +31.01 Certification of Chief Executive Officer pursuant to Rule 13a-14 or +15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to +Section 302 of the Sarbanes-Oxley Act of 2002. +31.02 Certification of Chief Financial Officer pursuant to Rule 13a-14 or +15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to +Section 302 of the Sarbanes-Oxley Act of 2002. +32.01 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section +1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of +2002. +32.02 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section +1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of +2002. +SIGNATURE +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. +Dated: New York, New York +March 16, 2005 +STEVEN MADDEN, LTD. +By: /s/ JAMIESON KARSON +------------------------------------ +Jamieson Karson +Chairman and Chief Executive 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 in the capacities and on the dates indicated. +Signature Title Date +--------------------------- ------------------------------ ------------------ +/s/ JAMIESON KARSON Chairman and Chief Executive March 16, 2005 +--------------------------- Officer +Jamieson Karson +/s/ ARVIND DHARIA Chief Financial Officer March 16, 2005 +--------------------------- +Arvind Dharia +/s/ JEFFREY BIRNBAUM Director March 16, 2005 +--------------------------- +Jeffrey Birnbaum +/s/ MARC COOPER Director March 16, 2005 +--------------------------- +Marc Cooper +/s/ JOHN L. MADDEN Director March 16, 2005 +--------------------------- +John L. Madden +/s/ PETER MIGLIORINI Director March 16, 2005 +--------------------------- +Peter Migliorini +/s/ THOMAS H. SCHWARTZ Director March 16, 2005 +--------------------------- +Thomas H. Schwartz +/s/ AWADHESH SINHA Director March 16, 2005 +--------------------------- +Awadhesh Sinha +STEVEN MADDEN, LTD. +FORM 10-K +EXHIBIT INDEX +3.01 Certificate of Incorporation of the Company (incorporated by reference +to Exhibit 1 to the Company's Current Report on Form 8-K filed with the +Commission on November 23, 1998). +3.02 Amended & Restated By-Laws of the Company (incorporated by reference to +Exhibit 3.02 to the Company's Annual Report on Form 10-K for its fiscal +year ended December 31. 2001). +4.01 Specimen Certificate for shares of Common Stock (incorporated by +reference to Exhibit 4.01 to the Company's Registration Statement on +Form SB-2/A filed with the Commission on September 29, 1993 (File No. +033-67162)). +4.02 Rights Agreement between the Company and American Stock Transfer and +Trust Company (incorporated by reference to Exhibit 4.1 to the +Company's Current Report on Form 8-K filed with the Commission on +November 16, 2001). +10.07 Employment Agreement of Arvind Dharia (incorporated by reference to +Exhibit 10.07 to the Company's Annual Report on Form 10-K for its +fiscal year ending December 31, 2000). +10.08 Employment Agreement of Richard Olicker (incorporated by reference to +Exhibit 10.08 to the Company's Annual Report on Form 10-K for its +fiscal year ending December 31, 2000). +10.09 Second Amended Employment Agreement between the Company and Steven +Madden (incorporated by reference to Exhibit 99.1 to the Company's +Quarterly Report on Form 10-Q for its fiscal quarter ending June 30, +2001). +10.10 Employment Agreement of Jamieson Karson (incorporated by reference to +Exhibit 99.3 to the Company's Quarterly Report on Form 10-Q for its +fiscal quarter ending June 30, 2001). +10.11 Amendment No. 1 to Employment Agreement of Arvind Dharia (incorporated +by reference to Exhibit 99.4 to the Company's Quarterly Report on Form +10-Q for its fiscal quarter ending June 30, 2001). +10.12 Employment Agreement between Adesso-Madden, Inc. and Gerald Mongeluzo +(incorporated by reference to Exhibit 99.5 to the Company's Quarterly +Report on Form 10-Q for its fiscal quarter ending June 30, 2001). +10.13 Employment Agreement between Steven Madden Retail, Inc. and Mark +Jankowski (incorporated by reference to Exhibit 99.6 to the Company's +Quarterly Report on Form 10-Q for its fiscal quarter ending June 30, +2001). +10.14 Amendment No. 1 to Employment Agreement of Richard Olicker +(incorporated by reference to Exhibit 10.15 to the Company's Quarterly +Report on Form 10-Q for its fiscal quarter ending September 30, 2002). +10.15 Amendment No. 2 to Employment Agreement of Arvind Dharia (incorporated +by reference to Exhibit 10.16 to the Company's Quarterly Report on Form +10-Q for its fiscal quarter ending September 30, 2002). +10.16 Amendment No. 1 to Employment Agreement of Jamieson Karson +(incorporated by reference to Exhibit 10.16 to the Company's Quarterly +Report on Form 10-Q for its fiscal quarter ending June 30, 2004). +21.01 Subsidiaries of Registrant (incorporated by reference to Exhibit 21.01 +to the Company's Annual Report on Form 10-K for its fiscal year ending +December 31, 2000). +23.01 Consent of Eisner LLP. +31.01 Certification of Chief Executive Officer pursuant to Rule 13a-14 or +15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to +Section 302 of the Sarbanes-Oxley Act of 2002. +31.02 Certification of Chief Financial Officer pursuant to Rule 13a-14 or +15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to +Section 302 of the Sarbanes-Oxley Act of 2002. +32.01 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section +1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of +2002. +32.02 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section +1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of +2002. \ No newline at end of file diff --git a/raw/filings/0000913241/2004/0001019056-05-000307/filing_metadata.csv b/raw/filings/0000913241/2004/0001019056-05-000307/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..568c8e24b88fc5d17d3e85e2e7b1b2d3b366dc88 --- /dev/null +++ b/raw/filings/0000913241/2004/0001019056-05-000307/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000913241,SHOO,"STEVEN MADDEN, LTD.",10-K,2005-03-16,2004-12-31,2005-03-16T20:13:04.000Z,0001019056-05-000307,smadden_k2004.txt,FORM 10-K,250265,0,0,https://www.sec.gov/Archives/edgar/data/913241/000101905605000307/smadden_k2004.txt,https://www.sec.gov/Archives/edgar/data/913241/000101905605000307/,2004,2004,1 diff --git a/raw/filings/0000913241/2004/0001019056-05-000307/item1.txt b/raw/filings/0000913241/2004/0001019056-05-000307/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..b446cde7aaa4c95b357f0aa838a9adb40f74a8b3 --- /dev/null +++ b/raw/filings/0000913241/2004/0001019056-05-000307/item1.txt @@ -0,0 +1,476 @@ +ITEM 1 BUSINESS +Steven Madden, Ltd. (together with its subsidiaries, the "Company") designs, +sources, markets and sells fashion-forward footwear brands for women, men and +children. The Company distributes products through its retail stores, its +e-commerce website, department and specialty stores throughout the United States +and Canada and through special distribution arrangements in Europe, Central and +South America, Australia and Indonesia. The Company's product line includes core +products, which are sold year-round, complemented by a broad range of updated +styles which are designed to establish or capitalize on market trends. +The Company's business is comprised of three (3) distinct segments +(wholesale, retail and private label). The wholesale division includes seven (7) +brands: Steve Madden(R), Steven(R), l.e.i.(R), Candie's(R), Stevies(R), +Unionbay(R) and Steve Madden Mens. Steven Madden Retail, Inc., the Company's +wholly-owned retail subsidiary, operates Steve Madden, Steven and Shoe Biz +retail stores as well as the Company's outlet stores and e-commerce website. The +Company's wholly-owned private label subsidiary, Adesso-Madden, Inc., designs +and sources footwear products under private labels for many of the country's +large mass merchandisers. The Company also licenses its Steve Madden(R) +trademark for several accessory and apparel categories. +Steven Madden, Ltd., was incorporated as a New York corporation on July 9, +1990 and reincorporated under the same name in Delaware in November 1998. The +Company has established a reputation for its creative designs, popular styles +and quality products at accessible price points. The Company completed its +initial public offering in December 1993 and its shares of Common Stock +currently trade on The Nasdaq National Market under the symbol "SHOO". +The Company maintains its principal executive offices at 52-16 Barnett +Avenue, Long Island City, NY 11104, telephone number (718) 446-1800. +The Company's website is http://www.stevemadden.com. The Company makes +available free of charge on its website its Annual Reports on Form 10-K, +Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments +to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the +Securities Exchange Act of 1934, as amended (the "Exchange Act"), as soon as +reasonably practicable after such material is electronically filed with, or +furnished to, the Securities and Exchange Commission (the "Commission"). The +Company will provide paper copies of such filings free of charge upon request. +Wholesale Divisions +Madden Womens Wholesale +The Steve Madden(R) Womens Wholesale Division ("Madden Womens Wholesale") +designs, produces, sources, sells and markets the Company's Steve Madden(R) +brand to major department stores, better specialty stores, and shoe stores +throughout the United States. The Steve Madden(R) product line has become a +leading footwear brand in the fashion conscious junior marketplace. To serve its +customers (primarily women ages 16 to 25), Madden Womens Wholesale creates and +markets fashion forward footwear designed to appeal to customers seeking +exciting, new footwear designs at affordable prices. +As the Company's largest division, Madden Womens Wholesale accounted for +$114,000,000 of net sales in 2004, or approximately 34% of the Company's total +net sales. Many newly created styles of Madden Womens Wholesale are test +marketed at the Company's retail stores. Within a few days, the Company can +determine if the test product appeals to customers. This enables the Company to +use its flexible sourcing model to rapidly respond to changing preferences which +the Company believes is essential for success in the fashion footwear +marketplace. +l.e.i.(R) - Wholesale Division +Pursuant to the Company's license agreement with Jones Investment Company, +Inc., the Company has the right to use the l.e.i.(R) trademark in connection +with the sale and marketing of footwear through September 30, 2006. The +l.e.i.(R) trademark is well known for jeanswear in the junior marketplace sold +nationally through department and +specialty stores. The Company's l.e.i.(R) footwear products are targeted to +attract girls and young women ages 6 to 20 years old, a majority of which are +younger than the typical Steve Madden(R) brand customer. The l.e.i. Wholesale +Division generated net sales of $38,000,000 for the year ended December 31, +2004, or approximately 11% of the Company's total net sales. +Madden Mens Wholesale +The Steve Madden Mens Wholesale Division ("Madden Mens Wholesale") markets a +full collection of directional young men's shoes through major department +stores, better specialty stores and independent shoe stores throughout the +United States. Price points range from $70 to $100 at retail, targeted at men +ages 18 to 44 years old. +Madden Mens Wholesale accounted for $31,000,000 of net sales in 2004, or +approximately 9% of the Company's total net sales. Madden Mens Wholesale, which +is primarily produced in China, maintains open stock inventory positions in +select patterns to serve the replenishment programs of its wholesale customers. +Candie's Footwear +Pursuant to the Company's license agreement with Candie's, Inc., ("Candie's") +the Company designs, manufactures, and distributes Candie's(R) branded footwear +for women and children worldwide through the Company's Candie's Wholesale +Division ("Candie's Wholesale Division"). The Candie's(R) Wholesale Division +generated net sales of $16,000,000 for the year ended December 31, 2004, or +approximately 5% of the Company's total net sales. +On December 6, 2004, the license agreement with Candie's was amended to +reflect Candie's decision to name Kohl's Corporation as the exclusive provider +of a new line of Candie's apparel. Pursuant to the amendment, commencing on +January 1, 2007, the Company will no longer have the exclusive right to market +Candie's branded footwear and will be permitted to sell Candie's branded +footwear only to Kohl's. Under the terms of the amendment, Candie's has +guaranteed that the Company will achieve minimum sales levels with Kohl's during +the term of the agreement. In the event such minimum sales levels are not +achieved, Candie's is required to compensate the Company in an amount based on a +percentage of the sales shortfall. +Diva Acquisition Corp. - Steven(R) Wholesale Division +Diva Acquisition Corp. ("Steven(R) Wholesale Division") designs and markets +women's fashion footwear under the "Steven(R)" trademark through major +department and better footwear specialty stores and one (1) Company-owned retail +shoe store located in New York City. Priced a tier above the Steve Madden(R) +brand, Steven(R) products are designed to appeal principally to fashion +conscious women, ages 26 to 45, who shop at department stores and footwear +boutiques. Steven(R) Wholesale Division generated net sales of $21,000,000 for +the year ended December 31, 2004, or approximately 6% of the Company's total net +sales. +Stevies Inc. - Wholesale Division +The Company's Stevies(R) wholesale division ("Stevies(R) Wholesale Division") +generated net sales of $10,000,000 for the year ended December 31, 2004, or +approximately 3% of the Company's total net sales. Stevies(R) products are +marketed through department stores such as May Department Stores, Belk, Limited +Too, as well as independent children's stores throughout the country. +Unionbay Men's Footwear +Pursuant to the Company's license agreement with Seattle Pacific Industries, +Inc., the Company has the right to use the Unionbay(R) trademark in connection +with the sale and marketing of footwear for men and boys. Unionbay(R) is known +for casual apparel in the young men, junior and children's marketplace and is +distributed nationally through department and specialty stores. The Company's +Unionbay(R) wholesale division generated net sales of $600,000 for the year +ended December 31, 2004, or approximately .2% of the Company's total net sales. +Steven Madden Retail, Inc. - Retail Division +As of December 31, 2004, the Company owned and operated eighty-five (85) +retail shoe stores under the Steve Madden(R) name, one (1) under the Steven(R) +name, four (4) outlet stores and one (1) Internet store (through the +2 +www.stevemadden.com website). In 2004, the Company opened ten (10) new stores +and closed two (2) under-performing stores. Most of the Steve Madden stores are +located in major shopping malls in Alabama, Arizona, California, Colorado, +Connecticut, Delaware, Florida, Georgia, Illinois, Kansas, Louisiana, Maryland, +Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, +North Carolina, Ohio, Pennsylvania, Puerto Rico, Rhode Island, Texas, Virginia, +Wisconsin and the District of Columbia. The retail stores generated annual sales +in excess of $694 per square foot. Sales are primarily from the sale of the +Company's Steve Madden(R) product line. Comparative store sales increased 8.2% +in 2004 compared to 2003 while growth in sales was generated by new stores. Net +sales for the retail division were $108,000,000 for 2004. Net sales from the +retail division for the year ended December 31, 2004 were approximately 32% of +the Company's total net sales. +The Company believes that the retail division will continue to enhance +overall sales and profits of the Company while building equity in the Steve +Madden brand. The Company plans to add twelve to fifteen (12 - 15) new retail +stores during 2005. The expansion of the retail division enables the Company to +test and react to new products and classifications which, in turn, strengthens +the product development efforts of the Steve Madden wholesale division. +The Adesso-Madden, Inc. - Private Label Division +In September 1995, the Company incorporated Adesso-Madden, Inc. as a wholly +owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to mass +market merchandisers, shoe store chains and other value-priced retailers in +connection with their procurement of private label shoes. As a buying agent, A-M +arranges for shoe manufacturers to produce private label shoes to the +specifications of its clients. The Company believes that by operating in the +private label, mass merchandising market, the Company is able to maximize +additional non-branded sales opportunities. This leverages the Company's overall +sourcing and design capabilities. Currently, this division serves as a buying +agent for the procurement of women's, men's and children's footwear for large +retailers including Sears, Payless, Wal-Mart and Target. A-M receives buying +agent's commissions from its clients. The private label division generated +commission income of $4,500,000 for the year ended December 31, 2004. +Licensing +As of December 31, 2004, the Company licensed its Steve Madden trademark for +use in connection with the manufacturing, marketing and sale of outerwear +including leather outerwear, belts, sunglasses, eyewear and hosiery. Each +license agreement requires the licensee to pay to the Company a royalty based on +net sales, a minimum royalty in the event that specified net sales targets are +not achieved and a percentage of sales for advertising of the Steve Madden(R) +brand. Licensing income was $2,310,000 for the year ended December 31, 2004. +Design +The Company has established a reputation for its creative designs, popular +styles and quality products at affordable price points. The Company believes +that its future success will depend in substantial part on its ability to +continue to anticipate and react to changing consumer demands in a timely +manner. To meet this objective, the Company has developed a unique design +process that allows it to recognize and act quickly to changing consumer +demands. The Company's design team strives to create designs which it believes +fit the Company's image, reflect current or future trends and can be +manufactured in a timely and cost-effective manner. Once the initial design is +complete, a prototype is developed, which is reviewed and refined prior to the +commencement of limited production. Most new Steve Madden designs are then +tested in the Steve Madden(R) retail stores. Designs that prove popular are then +offered to wholesale and retail distribution nationwide. The Company believes +that its unique design and testing process and flexible sourcing model is a +significant competitive advantage allowing the Company to mitigate the risk of +the costly production and distribution of unpopular designs. +Product Sourcing and Distribution +The Company sources each of its product lines separately based on the +individual design, styling and quality specifications of the products in such +product lines. The Company does not own or operate manufacturing facilities; +rather, it sources its branded products through independently owned +manufacturers in Brazil, China, Italy, Mexico, Spain, Portugal and the United +States. The Company has established relationships with a number of manufacturers +in each of these countries. Although the Company has not entered into any +long-term manufacturing or supply contracts, the Company believes that a +sufficient number of alternative sources exist for the manufacture of its +3 +products. The principal materials used in the Company's footwear are available +from a number of sources, both within the United States and in foreign +countries. +The Company's design and distribution processes are intended to be flexible, +allowing the Company to respond to and accommodate changing consumer demand. The +Company's production staff tracks warehouse inventory on a regular basis, +monitors sell-through data and incorporates input on product demand from +wholesale customers. The Company can use product feedback to adjust production +or manufacture new products in as little as five weeks. +The Company distributes its products from two (2) third party distribution +warehouse centers located in California and New Jersey. The Company also +distributes its Internet shipments from a third party fulfillment center located +in Michigan. By utilizing distribution facilities that specialize in +distributing products to certain customers wholesale accounts, Steve Madden +retail stores and Internet fulfillment, the Company believes that its customers +are better served. +Customers +The Company's wholesale customers consist principally of department stores +and specialty stores, including shoe boutiques. Presently, the Company sells +approximately fifty-five percent (55%) of its products at wholesale to +department and specialty stores, including Federated Department Stores +(Bloomingdale's, Bon Marche, and Macy's), May Department Stores (Famous Barr, +Filene's, Foley's, Hecht's, Lord and Taylor and Robinsons May), Dillard's, +Marshall Field's and Nordstrom, Journeys, Limited Too and Mandees; and catalog +retailers, including Victoria's Secret and Fingerhut. For the year ended +December 31, 2004, May Department Stores and Federated Department Stores +accounted for approximately $35,000,000 (15%) and $40,000,000 (17%) of the +Company's wholesale net sales, respectively. +Distribution Channels +The Company sells its products principally through its Company-owned retail +stores and through department stores, specialty shoe stores and discount stores +in the United States and abroad. For the year 2004, net sales from the Company's +Retail Division and the Company's Wholesale Division accounted for approximately +$108,000,000 (32%) and $230,000,000 (68%) of the Company's total net sales, +respectively. The following paragraphs describe each of these distribution +channels. +Steve Madden and Steven Retail Stores +As of December 31, 2004, the Company operated eighty six (86) Company-owned +retail stores (including one Internet store) under the Steve Madden(R) name and +one (1) under the Steven(R) name. The Company believes that its retail stores +will continue to enhance overall sales, profitability, and its ability to react +to changing consumer trends. The stores are also a marketing tool which allows +the Company to strengthen brand recognition and to showcase selected items from +its full line of branded and licensed products. Furthermore, the retail stores +provide the Company with a venue to test and introduce new products and +merchandising strategies. Specifically, the Company often tests new designs at +its Steve Madden(R) retail stores before scheduling them for mass production and +wholesale distribution. In addition to these test marketing benefits, the +Company has been able to leverage sales information gathered at Steve Madden(R) +retail stores to assist its wholesale accounts in order placement and inventory +management. +A typical Steve Madden(R) store is approximately 1,400 to 1,600 square feet +and is located in malls and street locations which attract the highest +concentration of the Company's core demographic - style-conscious young women +ages 16 to 25 years old. The Steven(R) store has a more sophisticated design and +format styled to appeal to its more mature target audience. In addition to +carefully analyzing mall demographics, the Company also sets profitability +guidelines for each potential store site. Specifically, the Company targets well +trafficked sites at which the demographics fit the Company's consumer profile +and seeks to model new locations such that the projected fixed annual rent +expense does not exceed a specified percentage of projected sales over the life +of the lease. By setting these standards, the Company believes that each store +will contribute to the Company's overall profits both in the near- and +longer-terms. +4 +Outlet Stores +Shoe Biz, Inc., a wholly owned subsidiary of the Company ("Shoe Biz"), +operates three (3) outlet stores in New Jersey and New York, two (2) of which +operate under the Shoe Biz name and one (1) of which operates as a Steve Madden +Outlet store. Shoe Biz sells many product lines, including Steve Madden, Steven, +Stevies and l.e.i.(R) footwear, at a price lower than typically charged by other +"full price" retailers. +Department Stores +The Company currently sells to over 3,204 doors of twenty-two (22) department +stores throughout the United States and Canada. The Company's major accounts +include Federated Department Stores (Macy's, Bloomingdale's and Bon Marche), May +Department Stores (Filene's, Hecht's, Famous Barr, Foley's, Lord and Taylor and +Robinsons May and Marshall Fields'), Nordstrom and Dillard's. +The Company provides merchandising support to its department store customers +which includes in-store fixtures and signage, supervision of displays and +merchandising of the Company's various product lines. The Company's wholesale +merchandising effort includes the creation of in-store concept shops, where a +broader collection of the Company's branded products are showcased. These +in-store concept shops create an environment that is consistent with the +Company's image and enable the retailer to display and stock a greater volume of +the Company's products per square foot of retail space. In addition, these +in-store concept shops encourage longer term commitment by the retailer to the +Company's products and enhance consumer brand awareness. +In addition to merchandising support, the Company's key account executives +maintain weekly communications with their accounts to guide them in placing +orders and to assist them in managing inventory, assortment and retail sales. +The Company leverages its sell-through data gathered at its retail stores to +assist department stores in allocating their open-to-buy dollars to the most +popular styles in the product line and to phase out styles with weaker +sell-throughs. +Specialty Stores/Catalog Sales +The Company currently sells to specialty store locations throughout the +United States and Canada. The Company's major specialty store accounts include +Journeys, Mandees, Famous footwear and DSW. The Company offers its specialty +store accounts the same merchandising, sell-through and inventory tracking +support offered to its department store accounts. Sales of the Company's +products are also made through various catalogs, such as Victoria's Secret. +Internet Sales +The Company operates one (1) Internet website: www.stevemadden.com. Customers +can purchase numerous styles of the Company's Steve Madden(R), Steven and Steve +Madden Mens footwear, accessory and clothing products. Sales derived from the +Company's Internet website were $5,200,000 in 2004. +Distribution Agreements +In June 2002, the Company and Dabsan International, S.A. ("Dabsan") entered +into an agreement whereby the Company granted Dabsan the exclusive right to sell +Steve Madden products in certain Central and South American countries and the +right to develop Steve Madden retail stores in certain Central and South +American countries. Under the terms of the agreement, Dabsan was required to +purchase certain minimum amounts of Steve Madden shoes. Dabsan was also required +to open two (2) Steven Madden stores by October 31, 2004. However, in November +2004, Dabsan and the Company mutually agreed that it was not practicable to +enforce this requirement. +In February 2003, the Company and F.E.E.T. sas ("FEET") entered into a +distribution and license agreement whereby the Company granted FEET the +exclusive right to sell Steve Madden products in certain European countries with +a provision that expands the territory covered to include certain additional +European countries and North Africa. Under the terms of the agreement, FEET is +required to purchase certain minimum amounts of Steve Madden shoes. FEET is +currently in default of its minimum purchase requirements and the parties are in +discussion relating to the possible modification of the original terms of the +agreement. +5 +In May 2004, the Company and Les Importations Gelati Inc. ("Gelati") entered +into a retail sales agreement whereby the Company granted Gelati the exclusive +right to establish and operate Steve Madden retail stores in Canada. Under the +terms of the agreement Gelati is required to pay the Company a minimum annual +royalty for each store in operation in addition to a royalty for each pair of +footwear sold in the stores. Gelati is required to open one store per year in +2004, 2005 and 2006. +In June 2004, the Company and Steve Madden (Aust) Pty Ltd ("Madden +Australia") entered into a distribution agreement whereby the Company granted +Madden Australia the exclusive right to sell certain Steve Madden products in +Australia and New Zealand. Under the terms of the agreement, Madden Australia is +required to purchase certain minimum amounts of Steve Madden shoes and received +a right of first refusal with regard to the distribution of new licenses, +products or trademarks in the territory. The term of the contract is three years +(with an option to renegotiate certain terms after two years) plus one option +for an additional five (5) years if certain minimum purchase requirements are +met. +Competition +The fashion footwear industry is highly competitive. The Company's +competitors include specialty shoe companies as well as companies with +diversified footwear product lines. Many of these competitors, including Diesel, +Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may have greater +financial and other resources than the Company. The Company believes effective +advertising and marketing, fashionable styling, high quality and value are the +most important competitive factors and intends to continue to employ these +elements as it develops its products. +Marketing and Sales +The Company has focused on creating an integrated brand building program to +establish Steve Madden as the leading designer of fashion footwear for +style-conscious young women and men. As a result, the Company developed a +national advertising campaign for lifestyle and fashion magazines which was also +used in regional marketing programs such as radio advertisements, television +commercials, outdoor media, college event sponsorship and live online chat +forums. The Company also continues to promote its website (www.stevemadden.com) +where customers can purchase Steve Madden(R), Steven and Steve Madden Mens +products and interact with both the Company and other customers. +In order to service its wholesale accounts, the Company retains a sales force +of eighteen independent sales representatives. These sales representatives work +on a commission basis and are responsible for placing the Company's products +with its principal customers, including department and specialty stores. The +sales representatives are supported by the Company's senior executives, a staff +of twelve account executives, two merchandise coordinator and twenty customer +service representatives who continually cultivate relationships with wholesale +customers. This group of professionals assist accounts in merchandising and +assessing customer preferences and inventory requirements, which ultimately +serves to increase sales and profitability. +Management Information Systems (MIS) Operations +Sophisticated information systems are essential to the Company's ability to +maintain its competitive position and to support continued growth. The Company +operates on a dual AS/400 system which provides system support for all aspects +of its business including manufacturing purchase orders; customer purchase +orders; order allocations; invoicing; accounts receivable management; real time +inventory management; quick response replenishment; point-of-sale support; and +financial and management reporting functions. The Company has a PKMS bar coded +warehousing system which is integrated with the wholesale system in order to +provide accurate inventory positions and quick response size replenishment for +its customers. In addition, the Company has installed an EDI system which +provides a computer link between the Company and certain wholesale customers +that enables both the customer and the Company to monitor purchases, shipments +and invoicing. The EDI system also improves the Company's ability to respond to +customer inventory requirements on a weekly basis. +6 +Receivables Financing; Line of Credit +Under the terms of a factoring agreement with Capital Factors, Inc., the +Company is permitted to draw down 80% of its invoiced receivables at an interest +rate of one point below the Prime Rate (as defined in such agreement). The +agreement provides that Capital Factors is not required to purchase all the +Company's receivables and requires the Company to pay an unused line fee of .25% +of the average daily unused portion of the maximum amount of the credit line. On +September 1, 1998, the Company and Capital Factors amended its Factoring +Agreement to, among other things, provide the Company with a credit line of up +to $15,000,000, subject to certain limitations. The Company has not recently +borrowed funds under its credit line with Capital Factors. The agreement with +Capital Factors will continue in full force until terminated by either party +upon sixty days notice. Capital Factors maintains a lien on all of the Company's +receivables and assumes the credit risk for all assigned accounts approved by +it. +Trademarks and Service Marks +The STEVE MADDEN and STEVE MADDEN plus Design trademarks and service marks +have been registered in numerous International Classes (Int'l Cl. 25 for +clothing and footwear; Int'l Cl. 18 for leather goods, such as handbags and +wallets; Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry; Int'l Cl. 3 for +cosmetics and fragrances; Int'l Cl. 20 for picture frames and furniture; Int'l +Cl. 16 for paper goods; Int'l Cl. 24 for bedding; and Int'l Cl. 35 for retail +store services) in the United States. The Company also has trademark +registrations in the United States for the marks EYESHADOWS BY STEVE MADDEN +(Int'l Cl. 9 for eyewear), ICE TEE (Int'l Cl. 25 for clothing and footwear), +SHOE BIZ By STEVE MADDEN (Int'l Cl. 25 for clothing and footwear; and Int'l Cl. +35 for retail store services) and STEVEN M. (Int'l Class 25 for clothing and +footwear). Additionally, the Company has several pending trademark and service +mark applications in the United States for various marks, including a stylized +"H" Design (Int'l Cl. 25 for clothing and footwear), and STEVEN (Int'l Cl. 25 +for clothing and footwear). The Company also has pending trademark and service +mark applications in China and the 25 cooperating countries in Europe for TORCH +STRIPE (Int'l Cl. 25 for footwear). +The Company further owns registrations for the STEVE MADDEN and STEVE MADDEN +plus Design trademarks and service marks in various International Classes in +Argentina, Australia, Bahrain, Brazil, Canada, Chile, China, Colombia, Hong +Kong, Israel, Italy, Japan, Korea, Mexico, Panama, Saudi Arabia, South Africa, +Taiwan, the 25 cooperating countries of Europe and the Benelux countries and has +pending applications for registration of the STEVE MADDEN and STEVE MADDEN plus +Design trademarks and service marks in Bahrain, Belize, Costa Rica, El Salvador, +Guatemala, Honduras, Korea, Kuwait, Lebanon, Malaysia, Oman, Peru, Qatar, Saudi +Arabia, Turkey, the United Arab Emirates and Venezuela. Additionally, the +Company owns registrations for the STEVEN trademark and service mark in various +International Classes in Hong Kong, Lebanon and Japan and has pending +applications for registration of the STEVEN trademark and service mark in China, +Israel, Italy, Japan, Korea, Malaysia, Oman, Qatar, South Africa, Saudi Arabia, +Taiwan, Thailand, Turkey, the United Arab Emirates and the United States. There +can be no assurance, however, that the Company will be able to effectively +obtain rights to the STEVE MADDEN mark throughout all of the countries of the +world. Moreover, no assurance can be given that others will not assert rights +in, or ownership of, trademarks and other proprietary rights of the Company or +that the Company will be able to successfully resolve such conflicts. The +failure of the Company to protect such rights from unlawful and improper +appropriation may have a material adverse effect on the Company's business and +financial condition. +Additionally, the Company, through its Diva Acquisition Corp. subsidiary, +owns registrations for the DAVID AARON trademark and service mark in various +International Classes in the United States (Int'l Cl. 25 for clothing and +footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets; and +Int'l Cl. 35 for retail store services), Australia, Canada, Hong Kong, Japan, +Korea, South Africa and the 25 cooperating countries in Europe and for its D. +AARON trademark in Spain. Also, the Company own registrations for the DAVID +AARON trademark in International Class 3 for perfume and cosmetics; +International Class 9 for eyewear; International Class 14 for jewelry; +International Class 16 for paper goods; International Class 18 for bags; +International Class 24 for bed and bath products; International Class 25 for +clothing and footwear and International Class 26 hair accessories in Korea. The +Company believes that the DAVID AARON trademark has a significant value and is +important to the marketing of the Company's products. +The Company, through its Stevies, Inc. subsidiary, also owns various +registrations for the STEVIES and STEVIES plus Design trademark and service mark +in a number of International Classes in the United States (Int'l Cl. 18 for +7 +leather goods, such as handbags and wallets; Int'l Cl. 9 for eyewear; +International Class 35 for retail store services and, International Class 26 for +hair accessories) and for its STEVIES plus Design mark for various goods in +Argentina, Bahrain, China, Hong Kong, Israel, Japan, Korea, Lebanon, Mexico, +Taiwan and the 25 cooperating countries in Europe. Additionally Stevies, Inc. +has several pending trademark and service mark applications for registration of +the STEVIES and STEVIES plus Design marks in various International Classes in +the United States (Int'l Cl. 25 for clothing and footwear; Int'l Cl. 14 for +jewelry; Int'l Cl. 28 for toys; Int'l Cl. 26 for hair accessories; International +Class 16 for paper goods; International Class 3 for perfume and cosmetics and, +International Class 9 for CDs and eyewear) and in Brazil, Canada, Colombia, +Indonesia, Kuwait, Malaysia, Mexico, Oman, Panama, Peru, Qatar, Saudi Arabia, +South Africa, Thailand, Turkey, the United Arab Emirates and Venezuela. Finally, +Stevies, Inc. also owns several pending trademark and service mark applications +for registration of the STEVIES BY STEVE MADDEN mark in various International +Classes in the United States (Int'l Cl. 25 for clothing and footwear; Int'l Cl. +14 for jewelry; Int'l Cl. 18 for leather goods, such as handbags and wallets; +Int'l Cl. 16 for paper goods; Int'l Cl. 3 for cosmetics and fragrances; Int'l +Cl. 9 for eyewear; Int'l Cl. 26 for hair accessories; Int'l Cl. 28 for toys; and +Int'l Cl. 35 for retail store services). +Employees +On February 17, 2005, the Company employed approximately 1,510 employees, of +whom approximately 490 work on a full-time basis and approximately 1,020 work on +a part-time basis. The management of the Company considers relations with its +employees to be good. \ No newline at end of file diff --git a/raw/filings/0000913241/2004/0001019056-05-000307/item13.txt b/raw/filings/0000913241/2004/0001019056-05-000307/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..8552353321a5308f9760fdf8ed311937b9d59cdb --- /dev/null +++ b/raw/filings/0000913241/2004/0001019056-05-000307/item13.txt @@ -0,0 +1,4 @@ +ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS +The information required to be furnished pursuant to this item will be set +forth in the Company's proxy statement for the 2005 Annual Meeting of +Stockholders, and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000913241/2004/0001019056-05-000307/item9a.txt b/raw/filings/0000913241/2004/0001019056-05-000307/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..832fc6db786633a104771f309faab1097837f0be --- /dev/null +++ b/raw/filings/0000913241/2004/0001019056-05-000307/item9a.txt @@ -0,0 +1,26 @@ +ITEM 9A CONTROLS AND PROCEDURES +Disclosure Controls and Procedures +As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the +"Exchange Act"), the Company's management, including the Company's Chief +Executive Officer and Chief Financial Officer, has evaluated the effectiveness +of its disclosure controls and procedures as of the end of the fiscal year +covered by this annual report. Based on that evaluation, the Chief Executive +Officer and Chief Financial Officer have concluded that the Company's disclosure +controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) +were effective as of the end of the fiscal year covered by this annual report. +Changes in Internal Control Over Financial Reporting +As required by Rule 13a-15(d) under the Exchange Act, the Company's management, +including the Company's Chief Executive Officer and Chief Financial Officer, has +evaluated the Company's internal controls over financial reporting to determine +whether any changes occurred during the fourth quarter of 2004 that have +materially affected, or are reasonably likely to materially affect, the +Company's internal control over financial reporting. Based on that evaluation, +there has been no such material change during the fourth quarter of 2004. +Management Report on Internal Controls +As permitted by Commission Release No. 50754, the Company will include the +information required by Items 308(a) and 308(b) of Regulation S-K in a Form +10-K/A to be filed within 45 days. The Company has spent considerable time and +resources analyzing, documenting and testing its system of internal controls, +but has not yet completed its evaluation. Currently, the Company is not aware of +any material weaknesses in its internal controls over financial reporting and +related disclosures. \ No newline at end of file diff --git a/raw/filings/0000913241/2004/0001019056-05-000307/rp_note.txt b/raw/filings/0000913241/2004/0001019056-05-000307/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000913241/2004/0001019056-05-000307/rpt_disclosure.txt b/raw/filings/0000913241/2004/0001019056-05-000307/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..a007111cf6df3d498411e260405781a8ca07f61f --- /dev/null +++ b/raw/filings/0000913241/2004/0001019056-05-000307/rpt_disclosure.txt @@ -0,0 +1,68 @@ +Certain Relationships and Related Transactions +In July 2001, the Company entered into a consulting agreement with Peter J. +Solomon & Company, a financial advisory firm of which Marc Cooper, one of the +Company's directors, is a managing director. Under this agreement, the firm +provided financial advisory and investment banking services to the Company. This +agreement was amended in March 2004. Pursuant to this agreement, which expired +on March 31, 2005, the Company paid fees and expenses to Peter J. Solomon & +Company of $161,000, $33,000 and $150,000 for 2004, 2003 and 2002 respectively. +Under the amended agreement, the Company paid fees to Peter J. Solomon & Company +in the amount of $161,000 during 2004, and will pay fees in the amount of +$50,000 plus expenses incurred during 2005. +In July 2004, the Company entered into a consulting agreement with Charles +Koppelman, who served as a director of the Company from June 1998 through May +2004 and as Chairman of the Board from July 2001 through May 2004. Under this +agreement, Mr. Koppelman provided consulting services that included enhancing +and promoting the Company's brands and seeking licensing and acquisition +opportunities. Pursuant to this agreement, Mr. Koppelman received 100,000 stock +options and a fee of $105,000 in 2004. This agreement expires on June 30, 2005. +In October 2002, the Company entered into an agreement with Jeffrey +Birnbaum, one of the Company's directors. Under this agreement, Mr. Birnbaum +provided consulting services with respect to the designing and manufacturing of +shoes and general consulting services to the Company. Pursuant to this +agreement, Mr. Birnbaum received a fee of $250,000 in 2004 besides for fees +received for service to the Company as a director. Mr. Birnbaum has been the +Product Development Manager of Dolphin Shoe Company since August 1982. Dolphin +Shoe Company is one of the Company's domestic suppliers. In addition, Jeffrey +Birnbaum's brother, Steven Birnbaum owns a trading company, Bulls Eye Trading +("Bullseye") that acts as a selling agent for the Company. Jeffrey Birnbaum does +not own an interest in Bullseye nor is he a director of Bullseye nor does +Bullseye pay him any compensation. +In January 2004, the Company entered into an agreement with John Madden and +JLM Consultants, a company wholly-owned by John Madden, one of the Company's +directors. Under this agreement, Mr. Madden provided consulting services with +respect to the development of international sales of the Company. Under the +agreement, in 2004, JLM Consultants received a monthly draw with recourse in the +amount of $16,000 against sales commissions earned by Mr. Madden. Mr. Madden +also received a $1,000 per month travel allowance and $1,700 per month toward +health insurance premiums. Pursuant to this agreement, JLM Consultants received +a total of $224,400 in 2004, besides for Mr. Madden's fees received for service +to the Company as a director. In March 2005, JLM Consultants' draw against +commissions with recourse was raised to $20,000 per month. JLM Consultants will +receive an estimated total of $272,400 in 2005. +The Madden Mens division of the Company purchases a significant amount of +shoes from La Tandem International, Inc. Mr. James Chen, the brother of Harry +Chen, is the President of La Tandem International, Inc., and La Tandem +International, Inc. is owned or controlled by members of the Chen family. Harry +Chen is the chairman and lead designer of the Madden Mens Division of the +Company. +In May 2002, the Company entered into an employment agreement between the +Company, Adesso Madden, Inc., Joseph Masella and T.J.M. Sales Corporation. The +agreement was subsequently amended on September 22, 2003. Mr. Masella is the +president of T.J.M. Sales Corporation. Under the agreement as amended, T.J.M. +Sales Corporation receives a biweekly draw in the amount of $16,000 against +commissions earned by Mr. Masella on sales of Adesso Madden, Inc., and a +biweekly draw with recourse, in the amount of $4,000 against commissions earned +by Mr. Masella on net sales of the Candie's Women's Wholesale Division and +Adesso Madden, Inc. T.J.M. Sales Corporation received commissions in the amount +of $606,886 in 2004. +-19- +In March 2004, the Company entered into a commission agreement between the +Steven Madden Mens Wholesale Division and Hev Sales, Inc. Mr. Andrew Shames is +the President of Hev Sales Inc. Under the agreement, Hev Sales serves as sales +organization for the Steven Madden Mens Wholesale Division and receives an +annual guaranteed commission of $450,000. Hev Sales, Inc. received commissions +in the amount of $513,468 in 2004. +The Company has an agreement with Steven Madden, a beneficial holder of +more than 10% of the Company's outstanding shares of common stock. See +"Agreement with Steven Madden." \ No newline at end of file diff --git a/raw/filings/0000913241/2005/0001019056-06-000265/filing.txt b/raw/filings/0000913241/2005/0001019056-06-000265/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..b3353123dda8547f070c4fda5b09f5535166ef43 --- /dev/null +++ b/raw/filings/0000913241/2005/0001019056-06-000265/filing.txt @@ -0,0 +1,3772 @@ +10-K +1 +smadden_k2005.txt +FORM 10-K +UNITED STATES +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 +[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND +EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2005 Commission File Number 0-23702 +STEVEN MADDEN, LTD. +(Exact name of registrant as specified in its charter) +Delaware 13-3588231 +(State or other jurisdiction of (I.R.S. employer identification no.) +incorporation or organization) +52-16 Barnett Avenue, Long Island City, New York 11104 +(Address of principal executive offices) (Zip Code) +(718) 446-1800 +(Registrant's Telephone Number, Including Area Code) +Securities Registered Pursuant to Section 12(b) of the Act: None +Securities Registered Pursuant to Section 12(g) of the Act: +Common Stock, par value $.0001 per share +Preferred Stock Purchase Rights +Indicate by check mark if the registrant is a well-known seasoned issuer, +as defined in Rule 405 of the Securities Act. Yes [ ] No [X] +Indicate by check mark if the registrant is not required to file reports +pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] +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 a large accelerated filer, +an accelerated filer, or a non-accelerated filer. See definition of "accelerated +filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check +one): +Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] +Indicate by check mark whether the registrant is a shell company (as +defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] +The aggregate market value of the common equity held by non-affiliates of +the registrant (assuming for these purposes, but without conceding, that all +executive officers and Directors are "affiliates" of the registrant) as of June +30, 2005, the last business day of the registrant's most recently completed +second fiscal quarter, was approximately $233,359,000 (based on the closing sale +price of the registrant's common stock on that date as reported on The NASDAQ +National Market). +The number of outstanding shares of the registrant's common stock as of +March 9, 2006 was 13,846,168 shares. +DOCUMENTS INCORPORATED BY REFERENCE: +PART III INCORPORATES CERTAIN INFORMATION BY REFERENCE FROM THE +REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS +SCHEDULED TO BE HELD ON OR ABOUT MAY 26, 2006. +TABLE OF CONTENTS +PART I +ITEM 1 BUSINESS............................................................1 +ITEM 1A RISK FACTORS.......................................................10 +ITEM 1B UNRESOLVED STAFF COMMENTS..........................................13 +ITEM 2 PROPERTIES.........................................................13 +ITEM 3 LEGAL PROCEEDINGS..................................................14 +ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................15 +PART II +ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER +MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES................15 +ITEM 6 SELECTED FINANCIAL DATA............................................16 +ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND +RESULTS OF OPERATIONS............................................17 +ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........28 +ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................29 +ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING +AND FINANCIAL DISCLOSURE.........................................29 +ITEM 9A CONTROLS AND PROCEDURES............................................29 +ITEM 9B OTHER INFORMATION..................................................31 +PART III +ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................31 +ITEM 11 EXECUTIVE COMPENSATION.............................................31 +ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT +AND RELATED STOCKHOLDER MATTERS...................................31 +ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................31 +ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................31 +PART IV +ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.........................31 +PART I +ITEM 1 BUSINESS +Steven Madden, Ltd. (together with its subsidiaries, the "Company") +designs, sources, markets and sells fashion-forward footwear for women, men and +children. The Company distributes products through its retail stores, its +e-commerce website, department and specialty stores throughout the United States +and Canada and through special distribution arrangements in Europe, Central and +South America, Australia and Indonesia. The Company's product line includes core +products, which are sold year-round, complemented by a broad range of updated +styles which are designed to establish or capitalize on market trends. +The Company's business is comprised of three (3) distinct segments +(wholesale, retail and private label). The wholesale division includes eight (8) +brands: Steve Madden(R), Steven(R), l.e.i.(R), Candie's(R), Stevies(R), +SMNY(TM), Unionbay(R) and Steve Madden Mens. Steven Madden Retail, Inc., the +Company's wholly-owned retail subsidiary, operates Steve Madden, Steven and Shoe +Biz retail stores as well as the Company's outlet stores and e-commerce website. +The Company is planning on closing the Shoe Biz store in July of 2006. The +Company's wholly-owned private label subsidiary, Adesso-Madden, Inc., designs +and sources footwear products under private labels for many of the country's +large mass merchandisers. The Company also licenses its Steve Madden(R) +trademark for several accessory and apparel categories. +Steven Madden, Ltd. was incorporated as a New York corporation on July +9, 1990 and reincorporated under the same name in Delaware in November 1998. The +Company has established a reputation for its creative designs, popular styles +and quality products at accessible price points. The Company completed its +initial public offering in December 1993 and its shares of Common Stock +currently trade on The NASDAQ National Market under the symbol "SHOO". +The Company maintains its principal executive offices at 52-16 Barnett +Avenue, Long Island City, NY 11104, telephone number (718) 446-1800. +The Company's website is http://www.stevemadden.com. The Company makes +available free of charge on its website its Annual Reports on Form 10-K, +Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, any amendments to +such reports filed or furnished pursuant to Section 13(a) or 15(d) of the +Securities Exchange Act of 1934, as amended (the "Exchange Act") and our Proxy +Statement for our Annual Meeting as soon as reasonably practicable after such +material is electronically filed with, or furnished to, the Securities and +Exchange Commission (the "Commission"). The Company will provide paper copies of +such filings free of charge upon request. +Wholesale Divisions +Madden Women's Wholesale Division +The Steve Madden(R) Women's Wholesale Division ("Madden Women's") +designs, produces, sources, sells and markets the Company's Steve Madden(R) +brand to major department stores, better specialty stores and shoe stores +throughout the United States. The Steve Madden(R) product line has become a +leading footwear brand in the fashion conscious junior marketplace. To serve its +customers (primarily women ages 16 to 25), Madden Women's creates and markets +fashion forward footwear designed to appeal to customers seeking exciting, new +footwear designs at affordable prices. +As the Company's largest division, Madden Women's accounted for +$120,333,000 of net sales in the year ended December 31, 2005, or approximately +32% of the Company's total net sales. Many newly created styles for Madden +Women's are test marketed at the Company's retail stores. Within a few days, the +Company can determine if the test product appeals to customers. This enables the +Company to use its flexible sourcing model to rapidly respond to changing +preferences which the Company believes is essential for success in the fashion +footwear marketplace. +l.e.i.(R) - Wholesale Division +Pursuant to the Company's license agreement with Jones Investment +Company, Inc., the Company has the right to use the l.e.i.(R) trademark in +connection with the sale and marketing of footwear through September 30, 2006. +The l.e.i.(R) trademark is well known in the junior marketplace for jeans wear +and is sold nationally through department and specialty stores. The Company's +l.e.i.(R) footwear products are targeted to attract girls and young women ages 6 +to 20 years old, a majority of which are younger than the typical Steve +Madden(R) brand customer. The l.e.i. Wholesale Division ("l.e.i.") generated net +sales of $30,286,000 for the year ended December 31, 2005, or approximately 8% +of the Company's total net sales. +Madden Mens Wholesale Division +The Steve Madden Mens Wholesale Division ("Madden Mens ") designs, +produces, sources, sells and markets a full collection of directional young +men's shoes through major department stores, better specialty stores and +independent shoe stores throughout the United States. Price points range from +$70 to $100 at retail, targeted at men ages 18 to 44 years old. Madden Mens +accounted for $54,611,000 of net sales in the year ended December 31, 2005, or +approximately 15% of the Company's total net sales. Madden Mens, which is +primarily produced in China, maintains open stock inventory positions in select +patterns to serve the replenishment programs of its wholesale customers. +Candie's Wholesale Division +Pursuant to the Company's license agreement with Candie's, Inc. +("Candie's"), the Company designs, produces, sources, sells and markets +Candie's(R) branded footwear for women and children worldwide through the +Company's Candie's Wholesale Division ("Candie's"). Candie's(R) generated net +sales of $22,404,000 for the year ended December 31, 2005, or approximately 6% +of the Company's total net sales. +On December 6, 2004, the license agreement with Candie's was amended to +reflect Candie's decision to name Kohl's Corporation ("Kohl's") as the exclusive +provider of a new line of Candie's apparel. Pursuant to the amendment, +commencing on January 1, 2007, the Company will no longer have the exclusive +right to market Candie's branded footwear and will be permitted to sell Candie's +branded footwear only to Kohl's. Under the terms of the amendment, Candie's has +guaranteed that the Company will achieve minimum sales levels with Kohl's during +the term of the agreement, which runs through December 31, 2010. In the event +such minimum sales levels are not achieved, Candie's is required to compensate +the Company in an amount based on a percentage of the sales shortfall. +SM New York - Wholesale Division +The Company's SM New York Wholesale Division ("SMNY") began shipping +for the first time in the fourth quarter of 2005 and generated sales of +$1,576,000. SMNY(TM) is geared for young women ages 13 to 20 and is an "opening +price point" brand that is currently being sold at Federated Department Stores +and mid-tier department stores. +Diva Acquisition Corp. - Steven(R) Wholesale Division +Diva Acquisition Corp. ("Steven(R)") designs and markets women's +fashion footwear under the Steven(R) trademark through major department and +better footwear specialty stores and two (2) Company-owned retail shoe stores +located in New York City and Miami. Priced a tier above the Steve Madden(R) +brand, Steven(R) products are designed to appeal principally to fashion +conscious women, ages 26 to 45, who shop at department stores and footwear +boutiques. Steven(R) generated net sales of $16,453,000 for the year ended +December 31, 2005, or approximately 4% of the Company's total net sales. +Stevies Inc. - Wholesale Division +The Company's Stevies(R) Wholesale Division ("Stevies(R)") designs, +produces, sources, sells and markets footwear for girls to major department +stores, better specialty stores and shoe stores throughout the United States. +2 +Stevies(R) generated net sales of $7,886,000 for the year ended December 31, +2005, or approximately 2% of the Company's total net sales. Stevies(R) products +are marketed through department stores, such as Federated Department Stores, +Belk and Limited Too, as well as independent children's stores throughout the +country. +Unionbay Men's Footwear Wholesale Division +Pursuant to the Company's license agreement with Seattle Pacific +Industries, Inc., the Company has the right to use the Unionbay(R) trademark in +connection with the sale and marketing of footwear for men and boys. Unionbay(R) +is known for casual apparel in the young men's, junior's and children's +marketplace and is distributed nationally through department and specialty +stores. The Company's Unionbay(R) Wholesale Division ("Unionbay") generated net +sales of $726,000 for the year ended December 31, 2005, or under 1% of the +Company's total net sales. +Steven Madden Retail, Inc. - Retail Division +As of December 31, 2005, the Company owned and operated 94 retail shoe +stores under the Steve Madden(R) name, two (2) under the Steven(R) name, one (1) +outlet store under the Shoe Biz name and one (1) Internet store (through the +www.stevemadden.com website). In 2005, the Company opened twelve (12) new stores +and closed five (5) under-performing stores. Most of the Steve Madden stores are +located in major shopping malls in Alabama, Arizona, California, Colorado, +Connecticut, Delaware, Florida, Georgia, Illinois, Kansas, Louisiana, Maryland, +Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, +North Carolina, Ohio, Pennsylvania, Puerto Rico, Rhode Island, Texas, Virginia, +Wisconsin and the District of Columbia. The retail stores generated annual sales +in excess of $771 per square foot. Sales are primarily from the sale of the +Company's Steve Madden(R) product line. Comparative store sales (sales of those +stores that were open for all of 2005 and 2004) increased 5% in 2005 compared to +2004. Net sales for the retail division were $121,511,000 for 2005. Net sales +from the Retail Division for the year ended December 31, 2005 were approximately +32% of the Company's total net sales. +The Company believes that the retail division will continue to enhance +overall sales and profits of the Company while building equity in the Steve +Madden brand. The Company plans to add eight to ten (8 - 10) new retail stores +during 2006. The expansion of the retail division enables the Company to test +and react to new products and classifications which, in turn, strengthens the +product development efforts of the Steve Madden wholesale division. +The Adesso-Madden, Inc. - Private Label Division +In September 1995, the Company incorporated Adesso-Madden, Inc. as a +wholly owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to +mass market merchandisers, shoe store chains and other value-priced retailers in +connection with their procurement of private label shoes. As a buying agent, A-M +arranges for shoe manufacturers to produce private label shoes to the +specifications of its clients. The Company believes that by operating in the +private label, mass merchandising market, the Company is able to maximize +additional non-branded sales opportunities. This leverages the Company's overall +sourcing and design capabilities. Currently, this division serves as a buying +agent for the procurement of women's, men's and children's footwear for large +retailers including Target, Wal-Mart, Mervyns, J.C. Penney, Sears and Payless. +A-M receives buying agent's commissions from its clients. The private label +division generated net commission income of $4,833,000 for the year ended +December 31, 2005. +Licensing +As of December 31, 2005, the Company licensed its Steve Madden +trademark for use in connection with the manufacturing, marketing and sale of +outerwear including leather outerwear, belts, handbags, sunglasses, eyewear and +hosiery. Each license agreement requires the licensee to pay to the Company a +royalty based on net sales, a minimum royalty in the event that specified net +sales targets are not achieved and a percentage of sales for advertising of the +Steve Madden(R) brand. Licensing income was $2,286,000 for the year ended +December 31, 2005. +3 +Daniel M. Friedman +On February 7, 2006, the Company acquired all of the equity interest of +privately held Daniel M. Friedman and Associates, Inc. Founded in 1995, Daniel +M. Friedman is a manufacturer and distributor of name fashion handbags and +accessories. The acquisition was completed for $18,000,000 in cash and includes +certain earn out provisions based on financial performance through 2010. In +October of 1998, the Company entered into a license agreement with Daniel M. +Friedman for the design, manufacture and distribution of women's belts in the +United States and Canada. This agreement expired on June 30, 2005. On July 14, +2005, the Company entered into a new license agreement with Daniel M. Friedman +for the design, manufacture and distribution of handbags, women's belts, wallets +and other small leather goods. +Design +The Company has established a reputation for its creative designs, +popular styles and quality products at affordable price points. The Company +believes that its future success will depend in substantial part on its ability +to continue to anticipate and react to changing consumer demands in a timely +manner. To meet this objective, the Company has developed a unique design +process that allows it to recognize and act quickly to changing consumer +demands. The Company's design team strives to create designs which it believes +fit the Company's image, reflect current or future trends and can be +manufactured in a timely and cost-effective manner. Once the initial design is +complete, a prototype is developed, which is reviewed and refined prior to the +commencement of limited production. Most new designs are then tested in the +Steve Madden(R) retail stores. Designs that prove popular are then offered to +wholesale and retail distribution nationwide. The Company believes that its +unique design and testing process and flexible sourcing model is a significant +competitive advantage allowing the Company to mitigate the risk of the costly +production and distribution of unpopular designs. +Product Sourcing and Distribution +The Company sources each of its product lines separately based on the +individual design, styling and quality specifications of the products in such +product lines. The Company does not own or operate manufacturing facilities; +rather, it sources its branded products through independently owned +manufacturers in China, Brazil, Italy, Mexico, Spain, Portugal and the United +States. The Company has established relationships with a number of manufacturers +in each of these countries. Although the Company has not entered into any +long-term manufacturing or supply contracts, the Company believes that a +sufficient number of alternative sources exist for the manufacture of its +products. The principal materials used in the Company's footwear are available +from a number of sources, both within the United States and in foreign +countries. +The Company's design and distribution processes are intended to be +flexible, allowing the Company to respond to and accommodate changing consumer +demand. The Company's production staff tracks warehouse inventory on a regular +basis, monitors sell-through data and incorporates input on product demand from +wholesale customers. The Company can use product feedback to adjust production +or manufacture new products in as little as five weeks. +The Company distributes its products from two (2) third-party +distribution warehouse centers located in California and New Jersey. By +utilizing distribution facilities that specialize in distributing products to +certain customer wholesale accounts, Steve Madden retail stores and Internet +fulfillment, the Company believes that its customers are better served. +Customers +The Company's wholesale customers consist principally of department +stores and specialty stores, including shoe boutiques. Presently, the Company +sells approximately 72% of its products at wholesale to department and specialty +stores, including Federated Department Stores (Macy's, Bloomingdale's, Bon +Marche, Filene's, Hecht's, Famous Barr, Foley's, Lord and Taylor, Robinsons May +and Marshall Fields'), Dillard's, Nordstrom, Journeys, Limited Too and Mandees; +and catalog retailers, including Victoria's Secret and Fingerhut. For the year +ended December 31, 2005, Federated Department Stores accounted for approximately +$80,290,000 (28%) of the Company's wholesale gross sales. +4 +Distribution Channels +The Company sells its products principally through its Company-owned +retail stores and through department stores, specialty shoe stores and discount +stores in the United States and abroad. For the year ended December 31, 2005, +net sales from the Company's Retail Division and the Company's Wholesale +Division accounted for approximately $121,511,000 (32%) and $254,275,000 (68%) +of the Company's total net sales, respectively. The following paragraphs +describe each of these distribution channels. +Steve Madden and Steven Retail Stores +As of December 31, 2005, the Company operated 95 Company-owned retail +stores (including one Internet store) under the Steve Madden(R) name and two (2) +under the Steven(R) name. The Company believes that its retail stores will +continue to enhance overall sales, profitability, and its ability to react to +changing consumer trends. The stores are also a marketing tool that allows the +Company to strengthen brand recognition and to showcase selected items from its +full line of branded and licensed products. Furthermore, the retail stores +provide the Company with a venue to test and introduce new products and +merchandising strategies. Specifically, the Company often tests new designs at +its Steve Madden(R) retail stores before scheduling them for mass production and +wholesale distribution. In addition to these test marketing benefits, the +Company has been able to leverage sales information gathered at Steve Madden(R) +retail stores to assist its wholesale accounts in order placement and inventory +management. +A typical Steve Madden(R) store is approximately 1,400 to 1,600 square +feet and is located in a mall or street location that the Company expects will +attract the highest concentration of the Company's core demographic, +style-conscious young women ages 16 to 25 years old. The Steven(R) stores have a +more sophisticated design and format styled to appeal to their more mature +target audience. In addition to carefully analyzing mall demographics and +location, the Company also sets profitability guidelines for each potential +store site. Specifically, the Company targets well trafficked sites at which the +demographics fit the Company's consumer profile and seeks new locations where +the projected fixed annual rent expense does not exceed a specified percentage +of projected sales over the life of the lease. By setting these standards, the +Company seeks to identify stores that will contribute to the Company's overall +profits both in the near- and longer-terms. +Outlet Stores +Shoe Biz, Inc., a wholly owned subsidiary of the Company ("Shoe Biz"), +operates one (1) outlet store in New York which operates under the Shoe Biz +name. Shoe Biz sells many product lines, including Steve Madden, Steven, Stevies +and l.e.i.(R) footwear, at a price lower than typically charged by other full +price retailers. The Company is planning to close the Shoe Biz store in July of +2006. +Department Stores +The Company currently sells to over 6,500 doors of 22 department stores +throughout the United States and Canada. The Company's major accounts include +Federated Department Stores (Macy's, Bloomingdale's, Bon Marche, Filene's, +Hecht's, Famous Barr, Foley's, Lord and Taylor, Robinsons May and Marshall +Fields'), Nordstrom and Dillard's. +The Company provides merchandising support to its department store +customers which includes in-store fixtures and signage, supervision of displays +and merchandising of the Company's various product lines. The Company's +wholesale merchandising effort includes the creation of in-store concept shops, +where a broader collection of the Company's branded products are showcased. +These in-store concept shops create an environment that is consistent with the +Company's image and enable the retailer to display and stock a greater volume of +the Company's products per square foot of retail space. In addition, these +in-store concept shops encourage longer term commitment by the retailer to the +Company's products and enhance consumer brand awareness. +In addition to merchandising support, the Company's key account +executives maintain weekly communications with their accounts to guide them in +placing orders and to assist them in managing inventory, assortment and retail +sales. The Company leverages its sell-through data gathered at its retail stores +5 +to assist department stores in allocating their open-to-buy dollars to the most +popular styles in the product line and to phase out styles with weaker +sell-throughs. +Specialty Stores/Catalog Sales +The Company currently sells to specialty store locations throughout the +United States and Canada. The Company's major specialty store accounts include +Journeys, Mandees, Famous Footwear and DSW. The Company offers its specialty +store accounts the same merchandising, sell-through and inventory tracking +support offered to its department store accounts. Sales of the Company's +products are also made through various catalogs, such as Victoria's Secret. +Internet Sales +The Company operates one (1) Internet website: www.stevemadden.com. +Customers can purchase numerous styles of the Company's Steve Madden(R), Steven +and Steve Madden Mens footwear, accessory and clothing products. Sales derived +from the Company's Internet website were $5,281,000 in 2005. +Distribution Agreements +Steve Madden products are available in many countries and territories +worldwide via several retail selling and distribution agreements. Under the +terms of the retail selling agreements, the licensee is required to open a +minimum number of stores each year and is required to pay the Company a royalty +for each pair of footwear sold. Under the terms of the distribution agreements, +the distributor is required to purchase certain minimum amounts of Steve Madden +shoes. These agreements, which expire at various times through December 31, +2009, are exclusive in their specific territories which include Canada, +Australia, New Zealand, Israel, UAE, Bahrain, Qatar, Oman, Indonesia, Mexico and +several countries in Central and South America. +Competition +The fashion footwear industry is highly competitive. The Company's +competitors include specialty shoe companies as well as companies with +diversified footwear product lines. Many of these competitors, including Diesel, +Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may have greater +financial and other resources than the Company. The Company believes effective +advertising and marketing, fashionable styling, high quality and value are the +most important competitive factors and intends to continue to employ these +elements as it develops its products. +Marketing and Sales +The Company has focused on creating an integrated brand building +program to establish Steve Madden as the leading designer of fashion footwear +for style-conscious young women and men. As a result, the Company developed a +national advertising campaign for lifestyle and fashion magazines which was also +used in regional marketing programs such as radio advertisements, television +commercials, outdoor media, college event sponsorship and live online chat +forums. The Company also continues to promote its website (www.stevemadden.com) +where customers can purchase Steve Madden(R), Steven(R) and Steve Madden Mens +products and interact with both the Company and other customers. +In order to service its wholesale accounts, the Company retains a sales +force of 22 independent sales representatives as of March 1, 2006. These sales +representatives work on a commission basis and are responsible for placing the +Company's products with its principal customers, including department and +specialty stores. The sales representatives are supported by the Company's +senior executives and, as of March 1, 2006, a staff of 13 account executives, 14 +merchandise coordinators and 28 customer service representatives who continually +cultivate relationships with wholesale customers. This group of professionals +assist accounts in merchandising and assessing customer preferences and +inventory requirements, which ultimately serves to increase sales and +profitability. +6 +Management Information Systems (MIS) Operations +Sophisticated information systems are essential to the Company's +ability to maintain its competitive position and to support continued growth. +The Company operates on a dual AS/400 system which provides system support for +all aspects of its business including manufacturing purchase orders; customer +purchase orders; order allocations; invoicing; accounts receivable management; +real time inventory management; quick response replenishment; point-of-sale +support; and financial and management reporting functions. The Company has a +PKMS bar coded warehousing system that is integrated with the wholesale system +in order to provide accurate inventory positions and quick response size +replenishment for its customers. In addition, the Company has installed an EDI +system which provides a computer link between the Company and certain wholesale +customers that enables both the customer and the Company to monitor purchases, +shipments and invoicing. The EDI system also improves the Company's ability to +respond to customer inventory requirements on a weekly basis. +Receivables Financing; Line of Credit +Under the terms of a factoring agreement with GMAC Commercial Finance +LLC ("GMAC"), the Company is permitted to draw down 80% of its invoiced +receivables at an interest rate of two and one-half percent (2.5%) over the 30 +day LIBOR (as defined in such agreement). The agreement, which has no specific +expiration date and can be terminated by either party with sixty (60) days +written notice after June 30, 2007, provides the Company with a $25 million +credit facility with a $15 million sub-limit on direct borrowings. GMAC +maintains a lien on all of the Company's receivables and assumes the credit risk +for all assigned accounts approved by them. As of December 31, 2005, the Company +had not used any portion of the credit line. +Trademarks and Service Marks +The STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and service +marks have been registered in numerous International Classes in the United +States (Int'l Cl. 25 for clothing and footwear; Int'l Cl. 18 for leather goods, +such as handbags and wallets; Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry; +Int'l Cl. 3 for cosmetics and fragrances; Int'l Cl. 20 for picture frames and +furniture; Int'l Cl. 16 for paper goods; Int'l Cl. 24 for bedding; and Int'l Cl. +35 for retail store services). The Company also has pending trademark +applications in the United States for the mark STEVE MADDEN and/or STEVE MADDEN +(design) in numerous international classes (Class 2 for paints, Class 4 for +candles, Class 6 for key chains and id bracelets, Class 11 for lamps, Class 21 +for housewares, Class 26 for hair accessories, Class 27 for rugs and carpets, +Class 28 for sporting goods, and Class 32 for light beverages). +The Company also has trademark registrations in the United States for +the marks EYESHADOWS BY STEVE MADDEN (Int'l Cl. 9 for eyewear), ICE TEE (Int'l +Cl. 25 for clothing and footwear), SHOE BIZ BY STEVE MADDEN (Int'l Cl. 25 for +clothing and footwear; and Int'l Cl. 35 for retail store services) STEVEN M. +(Int'l Class 25 for clothing and footwear); and STEVEN (Int'l Cl. 25 for +clothing and footwear, Class 3 for cosmetics and fragrances, Class 14 for +jewelry, Class 18 for leather goods, Class 26 for hair accessories, Class 35 for +retail store services, and Class 9 for eyewear). The Company also has pending +applications for STEVEN in various international classes (Class 2 for paints, +Class 4 for candles, Class 6 for key chains and id bracelets, Class 11 for +lamps, Class 16 for printed matter, Class 20 for furniture, Class 21 for +housewares, Class 24 for fabrics and bedding, Class 26 for hair accessories, +Class 27 for rugs and carpets, Class 28 for sporting goods, and Class 32 for +light beverages). The Company also owns a registration for the mark SOHO COBBLER +and SOHO COBBLER (design) in the U.S. in Class 25 for footwear. +The Company also has several pending applications in the U.S. for +MADDEN in a variety of international classes (Class 3 for cosmetics and +fragrances, Class 18 for bags, , Class 14 for jewelry, and Class 25 for clothing +and footwear). The Company also has pending applications in the U.S. for STEVEN +BY STEVE MADDEN in Classes 18 (bags) and 24 (bedding), and for MADDEN BY STEVE +MADDEN in Class 2 for paints, Class 3 for perfume and cosmetics, Class 4 for +candles, Class 6 for key rings and key chains, Class 9 for eyewear and CDs, +Class 11 for lamps, Class 14 for jewelry, Class 16 for stationery and notebooks, +Class 18 for bags, Class 20 for furniture, Class 21 for housewares, Class 24 for +bedding, Class 25 for clothing and footwear, Class 26 for hair accessories, +Class 27 for carpets and rugs, Class 28 for toys and games, Class 32 for light +beverages, and Class 35 for retail store services. +7 +Additionally, the Company has several pending trademark and service +mark applications in the United States for various marks, including a stylized +"H" Design (Int'l Cl. 25 for clothing and footwear). STEVE MADDEN LUXE in Class +25 for clothing and footwear, and FINA FIRENZE in Classes 18 (bags), 25 +(clothing and footwear), and 35 (retail stores). RULE STEVE MADDEN (in Class 2 +for paints, Class 3 for perfume and cosmetics, Class 4 for candles, Class 6 for +key rings and key chains, Class 9 for eyewear and CDs, Class 11 for lamps, Class +14 for jewelry, Class 16 for stationery and notebooks, Class 18 for bags, Class +20 for furniture, Class 21 for housewares, Class 24 for bedding, Class 25 for +clothing and footwear, Class 26 for hair accessories, Class 27 for carpets and +rugs, Class 28 for toys and games, Class 32 for light beverages, and Class 35 +for retail store services), SM NEW YORK (in Class 3 for perfume and cosmetics, +Class 14 for jewelry, Class 18 for bags, Class 20 for furniture, Class 21 for +housewares, and Class 25 for clothing and footwear); and SMNY (in Class 3 for +perfume and cosmetics, Class 14 for jewelry, Class 18 for bags, Class 20 for +furniture, Class 21 for housewares, and Class 25 for clothing and footwear). +The Company further owns registrations for the STEVE MADDEN and/or +STEVE MADDEN plus Design trademarks and service marks in various International +Classes in Argentina, Australia, Bahrain, Belize, Brazil, Canada, Chile, China, +Colombia, El Salvador, Guatemala, Hong Kong, Israel, Italy, Japan, Korea, +Lebanon, Mexico, Nicaragua, the Netherlands, Panama, Saudi Arabia, Singapore, +South Africa, Taiwan, the United Arab Emirates, Venezuela, the European Union, +and the Benelux countries and has pending applications for registration of the +STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and service marks in +Bahrain, Costa Rica, Guatemala, Honduras, Indonesia, Korea, Kuwait, Lebanon, New +Zealand, Oman, Peru, Philippines, Qatar, Russia, Saudi Arabia, Singapore, +Turkey, and the United Arab Emirates . Additionally, the Company owns +registrations for the STEVEN trademark and service mark in various International +Classes in China, Hong Kong, Lebanon, Japan, Thailand, Taiwan, and the United +Arab Emirates and has pending applications for registration of the STEVEN +trademark and service mark in Australia, Bahrain, China, Indonesia, Israel, +Italy, Korea, Malaysia, New Zealand, Oman, Philippines, Qatar, Russia, South +Africa, Saudi Arabia, Taiwan, Thailand, Turkey, and Taiwan. +The Company further owns registrations for the "torch stripe" design in +Class 25 in the European Union and Panama, and has a pending application for the +"torch stripe" design in Class 25 in China. +The Company further owns registrations for the mark STEVEN BY STEVE +MADDEN in various international classes in the European Union, and has pending +applications for the mark STEVEN BY STEVE MADDEN in various international +classes in Canada, China, Israel, and Korea, +The Company further owns registrations for the mark SCOOP in various +international classes in the European Union. +The Company further has pending applications for the mark SCOOP +(design) in Classes 25 and/or 35 in Australia, Canada, China, Hong Kong, Kuwait, +Mexico, Russia, and Switzerland, +The Company further owns a registration for the mark WHAT'S THE SCOOP +in Class 25 in Hong Kong, and has pending applications for the mark WHAT'S THE +SCOOP in Class 25 in China, Japan, and Taiwan. +The Company further owns registrations for the mark SCOOP STREET in +Class 25 in Hong Kong, Japan, and has pending applications for the mark SCOOP +STREET in Class 25 in China and Taiwan. +The Company further has a pending application for the mark SCOOP NYC in +Class 3 in Japan. +The Company further owns a registration for the mark SCOOPKIDS in Class +25 in Japan. +Additionally, the Company, through its Diva Acquisition Corp. +subsidiary, owns registrations for the DAVID AARON trademark and service mark in +various International Classes in the United States (Int'l Cl. 25 for clothing +and footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets; and +Int'l Cl. 35 for retail store services), and in Australia, Canada, the European +Union, Hong Kong, Japan, Korea, Panama, and South Africa in some or all of +Classes 3, 18, and 25, and for its D. AARON trademark in Class 25 Spain. Also, +the Company own registrations for the DAVID AARON trademark in the United States +in International Class 3 for perfume and cosmetics; International Class 9 for +8 +eyewear; International Class 14 for jewelry; International Class 16 for paper +goods; International Class 18 for bags; International Class 24 for bed and bath +products; International Class 25 for clothing and footwear and International +Class 26 hair accessories in Korea. +The Company, through its Stevies, Inc. subsidiary, also owns various +registrations for the STEVIES and /or STEVIES plus Design trademark and service +mark in a number of International Classes in the United States (Int'l Cl. 18 for +leather goods, such as handbags and wallets; Int'l Cl. 9 for eyewear; +International Class 35 for retail store services; International Class 14 for +jewelry; International Class 28 for toys; International Class 16 for paper +goods; International Class 3 for perfume and cosmetics, International Class 9 +for CDs and eyewear, and International Class 26 for hair accessories), and for +STEVIES BY STEVE MADDEN in Class 14 for jewelry, Class 9 for eyewear, Class 3 +for perfume and cosmetics, Class 28 for toys and games, Class 35 for retail +services, Class 16 for stationery and notebooks, Class 18 for bags). The +Company, through its Stevies, Inc. subsidiary, also owns registrations for its +STEVIES and/or STEVIES plus Design mark for various goods in Argentina, Bahrain, +Canada, China, Columbia, the European Union, Hong Kong, Israel, Japan, Korea, +Lebanon, Malaysia, Mexico, Panama, Singapore, Taiwan and the United Arab +Emirates. Additionally Stevies, Inc. has several pending trademark and service +mark applications for registration of the STEVIES and STEVIES plus Design marks +in various International Classes in Brazil, Indonesia, Korea, Kuwait, Mexico, +New Zealand, Oman, Peru, Qatar, Saudi Arabia, Singapore, South Africa, Thailand, +Turkey, the United Arab Emirates and Venezuela. Finally, Stevies, Inc. also owns +several trademark and service mark registrations of the STEVIES BY STEVE MADDEN +mark in various International Classes in the United States (Int'l Cl. 25 for +clothing and footwear; Int'l Cl. 14 for jewelry; Int'l Cl. 18 for leather goods, +such as handbags and wallets; Int'l Cl. 16 for paper goods; Int'l Cl. 3 for +cosmetics and fragrances; Int'l Cl. 9 for eyewear; Int'l Cl. 28 for toys; and +Int'l Cl. 35 for retail store services). +The Company believes that its trademarks have a significant value and +are important to the marketing of the Company's products. There can be no +assurance, however, that the Company will be able to effectively obtain rights +to its marks throughout all of the countries of the world. Moreover, no +assurance can be given that others will not assert rights in, or ownership of, +trademarks and other proprietary rights of the Company or that the Company will +be able to successfully resolve such conflicts. The failure of the Company to +protect such rights from unlawful and improper appropriation may have a material +adverse effect on the Company's business and financial condition. +Employees +On March 3, 2006, the Company employed approximately 1,414 employees, +of whom approximately 586 work on a full-time basis and approximately 828 work +on a part-time basis. The management of the Company considers relations with its +employees to be good. +Seasonality +Historically, the Company's merchandising businesses have experienced +holiday retail seasonality. In addition to seasonal fluctuations, the Company's +operating results fluctuate quarter to quarter as a result of the timing of +holidays, weather, the timing of larger shipments of footwear, market acceptance +of the Company's products, the mix, pricing and presentation of the products +offered and sold, the hiring and training of additional personnel, inventory +write downs for obsolescence, the cost of materials, the product mix between +wholesale, retail and licensing businesses, the incurrence of other operating +costs and factors beyond the Company's control, such as general economic +conditions and actions of competitors. +Backlog +The Company had unfilled wholesale customer orders of $90 million and +$82 million, as of March 1, 2006 and 2005, respectively. The Company's backlog +at a particular time is affected by a number of factors, including seasonality, +timing of market weeks, and wholesale customer purchases of its core basic +products through the Company's open stock program. Accordingly, a comparison of +backlog from period to period may not be indicative of eventual shipments. +9 +ITEM 1A RISK FACTORS +You should carefully consider the risks and uncertainties we describe +below and the other information in this Annual Report or incorporated by +reference herein before deciding to invest in, or retain, shares of our common +stock. These are not the only risks and uncertainties that we face. Additional +risks and uncertainties that we do not currently know about or that we currently +believe are immaterial, or that we have not predicted, may also harm our +business operations or adversely affect us. If any of these risks or +uncertainties actually occurs, our business, financial condition, operating +results or liquidity could be materially harmed. +Fashion Industry Risks. The success of the Company will depend in +significant part upon its ability to anticipate and respond to product and +fashion trends as well as to anticipate, gauge and react to changing consumer +demands in a timely manner. There can be no assurance that the Company's +products will correspond to the changes in taste and demand or that the Company +will be able to successfully market products that respond to such trends. If the +Company misjudges the market for its products, it may be faced with significant +excess inventories for some products and missed opportunities for others. In +addition, misjudgments in merchandise selection could adversely affect the +Company's image with its customers resulting in lower sales and increased +markdown allowances for customers which could have a material adverse effect on +the Company's business, financial condition and results of operations. +The industry in which the Company operates is cyclical, with purchases +tending to decline during recessionary periods when disposable income is low. +Purchases of contemporary shoes and accessories tend to decline during +recessionary periods and also may decline at other times. While the Company has +fared well in recent years in a difficult retail environment, there can be no +assurance that the Company will be able to return to its historical rate of +growth in revenues and earnings, or remain profitable in the future. A recession +in the national or regional economies or uncertainties regarding future economic +prospects, among other things, could affect consumer-spending habits and have a +material adverse effect on the Company's business, financial condition and +results of operations. +In recent years, the retail industry has experienced consolidation and +other ownership changes. In the future, retailers in the United States and in +foreign markets may consolidate, undergo restructurings or reorganizations, or +realign their affiliations, any of which could decrease the number of stores +that carry the Company's products or increase the ownership concentration within +the retail industry. While such changes in the retail industry to date have not +had a material adverse effect on the Company's business or financial condition, +there can be no assurance as to the future effect of any such changes. +Inventory Management. The fashion-oriented nature of the Company's +products and the rapid changes in customer preferences leave the Company +vulnerable to an increased risk of inventory obsolescence. Thus, the Company's +ability to manage its inventories properly is an important factor in its +operations. Inventory shortages can adversely affect the timing of shipments to +customers and diminish sales and brand loyalty. Conversely, excess inventories +can result in lower gross margins due to the excessive discounts and markdowns +that might be necessary to reduce inventory levels. The inability of the Company +to effectively manage its inventory would have a material adverse effect on the +Company's business, financial condition and results of operations. +Dependence upon Customers and Risks Related to Extending Credit to +Customers. The Company's customers consist principally of department stores and +specialty stores, including shoe boutiques. Certain of the Company's department +store customers, including some under common ownership, account for significant +portions of the Company's wholesale business. +The Company generally enters into a number of purchase order +commitments with its customers for each of its lines every season and does not +enter into long-term agreements with any of its customers. Therefore, a decision +by a significant customer of the Company, whether motivated by competitive +conditions, financial difficulties or otherwise, to decrease the amount of +merchandise purchased from the Company or to change its manner of doing business +could have a material adverse effect on the Company's business, financial +condition and results of operations. The Company sells its products primarily to +retail stores across the United States and extends credit based on an evaluation +of each customer's financial condition, usually without collateral. While +various retailers, including some of the Company's customers, have experienced +financial difficulties in the past few years which increased the risk of +10 +extending credit to such retailers, the Company's losses due to bad debts have +been limited. Pursuant to the Factoring Agreement between GMAC and the Company, +GMAC currently assumes the credit risk related to approximately 93% of the +Company's accounts receivables. However, financial difficulties of a customer +could cause the Company to curtail business with such customer or require the +Company to assume more credit risk relating to such customer's account +receivable. +Impact of Foreign Manufacturers. Substantial portions of the Company's +products are currently sourced outside the United States through arrangements +with a number of foreign manufacturers in four different countries. During the +twelve-month period ended December 31, 2005, approximately 99% of the Company's +products were purchased from sources outside the United States, primarily from +China, Brazil, Italy and Spain. +Risks inherent in foreign operations include work stoppages, +transportation delays and interruptions, changes in social, political and +economic conditions which could result in the disruption of trade from the +countries in which the Company's manufacturers or suppliers are located, the +imposition of additional regulations relating to imports, the imposition of +additional duties, taxes and other charges on imports, significant fluctuations +of the value of the dollar against foreign currencies, or restrictions on the +transfer of funds, any of which could have a material adverse effect on the +Company's business, financial condition and results of operations. The Company +does not believe that any such economic or political condition will materially +affect the Company's ability to purchase products, since a variety of materials +and alternative sources are available. The Company cannot be certain, however, +that it will be able to identify such alternative sources without delay (if +ever) or without greater cost to the Company. The Company's inability to +identify and secure alternative sources of supply in this situation would have a +material adverse effect on the Company's business, financial condition and +results of operations. +The Company's imported products are also subject to United States +customs duties. The United States and the countries in which the Company's +products are produced or sold, from time to time, impose new quotas, duties, +tariffs, or other restrictions, or may adversely adjust prevailing quota, duty +or tariff levels, any of which could have a material adverse effect on the +Company's business, financial condition and results of operations. +Possible Adverse Impact of Unaffiliated Manufacturers' Inability to +Manufacture in a Timely Manner, Meet Quality Standards or to Use Acceptable +Labor Practices. As is common in the footwear industry, the Company contracts +for the manufacture of a majority of its products to its specifications through +foreign manufacturers. The Company does not own or operate any manufacturing +facilities and is therefore dependent upon independent third parties for the +manufacture of all of its products. The Company's products are manufactured to +its specifications by both domestic and international manufacturers. The +inability of a manufacturer to ship orders of the Company's products in a timely +manner or to meet the Company's quality standards could cause the Company to +miss the delivery date requirements of its customers for those items, which +could result in cancellation of orders, refusal to accept deliveries or a +reduction in purchase prices, any of which could have a material adverse effect +on the Company's business, financial condition and results of operations. +Although the Company enters into a number of purchase order commitments +each season specifying a time frame for delivery, method of payment, design and +quality specifications and other standard industry provisions, the Company does +not have long-term contracts with any manufacturer. As a consequence, any of +these manufacturing relationships may be terminated, by either party, at any +time. Although the Company believes that other facilities are available for the +manufacture of the Company's products, both within and outside of the United +States, there can be no assurance that such facilities would be available to the +Company on an immediate basis, if at all, or that the costs charged to the +Company by such manufacturers will not be greater than those presently paid. +The Company does not control its licensing partners or independent +manufacturers or their labor practices. The violation of labor or other laws by +an independent manufacturer of the Company or by one of the Company's licensing +partners, or the divergence of an independent manufacturer's or licensing +partner's labor practices from those generally accepted as ethical in the United +States, could have a material adverse effect on the Company's business, +financial condition and results of operations. +Intense Industry Competition. The fashion footwear industry is highly +competitive and barriers to entry are low. The Company's competitors include +specialty companies as well as companies with diversified product lines. The +recent market growth in the sales of fashion footwear has encouraged the entry +of many new competitors and increased competition from established companies. +11 +Most of these competitors, including Diesel, Kenneth Cole, Nine West, DKNY, +Skechers, Nike and Guess, may have significantly greater financial and other +resources than the Company and there can be no assurance that the Company will +be able to compete successfully with other fashion footwear companies. Increased +competition could result in pricing pressures, increased marketing expenditures +and loss of market share, and could have a material adverse effect on the +Company's business, financial condition and results of operations. The Company +believes effective advertising and marketing, branding of the Steve Madden name, +fashionable styling, high quality and value are the most important competitive +factors and plans to continually employ these elements as it develops its +products. The Company's inability to effectively advertise and market its +products could have a material adverse effect on the Company's business, +financial condition and results of operations. +Expansion of Retail Business. The Company's continued growth depends to +a significant degree on further developing the Steve Madden(R), Stevies(R), +Steven(R), SMNY, Steve Madden Mens, l.e.i.(R), Unionbay(R) and Candie's(R) +brands, creating new product categories and businesses and operating +Company-owned Steve Madden and Steven stores on a profitable basis. During the +year ended December 31, 2005, the Company opened 12 Steve Madden retail stores +and has plans to open eight to ten (8 - 10) additional stores in the year 2006. +The Company's recent and planned expansion includes the opening of stores in new +geographic markets as well as strengthening existing markets. New markets have +in the past presented, and will continue to present, competitive and +merchandising challenges that are different from those faced by the Company in +its existing markets. There can be no assurance that the Company will be able to +open new stores, and if opened, that such new stores will be able to achieve +sales and profitability levels consistent with management's expectations. The +Company's retail expansion is dependent on a number of factors, including the +Company's ability to locate and obtain favorable store sites, the performance of +the Company's wholesale and retail operations, and the ability of the Company to +manage such expansion and hire and train personnel. Past comparable store sales +results may not be indicative of future results, and there can be no assurance +that the Company's comparable store sales results can be maintained or will +increase in the future. In addition, there can be no assurance that the +Company's strategies to increase other sources of revenue, which may include +expansion of its licensing activities, will be successful or that the Company's +overall sales or profitability will increase or not be adversely affected as a +result of the implementation of such retail strategies. +Management of Growth. The Company's operations have increased and will +continue to increase demand on the Company's managerial, operational and +administrative resources. The Company has recently invested significant +resources in, among other things, its management information systems and hiring +and training new personnel. However, in order to manage currently anticipated +levels of future demand, the Company may be required to, among other things, +expand its distribution facilities, establish relationships with new +manufacturers to produce its products, and continue to expand and improve its +financial, management and operating systems. There can be no assurance that the +Company will be able to manage future growth effectively and a failure to do so +could have a material adverse effect on the Company's business, financial +condition and results of operations. +Seasonal and Quarterly Fluctuations. The Company's results may +fluctuate quarter to quarter as a result of the timing of holidays, weather, the +timing of larger shipments of footwear, market acceptance of the Company's +products, the mix, pricing and presentation of the products offered and sold, +the hiring and training of additional personnel, inventory write downs for +obsolescence, the cost of materials, the product mix between wholesale, retail +and licensing businesses, the incurrence of other operating costs and factors +beyond the Company's control, such as general economic conditions and actions of +competitors. In addition, the Company expects that its sales and operating +results may be significantly impacted by the opening of new retail stores and +the introduction of new products. Accordingly, the results of operations in any +quarter will not necessarily be indicative of the results that may be achieved +for a full fiscal year or any future quarter. +Trademark and Service Mark Protection. The Company believes that its +trademarks and service marks and other proprietary rights are important to its +success and its competitive position. Accordingly, the Company devotes +substantial resources to the establishment and protection of its trademarks on a +worldwide basis. Nevertheless, there can be no assurance that the actions taken +by the Company to establish and protect its trademarks and other proprietary +rights will be adequate to prevent imitation of its products by others or to +prevent others from seeking to block sales of the Company's products on the +basis that they violate the trademarks and proprietary rights of others. +Moreover, no assurance can be given that others will not assert rights in, or +12 +ownership of, trademarks and other proprietary rights of the Company or that the +Company will be able to successfully resolve such conflicts. In addition, the +laws of certain foreign countries may not protect proprietary rights to the same +extent as do the laws of the United States. The failure of the Company to +establish and then protect such proprietary rights from unlawful and improper +utilization could have a material adverse effect on the Company's business, +financial condition and results of operations. +Foreign Currency Fluctuations. The Company makes approximately 97% of +its purchases in U.S. dollars. However, the Company sources substantially all of +its products overseas and, as such, the cost of these products may be affected +by changes in the value of the relevant currencies. Changes in currency exchange +rates may also affect the relative prices at which the Company and foreign +competitors sell their products in the same market. There can be no assurance +that foreign currency fluctuations will not have a material adverse effect on +the Company's business, financial condition and results of operations. +Outstanding Options. As of March 9, 2006, there were outstanding +options to purchase an aggregate of approximately 1,262,602 shares of Common +Stock. Holders of such options are likely to exercise them when, in all +likelihood, the market price of the Company's stock is significantly higher than +the exercise price of the options. Further, while options are outstanding, they +may adversely affect the terms on which the Company could obtain additional +capital, if required. +Economic and Political Risks. The present economic condition in the +United States and concern about uncertainties could significantly reduce the +disposable income available to the Company's customers for the purchase of the +Company's products. In addition, current unstable political conditions, +including the potential or actual conflicts in Iraq, North Korea or elsewhere, +or the continuation or escalation of terrorism, could have an adverse effect on +the Company's business, financial condition and results of operations. +ITEM 1B. UNRESOLVED STAFF COMMENTS +None. +ITEM 2 PROPERTIES +The Company maintains approximately 33,000 square feet for its +executive offices and sample production facilities at 52-16 Barnett Avenue, Long +Island City, NY 11104. The lease for the Company's headquarters expires on June +30, 2008 and can be extended, at the option of the Company, through June 30, +2013. +The Company's showroom is located at 1370 Avenue of the Americas, New +York, NY. All of the Company's brands are displayed for sale from this 9,917 +square foot space. The lease for the Company's showroom expires on February 28, +2013. +The Company maintains approximately 7,200 square feet as a storage +facility at 25-15 Borough Place, Woodside, NY. The lease for this space expires +October 31, 2010. +The Company also maintains an 807 square foot showroom located at +Fashion Center Dallas in the World Trade Center, Dallas, Texas. The lease for +this showroom expires on April 30, 2007. +The Company also currently engages two independent distributors to +warehouse and distribute its products. +The Company's private label division, Adesso Madden, maintains +approximately 3,120 square feet of office and showroom space at 99 Seaview +Boulevard, Port Washington, N. Y. The lease for Adesso Madden expires on May 31, +2006. +All of the Company's retail stores are leased pursuant to leases that, +under their original term, extend for an average of ten years in length. A +majority of the leases include clauses that provide for contingent rental +payments if gross sales exceed certain targets. In addition, a majority of the +leases enable the Company and/or the landlord to terminate the lease in the +13 +event that the Company's gross sales do not achieve certain minimum levels +during a prescribed period. Many of the leases contain rent escalation clauses +to compensate for increases in operating costs and real estate taxes. +The current terms of the Company's retail store leases expire as +follows: +Years Lease Terms Expire Number of Stores +------------------------------- ---------------------------- +2006 1 +2007 6 +2008 12 +2009 11 +2010 11 +2011 14 +2012 9 +2013 11 +2014 11 +ITEM 3 LEGAL PROCEEDINGS +Except as set forth below, no material legal proceedings are pending to +which the Company or any of its property is subject. +On July 28, 2005, adidas America, Inc., and adidas-Salomon AG +(together, "adidas") filed a Demand for Arbitration (the "Demand") against Steve +Madden, Ltd. and Steve Madden Retail, Inc. before the American Arbitration +Association. In its Demand, adidas alleged that the parties had previously been +engaged in a lawsuit over the Company's sale of sneakers that allegedly +infringed adidas' "three stripe" mark. The parties settled that lawsuit by +entering into a settlement agreement dated August 4, 2003 that prohibited the +Company from selling shoes that contained adidas' "three-stripe" mark either +with one additional stripe or with one less stripe. adidas alleged in the Demand +that the Company was selling three shoes (the Finnley, the Troyy and the Soccet) +that adidas contends violate the settlement agreement and infringe adidas' +"three-stripe" mark. The parties were engaged in settlement discussions for +several months, but so far have been unable to settle and the Company filed its +answer to the Demand for Arbitration on January 20th. The parties will be +jointly selecting a panel of arbitrators over the next few weeks, while +settlement discussions continue. No discovery demands have been exchanged. The +Company believes it has substantial defenses to the claims asserted in the +Demand for Arbitration. +On August 10, 2005, the U.S. Customs Department issued a report that +asserts that certain commissions that the Company treated as buying agents +commissions (which are not subject to duty) should be treated as "selling agents +commissions" (which are subject to duty). In the report, Customs estimates that +the Company had underpaid duties during the calendar years of 1998 through 2004 +in the amount of $1,051,000. Based on management's estimation at this point, a +reserve of $1,051,000 has been recorded as of the December 31, 2005. Such +reserve may in the future be modified to reflect the status of this matter. +On or about January 23, 2006, the Company and certain of its executives +were named as defendants in a lawsuit filed by Jojeli, Inc. ("Jojeli") and Alan +Rick Friedman in the United States District Court for the Southern District of +New York. In their complaint, Jojeli and Mr. Friedman assert claims arising from +the Company's decision to terminate Jojeli's services on or about November 28, +2005. Mr. Friedman, Jojeli's principal, served as a senior salesperson for the +Company, and provided his services to the Company pursuant to an April 26, 2004 +written agreement. In their complaint, Jojeli and Mr. Friedman allege eight +claims against the Company and/or four of its executives, including breach of +contract, violation of the New York Labor Law, tortuous interference with +contract, civil conspiracy, defamation, and prima facie tort. They seek damages +on their various claims in differing amounts, ranging from $500,000 to $5.0 +million and they also seek a declaration that they are not bound by the +restrictive covenant in the parties' contract. The Company is still +14 +investigating the allegations of the complaint and has not yet filed an answer +or any relief from the Court. The Company believes the claims to be without +merit and it intends to vigorously defend the lawsuit. +The Company has been named as a defendant in certain other lawsuits in +the normal course of business. In the opinion of management, after consulting +with legal counsel, the liabilities, if any, resulting from these matters should +not have a material effect on the Company's financial position or results of +operations. It is the policy of management to disclose the amount or range of +reasonably possible losses in excess of recorded amounts. +ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS +No matters were submitted to a vote of the holders of the Company's +Common Stock during the last quarter of its fiscal year ended December 31, 2005. +PART II +ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER +MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +The Company's shares of common stock trade on The Nasdaq National +Market. The following table sets forth the range of high and low closing sales +prices for the Company's Common Stock during each fiscal quarter during the +two-year period ended December 31, 2005 as reported by The Nasdaq National +Market. The quotes represent inter-dealer prices without adjustment or mark-ups, +mark-downs or commissions and may not necessarily represent actual transactions. +The trading volume of the Company's securities fluctuates and may be limited +during certain periods. As a result, the liquidity of an investment in the +Company's securities may be adversely affected. +Common Stock +High Low High Low +--------- ---------- ---------- ---------- +2005 2004 +Quarter ended Quarter ended +March 31, March 31, +2005 19.40 16.22 2004 21.61 17.75 +Quarter ended Quarter ended +June 30, June 30, +2005 18.86 15.61 2004 20.70 17.66 +Quarter ended Quarter ended +September 30, September 30, +2005 24.65 17.77 2004 20.24 15.59 +Quarter ended Quarter ended +December December +31, 2005 30.32 22.70 31, 2004 19.79 15.79 +On March 9, 2006, the final quoted price as reported by The Nasdaq +National Market was $31.84 for each share of common stock. As of March 9, 2006, +there were 13,846,168 shares of Common Stock outstanding and 67 record holders. +Dividends. On November 3, 2005, the Board of Directors declared a +special dividend of $1 per share payable to Steven Madden, Ltd. shareholders of +record at the close of business on November 14, 2005. The dividend was paid on +November 23, 2005. +Equity Compensation Plans. Information regarding our equity +compensation plans as of December 31, 2005 is disclosed in Item 12. "Security +Ownership of Certain Beneficial Owners and Management and Related Stockholder +Matters." +15 +Issuer Repurchases of Equity Securities. There were no shares of common +stock repurchased by the Company during the fourth quarter of fiscal 2005. The +Company's previously announced share repurchase program, effective as of January +1, 2004, provides for share repurchases in the aggregate amount of $20 million +and has no set expiration or termination date. +Pursuant to an agreement reached on February 2, 2005 with an 8% +shareholder, the Company has agreed to commit $25 million in the year ended +January 31, 2006 and $10 million in the year ended January 31, 2007 to a +combination of share repurchases and/or dividends, such programs to be +implemented at such time and in such manner as the board of directors shall +determine in its sole discretion. +ITEM 6 SELECTED FINANCIAL DATA +The following selected financial data has been derived from the +Company's audited financial statements. The Income Statement Data relating to +2005, 2004 and 2003, and the Balance Sheet Data as of December 31, 2005 and 2004 +should be read in conjunction with the Company's audited consolidated financial +statements and notes thereto appearing elsewhere herein. +Year Ended December 31, +--------------------------------------------------------------------------------- +2005 2004 2003 2002 2001 +------------- ------------- ------------- ------------- ------------- +INCOME STATEMENT DATA: +Net sales $ 375,786,000 $ 338,144,000 $ 324,204,000 $ 326,136,000 $ 243,391,000 +Cost of sales 233,286,000 215,475,000 198,185,000 199,453,000 143,518,000 +Gross profit 142,500,000 122,669,000 126,019,000 126,683,000 99,873,000 +Commissions and licensing fee - net 7,119,000 4,588,000 5,742,000 4,381,000 3,955,000 +Operating expenses (117,530,000) (108,276,000) (98,135,000) (97,852,000) (77,516,000) +Cost of loss mitigation coverage (6,950,000) +Impairment of cost in excess of +fair value of net assets acquired (519,000) -- -- -- -- +Income from operations 31,570,000 18,981,000 33,626,000 33,212,000 19,362,000 +Interest income 2,554,000 2,009,000 1,611,000 1,166,000 1,344,000 +Interest expense (164,000) (68,000) (54,000) (16,000) (66,000) +Gain (loss) on sale of marketable +securities (500,000) 32,000 136,000 66,000 71,000 +Income before provision for income +taxes 33,460,000 20,954,000 35,319,000 34,428,000 20,711,000 +Provision for income taxes 14,260,000 8,679,000 14,865,000 14,587,000 8,595,000 +Net Income 19,200,000 12,275,000 20,454,000 19,841,000 12,116,000 +Basic income per share $ 1.43 $ 0.93 $ 1.58 $ 1.58 $ 1.04 +Diluted income per share $ 1.38 $ 0.86 $ 1.45 $ 1.45 $ 0.94 +Basic weighted average common +shares outstanding 13,407,717 13,148,869 12,985,265 12,594,861 11,617,862 +Effect of potential common shares +from exercise of options and +warrants 537,658 1,074,080 1,153,246 1,115,018 1,330,002 +Diluted weighted average common +shares outstanding 13,945,375 14,222,949 14,138,511 13,709,879 12,947,864 +BALANCE SHEET DATA +Total assets 211,728,000 186,430,000 177,870,000 150,500,000 121,862,000 +Working capital 114,066,000 101,417,000 105,140,000 86,461,000 82,633,000 +Noncurrent liabilities 2,757,000 2,088,000 1,828,000 1,532,000 1,313,000 +Stockholders' equity 182,065,000 164,665,000 159,187,000 130,075,000 102,360,000 +16 +ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION +AND RESULTS OF OPERATIONS +The following discussion of the Company's financial condition and +results of operations should be read in conjunction with the audited Financial +Statements and Notes thereto appearing elsewhere in this document. +Statements in this "Management's Discussion and Analysis of Financial +Condition and Results of Operations" and elsewhere in this document as well as +statements made in press releases and oral statements that may be made by the +Company or by officers, directors or employees of the Company acting on the +Company's behalf that are not statements of historical or current fact +constitute "forward-looking statements" within the meaning of the Private +Securities Litigation Reform Act of 1995. Such forward-looking statements +involve known and unknown risks, uncertainties and other unknown factors that +could cause the actual results of the Company to be materially different from +the historical results or from any future results expressed or implied by such +forward-looking statements. In addition to statements which explicitly describe +such risks and uncertainties, readers are urged to consider statements labeled +with the terms "believes," "belief," "expects," "intends," "anticipates," +"projects" or "plans" and statements in the future tense to be uncertain +forward-looking statements. The forward-looking statements contained herein are +also subject generally to risks set forth herein under the caption "Risk +Factors" and to other risks and uncertainties that are described from time to +time in the Company's reports and registration statements filed with the +Securities and Exchange Commission. +Overview +($ in thousands, except retail sales data per square foot) +2005 was a turn around year for Steven Madden, Ltd. Net sales increased +11% to a record $375,786 in 2005 from $338,144 in 2004 while net commission and +licensing fee income increased 55% to $7,119 in 2005 from $4,588 in 2004. Net +income increased 56% to $19,200 in 2005, compared to $12,275 in 2004. The +Company's diluted earnings per share increased 60% to $1.38 per share for the +year ended December 31, 2005 compared to $0.86 per share in 2004. One reason for +the top line growth was Steve Madden's return to the Company on April 14 of this +year in the capacity of its Creative and Design Chief (a non-executive +position). The Company's impressive sales growth is a testament to Mr. Madden's +creative abilities. Additionally, the sales growth of the Company is the result +of the double-digit growth realized in the following divisions: +1. Madden Mens has evolved into a "collection" brand offering a full +assortment of dress, casual and sport footwear. The expanded +product line has helped Madden Mens establish open stock programs +with several customers and increase the number of doors with +Dillards and Nordstrom, all of which contributed to a net sales +increase of 74% to $54,611 in 2005 from $31,301 in 2004. +2. The Candie's product line gave the Company entree into the young +women and girls market. In just its second year of operation and +propelled by its success at Kohl's, Candie's net sales increased +44% to $22,404 in 2005 from $15,584 in 2004. +3. The Company continued to expand the Retail Division by opening 12 +stores and closing 5 under-performing stores in 2005. Net sales +in the Retail Division increased 13% to $121,511 in 2005 from +$107,797 in 2004. +Several factors accounted for the increase in profitability, including the +following: +1. Management has implemented new inventory controls and procedures +in an attempt to reduce inventory levels. For example, +"cut-to-order" inventory controls in l.e.i., Candie's, and +Stevies have resulted in reduced inventory levels in those +divisions. The new inventory controls have resulted in a +significant reduction of close-out sales in the second half of +2005 causing the Company's gross profit to increase by 2% to 38% +this year compared to 36% last year. +2. Net commission and licensing fee income increased 55% to $7,119 +in 2005 from $4,588 in 2004, primarily due to the growth of the +Adesso-Madden Division. The increase was the result of the +overall growth in first cost business, the expansion of the +division's private label business in men's footwear and the +transition of Unionbay to a first cost commission based model. +17 +3. The Company has initiated several cost control measures that have +resulted in a reduction of operating expenses as a percentage of +net sales to 31% in 2005 from 32% in 2004. +In the Retail Division, same store sales (sales in stores that were in +operation throughout all of 2005 and 2004) increased 5%. Store sales +productivity remained high with sales per square foot of $771. The Company is +planning to open eight to ten new stores in 2006. +The Company's annualized inventory turnover increased to 7.9 times in +2005 compared to 7.4 times in 2004, reflecting the inventory reductions +described above. The Company's accounts receivable average collection days +improved to 57 days this year compared to 64 days last year. As of December 31, +2005, the Company had $109,091 in cash, cash equivalents and marketable +securities, no short or long-term debt, and total stockholders equity of +$182,065. Working capital increased to $114,066 as of December 31, 2005, +compared to $101,417 on December 31, 2004. During the year ended December 31, +2005, net cash provided by operating activities increased to $42,742 as compared +to $12,863 in the same period last year. +On November 1, 2005, the Board of Directors declared a special dividend +of $1 per share payable to Steven Madden, Ltd. shareholders of record at the +close of business on November 14, 2005. The dividend was paid on November 23, +2005. +On February 7, 2006, management continued its strategy to diversify and +expand the demographics and the retail channels of its product lines by +acquiring Daniel M. Friedman and Associates, Inc. Daniel M. Friedman is an +importer and distributor of name fashion and private label handbags, belts and +accessories. This acquisition will enable the Company to further augment and +complement its core category and continue to expand its reach into the branded +lifestyle concept. +18 +The following tables set forth information on operations for the +periods indicated: +Selected Financial Information +Years Ended +December 31 +($ in thousands) +2005 2004 2003 +----------------------- ------------------------ ------------------------ +Consolidated: +------------ +Net sales $ 375,786 100% $ 338,144 100% $ 324,204 100% +Cost of sales 233,286 62 215,475 64 198,185 61 +Gross Profit 142,500 38 122,669 36 126,019 39 +Other operating income - net of +expenses 7,119 2 4,588 1 5,742 1 +Operating expenses 117,530 31 108,276 32 98,135 30 +Impairment of cost in excess of +Fair value of net assets acquired 519 0 -- -- -- -- +Income from operations 31,570 8 18,981 5 33,626 10 +Interest and other income net 1,890 1 1,973 1 1,693 1 +Income before income taxes 33,460 9 20,954 6 35,319 11 +Net income 19,200 5 12,275 4 20,454 6 +By Segment: +---------- +WHOLESALE DIVISIONS: +------------------- +Madden Womens Wholesale: +----------------------- +Net sales $ 120,333 100% $ 113,879 100% $ 109,285 100% +Cost of sales 86,556 72 82,414 72 77,313 71 +Gross profit 33,777 28 31,465 28 31,972 29 +Other operating income 2,286 2 2,310 2 2,827 3 +Operating expenses 29,402 24 28,828 25 27,630 25 +Income from operations 6,661 6 4,947 5 7,169 7 +l.e.i. Footwear Wholesale: +------------------------- +Net sales $ 30,286 100% $ 38,391 100% $ 60,623 100% +Cost of sales 20,122 66 27,575 72 38,016 63 +Gross profit 10,164 34 10,816 28 22,607 37 +Operating expenses 8,109 27 10,236 27 13,658 22 +Income from operations 2,055 7 580 1 8,949 15 +Madden Mens Wholesale: +--------------------- +Net sales $ 54,611 100% $ 31,301 100% $ 34,881 100% +Cost of sales 32,550 60 21,525 69 22,803 65 +Gross profit 22,061 40 9,776 31 12,078 35 +Operating expenses 12,961 24 8,742 28 8,277 24 +Income from operations 9,100 16 1,034 3 3,801 11 +Candie's Footwear Wholesale: +--------------------------- +Net sales $ 22,404 100% $ 15,584 100% $ 938 100% +Cost of sales 13,641 61 11,535 74 532 57 +Gross profit 8,763 39 4,049 26 406 43 +Operating expenses 5,716 25 4,357 28 748 80 +Income (loss) from operations 3,047 14 (308) (2) (342) (37) +19 +Selected Financial Information +Years Ended +December 31 +($ in thousands) +2005 2004 2003 +------------------------ ------------------------ ------------------------ +By Segment (Continued) +WHOLESALE DIVISIONS (Continued): +------------------------------- +SMNY: +---- +Net sales $ 1,576 100% -- -- -- -- +Cost of sales 808 51 -- -- -- -- +Gross profit 768 49 -- -- -- -- +Operating expenses 417 27 -- -- -- -- +Income from operations 351 22 -- -- -- -- +Diva Acquisition Corp. +---------------------- +(Steven Wholesale): +------------------ +Net sales $ 16,453 100% $ 21,039 100% $ 12,519 100% +Cost of sales 12,311 75 13,398 64 8,031 64 +Gross profit 4,142 25 7,641 36 4,488 36 +Operating expenses 4,704 28 5,274 25 3,360 27 +Income (loss) from operations (562) (3) 2,367 11 1,128 9 +Stevies Inc.: +------------ +Net sales $ 7,886 100% $ 9,575 100% $ 10,120 100% +Cost of sales 5,433 69 6,623 69 6,611 65 +Gross profit 2,453 31 2,952 31 3,509 35 +Other operating income -- -- -- -- 11 0 +Operating expenses 1,831 23 2,746 29 2,262 22 +Income from operations 622 8 206 2 1,258 13 +Unionbay Wholesale: +------------------ +Net sales $ 726 100% $ 578 100% $ 320 100% +Cost of sales 526 72 528 91 213 67 +Gross profit 200 28 50 9 107 33 +Operating expenses 163 23 604 105 481 150 +Income (loss) from operations 37 5 (554) (96) (374) (117) +RETAIL DIVISION: +--------------- +Steven Madden Retail Inc.: +------------------------- +Net sales $ 121,511 100% $ 107,797 100% $ 95,518 100% +Cost of sales 61,339 50 51,877 48 44,666 47 +Gross profit 60,172 50 55,920 52 50,852 53 +Operating expenses 54,227 45 47,489 44 41,719 44 +Impairment of cost in excess of +fair value of net assets acquired 519 0 -- -- -- -- +Income from operations 5,426 5 8,431 8 9,133 9 +Number of stores 98 91 83 +20 +Selected Financial Information +Years Ended +December 31 +($ in thousands) +2005 2004 2003 +------------------------ ------------------------ ------------------------ +By Segment (Continued) +ADESSO MADDEN INC.: +------------------- +(FIRST COST) +Other commission income - net +of expenses $4,833 $2,278 $2,904 +RESULTS OF OPERATIONS +($ in thousands) +Year Ended December 31, 2005 vs. Year Ended December 31, 2004 +Consolidated: +------------ +Total net sales for the year ended December 31, 2005 increased by 11% +to $375,786 from $338,144 for the comparable period last year. Significant sales +increases from Madden Mens, Candie's, and the Retail Division and a modest +increase from Madden Womens as well as net sales of $1,576 generated by the +Company's new division, SMNY were partially offset by declines in Steven, l.e.i. +and Stevies. +Gross profit as a percentage of sales increased to 38% in 2005 from 36% +in 2004. Gross profit as a percentage of sales in the Wholesale Divisions +increased to 32% in 2005 from 29% in 2004, primarily due to a significant +decrease in off-price sales and improved efficiencies in inventory management +resulting in lower inventory costs. This was partially offset by a decline in +gross margin in the Retail Division attributed to the liquidation of slow moving +inventory combined with the liquidation of inventory at four outlet stores +(three of which were temporary locations) that were closed during the third +quarter. +Operating expenses increased to $117,530 in 2005 from $108,276 in 2004. +As a percentage of sales, operating expenses decreased to 31% in 2005 from 32% +in 2004. The increase in dollars is primarily due to an increase in direct +selling expenses reflective of the 11% growth in sales and the incremental +payroll and occupancy costs associated with the operation of an additional seven +retail stores (net). Other contributing factors were an increase of accounting +fees incurred by the Company in connection with management's assessment and the +external audit of internal controls pursuant to Section 404 of the +Sarbanes-Oxley Act of 2002, and the settlement of the LaRue lawsuit in the +amount of $1,500. +Income from operations was $31,570 in 2005 compared to $18,981 in 2004. +Net income was $19,200 in 2005 compared to $12,275 in 2004. This increase in +income was primarily due to the increase in sales, the higher gross profit and +the substantial increase in commission income. +Wholesale Divisions: +-------------------- +Steven Madden, Ltd. (Madden Womens, l.e.i., Madden Mens, Candie's and SMNY): +Sales from Madden Womens accounted for $120,333 or 32%, and $113,879 or +34%, of total sales in 2005 and 2004, respectively. This increase resulted from +higher sales to specialty footwear retailers. Gross profit as a percentage of +sales remained the same as last year at 28%. Operating expenses increased to +$29,402 in 2005 from $28,828 in 2004 primarily due to an increase of accounting +fees incurred by the Company in connection with management's assessment and the +audit of internal controls pursuant to Section 404 of the Sarbanes-Oxley Act of +21 +2002, the aforementioned legal settlement of $1,500 as well as variable selling +and related expenses. As a percentage of sales, operating expenses decreased to +24% in 2005 from 25% in 2004. Income from operations for Madden Womens was +$6,661 in 2005 compared to $4,947 in 2004. +Sales from l.e.i. accounted for $30,286 or 8%, and $38,391 or 11%, of +total sales in 2005 and 2004, respectively. This decrease in sales was primarily +caused by planned reductions and a substantial reduction in closeout sales. +Gross profit as a percentage of sales increased to 34% in 2005 from 28% in 2004 +due to a significant decrease in the liquidation of inventory. Operating +expenses decreased to $8,109 in 2005 from $10,236 in 2004 due to a decrease in +payroll expenses reflective of management's initiative to reduce the workforce +in l.e.i. and due to a decrease in variable selling and related expenses. Income +from operations for l.e.i. was $2,055 in 2005 compared to $580 in 2004. +Sales from Madden Mens accounted for $54,611 or 15%, and $31,301 or 9%, +of total sales in 2005 and 2004, respectively. This 74% increase in sales was +driven by an increase in the number of doors at Dillards and Nordstrom, as well +as the introduction of a replenishment program. The division continued its +success with sport casual products while dress offerings were also successful, +giving the division a broader and more balanced collection. Gross profit as a +percentage of sales increased to 40% in 2005 from 31% in 2004 primarily due to a +substantial decrease in markdowns and sales allowances. Operating expenses +increased to $12,961 in 2005 from $8,742 in 2004. This increase is attributed to +increases in direct selling expenses, advertising and marketing expenses and an +increase in payroll expense required to support the Madden Mens' rapid sales +growth. Operating expenses as a percentage of sales decreased to 24% in 2005 +compared to 28% in 2004. Income from operations for Madden Mens increased to +$9,100 in 2005 compared to $1,034 in 2004. +Sales from Candie's accounted for $22,404 or 6%, and $15,584 or 5% of +total sales in 2005 and 2004, respectively. This 44% increase in sales is the +result of the growth in the Kohl's business and the success of several products, +including sandals with embellished heels and embellished flats. Gross profit as +a percentage of sales increased to 39% in 2005 from 26% in 2004 primarily due to +improved inventory management resulting in lower inventory markdowns. Operating +expenses increased to $5,716 in 2005 from $4,357 in 2004 due to increases in +payroll expenses, licensing fees and selling and related expenses in order to +position the Division for top line growth. As a percentage of sales, operating +expenses decreased to 25% in 2005 from 28% in 2004. Income from operations for +Candie's was $3,047 in 2005 compared to a loss from operations of $308 in 2004. +SMNY, which began shipping for the first time in the fourth quarter of +2005, generated net sales of $1,576. +Diva Acquisition Corp. (Steven): +Sales from Steven accounted for $16,453 or 4%, and $21,039 or 6%, of +total sales in 2005 and 2004, respectively. The decrease in sales was due to +disappointing sales of closed toe dress shoes in the first half of the year, +which was last year's bestseller. Additionally, last Fall's disappointing boot +season caused Steven's customers to push initial boot orders to the end of the +third quarter, eliminating the opportunity for any third quarter reorder +business. Gross profit as a percentage of sales decreased to 25% in 2005 from +36% in 2004 due to a substantial increase in markdowns and allowances as well as +a significant increase in off-price sales. Operating expenses decreased to +$4,704 in 2005 from $5,274 in 2004 due to a decrease in direct selling expenses. +Loss from operations for Steven was $562 in 2005 compared to income from +operations of $2,367 in 2004. +Stevies Inc. (Stevies): +Sales from Stevies accounted for $7,886 or 2%, and $9,575 or 3%, of +total sales in 2005 and 2004, respectively. The decrease was due to the decision +by May Company to discontinue offering kids products in its stores. In addition, +some of Stevies other customers were transferred to a "first cost" model and +thus its revenues were included in the Adesso-Madden division. Gross profit as a +percentage of sales remained the same as last year at 31%. Operating expenses +decreased to $1,831 in 2005 from $2,746 in 2004 due to a 29% reduction in +payroll expenses and a decrease in advertising and marketing expenses. Stevies +was able to offset the loss in sales by reducing overhead expenses resulting in +an increase of income from operations to $622 in 2005 compared to $206 in 2004. +22 +Unionbay Men's Footwear, Inc. (Unionbay): +Unionbay, the Company's license for the right to use the Unionbay +trademark(R) in connection with young men's footwear, generated net sales of +$726 in 2005 compared to $578 in 2004. During the third quarter of this year, +Unionbay migrated to a commission-based "first-cost" business and thus its +commission income is now included in the Adesso-Madden Division. Income from +operations for Unionbay was $37 in 2005 compared to a loss from operations of +$554 in 2004. +Retail Division: +---------------- +Sales from the Retail Division accounted for $121,511 or 32% and +$107,797 or 32% of total sales in 2005 and 2004, respectively. As of December +31, 2005, there were 98 retail stores compared to 91 retail stores as of +December 31, 2004. Comparable store sales (sales of those stores that were open +for all of 2005 and 2004) for the year ended December 31, 2005 increased 5% over +the same period of 2004. This increase was achieved through the early release +and success of opened up sandals in spring, strong boot sales in the fall, and a +substantial growth in Men's volume at the stores. Gross profit as a percentage +of sales decreased to 50% in 2005 from 52% in 2004, primarily due to an increase +in the liquidation of slow moving inventory combined with the liquidation of +inventory at five stores that were closed during the year 2005. Operating +expenses for the Retail Division were $54,227 in 2005 and $47,489 in 2004. This +increase was primarily due to increased payroll and payroll related expenses and +higher occupancy expenses associated with the operation of seven additional +stores in the current period and an increase in direct selling expenses. Income +from operations for the Retail Division decreased to $5,426 in 2005 compared to +$8,431 in 2004. +Adesso-Madden Division: +----------------------- +Adesso-Madden, Inc. generated net commission income of $4,833 in 2005, +compared to $2,278 in 2004. The increase was the result of the growth in first +cost business with existing, as well as new customers, the expansion of the +Company's private label business in men's footwear, the transition of Unionbay +to a first cost commission based model and the cumulative contribution of +commissions on international sales made on a direct-from-factory basis. +Year Ended December 31, 2004 vs. Year Ended December 31, 2003 +Consolidated: +------------ +Total net sales for the year ended December 31, 2004 increased by 4% to +$338,144 in 2004 from $324,404 for the comparable period of 2003. Sales +increases from the Retail Division, the new Candie's Division, Steven and Madden +were offset by declines in the l.e.i., Madden Mens and Stevies. +Gross profit as a percentage of sales decreased to 36% in 2004 from 39% +in 2003. This was primarily due to an increase in cost of sales due to higher +inventory costs associated with the utilization of product sourcing that +provided shorter delivery times combined with pricing pressure from our +wholesale customers. Additionally, the poor performance of the l.e.i. and +Candie's at retail necessitated high level inventory markdowns which resulted in +lower than expected margins. Finally, the liquidation of slow moving inventory +combined with heavy and persistent promotional activity throughout the year +negatively affected the Company's gross profit. +Operating expenses increased to $108,276 in 2004 from $98,135 in 2003. +This increase resulted from increased professional fees incurred by the Company +in complying with the rules and regulations adopted pursuant to the +Sarbanes-Oxley Act of 2002, higher payroll and payroll related expenses and +occupancy expenses associated with the operation of an additional eight retail +stores (net), an increase in advertising expenditures in support of the brand, a +reclassification of warehouse expenses and the costs associated with the launch +of Candie's and Unionbay. +Net commission and licensing fee income was $2,278 in 2004 compared to +$2,904 in 2003. Income from operations was $18,981 in 2004 compared to $33,626 +in 2003. Net income was $12,275 in 2004 compared to $20,454 in 2003. The +decrease in income was primarily due to the lower margins and increased expenses +described directly above. +23 +Wholesale Divisions: +------------------- +Steven Madden, Ltd. (Madden Womens, l.e.i., Madden Mens and Candie's): +Sales from the Madden Womens accounted for $113,879 or 34%, and +$109,285 or 34%, of total sales in 2004 and 2003, respectively. Gross profit as +a percentage of sales decreased to 28% in 2004 from 29% in 2003, primarily due +to the liquidation of slow moving inventory and an increase in markdowns and +allowances caused by higher levels of promotional activities at retail in the +third and fourth quarters of 2004. Operating expenses increased to $28,828 in +2004 from $27,630 in 2003, due to an increase in advertising expenditures in +support of the brand and increases in selling and related expenses. Income from +operations for Madden Womens was $4,947 in 2004 compared to $7,169 in 2003. +Sales from the l.e.i. accounted for $38,391 or 11%, and $60,623 or 19%, +of total sales in 2004 and 2003, respectively. This decrease in sales resulted +from a reduction in consumer demand for casual classifications combined with a +disappointing performance at retail. Gross profit as a percentage of sales +decreased to 28% in 2004 from 37% in 2003, primarily due to the liquidation of +slow moving inventory and higher inventory markdowns and clearance at retail. +Operating expenses decreased to $10,236 in 2004 from $13,658 in 2003 due to +decreases in payroll and payroll related expenses and selling and marketing +expenses. Income from operations for l.e.i. was $580 in 2004 compared to $8,949 +in 2003. +Sales from the Madden Mens accounted for $31,301 or 9%, and $34,881 or +11%, of total sales in 2004 and 2003, respectively. This sales decrease was the +result of a downturn in the Madden Men's casual fashion footwear segment during +the first half of the year. The Company broadened and repositioned the fall line +resulting in an increase in sales in the fourth quarter of 2004 of 61% to +$10,951 compared to $6,816 in the same period of 2003. Gross profit as a +percentage of sales decreased to 31% in 2004 from 35% in 2003, primarily due to +the liquidation of slow moving inventory and an increase in markdowns and +allowances caused by higher levels of promotional activities at retail. +Operating expenses increased to $8,742 in 2004 from $8,277 in 2003. Income from +operations for Madden Mens was $1,034 in 2004 compared to $3,801 in 2003. +Sales from Candie's which was launched in the fourth quarter of 2003, +generated net sales of $15,584 in 2004. Heavy promotional activity combined with +several challenges in product design resulted in a lower than anticipated gross +profit as a percentage of sales of 26%. Operating expenses were $4,357 or 28% of +net sales in 2004. Loss from operations for Candie's was $308 in 2004 compared +to $342 in 2003. +Diva Acquisition Corp. (Steven): +Sales from Steven accounted for $21,039 or 6%, and $12,519 or 4%, of +total sales in 2004 and 2003, respectively. This 68% increase in sales was +principally due to the success of key styles including woods, jeweled sandals +and dress mocs. Also, Steven added new retail doors, including Dillards, Macy's +West and Parisians, and initiated a replenishment program during the first +quarter of 2004, enabling retailers to generate weekly reorders with improved +turn and profitability. Gross profit as a percentage of sales remained the same +as last year at 36%. Operating expenses increased to $5,274 in 2004 from $3,360 +in 2003, due to increases in selling, designing, marketing and advertising +expenses. Income from operations for Steven was $2,367 in 2004, compared to +$1,128 in 2003. +Stevies Inc. ("Stevies"): +Sales from Stevies accounted for $9,575 or 3%, and $10,120 or 3%, of +total sales in 2004 and 2003, respectively. The decrease in sales was due to the +disappointing performance in boot, slipper and athletic classification in the +fourth quarter of 2004. Gross profit as a percentage of sales decreased to 31% +in 2004 from 35% in 2003, primarily due to pricing pressures and the liquidation +of slow moving inventory. Operating expenses increased to $2,746 in 2004 from +$2,262 in 2003 due to increases in payroll and payroll related expenses and +marketing and advertising expenses. Income from operations for Stevies was $206 +in 2004 compared to $1,258 in 2003. +24 +Unionbay Men's Footwear, Inc. (Unionbay): +Unionbay, which launched in the fall of 2003, generated net sales of +$578 for the year 2004. The consumer acceptance of the fall 2003 line was less +than anticipated. As a result, the Company changed product direction, which +caused the Company to forgo shipments of spring 2004 Unionbay products. +Retail Division: +--------------- +Sales from the Retail Division accounted for $107,797 or 32% and +$95,518 or 29% of total sales in 2004 and 2003, respectively. As of December 31, +2004, there were 91 retail stores compared to 83 retail stores as of December +31, 2003. Comparable store sales (sales of those stores that were open for all +of 2003 and 2004) for the year ended December 31, 2004 increased 8% over the +same period of 2003. This increase was achieved through management's immediate +reaction to at-once demand for boots early in the first quarter of 2004. Gross +profit as a percentage of sales decreased to 52% in 2004 from 53% in 2003, +primarily due to an increase in promotional activity in 2004. Operating expenses +for the Retail Division were $47,489 in 2004 and $41,719 in 2003. This increase +was primarily due to increased payroll and payroll related expenses and higher +occupancy expenses associated with the operation of an additional eight stores +(net) in the current period and higher advertising expenditures in support of +the brand. Despite increases in sales, income from operations for the Retail +Division decreased to $8,431 in 2004 compared to $9,133 in 2003, due to the +lower margins and the Company's investment in the brand through higher +advertising costs. +Adesso-Madden Division: +---------------------- +Adesso-Madden, Inc. generated net commission revenues of $2,278 in +2004, compared to $2,904 in 2003. This decrease was the result of a major +customer sharply reducing its purchases in order to reduce inventory levels in +its stores. +LICENSE AGREEMENTS +($ in thousands) +Revenues from licensing were virtually unchanged at $2,286 in 2005 from +$2,310 in 2004. As of December 31, 2005, the Company had four license partners +covering five product categories of its Steve Madden brand. The product +categories include hosiery, handbags, sunglasses, eyewear and belts. On February +7, 2006, the Company acquired Daniel M. Friedman and Associates, Inc., which had +a license agreement with the Company to manufacture and distribute handbags and +belts. +LIQUIDITY AND CAPITAL RESOURCES +($ in thousands) +The Company had working capital of $114,066 at December 31, 2005 +compared to $101,417 at December 31, 2004. The Company's net income for the year +ended December 31, 2005 was the primary reason for the increase in working +capital. +Under the terms of a factoring agreement with GMAC, the Company is +eligible to draw down 80% of its invoiced receivables at an interest rate of two +and one-half percent (2.5%) over the 30 day LIBOR. The agreement, which has no +specific expiration date and can be terminated by either party with 60 days +written notice after June 30, 2007, provides the Company with a $25 million +credit facility with a $15 million sub-limit on direct borrowings. GMAC +maintains a lien on all of the Company's receivables and assumes the credit risk +for all assigned accounts approved by them. As of December 31, 2005 the Company +had not used any portion of the credit line. +As of December 31, 2005 the Company had invested $56,249 in marketable +securities consisting of corporate bonds, U.S. Treasury notes, government +asset-backed securities, certificates of deposits and equities. +The Company believes that based upon its current financial position and +available cash and marketable securities, it will meet all of its financial +commitments and operating needs for at least the next twelve months. +25 +OPERATING ACTIVITIES +($ in thousands) +During the year ended December 31, 2005, net cash provided by operating +activities was $42,742. Sources of cash were provided primarily by the +following: net income of $19,200, a decrease in inventories of $5,972, an +increase in accounts payable and other accrued expenses of $4,320 and an +increase in accrued incentive compensation of $2,909. The primary uses of cash +were an increase in factored receivables of $3,282, an increase in non-factored +receivables of $1,197 and an increase in prepaid expenses, prepaid taxes, +deposits and other assets of $624. +At December 31, 2005, the Company had un-negotiated open letters of +credit for the purchase of imported merchandise of approximately $3,302. +The Company has an employment agreement with Steven Madden, its +Creative and Design Chief, which provides for an annual base salary of $600 +subject to certain specified adjustments, through June 30, 2015. The agreement +also provides for annual bonuses based on EBITDA, on revenue of any new +business, and royalty income over $2 million, an annual option grant at exercise +prices equal to the market price on the date of grant and a non-accountable +expense allowance. +The Company has employment agreements with certain executives, which +provide for the payment of compensation aggregating approximately $1,849 in +2006, $1,643 in 2007, $1,192 in 2008 and $480 in 2009. In addition, such +employment agreements provide for incentive compensation based on various +performance criteria as well as other benefits. The Chief Operating Officer of +the Company is entitled to deferred compensation calculated as a percentage of +his base salary. +Significant portions of the Company's products are produced at overseas +locations, the majority of which are located in China as well as Brazil, Italy +and Spain. The Company has not entered into any long-term manufacturing or +supply contracts with any of these foreign companies. The Company believes that +a sufficient number of alternative sources exist outside of the United States +for the manufacture of its products. In addition, the Company currently makes +approximately 97% of its purchases in U.S. dollars. +INVESTING ACTIVITIES +($ in thousands) +During the year ended December 31, 2005, the Company invested $17,252 +in marketable securities and received $9,153 from the maturities and sales of +securities. The Company made capital expenditures of $5,822, principally for +leasehold improvements for the twelve additional retail stores that were opened +during the period, as well as for additional showroom space and upgrades to the +computer systems. +FINANCING ACTIVITIES +($ in thousands) +During the year ended December 31, 2005, the Company paid dividends of +$13,813 and repurchased 444,000 shares of the Company's common stock at a total +cost of $7,735. The Company received $16,483 in connection with the exercise of +stock options. +INFLATION +The Company does not believe that the relatively low rates of inflation +experienced over the last few years in the United States, where it primarily +competes, have had a significant effect on sales, expenses or profitability. +26 +CONTRACTUAL OBLIGATIONS +The Company's contractual obligations as of December 31, 2005 were as follows: +Payment due by period (in thousands) +Contractual Obligations Total 2006 2007-2008 2009-2010 2011 and after +----------------------------- ----------- ----------- ----------- ----------- -------------- +Operating lease obligations $ 84,311 $ 12,540 $ 24,111 $ 19,194 $ 28,466 +Purchase obligations 46,994 46,994 0 0 0 +Other long-term liabilities +(future minimum royalty +payments) 2,603 2,228 375 0 0 +Total $ 133,908 $ 61,762 $ 24,486 $ 19,194 $ 28,466 +CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES +Management's Discussion and Analysis of Financial Condition and Results +of Operations is based upon the Company's audited consolidated financial +statements which have been prepared in accordance with accounting principles +generally accepted in the United States. The preparation of these financial +statements requires management to make estimates and judgments that affect the +reported amounts of assets, liabilities, sales and expenses, and related +disclosure of contingent assets and liabilities. Estimates by their nature are +based on judgments and available information. Estimates are made based upon +historical factors, current circumstances and the experience and judgment of +management. Assumptions and estimates are evaluated on an ongoing basis and the +Company may employ outside experts to assist in evaluations. Therefore, actual +results could materially differ from those estimates under different assumptions +and conditions. Management believes the following critical accounting estimates +are more significantly affected by judgments and estimates used in the +preparation of the Company's consolidated financial statements: accounts +receivable and inventory reserves, valuation of intangible assets, and +litigation reserves. +Allowances for bad debts, returns and customer chargebacks. The Company +provides reserves against its trade accounts receivables for future customer +chargebacks, co-op advertising allowances, discounts, returns and other +miscellaneous deductions that relate to the current period. The reserve against +the Company's non-factored trade receivables also includes estimated losses that +may result from customers' inability to pay. The amount of the reserve for bad +debts, returns, discounts and compliance chargebacks are determined by analyzing +aged receivables, current economic conditions, the prevailing retail environment +and historical dilution levels for customers. As a result of a reevaluation of +the retail environment, the Company has revised its method for evaluating its +allowance for customer markdowns and advertising chargebacks. In the past, the +Company would look at historical dilution levels for customers to determine the +allowance amount. Under the new methodology, the Company evaluates anticipated +chargebacks by reviewing several performance indicators for its major customers. +These performance indicators (which include inventory levels at the retail +floors, sell through rates and gross margin levels) are analyzed by key account +executives to estimate the amount of the anticipated customer allowance. Failure +to correctly estimate the amount of the reserve could materially impact the +Company's results of operation and financial position. +27 +Inventory reserves. Inventories are stated at lower of cost or market, +on a first-in, first-out basis. The Company reviews inventory on a regular basis +for excess and slow moving inventory. The review is based on an analysis of +inventory on hand, prior sales, and expected net realizable value through future +sales. The analysis includes a review of inventory quantities on hand at +period-end in relation to year-to-date sales and projections for sales in the +foreseeable future as well as subsequent sales. The Company considers quantities +on hand in excess of estimated future sales to be at risk for market impairment. +The net realizable value, or market value, is determined based on the estimate +of sales prices of such inventory through off-price or discount store channels. +The likelihood of any material inventory write-down is dependent primarily on +the expectation of future consumer demand for the Company's product. A +misinterpretation or misunderstanding of future consumer demand for the +Company's product, the economy, or other failure to estimate correctly, could +result in inventory valuation changes, either favorably or unfavorably, compared +to the valuation determined to be appropriate as of the balance sheet date. +Valuation of intangible assets. SFAS No. 142, which was adopted by the +Company on January 1, 2002, requires that goodwill and intangible assets with +indefinite lives no longer be amortized, but rather be tested for impairment at +least annually. This pronouncement also requires that intangible assets with +finite lives be amortized over their respective lives to their estimated +residual values, and reviewed for impairment in accordance with SFAS No. 144. In +accordance with SFAS No. 144, long-lived assets, such as property, equipment, +leasehold improvements and goodwill subject to amortization, are reviewed for +impairment annually or whenever events or changes in circumstances indicate that +the carrying amount of an asset may not be recoverable. Recoverability of assets +to be held and used is measured by a comparison of the carrying amount of an +asset to the estimated undiscounted future cash flows expected to be generated +by the asset. If the carrying amount of an asset exceeds its estimated future +cash flows, an impairment charge is recognized by the amount by which the +carrying amount of the asset exceeds the fair value of the asset. +Litigation reserves. Estimated amounts for litigation claims that are +probable and can be reasonably estimated are recorded as liabilities in the +Company's consolidated financial statements. The likelihood of a material change +in these estimated reserves would be dependent on new claims as they may arise +and the favorable or unfavorable events of a particular litigation. As +additional information becomes available, management will assess the potential +liability related to the pending litigation and revise their estimates. Such +revisions in management's estimates of the contingent liability could materially +impact the Company's results of operation and financial position. +Cost of Goods Sold. All costs incurred to bring finished products to +the warehouse or our retail stores are included in the cost of sales line item +of the Company's Consolidated Statement of Operations. These include purchase +commissions, letter of credit fees, FOB costs, sample expenses, custom duty, +inbound freight, labels and product packaging. All warehouse and distribution +costs are included in the operating expenses line item of the Company's +Consolidated Statement of Operations. The Company classifies all shipping costs +to customers as operating expenses. The Company's gross margins may not be +comparable to other companies in the industry because some companies may include +warehouse and distribution costs as a component of cost of sales, while other +companies report on the same basis as the Company and include them in operating +expenses. +ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +($ in thousands) +The Company does not engage in the trading of market risk sensitive +instruments in the normal course of business. Financing arrangements for the +Company are subject to variable interest rates primarily based on LIBOR. An +analysis of the Company's credit agreement with GMAC can be found in Note C, +"Due From Factor" to the Consolidated Financial Statements included in this +Annual Report on Form 10-K. As of December 31, 2005 and December 31, 2004, there +were no direct borrowings outstanding under the credit agreement. +As of December 31, 2005, the Company had investments in marketable +securities valued at $56,249, which consist primarily of corporate bonds, U.S. +treasury notes, certificates of deposit and government asset-backed securities +that have various maturities through December 2034, as well as marketable equity +securities. These investments are subject to interest rate risk and will +decrease in value if market interest rates increase. The Company currently has +the ability to hold these investments until maturity. Should there be a +28 +significant increase in interest rates, the value of these investments would be +negatively affected unless they were held to maturity. In addition, any further +decline in interest rates would reduce the Company's interest income. +ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +See the financial statements following Item 15 of this Annual Report on +Form 10-K. +ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING +AND FINANCIAL DISCLOSURE +None. +ITEM 9A CONTROLS AND PROCEDURES +Disclosure Controls and Procedures +As required by Rule 13a-15(b) of the Exchange Act, the Company's +management, including the Company's Chief Executive Officer and Chief Financial +Officer, has evaluated the effectiveness of its disclosure controls and +procedures as of the end of the fiscal year covered by this annual report. Based +on that evaluation, the Chief Executive Officer and Chief Financial Officer have +concluded that the Company's disclosure controls and procedures (as defined in +Rule 13a-15(e) under the Exchange Act) were effective as of the end of the +fiscal year covered by this annual report. +Changes in Internal Control Over Financial Reporting +As required by Rule 13a-15(d) under the Exchange Act, the Company's +management, including the Company's Chief Executive Officer and Chief Financial +Officer, has evaluated the Company's internal controls over financial reporting +to determine whether any changes occurred during the fourth quarter of 2005 that +have materially affected, or are reasonably likely to materially affect, the +Company's internal control over financial reporting. Based on that evaluation, +there has been no such material change during the fourth quarter of 2005. +Management's Annual Report on Internal Control Over Financial Reporting +The management of the Company is responsible for establishing and +maintaining adequate internal control over financial reporting. Internal control +over financial reporting is defined in Rule 13a-15(f) promulgated under the +Securities Exchange Act of 1934 as a process designed by, or under the +supervision of, the Company's principal executive and principal financial +officers and effected by the Company's board of directors, management and other +personnel, 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 and +includes those policies and procedures that: +o Pertain to the maintenance of records that in reasonable detail +accurately and fairly reflect the transactions and dispositions of the +assets of the Company; +o 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 +o 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. +29 +Because of its inherent limitations, internal control over financial +reporting may not prevent or detect misstatements. 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. +Management of the Company assessed the effectiveness of the Company's +internal control over financial reporting as of December 31, 2005. In making +this assessment, management used the criteria set forth by the Committee of +Sponsoring Organizations of the Treadway Commission (COSO) in Internal +Control-Integrated Framework. Based on its assessment and those criteria, +management believes that the Company maintained effective internal control over +financial reporting as of December 31, 2005. +The Company's Independent Registered Public Accounting Firm, Eisner +LLP, has audited and issued a report on management's assessment of the Company's +internal control over financial reporting. The report of Eisner LLP appears +below. +To the Board of Directors and Shareholders of +Steven Madden, Ltd. +We have audited management's assessment, included in the accompanying +Management's Annual Report on Internal Control Over Financial Reporting, that +Steven Madden, Ltd. and subsidiaries (the "Company") maintained effective +internal control over financial reporting as of December 31, 2005, based on +criteria established in Internal Control - Integrated Framework issued by the +Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). +Steven Madden, Ltd.'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 (i) +pertain to the maintenance of records that, in reasonable detail, accurately and +fairly reflect the transactions and dispositions of the assets of the company; +(ii) 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 (iii) 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 Steven Madden, Ltd. +maintained effective internal control over financial reporting as of December +31, 2005, is fairly stated, in all material respects, based on criteria +established in Internal Control-Integrated Framework issued by the COSO. Also, +in our opinion, Steven Madden, Ltd. and subsidiaries maintained, in all material +30 +respects, effective internal control over financial reporting as of December 31, +2005, based on criteria established in Internal Control-Integrated Framework +issued by COSO. +We also have audited, in accordance with the standards of the Public +Company Accounting Oversight Board (United States), the consolidated balance +sheets of Steven Madden, Ltd. and subsidiaries as of December 31, 2005 and 2004, +and the related consolidated statements of operations, changes in stockholders' +equity, and cash flows for the years in the three-year period ended December 31, +2005, and our report dated March 6, 2006 expressed an unqualified opinion on +those consolidated financial statements. +Eisner LLP +New York, New York +March 6, 2006 +ITEM 9B OTHER INFORMATION +None. +PART III +ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT +The information required to be furnished pursuant to this item will be +set forth in the Company's proxy statement for the 2006 Annual Meeting of +Stockholders, and is incorporated herein by reference. +ITEM 11 EXECUTIVE COMPENSATION +The information required to be furnished pursuant to this item will be +set forth in the Company's proxy statement for the 2006 Annual Meeting of +Stockholders, and is incorporated herein by reference. +ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT +AND RELATED STOCKHOLDER MATTERS +The information required to be furnished pursuant to this item will be +set forth in the Company's proxy statement for the 2006 Annual Meeting of +Stockholders, and is incorporated herein by reference. +ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS +The information required to be furnished pursuant to this item will be +set forth in the Company's proxy statement for the 2006 Annual Meeting of +Stockholders, and is incorporated herein by reference. +ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES +The information required to be furnished pursuant to this item will be +set forth in the Company's proxy statement for the 2006 Annual Meeting of +Stockholders, and is incorporated herein by reference. +PART IV +ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a)(1) Financial Statements +The following consolidated financial statements of Steven Madden, Ltd. and +subsidiaries are included in Item 8: +31 +STEVE MADDEN, LTD. AND SUBSIDIARIES +Contents +Page +---- +Consolidated Financial Statements +Report of Independent Registered Public Accounting Firm F-2 +Balance sheets as of December 31, 2005 and 2004 F-3 +Statements of income for the years ended December 31, 2005, +2004 and 2003 F-4 +Statements of changes in stockholders' equity for the years +ended December 31, 2005, 2004 and 2003 F-5 +Statements of cash flows for the years ended December 31, +2005, 2004 and 2003 F-7 +Notes to financial statements F-8 +F-1 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Board of Directors and Stockholders +Steven Madden, Ltd. +We have audited the accompanying consolidated balance sheets of Steven Madden, +Ltd. and subsidiaries (the "Company") as of December 31, 2005 and 2004, and the +related consolidated statements of operations, changes in stockholders' equity +and cash flows for the years in the three-year period ended December 31, 2005. +These financial statements are the responsibility of the Company's management. +Our responsibility is to express an opinion on these financial statements 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 Steven Madden, +Ltd. and subsidiaries as of December 31, 2005 and 2004, and the consolidated +results of their operations and their consolidated cash flows for each of the +years in the three-year period ended December 31, 2005 in conformity with U.S. +generally accepted accounting principles. +We also have audited, in accordance with the standards of the Public Company +Accounting Oversight Board (United States), the effectiveness of Steven Madden, +Ltd.'s internal control over financial reporting as of December 31, 2005, based +on criteria established in Internal Control - Integrated Framework issued by the +Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our +report dated March 6, 2006 expressed an unqualified opinion on management's +assessment of, and the effective operation of, internal control over financial +reporting. +Eisner LLP +New York, New York +March 6, 2006 +F-2 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Balance Sheets +(in thousands) December 31, +---------------------------- +2005 2004 +------------ ------------ +ASSETS +Current assets: +Cash and cash equivalents $ 52,842 $ 30,853 +Accounts receivable - net of allowances of $813 and $536 3,294 2,374 +Due from factor - net of allowances of $7,587 and $2,379 31,785 33,711 +Inventories 28,412 34,384 +Marketable securities - available for sale 14,092 12,784 +Prepaid expenses and other current assets 2,435 2,235 +Prepaid taxes 2,512 2,255 +Deferred taxes 5,600 2,498 +------------ ------------ +Total current assets 140,972 121,094 +Property and equipment, net 20,898 20,715 +Deferred taxes 5,568 5,780 +Deposits and other 586 435 +Marketable securities - available for sale 42,157 36,340 +Cost in excess of fair value of net assets acquired - net of accumulated +amortization of $599 and $714 1,547 2,066 +------------ ------------ +$ 211,728 $ 186,430 +============ ============ +LIABILITIES +Current liabilities: +Accounts payable $ 15,579 $ 13,450 +Accrued expenses 7,998 5,807 +Accrued incentive compensation 3,329 420 +------------ ------------ +Total current liabilities 26,906 19,677 +Deferred rent 2,757 2,088 +------------ ------------ +29,663 21,765 +------------ ------------ +Commitments, contingencies and other - see notes I & K +STOCKHOLDERS' EQUITY +Preferred stock - $.0001 par value, 5,000 shares authorized; none issued Series +A Junior Participating preferred stock - $.0001 par value, 60 shares +authorized; none issued +Common stock - $.0001 par value, 60,000 shares authorized, 16,150 and +14,608 shares issued, 13,916 and 12,818 shares outstanding at +December 31, 2005 and 2004, respectively 2 1 +Additional paid-in capital 99,950 80,631 +Retained earnings 108,838 103,451 +Unearned compensation -- (703) +Other comprehensive loss: +Unrealized loss on marketable securities (net of taxes) (1,299) (1,024) +Treasury stock - 2,234 and 1,790 shares at cost at December 31, 2005 and +2004, respectively (25,426) (17,691) +------------ ------------ +182,065 164,665 +------------ ------------ +$ 211,728 $ 186,430 +============ ============ +See notes to financial statements +F-3 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements of Income +(in thousands, except per share data) Year Ended December 31, +-------------------------------------- +2005 2004 2003 +---------- ---------- ---------- +Net sales: +Wholesale $ 254,275 $ 230,347 $ 228,686 +Retail 121,511 107,797 95,518 +---------- ---------- ---------- +375,786 338,144 324,204 +---------- ---------- ---------- +Cost of sales: +Wholesale 171,947 163,598 153,519 +Retail 61,339 51,877 44,666 +---------- ---------- ---------- +233,286 215,475 198,185 +---------- ---------- ---------- +Gross profit 142,500 122,669 126,019 +Commission and licensing fee income - net 7,119 4,588 5,742 +Operating expenses (117,530) (108,276) (98,135) +Impairment of cost in excess of fair value of net assets acquired (519) -- -- +---------- ---------- ---------- +Income before other income (expenses) and provision for +income taxes 31,570 18,981 33,626 +Other income (expenses): +Interest income 2,554 2,009 1,611 +Interest expense (164) (68) (54) +Gain (loss) on sale of marketable securities (500) 32 136 +---------- ---------- ---------- +Income before provision for income taxes 33,460 20,954 35,319 +Provision for income taxes 14,260 8,679 14,865 +---------- ---------- ---------- +Net income $ 19,200 $ 12,275 $ 20,454 +========== ========== ========== +Basic income per share $ 1.43 $ 0.93 $ 1.58 +========== ========== ========== +Diluted income per share $ 1.38 $ 0.86 $ 1.45 +========== ========== ========== +Basic weighted average common shares outstanding 13,408 13,149 12,985 +Effect of dilutive securities - options 537 1,074 1,153 +---------- ---------- ---------- +Diluted weighted average common shares outstanding 13,945 14,223 14,138 +========== ========== ========== +Dividends paid per common share $ 1.00 $ 0.00 $ 0.00 +========== ========== ========== +See notes to financial statements +F-4 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements of Changes in Stockholders' Equity +(in thousands) +Common Stock +------------------------------- Additional Unearned +Shares Amount Paid-in Capital Retained Earnings Compensation +-------------- -------------- --------------- ----------------- -------------- +Balance - December 31, 2002 14,016 1 70,683 70,722 (3,476) +Exercise of stock options 443 4,805 +Tax benefit from exercise of options 1,239 +Deferred compensation in connection with +issuance of stock options and +restricted stock 2,409 (2,409) +Amortization of unearned compensation 2,877 +Unrealized holding loss on marketable +securities (net of taxes of $190) +Net income 20,454 +Comprehensive income +-------------- -------------- -------------- -------------- -------------- +Balance - December 31, 2003 14,459 1 79,136 91,176 (3,008) +Exercise of stock options 129 454 +Tax benefit from exercise of options 1,004 +Issuance of fully vested restricted stock 20 +Forfeiture of restricted stock (183) 121 +Cash in lieu of restricted stock (378) +Deferred compensation in connection with +issuance of stock options and +restricted stock 598 (598) +Amortization of unearned +compensation 2,782 +Unrealized holding loss on marketable +securities (net of taxes of $741) +Net income 12,275 +Comprehensive income +Common stock purchased for treasury +-------------- -------------- -------------- -------------- -------------- +Balance - December 31, 2004 14,608 1 80,631 103,451 (703) +Exercise of stock options 1,422 1 16,482 +Tax benefit from exercise of options 4,604 +Issuance of fully vested restricted +stock 120 +Cash in lieu of restricted stock (1,767) +Amortization of unearned compensation 703 +Unrealized holding loss on marketable +securities (net of taxes of $199) +Net income 19,200 +Comprehensive income +Cash dividend paid (13,813) +Common stock purchased for treasury +-------------- -------------- -------------- -------------- -------------- +Balance - December 31, 2005 16,150 $ 2 $ 99,950 $ 108,838 $ -- +============== ============== ============== ============== ============== +See notes to financial statements +F-5 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements of Changes in Stockholders' Equity (Continued) +(in thousands) +Accumulated +Other Treasury Stock Total +Comprehensive --------------------------- Stockholders' Comprehensive +Gain (Loss) Shares Amount Equity Income +------------ ------------ ------------ ------------ ------------ +Balance - December 31, 2002 136 1,245 (7,991) 130,075 +Exercise of stock options 4,805 +Tax benefit from exercise of options 1,239 +Deferred compensation in connection with +issuance of stock options and +restricted stock 0 +Amortization of unearned compensation 2,877 +Unrealized holding loss on marketable +securities (net of taxes of $190,000) (263) (263) $ (263) +Net income 20,454 20,454 +------------ +Comprehensive income $ 20,191 +------------ ------------ ------------ ------------ ============ +Balance - December 31, 2003 (127) 1,245 (7,991) 159,187 +Exercise of stock options 454 +Tax benefit from exercise of options 1,004 +Issuance of fully vested restricted stock +Forfeiture of restricted stock (62) +Cash in lieu of restricted stock (378) +Deferred compensation in connection with +issuance of stock options and +restricted stock +Amortization of unearned compensation 2,782 +Unrealized holding loss on marketable +securities (net of taxes of $741) (897) (897) (897) +Net income 12,275 12,275 +------------ +Comprehensive income $ 11,378 +============ +Common stock purchased for treasury 545 (9,700) (9,700) +------------ ------------ ------------ ------------ +Balance - December 31, 2004 (1,024) 1,790 (17,691) 164,665 +Exercise of stock options 16,483 +Tax benefit from exercise of options 4,604 +Issuance of fully vested restricted stock +Cash in lieu of restricted stock (1,767) +Amortization of unearned compensation 703 +Unrealized holding loss on marketable +securities (net of taxes of $199) (275) (275) (275) +Net income 19,200 19,200 +------------ +Comprehensive income $ 18,925 +============ +Cash dividend paid (13,813) +Common stock purchased for treasury 444 (7,735) (7,735) +------------ ------------ ------------ ------------ +Balance - December 31, 2005 $ (1,299) 2,234 $ (25,426) $ 182,065 +============ ============ ============ ============ +See notes to financial statements +F-6 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements of Cash Flows +(in thousands) Year Ended December 31, +-------------------------------------- +2005 2004 2003 +---------- ---------- ---------- +Cash flows from operating activities: +Net income $ 19,200 $ 12,275 $ 20,454 +Adjustments to reconcile net income to net cash provided +by operating activities: +Equity-based compensation 703 2,719 2,877 +Depreciation and amortization 5,120 4,865 4,743 +Loss on disposal of fixed assets 535 198 -- +Impairment of cost in excess of fair value of net asset +acquired 519 -- -- +Deferred taxes (2,691) (227) (1,978) +Tax benefit from exercise of options 4,604 1,004 1,239 +Provision for doubtful accounts and chargebacks 5,485 537 163 +Deferred rent expense 669 260 296 +Realized (gain) loss on sale of marketable securities 500 (32) (136) +Changes in: +Accounts receivable (1,197) 1,824 (1,196) +Due from factor (3,282) (5,416) (6,583) +Inventories 5,972 (10,526) (4,413) +Prepaid expenses, prepaid taxes, deposits and other +assets (624) 2,559 (5,535) +Accounts payable and accrued expenses 4,320 2,870 206 +Accrued incentive compensation 2,909 (47) (2,234) +---------- ---------- ---------- +Net cash provided by operating activities 42,742 12,863 7,903 +---------- ---------- ---------- +Cash flows from investing activities: +Purchase of property and equipment (5,822) (7,387) (6,061) +Purchases of marketable securities (17,252) (27,779) (47,059) +Maturity/sale of marketable securities 9,153 9,708 36,785 +---------- ---------- ---------- +Net cash used in investing activities (13,921) (25,458) (16,335) +---------- ---------- ---------- +Cash flows from financing activities: +Proceeds from exercise of stock options 16,483 454 4,805 +Cash dividend paid (13,813) -- -- +Cash in lieu of restricted stock (1,767) (378) -- +Common stock purchased for treasury (7,735) (9,700) -- +Payments of lease obligations -- (1) (13) +---------- ---------- ---------- +Net cash provided by (used in) financing +activities (6,832) (9,625) 4,792 +---------- ---------- ---------- +Net increase (decrease) in cash and cash equivalents 21,989 (22,220) (3,640) +Cash and cash equivalents - beginning of year 30,853 53,073 56,713 +---------- ---------- ---------- +Cash and cash equivalents - end of year $ 52,842 $ 30,853 $ 53,073 +========== ========== ========== +Supplemental disclosures of cash flow information: +Cash paid during the year for: +Interest $ 164 $ 68 $ 54 +Income taxes $ 12,536 $ 5,855 $ 18,700 +See notes to financial statements +F-7 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +[1] Organization: +Steven Madden, Ltd., a Delaware corporation, designs and sources +women's, girl's and men's shoes, for sale through its wholesale and +retail channels under the Steve Madden, Steven, Stevies, SMNY, Madden +Mens, l.e.i. (under license), Candie's (under license) and Unionbay +(under license) brand names. Revenue is generated predominately through +the sale of the Company's brand name merchandise and certain licensed +products. At December 31, 2005 and 2004, the Company operated 98 and 91 +retail stores (including its website as a store), respectively. Such +revenue is subject to seasonal fluctuations. See Note M for operating +segment information. +[2] Principles of consolidation: +The consolidated financial statements include the accounts of Steven +Madden, Ltd. and its wholly owned subsidiaries Steven Madden Retail, +Inc., Diva Acquisition Corp., Adesso-Madden, Inc., Unionbay Men's +Footwear, Inc. and Stevies, Inc. (collectively referred to as the +"Company"). All significant intercompany balances and transactions have +been eliminated. +[3] Use of estimates: +The preparation of financial statements in conformity with accounting +principles generally accepted in the United States of America requires +management to make estimates and assumptions that affect the reported +amounts of assets and liabilities and disclosure of contingent assets +and liabilities at the date of the financial statements and the +reported amounts of revenue and expenses during the reporting period. +Actual results could differ from those estimates. +Allowances for bad debts, returns and customer chargebacks: The Company +provides reserves on trade accounts receivables for future customer +chargebacks and markdown allowances, discounts, returns and other +miscellaneous compliance related deductions that relate to the current +period sales. As a result of a reevaluation of the retail environment, +the Company has revised its method for evaluating its estimate of the +allowance for customer chargebacks. In the past, the Company would look +at historical dilution levels for customers to determine the allowance +amount. Under the new method of estimation, the Company evaluates +anticipated chargebacks by reviewing several performance indicators at +its major customers. These performance indicators, which include +inventory levels, sell through rates and gross margin levels, are +analyzed by key account executives to estimate the amount of the +anticipated customer allowance. This change in accounting estimate +resulted in an increase of our reserve by approximately $1,700 in the +fourth quarter of 2005. +[4] Cash equivalents: +Cash equivalents at December 31, 2005 and 2004, amounted to +approximately $43,290 and $16,428, respectively, and consist of money +market accounts and commercial paper. The Company considers all highly +liquid instruments with an original maturity of three months or less +when purchased to be cash equivalents. +F-8 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) +[5] Marketable securities: +Marketable securities consist primarily of corporate bonds, U.S. +treasury notes, certificates of deposit and government asset-backed +securities with maturities greater than three months and up to five +years at the time of purchase, as well as marketable equity securities. +These securities, which are classified as available for sale, are +carried at fair value, with unrealized gains and losses net of any tax +effect, are reported in stockholders' equity as accumulated other +comprehensive income, and are held at an investment bank with the +schedule of maturities at December 31, 2005 as follows: +Maturities +------------------------------- +1 Year or Less 1 to 5 Years +-------------- -------------- +Schedule of maturities: +Municipal bonds $ 4,948 $ 27,698 +US Government and Federal +agency bonds 1,392 5,126 +Corporate bonds 2,986 7,290 +Certificates of deposit -- 2,043 +-------------- -------------- +9,326 42,157 +Marketable equity securities 4,766 -- +-------------- -------------- +$ 14,092 $ 42,157 +============== ============== +[6] Inventories: +Inventories, which consist of finished goods on hand and in transit, +are stated at the lower of cost (first-in, first-out method) or market. +[7] Property and equipment: +Property and equipment are stated at cost less accumulated depreciation +and amortization. Depreciation is computed utilizing the straight-line +method based on estimated useful lives ranging from three to ten years. +Leasehold improvements are amortized utilizing the straight-line method +over the shorter of their estimated useful lives or the remaining lease +term. Depreciation and amortization include amounts relating to +property and equipment under capital leases. +Impairment losses are recognized for long-lived assets, including +certain intangibles, used in operations when indicators of impairment +are present and the undiscounted cash flows estimated to be generated +by those assets are not sufficient to recover the assets' carrying +amount. Impairment losses are measured by comparing the fair value of +the assets to their carrying amount. No impairment losses have been +incurred for the years presented other than the impairment in the cost +in excess of fair value acquired as described in Note A[8]. +[8] Cost in excess of fair value of net assets acquired: +Cost in excess of fair value of net assets acquired relates to the +acquisition of Diva Acquisition Corp in 1996, and through December 31, +2001 was being amortized over 20 years. During 2002, the Company +adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("FAS +142"). Amortization of indefinite lived intangible assets was no longer +allowed under FAS 142, however these identified assets are subject to +impairment tests at least annually or whenever an event occurs. +F-9 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) +On May 1, 1998, the Company purchased certain assets from and assumed +certain liabilities of Daniel Scott, Inc. which operated two retail +outlet stores under the name Shoe Biz. The acquisition was recorded at +a total cost of approximately $703, including related expenses, of +which $635 was allocated to cost in excess of fair value of the +identifiable net assets acquired ("goodwill"). Prior to the adoption of +FAS No. 142, the Company had amortized approximately $116 of the +goodwill, resulting in a net value of $519. During the year ended +December 31, 2004, the Company operated four stores under the Shoe Biz +name. In order to consolidate its resources to the Steve Madden brand, +the Company has decided to discontinue using the Shoe Biz name. As a +result, as of June 30, 2005, one Shoe Biz store has been converted to a +Steve Madden store, while two other Shoe Biz stores have been closed. +The remaining store operating under the Shoe Biz name has generated +operating losses during the last fiscal years and the net present value +of the future cash flows of this store is negative. As a result, the +entire balance of the goodwill of $519 is considered impaired and was +recognized as a reduction of income in the second quarter of 2005. +[9] Net income per share: +Basic income per share is based on the weighted average number of +common shares outstanding during the year. Diluted income per share +reflects the potential dilution assuming common shares were issued upon +the exercise of outstanding in-the-money options and the proceeds +(including the amount of compensation cost, if any, attributed to +future services and not yet recognized and the amount of tax benefits, +if any, that would be credited to additional paid-in capital assuming +exercise of the options) thereof were used to purchase treasury stock +at the average market price during the period. For the years ended +December 31, 2005 and 2004, options exercisable into approximately none +and 1,252 shares of common stock, respectively, have not been included +in the calculation of diluted income per share as the result would have +been antidilutive. +[10] Advertising costs: +The Company expenses costs of print, radio and billboard advertisements +as of the first date the advertisements take place. Advertising expense +included in operating expenses amounted to approximately $8,354 in +2005, $8,993 in 2004 and $7,666 in 2003. +[11] Fair value of financial instruments: +The carrying value of the Company's financial instruments approximates +fair value due to their short-term nature or their underlying terms. +Marketable securities are carried at quoted market prices which +represent fair value. +[12] Stock-based compensation: +At December 31, 2005, the Company had various stock option plans, which +are described more fully in Note D. The Company has elected to continue +to follow the intrinsic value method in accounting for its stock-based +employee compensation arrangements. The following table illustrates the +effect on net income and earnings per share if the company had applied +the fair value recognition provisions of SFAS No. 123 to stock-based +employee compensation. +F-10 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) +Year Ended December 31, +-------------------------------------- +2005 2004 2003 +---------- ---------- ---------- +Reported net income $ 19,200 $ 12,275 $ 20,454 +Stock-based employee compensation +included in reported net income, net +of tax 165 623 412 +Stock-based employee compensation +determined under the fair value +based method, net of tax (2,004) (3,861) (2,838) +---------- ---------- ---------- +Pro forma net income $ 17,361 $ 9,037 $ 18,028 +========== ========== ========== +Basic income per share: +As reported $ 1.43 $ 0.93 $ 1.58 +Pro forma $ 1.29 $ 0.69 $ 1.39 +Diluted income per share: +As reported $ 1.38 $ 0.86 $ 1.45 +Pro forma $ 1.24 $ 0.64 $ 1.28 +The weighted average fair value of options granted in 2005, 2004 and +2003 was approximately $6.11, $9.77 and $10.62, respectively, using the +Black-Scholes option-pricing model with the following assumptions: +2005 2004 2003 +------------ ------------ ------------ +Volatility 43% 65% 71% +Risk free interest rate 3.86% 3.32% - 3.51% 2.18% - 3.0% +Expected life in years 3 5 4 +Dividend yield 0 0 0 +[13] Revenue recognition: +The Company recognizes revenue on wholesale sales when products are +shipped pursuant to our standard terms which are freight on board (FOB) +warehouse or when products are delivered to the consolidators as per +the terms of the customers purchase order. Sales reductions for +anticipated discounts, allowances and other deductions are recognized +when sales are recorded. Customers retain the right to replacement of +the product for poor quality or improper or short shipments, which have +historically been immaterial. Retail sales are recognized when the +payment is received from customers and are recorded net of returns. The +Company earns commission income as a buying agent through its +Adesso-Madden Division by arranging to produce private label shoes to +the specifications of its clients. Commission revenue is recognized as +earned subsequent to when title of the product transfers from the +manufacturer to the customer and is on a net basis after deducting +operating expenses. +F-11 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) +The Company licenses its Steve Madden trademark for use in connection +with the manufacturing, marketing and sale of belts, handbags, +sunglasses, eyewear and hosiery products. Each license agreement +requires the licensee to pay to the Company a royalty and advertising +fee based on net sales as defined in the various agreements. A minimum +royalty and advertising fee is due the Company in the event that +specified net sales targets are not achieved. Licensing revenue is +recognized on the basis of net sales reported by the licensees or, if +greater, minimum guaranteed royalties when earned. In substantially all +of the Company's license agreements, the minimum guaranteed royalty is +earned and payable on a quarterly basis. +[14] Sales deductions: +The Company supports retailers' initiatives to maximize sales of the +Company's products on the retail floor by subsidizing the co-op +advertising programs of such retailers, providing them with inventory +markdown allowances and participating in various other marketing +initiatives of its major customers. Such expenses are reflected in the +financial statements as deductions to net sales. For the years ended +December 31, 2005, 2004 and 2003 the total deductions to net sales for +these expenses were $36,356, $30,027 and $27,859 respectively. +[15] Cost of sales: +All costs incurred to bring finished products to the Company's +distribution center are included in the cost of sales line item on the +Consolidated Statement of Operations. These include purchase +commissions, letter of credit fees, brokerage fees, FOB costs, sample +expenses, custom duty, inbound freight, labels and product packaging. +All warehouse and distribution costs are included in the operating +expenses line item of the Company's Consolidated Statement of +Operations. The Company classifies all shipping costs to customers as +operating expenses. The Company's gross margins may not be comparable +to other companies in the industry because some companies may include +warehouse, distribution, and royalty expenses as a component of cost of +sales, while other companies report on the same basis as the Company +and include them in operating expenses. +[16] Warehouse and shipping costs: +The Company includes all warehouse and distribution costs, including +internal transfer costs, in the Operating Expenses line on the +Consolidated Statements of Income. For the years ended December 31, +2005, 2004 and 2003, the total Warehouse and Distribution Costs +included in Operating Expenses was $6,229, $5,819 and $3,510 +respectively. The Company's standard terms of sales are "FOB Steve +Madden warehouse" and thus the Company's wholesale customers absorb +most shipping costs. Shipping costs to wholesale customers incurred by +the Company are not considered significant and are included in the +Operating Expense line in the Consolidated Statements of Income. +[17] Impairment of long-lived assets: +During fiscal 2002, the Company adopted SFAS No. 144, "Accounting for +the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). If facts +and circumstances indicate that the Company's long-lived assets might +be impaired, the estimated future undiscounted cash flows associated +with the long-lived asset would be compared to its carrying amounts to +determine if a write-down to fair value is necessary. If a write-down +is required, the amount is determined by estimation of the present +value of net discounted cash flows in accordance with FAS 144. +F-12 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) +[18] 401(k) Plan: +The Company maintains a tax-qualified, 401(k) plan which is available +to each of the Company's eligible employees who elect to participate +after meeting certain length-of-service requirements. The Company makes +discretionary matching contributions of 25% of employees' contributions +up to a maximum of 6% of employees' compensation, which vest to the +employees over a period of time. Total matching contributions to the +plan for 2005, 2004 and 2003 were approximately $176, $187 and $162, +respectively. +[19] Prior years' reclassification: +Certain reclassifications were made to prior year amounts to conform to +the 2005 presentation. +[20] Recently issued accounting standards: +In December 2004, the Financial Accounting Standards Board ("FASB") +issued Statement of Financial Accounting Standards No. 123R, +"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, +"Accounting for Stock-Based Compensation," and supercedes APB Opinion +No. 25, "Accounting for Stock Issued to Employees." This statement +requires that all share-based payments to employees be recognized in +the financial statements based on their fair values on the date of +grant. The Company currently uses the intrinsic value method to measure +compensation expense for stock-based awards. Note A(12) entitled +Stock-based compensation provides a pro forma net income and earnings +per share as if the Company had used a fair-value based method provided +by SFAS 123R to measure stock-based compensation for 2005, 2004 and +2003. The Company is required to adopt SFAS 123R in the first quarter +of fiscal 2006 and intends to use the "modified prospective method". +Under this transition method, compensation cost will be recognized for +all unvested options granted prior to the adoption date and for all +share-based payments issued after the effective date. The Company has +not yet determined the effect that the adoption of SFAS 123R will have +on the Company's consolidated statements of income in 2006. +In November of 2004, the FASB issued SFAS No. 151, "Inventory Costs," +which amends the guidance in ARB No. 43, Chapter 4, "Inventory +Pricing," to clarify the accounting for abnormal amounts of idle +facility expense, freight, handling costs and wasted material +(spoilage). This statement requires that those items be recognized as +current-period charges regardless of whether they meet the criterion of +"so abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires +that allocation of fixed production overheads to the costs of +conversion be based on the normal capacity of the production +facilities. The Company is required to adopt the provision of SFAS No. +151 in the first quarter of 2006. The Company does not expect SFAS 151 +to have a material impact on its consolidated results of operation or +financial condition. +In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and +Error Corrections - A Replacement of APB Opinion No. 20 and FASB +Statement No. 3" ("SFAS 154"). SFAS 154 applies to all voluntary +changes in accounting principle and to changes required by an +accounting pronouncement that does not include a specific transition +provision. This statement requires retrospective application to prior +periods' financial statements of changes in accounting principle, +unless it is impracticable to determine ether the period-specific +effects or the cumulative effect of the change. This statement is +effective for accounting changes and corrections of errors made in +fiscal years beginning after December 15, 2005. +F-13 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE B - PROPERTY AND EQUIPMENT +The major classes of assets and accumulated depreciation and +amortization are as follows: +December 31, +---------------------------- +2005 2004 +------------ ------------ +Leasehold improvements $ 31,690 $ 27,754 +Machinery and equipment 1,001 799 +Furniture and fixtures 4,823 4,673 +Computer equipment 5,458 5,043 +------------ ------------ +42,972 38,269 +Less accumulated depreciation and amortization (22,074) (17,554) +------------ ------------ +Property and equipment - net $ 20,898 $ 20,715 +============ ============ +NOTE C - DUE FROM FACTOR +On July 1, 2005, the Company entered into a factoring agreement with GMAC +Commercial Finance LLC ("GMAC"). Under the terms of the agreement, the Company +may request advances from the factor up to 80% of aggregate receivables +purchased by the factor at an interest rate of two and one-half percent (2.5%) +over the 30 day LIBOR. The Company also pays a fee equal to 0.325% of the gross +invoice amount of each receivable purchased. Prior to July 1, 2005, the Company +had a factoring agreement with Capital Factors, Inc. The Company sells and +assigns a substantial portion of its receivables, principally without recourse, +to the factor. As of December 31, 2005 and 2004, $555 and $295 of factored +receivables, respectively, were sold by the Company with recourse. GMAC will +maintain a lien on all of the Company's receivables and assume the credit risk +for all assigned accounts approved by them with certain restrictions. +A "factored" sale (whether "with" or "without" recourse) is substantially the +same as a non-factored sale and the Company accounts for its factored +sales/receivables in the same manner as its non-factored sales/receivables. The +factor services the collection of the Company's accounts receivable. Funds +collected by the factor are applied against advances owed to the factor (if +any), and the balance is due and payable to the Company, net of any fees. The +allowance against "due from factor" is an estimated provision for markdowns, +allowances, discounts, advertising and other deductions that customers may +deduct against their payments. +NOTE D - STOCK OPTIONS +The Company has established various stock option plans under which options to +purchase shares of common stock may be granted to employees, directors, +officers, agents, consultants and independent contractors. The plans provide +that the option price shall not be less than the fair market value of the common +stock on the date of grant and that no portion of the option may be exercised +beyond ten years from that date. No incentive stock option can be granted and +exercised beyond five years to a stockholder owning 10% or more of the Company's +outstanding common stock. Options granted under the plans during the three years +ended December 31, 2005 vest between three months and two years from the date of +grant. +The Company has several stock option plans. The 1993 Incentive Stock Option +Plan, The 1995 Stock Plan, The 1996 Stock Plan and The 1997 Stock Plan provide +for options to be granted to employees and directors. +The 1993 Incentive Stock Option Plan and the 1995 Stock Plan expired in 2003 and +2005, respectively. +In June 1999, the Company adopted The 1999 Stock Plan which authorized the +issuance of up to 400,000 shares. In May 2000, the stockholders approved an +amendment to this Plan to increase the maximum number of shares to be issued +under the Plan to 975,000 shares. In July 2001, the stockholders approved an +amendment to this Plan to increase the maximum number of shares to be issued +under the Plan to 1,600,000 shares. In May 2002, the +F-14 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE D - STOCK OPTIONS (CONTINUED) +stockholders approved a further amendment to this Plan to increase the maximum +number of shares to be issued under the Plan to 2,280,000. In 2003, the +stockholders approved a further amendment to this Plan to increase the maximum +number of shares to be issued under the Plan to 2,920,000. In May of 2004, the +stockholders approved a further amendment to this Plan to increase the maximum +number of shares to be issued under the plan to 3,220,000. Terms of the 1999 +Stock Plan are not materially different from the various existing stock option +plans. +Through December 31, 2005, 3,219,000 options had been granted under The 1999 +Stock Plan, as amended, and as of such date, 1,000 shares were available for +grant. +In connection with the amended employment agreement of the former Chief +Executive Officer ("CEO"), who is now the Company's Creative and Design Chief, +the Company issued options to purchase 500,000 shares of its common stock. The +options, which vested in August 1998, had an exercise price of $3.31 and were +exercisable over 10 years expiring in March 2005. The last of these options were +exercised in January of 2005. Unearned compensation was recorded in the amount +of $1,345, which represented the difference between the exercise price and the +fair value of the stock on the date of grant, and was classified as a component +of stockholders' equity. Through December 31, 2003, the unearned compensation +was being amortized over the ten-year term of the amended agreement. During the +year ended December 31, 2004, the Company reevaluated its policy on amortizing +unearned compensation relating to the issuance of stock options. The Company +concluded that deferred compensation was to be amortized over the shorter of the +vesting period of the option or the term of the employment agreement. +Accordingly, the balance in unearned compensation was expensed, resulting in a +charge to operations of $512 in 2004. $128 was charged to operations for the +year ended December 31, 2003. +In connection with an amendment to the Chief Operating Officer's employment +agreement (the "COO Agreement") dated July 1, 2002, the Company issued 20,000 +restricted shares of its common stock, which vest quarterly through January 1, +2005. The market value of the stock on the date of grant was $18.74 per share. +Unearned compensation was recorded in the amount of $375 and is classified as a +component of stockholders' equity. The unearned compensation was amortized over +the vesting period of the stock. Accordingly, $150 and $225 were charged to +operations in 2004 and 2003, respectively. +Activity relating to stock options granted under the Company's plans and outside +the plans during the three years ended December 31, 2005 is as follows: +2005 2004 2003 +---------------------------- ---------------------------- ---------------------------- +Weighted Weighted Weighted +Average Average Average +Number of Exercise Number of Exercise Number of Exercise +Shares Price Shares Price Shares Price +------------ ------------ ------------ ------------ ------------ ------------ +Outstanding at January 1 2,513,000 $ 12.71 2,274,000 $ 11.35 2,345,000 $ 10.14 +Granted 319,000 17.89 380,000 17.84 403,000 17.81 +Exercised (1,422,000) 11.59 (129,000) 3.25 (443,000) 10.79 +Cancelled/Forfeited (110,000) 18.82 (12,000) 19.00 (31,000) 11.87 +------------ ------------ ------------ +Outstanding at December 31 1,300,000 14.68 2,513,000 12.71 2,274,000 11.35 +============ ============ ============ +Exercisable at December 31 1,280,000 14.63 2,272,000 12.93 1,885,000 10.33 +============ ============ ============ +F-15 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE D - STOCK OPTIONS (CONTINUED) +The following table summarizes information about stock options at December 31, +2005: +Options Outstanding Options Exercisable +--------------------------------------------------- ------------------------ +Weighted Average Weighted +Remaining Weighted Average +Number Contractual Life Average Number Exercise +Range of Exercise Price Outstanding (in Years) Exercise Price Exercisable Price +----------------------------- ------------- ------------------- -------------- ----------- -------- +under $3.35 320,000 1.5 $ 3.31 320,000 $ 3.31 +$5.50 to $12.00 37,000 3.1 7.07 37,000 7.07 +$17.42 to $18.75 354,000 8.9 17.96 334,000 17.98 +$18.98 to $20.98 589,000 7.0 19.35 589,000 19.35 +------------ ---------- +1,300,000 6.1 14.68 1,280,000 14.63 +============ ========== +The following table summarizes the amount of options authorized, the amount of +options granted (net of expired or cancelled options) and the amount of options +available for grant for each of the 1996 Plan, 1997 Plan and 1999 Plan: +1996 Plan 1997 Plan 1999 Plan +--------- --------- --------- +Options authorized 375,000 1,000,000 3,220,000 +Options granted net of +expired or cancelled 373,700 997,200 3,219,000 +--------- --------- --------- +Available for grant as of +December 31, 2005 1,300 2,800 1,000 +========= ========= ========= +In May 2003, the Company granted 100,000 options to Charles Koppelman, a +director, exercisable at $13.50 per share which vest over one year on a +quarterly basis. The difference between the market price of $19.00 per share and +the option exercise price was reflected as unearned compensation and was +amortized over the one-year vesting period. In May of 2004, pursuant to a +consulting agreement with this former director, the Company granted 100,000 +options exercisable at $13.50 per share which vest over one year on a quarterly +basis. The difference between the market price of $19.09 per share and the +option exercise price has been reflected as unearned compensation and was +amortized over the one-year vesting period. See note K(6) for a description of +the consulting agreement. +F-16 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE E - RESTRICTED STOCK AWARDS +Restricted stock awards have been granted to certain key executives in +management. These awards vested on various dates between January 2004 and +January 2006. Awards of 101,000 shares and 190,000 shares were granted in 2003 +and 2002, respectively. The average market price on the date of grant for awards +granted in 2003 and 2002 was $18.41 and $17.15, respectively. Restricted stock +compensation charged to expense was $418, $1,715 and $842 for 2005, 2004 and +2003, respectively. +In July 2004, the Company and several of its salesmen mutually agreed to replace +restricted stock awards due to vest in January 2006 with cash awards to be paid +on the vesting date. No shares had been issued under the original award. These +cash rewards retained the same characteristics as the original restricted stock +awards. The vesting date (i.e. the payment date) of the cash awards was the same +as the vesting date of the restricted stock, and the payment was contingent upon +the recipient still being employed with the Company on the vesting date. The +cash awards, which totaled $183, were charged to operations through December 31, +2005. The transaction resulted in a reduction of Paid in Capital equal to the +vested award. +In April of 2004, an employee of the Company received shares of the Company's +common stock pursuant to the vesting of his restricted stock award. These shares +were unregistered, and in August 2004 the Company agreed to purchase the shares +back from the employee for $378, which was equal to the value of the restricted +stock when originally issued. The transaction resulted in a reduction of Paid in +Capital equal to the vested award. +In April and October of 2002, two executives of the Company were granted +restricted stock awards pursuant to their employment agreements. The awards +vested on June 30, 2005 and were contingent on the employee's continuous +employment through the vesting date. Under the terms of the agreements, the +issuance of the shares of common stock required shareholder approval. At the +annual meeting of stockholders held on May 27 of 2005, the shareholders did not +approve the issuance of the shares. As stated in the Company's proxy statement, +the executives were paid $1,776 equal to the fair value of the restricted stock +when first granted. The transaction resulted in a reduction of Paid in Capital +equal to the vested award. +NOTE F - PREFERRED STOCK +The Company has authorized 5,000,000 shares of preferred stock. The Board of +Directors has designated 60,000 shares of such preferred stock as Series A +Junior Participating Preferred Stock ("Series A Preferred"). Holders of the +shares of Series A Preferred are entitled to dividends equal to 1,000 times +dividends declared or paid on the Company's common stock. Each share of Series A +preferred entitles the holder to 1,000 votes on all matters submitted to the +holders of common stock. The Series A Preferred has a liquidation preference of +$1,000 per share, and is not redeemable by the Company. No preferred shares have +been issued. +NOTE G - RIGHTS AGREEMENT +On October 30, 2001, the Company declared a dividend distribution of one +preferred stock purchase right (a "Right") for each outstanding share of common +stock. Each Right entitles the holder to purchase from the Company one +one-thousandth (1/1,000) of a share of Series A Preferred at a price of $75 per +one one-thousandth (1/1,000) of a share. Initially, the Rights will not be +exercisable and will automatically trade with the common stock. The Rights +become exercisable, in general, ten days following the announcement of a person +or group acquiring beneficial ownership of at least 15% of the outstanding +voting stock of the Company. +NOTE H - COMMON STOCK DIVIDEND +On November 1, 2005, the Board of Directors declared a special dividend of $1 +per share payable to Steven Madden, Ltd. shareholders of record at the close of +business on November 14, 2005. The dividend was paid on November 23, 2005. +F-17 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE I - OPERATING LEASES +The Company leases office, showroom and retail facilities under noncancelable +operating leases with terms expiring at various times through 2021. Future +minimum annual lease payments under noncancelable operating leases consist of +the following at December 31: +2006 $ 12,540 +2007 12,633 +2008 11,478 +2009 10,149 +2010 9,045 +Thereafter 28,466 +-------- +$ 84,311 +======== +A majority of the retail store leases provide for contingent rental payments if +gross sales exceed certain targets. In addition, many of the leases contain rent +escalation clauses to compensate for increases in operating costs and real +estate taxes. +Rent expense for the years ended December 31, 2005, 2004 and 2003 was +approximately $15,592, $13,520 and $12,340, respectively. Included in such +amounts are contingent rents of $182, $105 and $99 in 2005, 2004 and 2003, +respectively. +Rent expense is calculated by amortizing total rental payments (net of any +rental abatements, construction allowances and other rental concessions), on a +straight-line basis, over the lease term. Accordingly, rent expense charge to +operations differs from rent paid resulting in the Company recording deferred +rent. +NOTE J - INCOME TAXES +The income tax provision (benefit) consists of the following: +2005 2004 2003 +---------- ---------- ---------- +Current: +Federal $ 12,690 $ 6,422 $ 12,183 +State and local 4,260 2,484 4,660 +---------- ---------- ---------- +16,950 8,906 16,843 +---------- ---------- ---------- +Deferred: +Federal (2,241) (189) (1,648) +State and local (449) (38) (330) +---------- ---------- ---------- +(2,690) (227) (1,978) +---------- ---------- ---------- +$ 14,260 $ 8,679 $ 14,865 +========== ========== ========== +F-18 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE J - INCOME TAXES (CONTINUED) +A reconciliation between taxes computed at the federal statutory rate and the +effective tax rate is as follows: +December 31, +---------------------------------- +2005 2004 2003 +-------- -------- -------- +Income taxes at federal statutory rate 35.0% 35.0% 35.0% +State income taxes - net of federal income +tax benefit 7.4 7.6 8.3 +Nondeductible impairment charges 0.5 -- -- +Nondeductible items 0.3 0.1 0.1 +Other (0.6) (1.3) (1.3) +-------- -------- -------- +Effective rate 42.6% 41.4% 42.1% +======== ======== ======== +The Company applies the liability method of accounting for income taxes. Under +this method, deferred tax assets and liabilities are determined based on +differences between financial reporting and tax bases of assets and liabilities +and are measured using the enacted tax rates and laws that are expected to be in +effect when the differences are expected to reverse. +Realization of deferred tax assets depends on generating sufficient future +taxable income. Although realization is not assured, management believes it is +more likely than not that all of the deferred tax assets will be realized. The +amount of deferred tax assets considered realizable, however, could be reduced +in the near term if estimates of future taxable income are reduced. +The components of deferred tax assets and liabilities are as follows: +December 31, +----------------------- +2005 2004 +---------- ---------- +Current deferred tax assets: +Receivable allowances $ 3,537 $ 1,232 +Inventory 1,321 918 +Unrealized loss 316 286 +Other 426 62 +---------- ---------- +5,600 2,498 +---------- ---------- +Non-current deferred tax assets: +Depreciation 3,364 2,195 +Deferred compensation 609 2,253 +Deferred rent 971 878 +Unrealized loss 624 454 +---------- ---------- +5,568 5,780 +---------- ---------- +Deferred tax assets $ 11,168 $ 8,278 +========== ========== +F-19 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER +[1] Indictment: +On June 20, 2000, Steven Madden, the Company's former Chairman and +Chief Executive Officer, was indicted in the United States District +Courts for the Southern District and Eastern District of New York. The +indictments alleged that Mr. Madden engaged in securities fraud and +money laundering activities. In addition, the Securities and Exchange +Commission filed a complaint in the United States District Court for +the Eastern District of New York alleging that Mr. Madden violated +Section 17(a) of the Securities Exchange Act of 1934, as amended. On +May 21, 2001, Steven Madden entered into a plea agreement with the U.S. +Attorney's Office, pursuant to which he pled guilty to four of the +federal charges filed against him. In addition, Mr. Madden reached a +separate settlement agreement with the Securities and Exchange +Commission regarding the allegations contained in its complaint. As a +result, Mr. Madden resigned as the Company's Chief Executive Officer +and as a member of the Company's Board of Directors effective July 1, +2001. Mr. Madden has agreed to serve as the Company's Creative and +Design Chief, a non-executive position. On April 4, 2002, Mr. Madden +was sentenced in the United States District Court for the Southern +District of New York to forty-one (41) months' imprisonment in +connection with two of the federal charges to which he pled guilty. On +May 3, 2002, Mr. Madden was sentenced in the United States District +Court for the Eastern District of New York to forty-one (41) months' +imprisonment in connection with the remaining two charges to which he +pled guilty. The sentences ran concurrently. Under the settlement +agreement with the Securities and Exchange Commission, Mr. Madden has +agreed to not serve as an officer or director of a publicly traded +company for 7 years. Neither the indictments nor the Securities and +Exchange Commission complaint allege any wrongdoing by the Company or +its other officers and directors. Mr. Madden began serving his sentence +in September of 2002. On April 14, 2005, Mr. Madden was released from +federal prison and has returned to work at the Company as its Creative +and Design Chief, a non-executive position. +In December 2001, the Company purchased a loss mitigation policy to +cover costs arising out of lawsuits related to the June 2000 federal +indictment of Steven Madden described above. The policy covered the +Company's anticipated damages and legal costs in connection with such +lawsuits. The Company was obligated to pay for damages and costs in +excess of the policy limits. The cost of the policy was $6,950. On June +1, 2004, the aforementioned lawsuits were settled for damages and costs +that were below the policy limits. +[2] Other actions: +(a) On December 15, 2003, the Company commenced an action against +LaRue Distributors, Inc. ("LaRue") in the United States +District Court for the Southern District of New York. The +Company sought a declaratory judgment that the Company +properly terminated a license agreement with LaRue and +monetary damages for breach of the license agreement and +trademark infringement by LaRue. On January 20, 2004, LaRue +served an answer and counterclaim alleging that the license +agreement was improperly terminated by the Company and seeking +$9,900 in compensatory damages, as well as additional punitive +damages. The parties served cross-motions for summary judgment +which were submitted to the court on February 28, 2005. On +August 1, 2005, the parties agreed to a settlement pursuant to +which the Company paid LaRue $1,500 in full satisfaction of +any and all claims relating to this action. A Stipulation of +Dismissal, with prejudice, has been filed with the court and +the parties have exchanged general releases. +F-20 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED) +(b) On or about July 9, 2004, an action was filed in the United +States District Court for the Southern District of New York +against the Company by Robert Marc for trademark infringement, +captioned Robert Marc v. Steven Madden, Ltd. Case No. 04 CV +5354 (JGK). In the action, Robert Marc claimed trademark +infringement in connection with a "bar and dot" design on the +sides of certain eyewear. The alleged infringing eyeglasses +are manufactured and sold by the Company's licensee for +eyewear, Colors in Optics, which was also a defendant in the +action. Colors in Optics assumed responsibility for the +defense of this action. The matter was settled with no payment +of money by Steven Madden, Ltd. The case was dismissed on May +10, 2005. +(c) On or about December 20, 2004, an action was filed in the +United States District Court for the Central District of +California against the Company by Global Brand Marketing, Inc. +(GBMI) for patent infringement, captioned Global Brand +Marketing, Inc. v. Steven Madden, Ltd., Case No. CV 04-10339 +(RJK-AJW (RZx)). In the action, GBMI claimed infringement of a +design patent in connection with a shoe sold by Steven Madden, +Ltd. referred to as the "Ronan". The parties settled the +matter on or about April 5, 2005 and a dismissal was filed on +April 27, 2005. The settlement did not have a material effect +on the Company's financial position. +(d) On July 28, 2005, adidas America, Inc., and adidas-Salomon AG +(together, "adidas") filed a Demand for Arbitration (the +"Demand") against Steve Madden, Ltd., and Steve Madden Retail, +Inc. before the American Arbitration Association. In its +Demand, adidas alleged that the parties had previously been +engaged in a lawsuit over the Company's sale of sneakers that +allegedly infringed adidas' "three stripe" mark. The parties +settled that lawsuit by entering into a settlement agreement +dated August 4, 2003 that prohibited the Company from selling +shoes that contained adidas' "three-stripe" mark either with +one additional stripe or with one less stripe. adidas alleged +in the Demand that the Company was selling three shoes (the +Finnley, the Troyy, and the Soccet) that adidas contends +violate the settlement agreement and infringe adidas' +"three-stripe" mark. The parties were engaged in settlement +discussions for several months, but so far have been unable to +settle and the Company filed its answer to the Demand for +Arbitration on January 20th, 2006. The parties will be jointly +selecting a panel of arbitrators over the next few weeks, +while settlement discussions continue. No discovery demands +have been exchanged. The Company believes it has substantial +defenses to the claims asserted in the Demand for Arbitration. +(e) On August 10, 2005, the U.S. Customs Department ("Customs") +issued a report that asserts that certain commissions which +the Company treated as buying agents commissions (which is +non-dutiable), should be treated as "selling agents +commissions" and hence is dutiable. In the report, Customs +estimates that the Company had underpaid duties during the +calendar years of 1998 through 2004 in the amount of $1,051. +Based on management's estimation at this point, a reserve of +$1,051 has been recorded as of the December 31, 2005 Financial +Statements. Such reserve may in the future be modified to +reflect the status of this matter. +(f) On or about January 23, 2006, the Company and certain of its +executives were named as defendants in a lawsuit filed by +Jojeli, Inc. ("Jojeli") and Alan Rick Friedman in the United +States District Court for the Southern District of New York. +In their complaint, Jojeli and Mr. Friedman assert claims +arising from the Company's decision to terminate Jojeli's +services on or about November 28, 2005. Mr. Friedman, Jojeli's +principal, served as a senior salesperson for the Company, and +provided his services to the Company pursuant to an April 26, +2004 written agreement. In their complaint, Jojeli and Mr. +Friedman allege eight claims against the Company and/or four +of its executives, including breach of contract, violation of +the New York Labor Law, tortuous interference with contract, +civil conspiracy, defamation, and prima facie tort. They seek +damages on their various claims in differing amounts, ranging +from $500 to $5,000, and they also seek a declaration that +they are not bound by the restrictive covenant in the parties' +contract. The Company is still investigating the allegations +of the complaint and has not yet filed an answer or +F-21 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED) +any relief from the Court. The Company believes the claims to +be without merit and it intends to vigorously defend the +lawsuit. +(g) The Company has been named as a defendant in certain other +lawsuits in the normal course of business. In the opinion of +management, after consulting with legal counsel, the +liabilities, if any, resulting from these matters should not +have a material effect on the Company's financial position or +results of operations. It is the policy of management to +disclose the amount or range of reasonably possible losses in +excess of recorded amounts. +[3] Employment agreements: +Effective as of July 1, 2005, the Company amended its employment +agreement with Steven Madden, the Company's Creative and Design Chief. +The agreement provides for an annual salary of $600, subject to certain +specified adjustments, through June 30, 2015. The agreement also +provides for annual bonuses based on EBITDA and on revenue for any new +business, an annual option grant at exercise prices equal to the market +price on the date of grant and a non-accountable expense allowance. +Effective as of July 1, 2005, the Company entered into an employment +agreement with Awadhesh Sinha, pursuant to which Mr. Sinha will serve +as the Company's Chief Operating Officer. The initial term of the +agreement is three years through June 30, 2008, with successive +one-year automatic renewal terms. The agreement provides for an annual +salary of $425 with annual increases and performance bonuses. The +agreement requires the Company to accrue deferred cash compensation +equal to 25% of the annual salary, payable to Mr. Sinha at the end of +the term of the agreement. +Effective as of May 23, 2005, the Company amended its employment +agreement with Richard Olicker, the Company's President. The agreement +provided for an annual salary of $454 through December 31, 2005. The +agreement also provides for an annual performance bonus. Mr. Olicker +left the Company in conjunction with the expiration of his employment +agreement on December 31, 2005. +Effective January 1, 2006, the Company amended its employment agreement +with Jamieson Karson, the Company's Chief Executive Officer and +Chairman of the Board. The agreement provides for an annual salary of +$500,000 through December 31, 2008. The agreement also provides for an +annual bonus at the discretion of the Board of Directors. +Effective February 1, 2006, the Company amended its employment +agreement with Arvind Dharia, the Company's Chief Financial Officer. +The agreement provides for an annual salary of $425, with annual +increases through December 31, 2009. The agreement also provides for an +annual bonus at the discretion of the Board of Directors. +The Company has employment agreements with other executives (the +"executives") which expire between June 30, 2007 and December 31, 2009. +These agreements provide for cash bonuses based upon a percentage of +year-to-year increases in earnings before interest, taxes, depreciation +and amortization, option grants and non-accountable expense allowances +as defined. Base salary commitments for these executives are as +follows: +2006 $ 1,849 +2007 1,643 +2008 1,192 +2009 480 +------- +$ 5,164 +======= +F-22 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED) +In connection with their employment agreements, two executives received +an aggregate of 40,000 shares of restricted common stock from the +Company in 2002. The restricted shares vested equally each quarter over +the period of their employment agreements through December 2005. +Accordingly, the Company has recorded a charge to operations in the +amount of $104 and $254 for the 20,000 and 20,000 shares that vested +during the years ended December 31, 2005 and 2004, respectively. +Further, one executive received 100,000 stock options exercisable at +$19.00 per share, the market price on the date of grant. 20,000 of +these options vested on June 30, 2003 and the balance vested equally, +each quarter, through June 30, 2005. +In addition, the Company accrued aggregate cash obligations of +approximately $1,669 for bonuses under these agreements for the year +ended December 31, 2005. +[4] Letters of credit: +At December 31, 2005 and 2004, the Company had open letters of credit +for the purchase of imported merchandise of approximately $3,302 and +$9,808, respectively. +[5] Royalty agreements: +Pursuant to the Company's license agreement with Jones Investment +Company, Inc., the Company has the right to use the l.e.i. trademark in +connection with the sale and marketing of footwear. The agreement, +which expires on September 30, 2006, requires the Company to pay a +royalty equal to a percentage of net sales and a minimum royalty in the +event that specified net sales targets are not achieved. +On January 7, 2003, the Company entered into a long-term license +agreement with Seattle Pacific Industries, Inc., under which the +Company has the right to use the Unionbay trademark in connection with +the sale and marketing of footwear for men and boys. The initial term +of the agreement expires on December 31, 2006, with four 3-year renewal +terms, the last of which will expire on December 31, 2018. The +agreement requires the Company to make royalty and advertising payments +equal to a percentage of net sales and a minimum royalty and +advertising payment in the event that specified net sales targets are +not achieved. +On May 12, 2003, the Company entered into a long-term license agreement +with Candie's, Inc. to design, manufacture, and distribute Candie's +branded footwear for women and children worldwide. The initial term of +the agreement expires on December 31, 2009, with four 3-year renewal +terms, the last of which expires on December 31, 2021. The agreement +required the Company to make royalty and advertising payments equal to +a percentage of net sales of licensed products and a minimum royalty +and advertising payment in the event that specified net sales targets +are not achieved. On December 6, 2004, the agreement was amended to +reflect Candie's decision to name Kohl's Corporation the exclusive +provider of a new line of Candie's apparel. The amendment extended the +initial term of the agreement to December 31, 2010, and eliminated the +renewal term options. Pursuant to the amendment, commencing on January +1, 2007, the Company will no longer have the exclusive right to market +Candie's branded footwear and will be permitted to sell Candie's +branded footwear only to Kohl's. Under the terms of the amendment, +Candie's guarantees that the Company will achieve minimum sales levels +with Kohl's during the term of the agreement. In the event such minimum +sales levels are not achieved, Candie's is required to compensate the +Company in an amount based on a percentage of the sales shortfall. +Effective January 1, 2005, all royalty and advertising payments were +eliminated. As an inducement to execute the amendment, the Company is +required to pay Candie's a total of $3,000 payable in eight equal +quarterly installments beginning in February of 2005. +F-23 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED) +Royalty expenses are included in the "operating expenses" section of +the Company's Consolidated Statements of Income. Aggregate minimum +future royalties under these agreements are as follows: +Year Ending +December 31, +----------------- +2006 $ 2,318 +2007 375 +----------- +$ 2,693 +=========== +[6] Related Party Transactions: +In January 2004, the Company entered into an agreement with JLM +Consultants, a company wholly-owned by John Madden, one of the +Company's directors. Under this agreement, Mr. Madden provided +consulting services with respect to the development of international +sales of the Company. Pursuant to this agreement, JLM Consultants +received a fee and expenses of $352 and $252 in 2005 and 2004 +respectively, in addition to fees Mr. Madden received for service to +the Company as a director. +In July 2001, the Company entered into a consulting agreement with +Peter J. Solomon & Company, a financial advisory firm of which Marc +Cooper, one of the Company's directors, is a managing director. Under +this agreement, the firm provided financial advisory and investment +banking services to the Company. This agreement was amended in March +2004. Pursuant to this agreement, the Company paid fees and expenses to +Peter J. Solomon & Company of $66, $161 and $33 for 2005, 2004 and 2003 +respectively. +In July 2004, the Company entered into a consulting agreement with +Charles Koppelman, who served as a director of the Company from June +1998 through May 2004 and as Chairman of the Board from July 2001 +through May 2004. Under this agreement, Mr. Koppelman provided +consulting services that included enhancing and promoting the Company's +brands and seeking licensing and acquisition opportunities. Pursuant to +this agreement, Mr. Koppelman received 100,000 options and a fee of $90 +and $105 in 2005 and 2004 respectively. See Note D for a description of +the options. This agreement expired on June 30, 2005. +In October 2002, the Company entered into an arrangement with Jeff +Birnbaum, one of the Company's directors. Under this arrangement, Mr. +Birnbaum provided consulting services with respect to the designing and +manufacturing of shoes and general consulting services to the Company. +Pursuant to this arrangement, Mr. Birnbaum received a fee of $200 and +$250 in 2005 and 2004 respectively, in addition to fees received for +service to the Company as a director. Mr. Birnbaum has been a one-third +stockholder and the Product Development Manager of Dolphin Shoe Company +since August 1982. Dolphin Shoe Company is one of the Company's +domestic suppliers. In addition, Jeff Birnbaum's brother, Steven +Birnbaum owned a trading company, Bulls Eye Trading ("Bullseye") that +acted as a selling agent for the Company. Dolphin Shoe acquired +Bullseye in 2005. Jeff Birnbaum did not own an interest in Bullseye nor +was he a director of Bullseye nor did Bullseye pay him any +compensation. +The Madden Mens division of the Company purchases a significant amount +of shoes from La Tandem International, Inc. Mr. James Chen, the brother +of Harry Chen, is the President of La Tandem International, Inc., and +La Tandem International, Inc. is owned or controlled by members of the +Chen family. Harry Chen was the chairman and lead designer of the +Madden Mens Division of the Company until June 30, 2005. +F-24 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED) +[7] Concentrations: +The Company maintains cash and cash equivalents with various major +financial institutions which at times are in excess of the amount +insured. In addition, the Company's marketable securities and a money +account are principally held at one brokerage company. +During the year ended December 31, 2005, the Company purchased +approximately 21% and 12% of its merchandise from two suppliers in +China, respectively. Total inventory purchases for the year ended +December 31, 2005 from China was approximately 82%. +During the year ended December 31, 2004, the Company purchased +approximately 25% of its merchandise from a supplier in Brazil and 17% +and 10% of its merchandise from two suppliers in China, respectively. +Total inventory purchases for the year ended December 31, 2004 from +Brazil and China were approximately 26% and 41%, respectively. +During the year ended December 31, 2003, the Company purchased +approximately 13% of its merchandise from a supplier in Brazil. Total +inventory purchases for the year ended December 31, 2003 from Brazil +were approximately 19%. The Company also purchased inventory during the +year ended December 31, 2003 from two vendors in China totaling +approximately 32%. +Sales to one customer accounted for 19% of total net sales for the year +ended December 31, 2005. This customer represented 24% of accounts +receivable at December 31, 2005. +Sales to two customers accounted for 10% and 9% of total net sales for +the year ended December 31, 2004. These customers each represented 13% +of accounts receivable at December 31, 2004. +Sales to two customers accounted for 10% and 11% of total net sales for +the year ended December 31, 2003. These customers each represented 17% +of accounts receivable at December 31, 2003. +Sales to such customers are included in the wholesale segment (see Note +M). Purchases are made primarily in United States dollars. +[8] Valuation and qualifying accounts: +The following is a summary of the allowance for doubtful accounts +related to accounts receivable and the allowance for chargebacks +related to the amount Due from Factor for the years ended December 31: +2005 2004 2003 +---------- ---------- ---------- +Balance at beginning of year $ 2,915 $ 2,378 $ 2,215 +Charged to expense 5,485 537 163 +Uncollectible accounts written off, net of recoveries -- -- -- +---------- ---------- ---------- +Balance at end of year $ 8,400 $ 2,915 $ 2,378 +========== ========== ========== +The following is a summary of the reserve for slow moving inventory for +the years ended December 31: +2005 2004 2003 +---------- ---------- ---------- +Balance at beginning of year $ 608 $ 663 $ 877 +Charged to reserve -- 55 214 +Increase to the reserve 535 -- -- +---------- ---------- ---------- +Balance at end of year $ 1,143 $ 608 $ 663 +========== ========== ========== +F-25 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED) +The following is a summary of cost in excess of fair value of net +assets acquired and the related accumulated amortization for the years +ended December 31: +2005 2004 2003 +---------- ---------- ---------- +Cost basis +Balance at beginning and end of year $ 2,780 $ 2,780 $ 2,780 +Write-off of impaired assets (635) 0 0 +---------- ---------- ---------- +Balance at end of year 2,145 2,780 2,780 +---------- ---------- ---------- +Accumulated amortization +Balance at beginning of year 714 714 714 +Write-off of impaired assets (116) 0 0 +---------- ---------- ---------- +Balance at end of year 598 714 714 +---------- ---------- ---------- +Cost in excess of fair value of net assets acquired $ 1,547 $ 2,066 $ 2,066 +========== ========== ========== +[9] Other: +Pursuant to an agreement reached on February 2, 2005 with an 8% +shareholder, the Company has agreed to commit $25 million during the +twelve months ended January 31, 2006 and $10 million during the twelve +months ended January 31, 2007 to a combination of share repurchases +and/or dividends, such programs to be implemented at such time and such +manner as the board of directors shall determine in its sole +discretion. As of March 6, 2006, the Company has repurchased 501 shares +for $10,503 and has paid dividends of $13,814. +NOTE L - SUBSEQUENT EVENT +On February 7, 2006, the Company acquired all of the equity interest of +privately held Daniel M. Friedman and Associates, Inc. Founded in 1995, Daniel +M. Friedman is a manufacturer and distributor of name fashion handbags and +accessories. The acquisition was completed for $18,000 in cash and includes +certain earn out provisions based on financial performance through 2010. In +October of 1998, the Company entered into a license agreement with Daniel M. +Friedman for the design, manufacture and distribution of women's belts in the +United States and Canada. This agreement expired on June 30, 2005. On July 14, +2005, the Company entered into a new license agreement with Daniel M. Friedman +for the design, manufacture and distribution of handbags, women's belts, wallets +and other small leather goods. +NOTE M - OPERATING SEGMENT INFORMATION +The Company's reportable segments are primarily based on methods used to +distribute its products. The wholesale and retail segments derive revenue from +sales of women's, men's, girl's and children's footwear. The wholesale segment, +through sales to department and specialty stores, and the retail segment, +through our operation of retail stores and our website, derive revenue from +sales of branded women's, men's, girl's and children's footwear. In addition, +the wholesale segment has a licensing program that extends the Steve Madden and +Stevies brands to accessories and ready-to-wear apparel. The other segment +represents activities of a subsidiary which earns commissions for serving as a +buying agent to mass-market merchandisers, shoe chains and other off-price +retailers with respect to their purchase of private label shoes. +F-26 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE M - OPERATING SEGMENT INFORMATION (CONTINUED) +The accounting policies of the segments are the same as those described in the +summary of significant accounting policies. The Company evaluates performance +based on profit or loss from operations before other income (expense) and the +provision for income taxes. The following is information for the Company's +reportable segments: +Wholesale Retail Private label Consolidated +-------------- -------------- -------------- -------------- +Year ended December 31, 2005: +Net sales to external customers (a) $ 254,275 $ 121,511 $ 375,786 +Gross profit 82,328 60,172 142,500 +Commissions and licensing fees - net 2,286 $ 4,833 7,119 +Income from operations 21,311 5,426 4,833 31,570 +Depreciation and amortization 1,361 3,750 9 5,120 +Loss on disposal of fixed assets 535 535 +Other significant items: +Deferred compensation 703 703 +Deferred rent expense 281 391 (3) 669 +Provision for doubtful accounts 5,485 5,485 +Segment assets (b) 171,316 38,576 1,836 211,728 +Capital expenditures 1,011 4,366 5,377 +Year ended December 31, 2004: +Net sales to external customers (a) $ 230,347 $ 107,797 $ 338,144 +Gross profit 66,749 55,920 122,669 +Commissions and licensing fees - net 2,310 $ 2,278 4,588 +Income from operations 8,272 8,431 2,278 18,981 +Depreciation and amortization 1,442 3,416 7 4,865 +Loss on disposal of fixed assets 198 198 +Other significant items: +Deferred compensation 2,782 2,782 +Deferred rent expense (reversal) 192 68 260 +Provision for doubtful accounts 537 537 +Segment assets (b) 135,362 44,048 891 180,301 +Capital expenditures 1,965 5,414 8 7,387 +Year ended December 31, 2003: +Net sales to external customers (a) $ 228,686 $ 95,518 $ 324,204 +Gross profit 75,167 50,852 126,019 +Commissions and licensing fees - net 2,838 $ 2,904 5,742 +Income from operations 21,589 9,133 2,904 33,626 +Depreciation and amortization 1,136 3,604 3 4,743 +Other significant items: +Deferred compensation 2,877 2,877 +Deferred rent expense (reversal) 33 262 1 296 +Provision for doubtful accounts 163 163 +Segment assets (b) 139,625 37,828 417 177,870 +Capital expenditures 2,667 3,394 6,061 +(a) Attributed to the United States, based on the location in which the sale +originated. +(b) All long-lived assets, consisting of property and equipment and cost in +excess of fair value of net assets acquired, are located in the United +States. +F-27 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2005 and 2004 +($ in thousands except per share data) +NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) +The following is a summary of the quarterly results of operations for the years +ended December 31, 2005 and 2004: +March 31, June 30, September 30, December 31, +-------------- -------------- -------------- -------------- +2005: +Wholesale, net $ 56,861 $ 68,331 $ 71,018 $ 58,065 +Retail, net 26,475 32,627 29,049 33,360 +-------------- -------------- -------------- -------------- +Net sales 83,336 100,958 100,067 91,425 +Cost of sales 55,018 62,448 63,836 51,984 +-------------- -------------- -------------- -------------- +Gross profit 28,318 38,510 36,231 39,441 +Commissions and licensing fee income - net 1,225 1,799 2,217 1,878 +Net income 962 5,286 5,513 7,439 +Net income per share: +Basic 0.07 0.40 0.41 0.54 +Diluted 0.07 0.39 0.39 0.51 +2004: +Wholesale, net $ 55,067 $ 59,804 $ 64,851 $ 50,625 +Retail, net 23,701 26,430 23,759 33,907 +-------------- -------------- -------------- -------------- +Net sales 78,768 86,234 88,610 84,532 +Cost of sales 47,496 53,522 57,160 57,297 +-------------- -------------- -------------- -------------- +Gross profit 31,272 32,712 31,450 27,235 +Commissions and licensing fee income - net 834 1,215 1,175 1,364 +Net income 4,126 4,090 3,686 373 +Net income per share: +Basic 0.31 0.31 0.28 0.03 +Diluted 0.29 0.28 0.26 0.03 +F-28 +(b) Exhibits. +3.01 Certificate of Incorporation of the Company (incorporated by reference +to Exhibit 1 to the Company's Current Report on Form 8-K filed with the +Commission on November 23, 1998). +3.02 Amended & Restated By-Laws of the Company (incorporated by reference to +Exhibit 3.02 to the Company's Annual Report on Form 10-K for its fiscal +year ended December 31. 2001). +4.01 Specimen Certificate for shares of Common Stock (incorporated by +reference to Exhibit 4.01 to the Company's Registration Statement on +Form SB-2/A filed with the Commission on September 29, 1993 (File No. +033-67162)). +4.02 Rights Agreement between the Company and American Stock Transfer and +Trust Company (incorporated by reference to Exhibit 4.1 to the +Company's Current Report on Form 8-K filed with the Commission on +November 16, 2001). +10.01 Third Amended Employment Agreement between the Company and Steven +Madden (incorporated by reference to Exhibit 10.1 to the Company's +Current Report on Form 8-K filed with the Commission on July 20, 2005). +10.02 Employment Agreement of Jamieson Karson (incorporated by reference to +Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the +Commission on January 6, 2006). +10.03 Employment Agreement of Arvind Dharia (incorporated by reference to +Exhibit 10.07 to the Company's Annual Report on Form 10-K for its +fiscal year ending December 31, 2000). +10.04 Amendment No. 1 to Employment Agreement of Arvind Dharia (incorporated +by reference to Exhibit 99.4 to the Company's Quarterly Report on Form +10-Q for its fiscal quarter ending June 30, 2001). +10.05 Amendment No. 2 to Employment Agreement of Arvind Dharia (incorporated +by reference to Exhibit 10.16 to the Company's Quarterly Report on Form +10-Q for its fiscal quarter ending September 30, 2002). +10.06 Amendment No. 3 to Employment Agreement of Arvind Dharia (incorporated +by reference to Exhibit 10.1 to the Company's Current Report on Form +8-K filed with the Commission on February 3, 2006). +10.07 Amendment No. 2 to Employment Agreement of Richard Olicker +(incorporated by reference to Exhibit 10.1 to the Company's Current +Report on Form 8-K filed with the Commission on June 16, 2005). +10.08 Employment Agreement between the Company and Awadhesh Sinha, dated as +of June 15, 2005 (incorporated by reference to Exhibit 10.1 to the +Company's Current Report on Form 8-K filed with the Commission on June +21, 2005). +10.09 Consulting Agreement, effective as of August 1, 2004, between the +Company, John Madden and J.L.M. Consultants Inc. +10.10 Amendment No. 1 to Consulting Agreement, dated as of March 10, 2005, +between the Company, John Madden and J.L.M. Consultants Inc. +10.11 Amendment No. 2 to Consulting Agreement, dated as of April 14, 2005, +between the Company, John Madden and J.L.M. Consultants Inc. +10.12 Employment Agreement with Robert Schmertz dated March 11, 2005 +(incorporated by reference to Exhibit 10.1 to the Company's Quarterly +Report on Form 10-Q for its fiscal quarter ending March 31, 2005). +10.13 Employment Agreement with Andrew Shames dated March 8, 2004 +(incorporated by reference to Exhibit 10.2 to the Company's Quarterly +Report on Form 10-Q for its fiscal quarter ending March 31, 2005). +10.14 Commission Agreement between the Company and Hev Sales, Inc. dated +March 8, 2004 (incorporated by reference to Exhibit 10.3 to the +Company's Quarterly Report on Form 10-Q for its fiscal quarter ending +March 31, 2005). +10.15 Employment Agreement between the Company, Adesso Madden, Inc. and +Joseph Masella and T.J.M. Sales Corporation dated May 7, 2002 +(incorporated by reference to Exhibit 10.4 to the Company's Quarterly +Report on Form 10-Q for its fiscal quarter ending March 31, 2005). +10.16 Amendment No. 1 to Employment Agreement between the Company, Adesso +Madden, Inc. and Joseph Masella and T.J.M. Sales Corporation dated +September 2, 2002 (incorporated by reference to Exhibit 10.5 to the +Company's Quarterly Report on Form 10-Q for its fiscal quarter ending +March 31, 2005). +10.17 Amendment No. 2 to Employment Agreement between the Company, Adesso +Madden, Inc. and Joseph Masella and T.J.M. Sales Corporation dated +September 27, 2002 (incorporated by reference to Exhibit 10.6 to the +Company's Quarterly Report on Form 10-Q for its fiscal quarter ending +March 31, 2005). +10.18 Employment Agreement between Adesso-Madden, Inc. and Gerald Mongeluzo +(incorporated by reference to Exhibit 99.5 to the Company's Quarterly +Report on Form 10-Q for its fiscal quarter ending June 30, 2001). +10.19 Employment Agreement between Steven Madden Retail, Inc. and Mark +Jankowski (incorporated by reference to Exhibit 99.6 to the Company's +Quarterly Report on Form 10-Q for its fiscal quarter ending June 30, +2001). +10.20 Settlement Agreement, dated February 2, 2005, among Barington Companies +Equity Partners, L.P., Barington Companies Investors, LLC, James +Mitarotonda, Barington Companies Offshore Fund, Ltd., Barington +Companies Advisors, LLC, Barington Capital Group, L.P., LNA Capital +Corp., Parche, LLC, Starboard Value & Opportunity Fund, LLC, Admiral +Advisors, LLC, Ramius Capital Group, LC, C4S & Co., LLC, Peter A. +Cohen, Morgan B. Stark, Jeffrey M. Solomon, Thomas W. Strauss, RJG +Capital Partners, LP, RJG Capital Management, LLC, Ronald Gross and +Steven Madden, Ltd. (incorporated by reference to Exhibit 99.1 to the +Company's Current Report on Form 8-K filed with the Commission on +February 2, 2005). +10.21 Stock Purchase Agreement, dated as of February 7, 2006, by and between +the Company and Daniel M. Friedman (incorporated by reference to +Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the +Commission on February 13, 2006). +10.22 Earn-Out Agreement, dated as of February 7, 2006, by and among the +Company, Daniel M. Friedman, Daniel M. Friedman & Associates, Inc. and +DMF International, Ltd. (incorporated by reference to Exhibit 10.2 to +the Company's Current Report on Form 8-K filed with the Commission on +February 13, 2006). +10.24 1996 Stock Plan, approved and adopted on March 6, 1996 (incorporated by +reference to Exhibit 10.27 to the Company's Registration Statement on +Form S-8 filed with the Commission on November 3, 1997). +10.25 The 1997 Stock Plan, approved and adopted on May 10, 1997 (incorporated +by reference to Exhibit 10.28 to the Company's Registration Statement +on Form S-8 filed with the Commission on November 3, 1997). +10.27 The 1998 Stock Plan, approved and adopted on January 16, 1998 +(incorporated by reference to Exhibit 10.2 to the Company's +Registration Statement on Form S-8 filed with the Commission on July +28, 1998). +10.28 The 1999 Stock Plan, approved and adopted on March 15, 1999, amended as +of March 20, 2000 and March 30, 2001 (incorporated by reference to +Exhibit 10.A to the Company's Registration Statement on Form S-8 filed +with the Commission on July 26, 2004). +21.01 Subsidiaries of Registrant +23.01 Consent of Eisner LLP +24.01 Power of Attorney (included on signature page hereto). +SIGNATURE +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. +Dated: New York, New York +March 14, 2006 +STEVEN MADDEN, LTD. +By: /s/ JAMIESON A. KARSON +------------------------------------ +Jamieson Karson +Chairman and Chief Executive Officer +KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears +below constitutes and appoints Jamieson A. Karson and Arvind Dharia, and each of +them, as his true and lawful attorneys-in-fact and agents, with full power of +substitution and re-substitution, for him in any and all capacities, to sign any +and all amendments to this Annual Report on Form 10-K and to file the same, with +all exhibits thereto, and other documents in connection therewith, with the +Securities and Exchange Commission hereby ratifying and confirming that each of +said attorneys-in-fact and agents, or his substitute or substitutes, may +lawfully do or cause to be done by virtue hereof. +Pursuant to the requirements of the Securities Exchange Act of 1934, this +report has been signed below by the following persons on behalf of the +registrant in the capacities and on the dates indicated. +Signature Title Date +---------------------------- ---------------------------- ------------- +/s/ JAMIESON A. KARSON Chairman and Chief Executive March 8, 2006 +---------------------------- Officer +Jamieson Karson +/s/ ARVIND DHARIA Chief Financial Officer March 8, 2006 +---------------------------- +Arvind Dharia +/s/ JEFFREY BIRNBAUM Director March 8, 2006 +---------------------------- +Jeffrey Birnbaum +/s/ MARC COOPER Director March 8, 2006 +---------------------------- +Marc Cooper +/s/ JOHN L. MADDEN Director March 8, 2006 +---------------------------- +John L. Madden +/s/ HAROLD KAHN Director March 8, 2006 +---------------------------- +Harold Kahn +/s/ PETER MIGLIORINI Director March 8, 2006 +---------------------------- +Peter Migliorini +/s/ THOMAS H. SCHWARTZ Director March 8, 2006 +---------------------------- +Thomas H. Schwartz +/s/ WALTER YETNIKOFF Director March 8, 2006 +---------------------------- +Walter Yetnikoff +STEVEN MADDEN, LTD. +FORM 10-K +EXHIBIT INDEX +3.01 Certificate of Incorporation of the Company (incorporated by reference +to Exhibit 1 to the Company's Current Report on Form 8-K filed with the +Commission on November 23, 1998). +3.02 Amended & Restated By-Laws of the Company (incorporated by reference to +Exhibit 3.02 to the Company's Annual Report on Form 10-K for its fiscal +year ended December 31. 2001). +4.01 Specimen Certificate for shares of Common Stock (incorporated by +reference to Exhibit 4.01 to the Company's Registration Statement on +Form SB-2/A filed with the Commission on September 29, 1993 (File No. +033-67162)). +4.02 Rights Agreement between the Company and American Stock Transfer and +Trust Company (incorporated by reference to Exhibit 4.1 to the +Company's Current Report on Form 8-K filed with the Commission on +November 16, 2001). +10.01 Third Amended Employment Agreement between the Company and Steven +Madden (incorporated by reference to Exhibit 10.1 to the Company's +Current Report on Form 8-K filed with the Commission on July 20, 2005). +10.02 Employment Agreement of Jamieson Karson (incorporated by reference to +Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the +Commission on January 6, 2006). +10.03 Employment Agreement of Arvind Dharia (incorporated by reference to +Exhibit 10.07 to the Company's Annual Report on Form 10-K for its +fiscal year ending December 31, 2000). +10.04 Amendment No. 1 to Employment Agreement of Arvind Dharia (incorporated +by reference to Exhibit 99.4 to the Company's Quarterly Report on Form +10-Q for its fiscal quarter ending June 30, 2001). +10.05 Amendment No. 2 to Employment Agreement of Arvind Dharia (incorporated +by reference to Exhibit 10.16 to the Company's Quarterly Report on Form +10-Q for its fiscal quarter ending September 30, 2002). +10.06 Amendment No. 3 to Employment Agreement of Arvind Dharia (incorporated +by reference to Exhibit 10.1 to the Company's Current Report on Form +8-K filed with the Commission on February 3, 2006). +10.07 Amendment No. 2 to Employment Agreement of Richard Olicker +(incorporated by reference to Exhibit 10.1 to the Company's Current +Report on Form 8-K filed with the Commission on June 16, 2005). +10.08 Employment Agreement between the Company and Awadhesh Sinha, dated as +of June 15, 2005 (incorporated by reference to Exhibit 10.1 to the +Company's Current Report on Form 8-K filed with the Commission on June +21, 2005). +10.09 Consulting Agreement, effective as of August 1, 2004, between the +Company, John Madden and J.L.M. Consultants Inc. +10.10 Amendment No. 1 to Consulting Agreement, dated as of March 10, 2005, +between the Company, John Madden and J.L.M. Consultants Inc. +10.11 Amendment No. 2 to Consulting Agreement, dated as of April 14, 2005, +between the Company, John Madden and J.L.M. Consultants Inc. +10.12 Employment Agreement with Robert Schmertz dated March 11, 2005 +(incorporated by reference to Exhibit 10.1 to the Company's Quarterly +Report on Form 10-Q for its fiscal quarter ending March 31, 2005). +10.13 Employment Agreement with Andrew Shames dated March 8, 2004 +(incorporated by reference to Exhibit 10.2 to the Company's Quarterly +Report on Form 10-Q for its fiscal quarter ending March 31, 2005). +10.14 Commission Agreement between the Company and Hev Sales, Inc. dated +March 8, 2004 (incorporated by reference to Exhibit 10.3 to the +Company's Quarterly Report on Form 10-Q for its fiscal quarter ending +March 31, 2005). +10.15 Employment Agreement between the Company, Adesso Madden, Inc. and +Joseph Masella and T.J.M. Sales Corporation dated May 7, 2002 +(incorporated by reference to Exhibit 10.4 to the Company's Quarterly +Report on Form 10-Q for its fiscal quarter ending March 31, 2005). +10.16 Amendment No. 1 to Employment Agreement between the Company, Adesso +Madden, Inc. and Joseph Masella and T.J.M. Sales Corporation dated +September 2, 2002 (incorporated by reference to Exhibit 10.5 to the +Company's Quarterly Report on Form 10-Q for its fiscal quarter ending +March 31, 2005). +10.17 Amendment No. 2 to Employment Agreement between the Company, Adesso +Madden, Inc. and Joseph Masella and T.J.M. Sales Corporation dated +September 27, 2002 (incorporated by reference to Exhibit 10.6 to the +Company's Quarterly Report on Form 10-Q for its fiscal quarter ending +March 31, 2005). +10.18 Employment Agreement between Adesso-Madden, Inc. and Gerald Mongeluzo +(incorporated by reference to Exhibit 99.5 to the Company's Quarterly +Report on Form 10-Q for its fiscal quarter ending June 30, 2001). +10.19 Employment Agreement between Steven Madden Retail, Inc. and Mark +Jankowski (incorporated by reference to Exhibit 99.6 to the Company's +Quarterly Report on Form 10-Q for its fiscal quarter ending June 30, +2001). +10.20 Settlement Agreement, dated February 2, 2005, among Barington Companies +Equity Partners, L.P., Barington Companies Investors, LLC, James +Mitarotonda, Barington Companies Offshore Fund, Ltd., Barington +Companies Advisors, LLC, Barington Capital Group, L.P., LNA Capital +Corp., Parche, LLC, Starboard Value & Opportunity Fund, LLC, Admiral +Advisors, LLC, Ramius Capital Group, LC, C4S & Co., LLC, Peter A. +Cohen, Morgan B. Stark, Jeffrey M. Solomon, Thomas W. Strauss, RJG +Capital Partners, LP, RJG Capital Management, LLC, Ronald Gross and +Steven Madden, Ltd. (incorporated by reference to Exhibit 99.1 to the +Company's Current Report on Form 8-K filed with the Commission on +February 2, 2005). +10.21 Stock Purchase Agreement, dated as of February 7, 2006, by and between +the Company and Daniel M. Friedman (incorporated by reference to +Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the +Commission on February 13, 2006). +10.22 Earn-Out Agreement, dated as of February 7, 2006, by and among the +Company, Daniel M. Friedman, Daniel M. Friedman & Associates, Inc. and +DMF International, Ltd. (incorporated by reference to Exhibit 10.2 to +the Company's Current Report on Form 8-K filed with the Commission on +February 13, 2006). +10.24 1996 Stock Plan, approved and adopted on March 6, 1996 (incorporated by +reference to Exhibit 10.27 to the Company's Registration Statement on +Form S-8 filed with the Commission on November 3, 1997). +10.25 The 1997 Stock Plan, approved and adopted on May 10, 1997 (incorporated +by reference to Exhibit 10.28 to the Company's Registration Statement +on Form S-8 filed with the Commission on November 3, 1997). +10.27 The 1998 Stock Plan, approved and adopted on January 16, 1998 +(incorporated by reference to Exhibit 10.2 to the Company's +Registration Statement on Form S-8 filed with the Commission on July +28, 1998). +10.28 The 1999 Stock Plan, approved and adopted on March 15, 1999, amended as +of March 20, 2000 and March 30, 2001 (incorporated by reference to +Exhibit 10.A to the Company's Registration Statement on Form S-8 filed +with the Commission on July 26, 2004). +21.01 Subsidiaries of Registrant +23.01 Consent of Eisner LLP +24.01 Power of Attorney (included on signature page hereto). \ No newline at end of file diff --git a/raw/filings/0000913241/2005/0001019056-06-000265/filing_metadata.csv b/raw/filings/0000913241/2005/0001019056-06-000265/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..fb5debaaa44ed1775a9b23d48759fca7deed7865 --- /dev/null +++ b/raw/filings/0000913241/2005/0001019056-06-000265/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000913241,SHOO,"STEVEN MADDEN, LTD.",10-K,2006-03-14,2005-12-31,2006-03-14T20:36:05.000Z,0001019056-06-000265,smadden_k2005.txt,FORM 10-K,2261354,0,0,https://www.sec.gov/Archives/edgar/data/913241/000101905606000265/smadden_k2005.txt,https://www.sec.gov/Archives/edgar/data/913241/000101905606000265/,2005,2005,1 diff --git a/raw/filings/0000913241/2005/0001019056-06-000265/item1.txt b/raw/filings/0000913241/2005/0001019056-06-000265/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..e32ae781c8e9f6706908133f2952b0481c4cfa0b --- /dev/null +++ b/raw/filings/0000913241/2005/0001019056-06-000265/item1.txt @@ -0,0 +1,555 @@ +ITEM 1 BUSINESS +Steven Madden, Ltd. (together with its subsidiaries, the "Company") +designs, sources, markets and sells fashion-forward footwear for women, men and +children. The Company distributes products through its retail stores, its +e-commerce website, department and specialty stores throughout the United States +and Canada and through special distribution arrangements in Europe, Central and +South America, Australia and Indonesia. The Company's product line includes core +products, which are sold year-round, complemented by a broad range of updated +styles which are designed to establish or capitalize on market trends. +The Company's business is comprised of three (3) distinct segments +(wholesale, retail and private label). The wholesale division includes eight (8) +brands: Steve Madden(R), Steven(R), l.e.i.(R), Candie's(R), Stevies(R), +SMNY(TM), Unionbay(R) and Steve Madden Mens. Steven Madden Retail, Inc., the +Company's wholly-owned retail subsidiary, operates Steve Madden, Steven and Shoe +Biz retail stores as well as the Company's outlet stores and e-commerce website. +The Company is planning on closing the Shoe Biz store in July of 2006. The +Company's wholly-owned private label subsidiary, Adesso-Madden, Inc., designs +and sources footwear products under private labels for many of the country's +large mass merchandisers. The Company also licenses its Steve Madden(R) +trademark for several accessory and apparel categories. +Steven Madden, Ltd. was incorporated as a New York corporation on July +9, 1990 and reincorporated under the same name in Delaware in November 1998. The +Company has established a reputation for its creative designs, popular styles +and quality products at accessible price points. The Company completed its +initial public offering in December 1993 and its shares of Common Stock +currently trade on The NASDAQ National Market under the symbol "SHOO". +The Company maintains its principal executive offices at 52-16 Barnett +Avenue, Long Island City, NY 11104, telephone number (718) 446-1800. +The Company's website is http://www.stevemadden.com. The Company makes +available free of charge on its website its Annual Reports on Form 10-K, +Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, any amendments to +such reports filed or furnished pursuant to Section 13(a) or 15(d) of the +Securities Exchange Act of 1934, as amended (the "Exchange Act") and our Proxy +Statement for our Annual Meeting as soon as reasonably practicable after such +material is electronically filed with, or furnished to, the Securities and +Exchange Commission (the "Commission"). The Company will provide paper copies of +such filings free of charge upon request. +Wholesale Divisions +Madden Women's Wholesale Division +The Steve Madden(R) Women's Wholesale Division ("Madden Women's") +designs, produces, sources, sells and markets the Company's Steve Madden(R) +brand to major department stores, better specialty stores and shoe stores +throughout the United States. The Steve Madden(R) product line has become a +leading footwear brand in the fashion conscious junior marketplace. To serve its +customers (primarily women ages 16 to 25), Madden Women's creates and markets +fashion forward footwear designed to appeal to customers seeking exciting, new +footwear designs at affordable prices. +As the Company's largest division, Madden Women's accounted for +$120,333,000 of net sales in the year ended December 31, 2005, or approximately +32% of the Company's total net sales. Many newly created styles for Madden +Women's are test marketed at the Company's retail stores. Within a few days, the +Company can determine if the test product appeals to customers. This enables the +Company to use its flexible sourcing model to rapidly respond to changing +preferences which the Company believes is essential for success in the fashion +footwear marketplace. +l.e.i.(R) - Wholesale Division +Pursuant to the Company's license agreement with Jones Investment +Company, Inc., the Company has the right to use the l.e.i.(R) trademark in +connection with the sale and marketing of footwear through September 30, 2006. +The l.e.i.(R) trademark is well known in the junior marketplace for jeans wear +and is sold nationally through department and specialty stores. The Company's +l.e.i.(R) footwear products are targeted to attract girls and young women ages 6 +to 20 years old, a majority of which are younger than the typical Steve +Madden(R) brand customer. The l.e.i. Wholesale Division ("l.e.i.") generated net +sales of $30,286,000 for the year ended December 31, 2005, or approximately 8% +of the Company's total net sales. +Madden Mens Wholesale Division +The Steve Madden Mens Wholesale Division ("Madden Mens ") designs, +produces, sources, sells and markets a full collection of directional young +men's shoes through major department stores, better specialty stores and +independent shoe stores throughout the United States. Price points range from +$70 to $100 at retail, targeted at men ages 18 to 44 years old. Madden Mens +accounted for $54,611,000 of net sales in the year ended December 31, 2005, or +approximately 15% of the Company's total net sales. Madden Mens, which is +primarily produced in China, maintains open stock inventory positions in select +patterns to serve the replenishment programs of its wholesale customers. +Candie's Wholesale Division +Pursuant to the Company's license agreement with Candie's, Inc. +("Candie's"), the Company designs, produces, sources, sells and markets +Candie's(R) branded footwear for women and children worldwide through the +Company's Candie's Wholesale Division ("Candie's"). Candie's(R) generated net +sales of $22,404,000 for the year ended December 31, 2005, or approximately 6% +of the Company's total net sales. +On December 6, 2004, the license agreement with Candie's was amended to +reflect Candie's decision to name Kohl's Corporation ("Kohl's") as the exclusive +provider of a new line of Candie's apparel. Pursuant to the amendment, +commencing on January 1, 2007, the Company will no longer have the exclusive +right to market Candie's branded footwear and will be permitted to sell Candie's +branded footwear only to Kohl's. Under the terms of the amendment, Candie's has +guaranteed that the Company will achieve minimum sales levels with Kohl's during +the term of the agreement, which runs through December 31, 2010. In the event +such minimum sales levels are not achieved, Candie's is required to compensate +the Company in an amount based on a percentage of the sales shortfall. +SM New York - Wholesale Division +The Company's SM New York Wholesale Division ("SMNY") began shipping +for the first time in the fourth quarter of 2005 and generated sales of +$1,576,000. SMNY(TM) is geared for young women ages 13 to 20 and is an "opening +price point" brand that is currently being sold at Federated Department Stores +and mid-tier department stores. +Diva Acquisition Corp. - Steven(R) Wholesale Division +Diva Acquisition Corp. ("Steven(R)") designs and markets women's +fashion footwear under the Steven(R) trademark through major department and +better footwear specialty stores and two (2) Company-owned retail shoe stores +located in New York City and Miami. Priced a tier above the Steve Madden(R) +brand, Steven(R) products are designed to appeal principally to fashion +conscious women, ages 26 to 45, who shop at department stores and footwear +boutiques. Steven(R) generated net sales of $16,453,000 for the year ended +December 31, 2005, or approximately 4% of the Company's total net sales. +Stevies Inc. - Wholesale Division +The Company's Stevies(R) Wholesale Division ("Stevies(R)") designs, +produces, sources, sells and markets footwear for girls to major department +stores, better specialty stores and shoe stores throughout the United States. +2 +Stevies(R) generated net sales of $7,886,000 for the year ended December 31, +2005, or approximately 2% of the Company's total net sales. Stevies(R) products +are marketed through department stores, such as Federated Department Stores, +Belk and Limited Too, as well as independent children's stores throughout the +country. +Unionbay Men's Footwear Wholesale Division +Pursuant to the Company's license agreement with Seattle Pacific +Industries, Inc., the Company has the right to use the Unionbay(R) trademark in +connection with the sale and marketing of footwear for men and boys. Unionbay(R) +is known for casual apparel in the young men's, junior's and children's +marketplace and is distributed nationally through department and specialty +stores. The Company's Unionbay(R) Wholesale Division ("Unionbay") generated net +sales of $726,000 for the year ended December 31, 2005, or under 1% of the +Company's total net sales. +Steven Madden Retail, Inc. - Retail Division +As of December 31, 2005, the Company owned and operated 94 retail shoe +stores under the Steve Madden(R) name, two (2) under the Steven(R) name, one (1) +outlet store under the Shoe Biz name and one (1) Internet store (through the +www.stevemadden.com website). In 2005, the Company opened twelve (12) new stores +and closed five (5) under-performing stores. Most of the Steve Madden stores are +located in major shopping malls in Alabama, Arizona, California, Colorado, +Connecticut, Delaware, Florida, Georgia, Illinois, Kansas, Louisiana, Maryland, +Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, +North Carolina, Ohio, Pennsylvania, Puerto Rico, Rhode Island, Texas, Virginia, +Wisconsin and the District of Columbia. The retail stores generated annual sales +in excess of $771 per square foot. Sales are primarily from the sale of the +Company's Steve Madden(R) product line. Comparative store sales (sales of those +stores that were open for all of 2005 and 2004) increased 5% in 2005 compared to +2004. Net sales for the retail division were $121,511,000 for 2005. Net sales +from the Retail Division for the year ended December 31, 2005 were approximately +32% of the Company's total net sales. +The Company believes that the retail division will continue to enhance +overall sales and profits of the Company while building equity in the Steve +Madden brand. The Company plans to add eight to ten (8 - 10) new retail stores +during 2006. The expansion of the retail division enables the Company to test +and react to new products and classifications which, in turn, strengthens the +product development efforts of the Steve Madden wholesale division. +The Adesso-Madden, Inc. - Private Label Division +In September 1995, the Company incorporated Adesso-Madden, Inc. as a +wholly owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to +mass market merchandisers, shoe store chains and other value-priced retailers in +connection with their procurement of private label shoes. As a buying agent, A-M +arranges for shoe manufacturers to produce private label shoes to the +specifications of its clients. The Company believes that by operating in the +private label, mass merchandising market, the Company is able to maximize +additional non-branded sales opportunities. This leverages the Company's overall +sourcing and design capabilities. Currently, this division serves as a buying +agent for the procurement of women's, men's and children's footwear for large +retailers including Target, Wal-Mart, Mervyns, J.C. Penney, Sears and Payless. +A-M receives buying agent's commissions from its clients. The private label +division generated net commission income of $4,833,000 for the year ended +December 31, 2005. +Licensing +As of December 31, 2005, the Company licensed its Steve Madden +trademark for use in connection with the manufacturing, marketing and sale of +outerwear including leather outerwear, belts, handbags, sunglasses, eyewear and +hosiery. Each license agreement requires the licensee to pay to the Company a +royalty based on net sales, a minimum royalty in the event that specified net +sales targets are not achieved and a percentage of sales for advertising of the +Steve Madden(R) brand. Licensing income was $2,286,000 for the year ended +December 31, 2005. +3 +Daniel M. Friedman +On February 7, 2006, the Company acquired all of the equity interest of +privately held Daniel M. Friedman and Associates, Inc. Founded in 1995, Daniel +M. Friedman is a manufacturer and distributor of name fashion handbags and +accessories. The acquisition was completed for $18,000,000 in cash and includes +certain earn out provisions based on financial performance through 2010. In +October of 1998, the Company entered into a license agreement with Daniel M. +Friedman for the design, manufacture and distribution of women's belts in the +United States and Canada. This agreement expired on June 30, 2005. On July 14, +2005, the Company entered into a new license agreement with Daniel M. Friedman +for the design, manufacture and distribution of handbags, women's belts, wallets +and other small leather goods. +Design +The Company has established a reputation for its creative designs, +popular styles and quality products at affordable price points. The Company +believes that its future success will depend in substantial part on its ability +to continue to anticipate and react to changing consumer demands in a timely +manner. To meet this objective, the Company has developed a unique design +process that allows it to recognize and act quickly to changing consumer +demands. The Company's design team strives to create designs which it believes +fit the Company's image, reflect current or future trends and can be +manufactured in a timely and cost-effective manner. Once the initial design is +complete, a prototype is developed, which is reviewed and refined prior to the +commencement of limited production. Most new designs are then tested in the +Steve Madden(R) retail stores. Designs that prove popular are then offered to +wholesale and retail distribution nationwide. The Company believes that its +unique design and testing process and flexible sourcing model is a significant +competitive advantage allowing the Company to mitigate the risk of the costly +production and distribution of unpopular designs. +Product Sourcing and Distribution +The Company sources each of its product lines separately based on the +individual design, styling and quality specifications of the products in such +product lines. The Company does not own or operate manufacturing facilities; +rather, it sources its branded products through independently owned +manufacturers in China, Brazil, Italy, Mexico, Spain, Portugal and the United +States. The Company has established relationships with a number of manufacturers +in each of these countries. Although the Company has not entered into any +long-term manufacturing or supply contracts, the Company believes that a +sufficient number of alternative sources exist for the manufacture of its +products. The principal materials used in the Company's footwear are available +from a number of sources, both within the United States and in foreign +countries. +The Company's design and distribution processes are intended to be +flexible, allowing the Company to respond to and accommodate changing consumer +demand. The Company's production staff tracks warehouse inventory on a regular +basis, monitors sell-through data and incorporates input on product demand from +wholesale customers. The Company can use product feedback to adjust production +or manufacture new products in as little as five weeks. +The Company distributes its products from two (2) third-party +distribution warehouse centers located in California and New Jersey. By +utilizing distribution facilities that specialize in distributing products to +certain customer wholesale accounts, Steve Madden retail stores and Internet +fulfillment, the Company believes that its customers are better served. +Customers +The Company's wholesale customers consist principally of department +stores and specialty stores, including shoe boutiques. Presently, the Company +sells approximately 72% of its products at wholesale to department and specialty +stores, including Federated Department Stores (Macy's, Bloomingdale's, Bon +Marche, Filene's, Hecht's, Famous Barr, Foley's, Lord and Taylor, Robinsons May +and Marshall Fields'), Dillard's, Nordstrom, Journeys, Limited Too and Mandees; +and catalog retailers, including Victoria's Secret and Fingerhut. For the year +ended December 31, 2005, Federated Department Stores accounted for approximately +$80,290,000 (28%) of the Company's wholesale gross sales. +4 +Distribution Channels +The Company sells its products principally through its Company-owned +retail stores and through department stores, specialty shoe stores and discount +stores in the United States and abroad. For the year ended December 31, 2005, +net sales from the Company's Retail Division and the Company's Wholesale +Division accounted for approximately $121,511,000 (32%) and $254,275,000 (68%) +of the Company's total net sales, respectively. The following paragraphs +describe each of these distribution channels. +Steve Madden and Steven Retail Stores +As of December 31, 2005, the Company operated 95 Company-owned retail +stores (including one Internet store) under the Steve Madden(R) name and two (2) +under the Steven(R) name. The Company believes that its retail stores will +continue to enhance overall sales, profitability, and its ability to react to +changing consumer trends. The stores are also a marketing tool that allows the +Company to strengthen brand recognition and to showcase selected items from its +full line of branded and licensed products. Furthermore, the retail stores +provide the Company with a venue to test and introduce new products and +merchandising strategies. Specifically, the Company often tests new designs at +its Steve Madden(R) retail stores before scheduling them for mass production and +wholesale distribution. In addition to these test marketing benefits, the +Company has been able to leverage sales information gathered at Steve Madden(R) +retail stores to assist its wholesale accounts in order placement and inventory +management. +A typical Steve Madden(R) store is approximately 1,400 to 1,600 square +feet and is located in a mall or street location that the Company expects will +attract the highest concentration of the Company's core demographic, +style-conscious young women ages 16 to 25 years old. The Steven(R) stores have a +more sophisticated design and format styled to appeal to their more mature +target audience. In addition to carefully analyzing mall demographics and +location, the Company also sets profitability guidelines for each potential +store site. Specifically, the Company targets well trafficked sites at which the +demographics fit the Company's consumer profile and seeks new locations where +the projected fixed annual rent expense does not exceed a specified percentage +of projected sales over the life of the lease. By setting these standards, the +Company seeks to identify stores that will contribute to the Company's overall +profits both in the near- and longer-terms. +Outlet Stores +Shoe Biz, Inc., a wholly owned subsidiary of the Company ("Shoe Biz"), +operates one (1) outlet store in New York which operates under the Shoe Biz +name. Shoe Biz sells many product lines, including Steve Madden, Steven, Stevies +and l.e.i.(R) footwear, at a price lower than typically charged by other full +price retailers. The Company is planning to close the Shoe Biz store in July of +2006. +Department Stores +The Company currently sells to over 6,500 doors of 22 department stores +throughout the United States and Canada. The Company's major accounts include +Federated Department Stores (Macy's, Bloomingdale's, Bon Marche, Filene's, +Hecht's, Famous Barr, Foley's, Lord and Taylor, Robinsons May and Marshall +Fields'), Nordstrom and Dillard's. +The Company provides merchandising support to its department store +customers which includes in-store fixtures and signage, supervision of displays +and merchandising of the Company's various product lines. The Company's +wholesale merchandising effort includes the creation of in-store concept shops, +where a broader collection of the Company's branded products are showcased. +These in-store concept shops create an environment that is consistent with the +Company's image and enable the retailer to display and stock a greater volume of +the Company's products per square foot of retail space. In addition, these +in-store concept shops encourage longer term commitment by the retailer to the +Company's products and enhance consumer brand awareness. +In addition to merchandising support, the Company's key account +executives maintain weekly communications with their accounts to guide them in +placing orders and to assist them in managing inventory, assortment and retail +sales. The Company leverages its sell-through data gathered at its retail stores +5 +to assist department stores in allocating their open-to-buy dollars to the most +popular styles in the product line and to phase out styles with weaker +sell-throughs. +Specialty Stores/Catalog Sales +The Company currently sells to specialty store locations throughout the +United States and Canada. The Company's major specialty store accounts include +Journeys, Mandees, Famous Footwear and DSW. The Company offers its specialty +store accounts the same merchandising, sell-through and inventory tracking +support offered to its department store accounts. Sales of the Company's +products are also made through various catalogs, such as Victoria's Secret. +Internet Sales +The Company operates one (1) Internet website: www.stevemadden.com. +Customers can purchase numerous styles of the Company's Steve Madden(R), Steven +and Steve Madden Mens footwear, accessory and clothing products. Sales derived +from the Company's Internet website were $5,281,000 in 2005. +Distribution Agreements +Steve Madden products are available in many countries and territories +worldwide via several retail selling and distribution agreements. Under the +terms of the retail selling agreements, the licensee is required to open a +minimum number of stores each year and is required to pay the Company a royalty +for each pair of footwear sold. Under the terms of the distribution agreements, +the distributor is required to purchase certain minimum amounts of Steve Madden +shoes. These agreements, which expire at various times through December 31, +2009, are exclusive in their specific territories which include Canada, +Australia, New Zealand, Israel, UAE, Bahrain, Qatar, Oman, Indonesia, Mexico and +several countries in Central and South America. +Competition +The fashion footwear industry is highly competitive. The Company's +competitors include specialty shoe companies as well as companies with +diversified footwear product lines. Many of these competitors, including Diesel, +Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may have greater +financial and other resources than the Company. The Company believes effective +advertising and marketing, fashionable styling, high quality and value are the +most important competitive factors and intends to continue to employ these +elements as it develops its products. +Marketing and Sales +The Company has focused on creating an integrated brand building +program to establish Steve Madden as the leading designer of fashion footwear +for style-conscious young women and men. As a result, the Company developed a +national advertising campaign for lifestyle and fashion magazines which was also +used in regional marketing programs such as radio advertisements, television +commercials, outdoor media, college event sponsorship and live online chat +forums. The Company also continues to promote its website (www.stevemadden.com) +where customers can purchase Steve Madden(R), Steven(R) and Steve Madden Mens +products and interact with both the Company and other customers. +In order to service its wholesale accounts, the Company retains a sales +force of 22 independent sales representatives as of March 1, 2006. These sales +representatives work on a commission basis and are responsible for placing the +Company's products with its principal customers, including department and +specialty stores. The sales representatives are supported by the Company's +senior executives and, as of March 1, 2006, a staff of 13 account executives, 14 +merchandise coordinators and 28 customer service representatives who continually +cultivate relationships with wholesale customers. This group of professionals +assist accounts in merchandising and assessing customer preferences and +inventory requirements, which ultimately serves to increase sales and +profitability. +6 +Management Information Systems (MIS) Operations +Sophisticated information systems are essential to the Company's +ability to maintain its competitive position and to support continued growth. +The Company operates on a dual AS/400 system which provides system support for +all aspects of its business including manufacturing purchase orders; customer +purchase orders; order allocations; invoicing; accounts receivable management; +real time inventory management; quick response replenishment; point-of-sale +support; and financial and management reporting functions. The Company has a +PKMS bar coded warehousing system that is integrated with the wholesale system +in order to provide accurate inventory positions and quick response size +replenishment for its customers. In addition, the Company has installed an EDI +system which provides a computer link between the Company and certain wholesale +customers that enables both the customer and the Company to monitor purchases, +shipments and invoicing. The EDI system also improves the Company's ability to +respond to customer inventory requirements on a weekly basis. +Receivables Financing; Line of Credit +Under the terms of a factoring agreement with GMAC Commercial Finance +LLC ("GMAC"), the Company is permitted to draw down 80% of its invoiced +receivables at an interest rate of two and one-half percent (2.5%) over the 30 +day LIBOR (as defined in such agreement). The agreement, which has no specific +expiration date and can be terminated by either party with sixty (60) days +written notice after June 30, 2007, provides the Company with a $25 million +credit facility with a $15 million sub-limit on direct borrowings. GMAC +maintains a lien on all of the Company's receivables and assumes the credit risk +for all assigned accounts approved by them. As of December 31, 2005, the Company +had not used any portion of the credit line. +Trademarks and Service Marks +The STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and service +marks have been registered in numerous International Classes in the United +States (Int'l Cl. 25 for clothing and footwear; Int'l Cl. 18 for leather goods, +such as handbags and wallets; Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry; +Int'l Cl. 3 for cosmetics and fragrances; Int'l Cl. 20 for picture frames and +furniture; Int'l Cl. 16 for paper goods; Int'l Cl. 24 for bedding; and Int'l Cl. +35 for retail store services). The Company also has pending trademark +applications in the United States for the mark STEVE MADDEN and/or STEVE MADDEN +(design) in numerous international classes (Class 2 for paints, Class 4 for +candles, Class 6 for key chains and id bracelets, Class 11 for lamps, Class 21 +for housewares, Class 26 for hair accessories, Class 27 for rugs and carpets, +Class 28 for sporting goods, and Class 32 for light beverages). +The Company also has trademark registrations in the United States for +the marks EYESHADOWS BY STEVE MADDEN (Int'l Cl. 9 for eyewear), ICE TEE (Int'l +Cl. 25 for clothing and footwear), SHOE BIZ BY STEVE MADDEN (Int'l Cl. 25 for +clothing and footwear; and Int'l Cl. 35 for retail store services) STEVEN M. +(Int'l Class 25 for clothing and footwear); and STEVEN (Int'l Cl. 25 for +clothing and footwear, Class 3 for cosmetics and fragrances, Class 14 for +jewelry, Class 18 for leather goods, Class 26 for hair accessories, Class 35 for +retail store services, and Class 9 for eyewear). The Company also has pending +applications for STEVEN in various international classes (Class 2 for paints, +Class 4 for candles, Class 6 for key chains and id bracelets, Class 11 for +lamps, Class 16 for printed matter, Class 20 for furniture, Class 21 for +housewares, Class 24 for fabrics and bedding, Class 26 for hair accessories, +Class 27 for rugs and carpets, Class 28 for sporting goods, and Class 32 for +light beverages). The Company also owns a registration for the mark SOHO COBBLER +and SOHO COBBLER (design) in the U.S. in Class 25 for footwear. +The Company also has several pending applications in the U.S. for +MADDEN in a variety of international classes (Class 3 for cosmetics and +fragrances, Class 18 for bags, , Class 14 for jewelry, and Class 25 for clothing +and footwear). The Company also has pending applications in the U.S. for STEVEN +BY STEVE MADDEN in Classes 18 (bags) and 24 (bedding), and for MADDEN BY STEVE +MADDEN in Class 2 for paints, Class 3 for perfume and cosmetics, Class 4 for +candles, Class 6 for key rings and key chains, Class 9 for eyewear and CDs, +Class 11 for lamps, Class 14 for jewelry, Class 16 for stationery and notebooks, +Class 18 for bags, Class 20 for furniture, Class 21 for housewares, Class 24 for +bedding, Class 25 for clothing and footwear, Class 26 for hair accessories, +Class 27 for carpets and rugs, Class 28 for toys and games, Class 32 for light +beverages, and Class 35 for retail store services. +7 +Additionally, the Company has several pending trademark and service +mark applications in the United States for various marks, including a stylized +"H" Design (Int'l Cl. 25 for clothing and footwear). STEVE MADDEN LUXE in Class +25 for clothing and footwear, and FINA FIRENZE in Classes 18 (bags), 25 +(clothing and footwear), and 35 (retail stores). RULE STEVE MADDEN (in Class 2 +for paints, Class 3 for perfume and cosmetics, Class 4 for candles, Class 6 for +key rings and key chains, Class 9 for eyewear and CDs, Class 11 for lamps, Class +14 for jewelry, Class 16 for stationery and notebooks, Class 18 for bags, Class +20 for furniture, Class 21 for housewares, Class 24 for bedding, Class 25 for +clothing and footwear, Class 26 for hair accessories, Class 27 for carpets and +rugs, Class 28 for toys and games, Class 32 for light beverages, and Class 35 +for retail store services), SM NEW YORK (in Class 3 for perfume and cosmetics, +Class 14 for jewelry, Class 18 for bags, Class 20 for furniture, Class 21 for +housewares, and Class 25 for clothing and footwear); and SMNY (in Class 3 for +perfume and cosmetics, Class 14 for jewelry, Class 18 for bags, Class 20 for +furniture, Class 21 for housewares, and Class 25 for clothing and footwear). +The Company further owns registrations for the STEVE MADDEN and/or +STEVE MADDEN plus Design trademarks and service marks in various International +Classes in Argentina, Australia, Bahrain, Belize, Brazil, Canada, Chile, China, +Colombia, El Salvador, Guatemala, Hong Kong, Israel, Italy, Japan, Korea, +Lebanon, Mexico, Nicaragua, the Netherlands, Panama, Saudi Arabia, Singapore, +South Africa, Taiwan, the United Arab Emirates, Venezuela, the European Union, +and the Benelux countries and has pending applications for registration of the +STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and service marks in +Bahrain, Costa Rica, Guatemala, Honduras, Indonesia, Korea, Kuwait, Lebanon, New +Zealand, Oman, Peru, Philippines, Qatar, Russia, Saudi Arabia, Singapore, +Turkey, and the United Arab Emirates . Additionally, the Company owns +registrations for the STEVEN trademark and service mark in various International +Classes in China, Hong Kong, Lebanon, Japan, Thailand, Taiwan, and the United +Arab Emirates and has pending applications for registration of the STEVEN +trademark and service mark in Australia, Bahrain, China, Indonesia, Israel, +Italy, Korea, Malaysia, New Zealand, Oman, Philippines, Qatar, Russia, South +Africa, Saudi Arabia, Taiwan, Thailand, Turkey, and Taiwan. +The Company further owns registrations for the "torch stripe" design in +Class 25 in the European Union and Panama, and has a pending application for the +"torch stripe" design in Class 25 in China. +The Company further owns registrations for the mark STEVEN BY STEVE +MADDEN in various international classes in the European Union, and has pending +applications for the mark STEVEN BY STEVE MADDEN in various international +classes in Canada, China, Israel, and Korea, +The Company further owns registrations for the mark SCOOP in various +international classes in the European Union. +The Company further has pending applications for the mark SCOOP +(design) in Classes 25 and/or 35 in Australia, Canada, China, Hong Kong, Kuwait, +Mexico, Russia, and Switzerland, +The Company further owns a registration for the mark WHAT'S THE SCOOP +in Class 25 in Hong Kong, and has pending applications for the mark WHAT'S THE +SCOOP in Class 25 in China, Japan, and Taiwan. +The Company further owns registrations for the mark SCOOP STREET in +Class 25 in Hong Kong, Japan, and has pending applications for the mark SCOOP +STREET in Class 25 in China and Taiwan. +The Company further has a pending application for the mark SCOOP NYC in +Class 3 in Japan. +The Company further owns a registration for the mark SCOOPKIDS in Class +25 in Japan. +Additionally, the Company, through its Diva Acquisition Corp. +subsidiary, owns registrations for the DAVID AARON trademark and service mark in +various International Classes in the United States (Int'l Cl. 25 for clothing +and footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets; and +Int'l Cl. 35 for retail store services), and in Australia, Canada, the European +Union, Hong Kong, Japan, Korea, Panama, and South Africa in some or all of +Classes 3, 18, and 25, and for its D. AARON trademark in Class 25 Spain. Also, +the Company own registrations for the DAVID AARON trademark in the United States +in International Class 3 for perfume and cosmetics; International Class 9 for +8 +eyewear; International Class 14 for jewelry; International Class 16 for paper +goods; International Class 18 for bags; International Class 24 for bed and bath +products; International Class 25 for clothing and footwear and International +Class 26 hair accessories in Korea. +The Company, through its Stevies, Inc. subsidiary, also owns various +registrations for the STEVIES and /or STEVIES plus Design trademark and service +mark in a number of International Classes in the United States (Int'l Cl. 18 for +leather goods, such as handbags and wallets; Int'l Cl. 9 for eyewear; +International Class 35 for retail store services; International Class 14 for +jewelry; International Class 28 for toys; International Class 16 for paper +goods; International Class 3 for perfume and cosmetics, International Class 9 +for CDs and eyewear, and International Class 26 for hair accessories), and for +STEVIES BY STEVE MADDEN in Class 14 for jewelry, Class 9 for eyewear, Class 3 +for perfume and cosmetics, Class 28 for toys and games, Class 35 for retail +services, Class 16 for stationery and notebooks, Class 18 for bags). The +Company, through its Stevies, Inc. subsidiary, also owns registrations for its +STEVIES and/or STEVIES plus Design mark for various goods in Argentina, Bahrain, +Canada, China, Columbia, the European Union, Hong Kong, Israel, Japan, Korea, +Lebanon, Malaysia, Mexico, Panama, Singapore, Taiwan and the United Arab +Emirates. Additionally Stevies, Inc. has several pending trademark and service +mark applications for registration of the STEVIES and STEVIES plus Design marks +in various International Classes in Brazil, Indonesia, Korea, Kuwait, Mexico, +New Zealand, Oman, Peru, Qatar, Saudi Arabia, Singapore, South Africa, Thailand, +Turkey, the United Arab Emirates and Venezuela. Finally, Stevies, Inc. also owns +several trademark and service mark registrations of the STEVIES BY STEVE MADDEN +mark in various International Classes in the United States (Int'l Cl. 25 for +clothing and footwear; Int'l Cl. 14 for jewelry; Int'l Cl. 18 for leather goods, +such as handbags and wallets; Int'l Cl. 16 for paper goods; Int'l Cl. 3 for +cosmetics and fragrances; Int'l Cl. 9 for eyewear; Int'l Cl. 28 for toys; and +Int'l Cl. 35 for retail store services). +The Company believes that its trademarks have a significant value and +are important to the marketing of the Company's products. There can be no +assurance, however, that the Company will be able to effectively obtain rights +to its marks throughout all of the countries of the world. Moreover, no +assurance can be given that others will not assert rights in, or ownership of, +trademarks and other proprietary rights of the Company or that the Company will +be able to successfully resolve such conflicts. The failure of the Company to +protect such rights from unlawful and improper appropriation may have a material +adverse effect on the Company's business and financial condition. +Employees +On March 3, 2006, the Company employed approximately 1,414 employees, +of whom approximately 586 work on a full-time basis and approximately 828 work +on a part-time basis. The management of the Company considers relations with its +employees to be good. +Seasonality +Historically, the Company's merchandising businesses have experienced +holiday retail seasonality. In addition to seasonal fluctuations, the Company's +operating results fluctuate quarter to quarter as a result of the timing of +holidays, weather, the timing of larger shipments of footwear, market acceptance +of the Company's products, the mix, pricing and presentation of the products +offered and sold, the hiring and training of additional personnel, inventory +write downs for obsolescence, the cost of materials, the product mix between +wholesale, retail and licensing businesses, the incurrence of other operating +costs and factors beyond the Company's control, such as general economic +conditions and actions of competitors. +Backlog +The Company had unfilled wholesale customer orders of $90 million and +$82 million, as of March 1, 2006 and 2005, respectively. The Company's backlog +at a particular time is affected by a number of factors, including seasonality, +timing of market weeks, and wholesale customer purchases of its core basic +products through the Company's open stock program. Accordingly, a comparison of +backlog from period to period may not be indicative of eventual shipments. +9 \ No newline at end of file diff --git a/raw/filings/0000913241/2005/0001019056-06-000265/item13.txt b/raw/filings/0000913241/2005/0001019056-06-000265/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..3cbe08e9ed896b07199475708fcd9321efe618aa --- /dev/null +++ b/raw/filings/0000913241/2005/0001019056-06-000265/item13.txt @@ -0,0 +1,4 @@ +ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS +The information required to be furnished pursuant to this item will be +set forth in the Company's proxy statement for the 2006 Annual Meeting of +Stockholders, and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000913241/2005/0001019056-06-000265/item9a.txt b/raw/filings/0000913241/2005/0001019056-06-000265/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..32eeb9e15df2708fdaf78bd9fa743b24534eaea7 --- /dev/null +++ b/raw/filings/0000913241/2005/0001019056-06-000265/item9a.txt @@ -0,0 +1,119 @@ +ITEM 9A CONTROLS AND PROCEDURES +Disclosure Controls and Procedures +As required by Rule 13a-15(b) of the Exchange Act, the Company's +management, including the Company's Chief Executive Officer and Chief Financial +Officer, has evaluated the effectiveness of its disclosure controls and +procedures as of the end of the fiscal year covered by this annual report. Based +on that evaluation, the Chief Executive Officer and Chief Financial Officer have +concluded that the Company's disclosure controls and procedures (as defined in +Rule 13a-15(e) under the Exchange Act) were effective as of the end of the +fiscal year covered by this annual report. +Changes in Internal Control Over Financial Reporting +As required by Rule 13a-15(d) under the Exchange Act, the Company's +management, including the Company's Chief Executive Officer and Chief Financial +Officer, has evaluated the Company's internal controls over financial reporting +to determine whether any changes occurred during the fourth quarter of 2005 that +have materially affected, or are reasonably likely to materially affect, the +Company's internal control over financial reporting. Based on that evaluation, +there has been no such material change during the fourth quarter of 2005. +Management's Annual Report on Internal Control Over Financial Reporting +The management of the Company is responsible for establishing and +maintaining adequate internal control over financial reporting. Internal control +over financial reporting is defined in Rule 13a-15(f) promulgated under the +Securities Exchange Act of 1934 as a process designed by, or under the +supervision of, the Company's principal executive and principal financial +officers and effected by the Company's board of directors, management and other +personnel, 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 and +includes those policies and procedures that: +o Pertain to the maintenance of records that in reasonable detail +accurately and fairly reflect the transactions and dispositions of the +assets of the Company; +o 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 +o 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. +29 +Because of its inherent limitations, internal control over financial +reporting may not prevent or detect misstatements. 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. +Management of the Company assessed the effectiveness of the Company's +internal control over financial reporting as of December 31, 2005. In making +this assessment, management used the criteria set forth by the Committee of +Sponsoring Organizations of the Treadway Commission (COSO) in Internal +Control-Integrated Framework. Based on its assessment and those criteria, +management believes that the Company maintained effective internal control over +financial reporting as of December 31, 2005. +The Company's Independent Registered Public Accounting Firm, Eisner +LLP, has audited and issued a report on management's assessment of the Company's +internal control over financial reporting. The report of Eisner LLP appears +below. +To the Board of Directors and Shareholders of +Steven Madden, Ltd. +We have audited management's assessment, included in the accompanying +Management's Annual Report on Internal Control Over Financial Reporting, that +Steven Madden, Ltd. and subsidiaries (the "Company") maintained effective +internal control over financial reporting as of December 31, 2005, based on +criteria established in Internal Control - Integrated Framework issued by the +Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). +Steven Madden, Ltd.'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 (i) +pertain to the maintenance of records that, in reasonable detail, accurately and +fairly reflect the transactions and dispositions of the assets of the company; +(ii) 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 (iii) 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 Steven Madden, Ltd. +maintained effective internal control over financial reporting as of December +31, 2005, is fairly stated, in all material respects, based on criteria +established in Internal Control-Integrated Framework issued by the COSO. Also, +in our opinion, Steven Madden, Ltd. and subsidiaries maintained, in all material +30 +respects, effective internal control over financial reporting as of December 31, +2005, based on criteria established in Internal Control-Integrated Framework +issued by COSO. +We also have audited, in accordance with the standards of the Public +Company Accounting Oversight Board (United States), the consolidated balance +sheets of Steven Madden, Ltd. and subsidiaries as of December 31, 2005 and 2004, +and the related consolidated statements of operations, changes in stockholders' +equity, and cash flows for the years in the three-year period ended December 31, +2005, and our report dated March 6, 2006 expressed an unqualified opinion on +those consolidated financial statements. +Eisner LLP +New York, New York +March 6, 2006 \ No newline at end of file diff --git a/raw/filings/0000913241/2005/0001019056-06-000265/rp_note.txt b/raw/filings/0000913241/2005/0001019056-06-000265/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000913241/2005/0001019056-06-000265/rpt_disclosure.txt b/raw/filings/0000913241/2005/0001019056-06-000265/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..ba40f405a83e9fa5e3bf19f2cb8bd12eca8f42ab --- /dev/null +++ b/raw/filings/0000913241/2005/0001019056-06-000265/rpt_disclosure.txt @@ -0,0 +1,58 @@ +Certain Relationships and Related Transactions +In July 2001, the Company entered into a consulting agreement with +Peter J. Solomon & Company, a financial advisory firm of which Marc S. Cooper, +one of the Company's directors, is a managing director. Under this agreement, +the firm provided financial advisory and investment banking services to the +Company. This agreement was amended in March 2004. The amended agreement expired +on March 31, 2005, but pursuant to its terms has been automatically renewed +until such time that the Company terminates it. Pursuant to this agreement, the +Company paid fees and expenses to Peter J. Solomon & Company of $161,000, +$33,000 and $150,000 for 2004, 2003 and 2002 respectively. Under the amended +agreement, the Company paid fees to Peter J. Solomon & Company in the amount of +$161,000 during 2004 and $50,000 plus expenses incurred during 2005. In +addition, the Company retained Peter J. Solomon & Company as an advisor in +connection with the Company's acquisition of all the capital stock of each of +Daniel M. Friedman & Associates, Inc. and DMF International, Ltd. In February +2006, the Company paid Peter J. Solomon & Company an advisory fee in the amount +equal to $412,000 for services and expenses provided in connection with such +acquisition. +In October 2002, the Company entered into an agreement with Jeffrey +Birnbaum, one of the Company's directors. Under this agreement, Mr. Birnbaum +provided consulting services with respect to the designing and manufacturing of +shoes and general consulting services to the Company, pursuant to which, Mr. +Birnbaum received a fee of $200,000 in 2005. In addition, Mr. Birnbaum received +fees for service to the Company as a director in the amount of $50,000 in 2005. +Mr. Birnbaum has been a partner and the Product Development Manager of Dolphin +Shoe Company since August 1982. Dolphin Shoe Company is one of the Company's +domestic suppliers. +In January 2004, the Company entered into an agreement with John Madden +and JLM Consultants, a company wholly-owned by John Madden, one of the Company's +directors, which was amended in 2005. Under this agreement, Mr. Madden provided +consulting services with respect to the development of international sales of +-19- +the Company. Under the agreement, in 2005, JLM Consultants received a monthly +draw with recourse in the amount of $20,000 against sales commissions earned by +Mr. Madden. Mr. Madden also received a $1,000 per month travel allowance and +$1,700 per month toward health insurance premiums. Pursuant to this agreement, +JLM Consultants received a total of $232,000 in 2005. In addition, in 2005 Mr. +Madden received fees for service to the Company as a director in the amount of +$50,000 and use of the Company's leased corporate apartment, a benefit valued at +$40,253. This agreement expired on December 31, 2005 but the parties have +continued the consulting arrangement under the same terms of the expired +agreement. +In January 2006, the Company entered into a consulting agreement with +Joseph Masella, which amended and restated a consulting agreement between the +Company, Mr. Masella and T.J.M Sales Corporation. Mr. Masella is the president +of T.J.M Sales Corporation. Under the amended and restated agreement, Mr. +Masella receives commissions on certain sales of Adesso Madden, Inc., the +Company and SM New York and T.J.M. Sales Corporation receives a biweekly draw in +the amount of $20,000 against these commissions. See "Employment and Consulting +Agreements with Certain Executive Officers." Mr. Masella, either directly or +through T.J.M. Sales Corporation, received commissions in the amount of +$1,545,391 in 2005. +In March 2004, the Company entered into a commission agreement between +the Steven Madden Mens Wholesale Division and Hev Sales, Inc. Mr. Andrew Shames +is the President of Hev Sales Inc. Under the agreement, Hev Sales serves as +sales organization for the Steven Madden Mens Wholesale Division and receives an +annual guaranteed commission of $450,000. Hev Sales, Inc. received commissions +in the amount of $450,008 in 2005. \ No newline at end of file diff --git a/raw/filings/0000913241/2007/0001019056-08-000394/filing.txt b/raw/filings/0000913241/2007/0001019056-08-000394/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..b89d8b9b583e4f817345ebe813dab04f04811adc --- /dev/null +++ b/raw/filings/0000913241/2007/0001019056-08-000394/filing.txt @@ -0,0 +1,5871 @@ +10-K +1 +smadden_10k07.htm +FORM 10K +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +WASHINGTON, D.C. 20549 +FORM 10-K +x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) +OF THE SECURITIES EXCHANGE ACT OF 1934 +o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES +AND EXCHANGE ACT OF 1934 +For +the fiscal year ended December 31, 2007 +Commission +File Number 0-23702 +STEVEN MADDEN, LTD. +(Exact name of registrant as specified in its charter) +Delaware +13-3588231 +(State +or other jurisdiction of +(I.R.S. +employer identification no.) +incorporation or organization) +52-16 +Barnett Avenue, Long Island City, New York 11104 +(Address of principal executive offices) (Zip Code) +(718) +446-1800 +(Registrant’s Telephone Number, Including Area Code) +Securities Registered +Pursuant to Section 12(b) of the Act: +Title +of Each Class +Name of Each Exchange on +Which Registered +Common Stock, par value +$.0001 per share +The NASDAQ Stock Market +LLC +Preferred Stock Purchase +Rights +The NASDAQ Stock Market +LLC +Securities Registered Pursuant to Section 12(g) of the Act: None +Indicate +by check mark if the registrant is a well-known seasoned issuer, as defined in +Rule 405 of the Securities Act. +Yes o No x +Indicate +by check mark if the registrant is not required to file reports pursuant to +Section 13 or 15(d) of the Securities Act. Yes o No x +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 o +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. o +Indicate by check mark +whether the registrant is a large accelerated filer, an accelerated filer, a +non-accelerated filer, or a smaller reporting company. See the definitions of +“large accelerated filer”, “accelerated filer” and “smaller reporting company” +in Rule 12b-2 of the Exchange Act. +(Check one): +Large accelerated filer o +Accelerated +filer x Non-accelerated +filer o Smaller +reporting company o +Indicate by check mark +whether the registrant is a shell company (as defined in Rule 12b-2 of the +Exchange Act). Yes o No x +The aggregate market value of the common +equity held by non-affiliates of the registrant (assuming for these purposes, +but without conceding, that all executive officers and Directors are +“affiliates” of the registrant) as of June 30, 2007, the last business day +of the registrant’s most recently completed second fiscal quarter, was +approximately $626,540,000 (based on the closing sale price of the registrant’s +common stock on that date as reported on The NASDAQ Global Select Market). +The number of +outstanding shares of the registrant’s common stock as of March 6, 2008 was +20,120,983 shares. +DOCUMENTS +INCORPORATED BY REFERENCE: +PART III INCORPORATES +CERTAIN INFORMATION BY REFERENCE FROM THE REGISTRANT’S DEFINITIVE PROXY +STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS SCHEDULED TO BE HELD ON OR +ABOUT MAY 23, 2008. +TABLE +OF CONTENTS +PART I +ITEM 1 +BUSINESS +1 +ITEM 1A +RISK +FACTORS +10 +ITEM 1B +UNRESOLVED +STAFF COMMENTS +14 +ITEM 2 +PROPERTIES +14 +ITEM 3 +LEGAL +PROCEEDINGS +15 +ITEM 4 +SUBMISSION +OF MATTERS TO A VOTE OF SECURITY HOLDERS +15 +PART II +ITEM 5 +MARKET +FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER +PURCHASES OF EQUITY SECURITIES +16 +ITEM 6 +SELECTED +FINANCIAL DATA +18 +ITEM 7 +MANAGEMENT’S +DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +19 +ITEM 7A +QUANTITATIVE +AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +28 +ITEM 8 +FINANCIAL +STATEMENTS AND SUPPLEMENTARY DATA +28 +ITEM 9 +CHANGES +IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +28 +ITEM 9A +CONTROLS +AND PROCEDURES +29 +ITEM 9B +OTHER +INFORMATION +30 +PART III +ITEM 10 +DIRECTORS, +EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +31 +ITEM 11 +EXECUTIVE +COMPENSATION +31 +ITEM 12 +SECURITY +OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER +MATTERS +31 +ITEM 13 +CERTAIN +RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +31 +ITEM 14 +PRINCIPAL +ACCOUNTANT FEES AND SERVICES +31 +PART IV +ITEM 15 +EXHIBITS +AND FINANCIAL STATEMENT SCHEDULES +31 +PART I +ITEM 1 +BUSINESS +Steven +Madden, Ltd. (and its subsidiaries) designs, sources, markets and retails +fashion-forward footwear for women, men and children. In addition, we design, +source, market and retail name brand and private label fashion handbags and +accessories through our Daniel M. Friedman Division. We distribute products +through our retail stores, our e-commerce website, department and specialty +stores throughout the United States and through special distribution +arrangements in Canada, Europe, Central and South America, Australia and Asia. +Our product line includes a broad range of updated styles which are designed to +establish or capitalize on market trends, complemented by core products. We +have established a reputation for our creative designs, popular styles and +quality products at affordable price points. +Our +business is comprised of three (3) distinct divisions (Wholesale, Retail and +First Cost). Our Wholesale Division includes eight (8) core segments: Steve +Madden Womens, Steve Madden Mens, Candie’s ® , +Madden Girl, Steve Madden’s Fix, Steven ® , Stevies ® and +Daniel M. Friedman. The Daniel M. Friedman Division, through license +agreements, includes the Daisy Fuentes, Betsey Johnson and Tracy Reese +accessories brands. Steven Madden Retail, Inc., our wholly-owned retail +subsidiary, operates Steve Madden ® and Steven ® retail +stores as well as our e-commerce website. Our wholly-owned subsidiary, +Adesso-Madden, Inc., acts as a buying agent for footwear products under private +labels for many of the country’s large mass merchandisers. We also license our +Steve Madden ® and Steven ® trademarks for several +accessory and apparel categories. +Steven +Madden, Ltd. was incorporated as a New York corporation on July 9, 1990 and reincorporated +under the same name in Delaware in November 1998. We completed our initial +public offering in December 1993 and our shares of common stock currently trade +on The NASDAQ Global Select Market under the symbol “SHOO”. +We +maintain our principal executive offices at 52-16 Barnett Avenue, Long Island +City, NY 11104, telephone number (718) 446-1800. +Our +website is http://www.stevemadden.com. We file our annual, quarterly and +current reports and other information with the Securities and Exchange +Commission. We make available, free of charge, on our website our Annual +Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form +8-K, any amendments to such reports filed or furnished pursuant to Section +13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and our +Proxy Statement for our Annual Meeting as soon as reasonably practicable after +such material is electronically filed with, or furnished to, the Securities and +Exchange Commission. We will provide paper copies of such filings free of +charge upon request. The public may read and copy any materials filed by us +with the Securities and Exchange Commission at the Securities and Exchange +Commission’s Public Reference Room at 100 R Street, NE, Washington, DC, 20549. +The public may also obtain information on the operation of the Public Reference +Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. In +addition, the Securities and Exchange Commission maintains an Internet site +that contains reports, proxy and information statements and other information +regarding us, which is available at http://www.sec.gov. +1 +Wholesale Divisions +Steve Madden Womens Wholesale Division +The +Steve Madden ® Womens Wholesale Division designs, sources and markets +our Steve Madden ® brand to major department stores, better specialty +stores and independently owned boutiques throughout the United States. The +Steve Madden ® brand has become a leading life-style brand in the +fashion conscious marketplace. To serve our customers (primarily women ages 16 +to 35), Madden Womens creates and markets fashion forward footwear designed to +appeal to customers seeking exciting, new footwear designs at affordable +prices. +As +our largest division, Madden Womens generated net sales of $127.8 million for +the year ended December 31, 2007, or approximately 30% of our total net sales. +New products for Madden Womens are test marketed at our retail stores. +Typically, within a few days, we can determine if the test product appeals to +customers. This enables us to use our flexible sourcing model to rapidly +respond to changing trends which we believe is essential for success in the +fashion arena. +Steve Madden Mens Wholesale Division +The +Steve Madden Mens Wholesale Division designs, sources and markets a full +collection of directional men’s shoes and fashion forward athletic shoes to +major department stores, better specialty stores and independent shoe stores +throughout the United States. Price points range from $70 to $100 at retail, +targeted at men ages 20 to 40 years old. Madden Mens generated net sales of +$51.2 million for the year ended December 31, 2007, or approximately 12% of our +total net sales. Madden Mens maintains open stock inventory positions in select +patterns to serve the replenishment programs of its wholesale customers. +Candie’s Wholesale Division +Pursuant +to our license agreement with Candie’s, Inc., we design, source and market +Candie’s ® branded footwear for women and kids through our Candie’s +Wholesale Division. Our Candie’s Wholesale Division generated net sales of +$22.1 million for the year ended December 31, 2007, or approximately 5% of our +total net sales. +On +December 6, 2004, the license agreement with Candie’s was amended to reflect +Candie’s decision to name Kohl’s Corporation as the exclusive provider of a new +line of Candie’s apparel. Pursuant to the amendment, commencing on January 1, +2007, we no longer have the exclusive right to market Candie’s ® +branded footwear and we are permitted to sell Candie’s ® branded +footwear only to Kohl’s. Under the terms of the amendment, Candie’s has +guaranteed that we will achieve minimum sales levels with Kohl’s during the +term of the agreement, which runs through December 31, 2010. In the event such +minimum sales levels are not achieved, Candie’s is required to compensate us in +an amount based on a percentage of the sales shortfall. For the year ended +December 31, 2007, the minimum sales level was met. +Madden Girl - Wholesale Division +The +Madden Girl Wholesale Division designs, sources and markets a full collection +of directional young women’s shoes. Madden Girl is geared for young women ages +13 to 20 and is an “opening price point” brand that is currently being sold at +department stores, mid-tier retailers and specialty stores. Madden Girl +generated net sales of $29.3 million for the year ended December 31, 2007, or +approximately 7% of our total net sales. +Steve Madden’s Fix - Wholesale Division +We +introduced Steve Madden’s Fix in the fourth quarter of 2007. The Fix Division +designs, sources and markets a line of fashion-forward athletic sneakers to +major department stores, better specialty stores and independently owned +boutiques throughout the United States. Fix is targeted at women ages 16 to 35 +with average price points that range from $60 to $80 at retail. Fix generated +net sales of $0.4 million in the fourth quarter, as well as for the year ended +December 31, 2007. +2 +Diva Acquisition Corp. - Steven ® Wholesale +Division +Diva +Acquisition Corp. designs, sources and markets women’s fashion footwear under +the Steven ® trademark through major department and better footwear +specialty stores throughout the United States. Priced a tier above the Steve Madden ® +brand, Steven ® products are designed to appeal principally to +fashion conscious women, ages 26 to 45, who shop at department stores and +footwear boutiques. Steven ® generated net sales of $16.1 million for +the year ended December 31, 2007, or approximately 4% of our total net sales. +Stevies ® Wholesale Division +Our +Stevies ® Wholesale Division designs, sources and markets footwear +for young girls to major department stores, such as Nordstrom, specialty +stores, such as Limited Too, and independent boutiques throughout the United +States. Stevies ® generated net sales of $8.9 million for the year +ended December 31, 2007 or approximately 2% of our total net sales. +Daniel M. Friedman Wholesale Division +Our +Daniel M. Friedman Wholesale Division designs, sources and markets name brand +and private label fashion handbags and accessories to major department stores, value price +retailers and better specialty stores throughout the United States. Daniel M. +Friedman generated net sales of $54.5 million for the year ended December 31, +2007, or approximately 13% of our total net sales. +Retail Division +Steven Madden Retail, Inc. +As +of December 31, 2007, we owned and operated one hundred (100) retail stores +including ninety-four (94) stores under the Steve Madden ® name and +six (6) under the Steven ® name. In addition, we operate one (1) +e-commerce website (through the www.stevemadden.com). In 2007, we opened seven +(7) new stores and closed two (2) underperforming stores. Steve Madden stores are +located in major shopping malls and in street locations across the United +States. In 2007, the retail stores generated annual sales in excess of $655 per +square foot. Sales are from our Steve Madden ® and Steven ® +products. Comparative store sales (sales of those stores, including the +e-commerce website, that were open for all of 2007 and 2006) decreased 7.6% in +2007 compared to 2006. The Retail Division generated net sales of $120.6 +million for the year ended December 31, 2007, or approximately 28% of our total +net sales. +We +believe that the Retail Division will continue to enhance overall sales and +profitability while building equity in the Steve Madden brand. We plan to add +three new retail stores during 2008. The expansion of the Retail Division +enables us to test and react to new products and classifications which, in +turn, strengthens the product development efforts of the Steve Madden Wholesale +Division. +First Cost Division +Adesso-Madden, Inc. +In +September 1995, we incorporated Adesso-Madden, Inc (“A-M”). as a wholly owned +subsidiary. A-M was formed to serve as a buying agent to mass-market merchants, +shoe store chains and other value-priced retailers in connection with the +procurement of footwear. As a buying agent, A-M utilizes its expertise and its +relationships with shoe manufacturers to facilitate the production of private +label shoes to its customers’ specifications. We believe that by operating in +the private label, mass merchandising market, we are able to maximize additional +non-branded sales opportunities. This leverages our overall sourcing and design +capabilities. Currently, this division serves as a buying agent for the +procurement of women’s, men’s and children’s footwear for large retailers, +including Target, Wal-Mart, Mervyns, J.C. Penney and Sears. A-M receives buying +agent’s commissions from its customers. In addition, we have leveraged the +strength of our Steve Madden brands and product designs resulting in a partial +recovery of our design, product and development costs from our suppliers. The +First Cost Division generated operating income of $14.7 million for the year +ended December 31, 2007. +3 +Licensing +As +of December 31, 2007, we licensed our Steve Madden ® and Steven ® +trademarks for use in connection with the manufacturing, marketing and sale of +cold weather accessories, sunglasses, eyewear, hosiery, outerwear and girl’s +apparel. Most of the license agreements require the licensee pay to us a +royalty based on actual net sales, a minimum royalty in the event that +specified net sales targets are not achieved and a percentage of sales for +advertising the brand. Licensing income for the year ended December 31, 2007 +was $3.7 million. +Design +We +have established a reputation for our creative designs, marketing and trendy +products at affordable price points. We believe that our future success will +substantially depend on our ability to continue to anticipate and react to +changing consumer demands in a timely manner. To meet this objective, we have +developed an unparalleled design process that allows us to recognize and act +quickly to changing consumer demands. Our design team strives to create designs +which it believes fit our image, reflect current or future trends and can be +manufactured in a timely and cost-effective manner. Once the initial design is +complete, a prototype is developed, which is reviewed and refined prior to the +commencement of initial production. Most new products are then tested in +selected Steve Madden ® retail stores. Winners are then offered for +wholesale and retail distribution nationwide. We believe that our design and +testing process and flexible sourcing model is a significant competitive +advantage allowing us to mitigate the risk of production costs and the +distribution of less desirable designs. +Product Sourcing and Distribution +We +source each of our product lines separately based on the individual design, +styling and quality specifications of the products in such product lines. We do +not own or operate manufacturing facilities; rather, we source our branded +products through agents and our own sourcing office with independently owned +manufacturers in China, Brazil, Italy, Mexico, Spain and India. We have +established relationships with a number of manufacturers and agents in each of +these countries. Although we have not entered into any long-term manufacturing +or supply contracts, we believe that a sufficient number of alternative sources +exist for the manufacture of our products. We continually monitor the availability +of the principal materials used in our footwear, which are available from a +number of sources in various parts of the world. We track inventory flow on a +regular basis, monitor sell-through data and incorporate input on product +demand from wholesale customers. We use retailers’ feedback to adjust the +production or manufacture of new products on a timely basis, which minimizes +the close out of slow-moving products. +We +distribute our products from three (3) third-party distribution warehouse +centers located in California and New Jersey. By utilizing distribution +facilities that specialize in distributing products to certain wholesale +accounts, Steve Madden ® retail stores and internet fulfillment, we +believe that our customers are better served. +Customers +Our +wholesale customers consist principally of department stores and specialty +stores, including independent boutiques. Approximately 86% of our wholesale +revenue is generated from department and specialty stores, including Macy’s, +Nordstrom, DSW, Kohl’s, Famous Footwear, and Dillard’s and catalog retailers, +including Victoria’s Secret. For the year ended December 31, 2007, Macy’s +accounted for approximately $51.2 million, or 17% of our wholesale net sales +and 12% of our total net sales. +4 +Distribution Channels +We +sell our products principally through department stores, specialty stores and +discount stores in the United States and through our company-owned retail +stores. For the year ended December 31, 2007, our Retail Division and our +Wholesale Division generated net sales of approximately $120.6 million and +$310.4 million, or 28% and 72% of our total net sales, respectively. Each of +these distribution channels are described below. +Steve Madden and Steven Retail Stores +As +of December 31, 2007, we operated ninety-four (94) company-owned retail stores +under the Steve Madden ® name and six (6) under the Steven ® +name and one (1) e-commerce website (through the www.stevemadden.com website). +We believe that our retail stores will continue to enhance overall sales, +profitability, and our ability to react to changing consumer trends. The stores +are also a marketing tool that allows us to strengthen brand recognition and to +showcase selected items from our full line of branded and licensed products. +Furthermore, the retail stores provide us with a venue to test and introduce +new products and merchandising strategies. Specifically, we often test new +designs at our Steve Madden ® retail stores before scheduling them +for mass production and wholesale distribution. In addition to these test +marketing benefits, we have been able to leverage sales information gathered at +Steve Madden ® retail stores to assist our wholesale customers in +order placement and inventory management. +A +typical Steve Madden ® store is approximately 1,400 to 1,600 square +feet and is located in a mall or street location that we expect will attract +the highest concentration of our core demographic, style-conscious customer +base. The Steven ® stores, which are generally the same size as our +Steve Madden stores, have a more sophisticated design and format styled to +appeal to their more mature target audience. In addition to carefully analyzing +mall demographics and locations, we also set profitability guidelines for each +potential store site. Specifically, we target well trafficked sites at which +the demographics fit our consumer profile and seek new locations where the +projected fixed annual rent expense stays within our guidelines. By setting these +guidelines, we seek to identify stores that will contribute to our overall +profitability both in the near and longer terms. +Department Stores +We +currently sell to over 3,414 doors of 20 department stores throughout the +United States. Our major accounts include Macy’s, Nordstrom, Dillard’s and Lord +& Taylor. +We +provide merchandising support to our department store customers which includes +in-store fixtures and signage, supervision of displays and merchandising of our +various product lines. Our wholesale merchandising effort includes the creation +of in-store concept shops, where a broader collection of our branded products +are showcased. These in-store concept shops create an environment that is +consistent with our image and are designed to enable the retailer to display +and sell a greater volume of our products per square foot of retail space. In +addition, these in-store concept shops encourage longer term commitment by the +retailer to our products and enhance consumer brand awareness. +In +addition to merchandising support, our key account executives maintain weekly +communications with their respective accounts to guide them in placing orders +and to assist them in managing inventory, assortment and retail sales. We +leverage our sell-through data gathered at our retail stores to assist +department stores in allocating their open-to-buy dollars to the most popular +styles in the product line and to phase out styles with weaker sell-throughs, +which minimizes markdown exposure at season’s end. +5 +Specialty Stores/Catalog Sales +We +currently sell to specialty store locations throughout the United States. Our +major specialty store accounts include DSW, Famous Footwear and Journeys. We +offer our specialty store accounts the same merchandising, sell-through and +inventory tracking support offered to our department store accounts. Sales of +our products are also made through various catalogs, such as Victoria’s Secret. +Internet Sales +We +operate an Internet website, www.stevemadden.com, where customers can purchase +numerous styles of our Steve Madden ® , Steven ® and Steve +Madden Mens footwear and accessory products. +Distribution Agreements +Steve +Madden ® products are available in many countries and territories worldwide +via several retail selling and distribution agreements. Under the terms of the +agreements, the distributors and retailers are required to open a minimum +number of stores each year and to pay us a fee for each pair of footwear +purchased, and in many cases, an additional fixed amount per pair or an +additional amount based on a percentage of sales. Under the terms of the +distribution agreements, the distributor is required to purchase certain +minimum amounts of Steve Madden ® shoes. These agreements, which +expire at various times through December 31, 2012 with renewal options at the +election of the distributors and retailers, are exclusive in their specific +territories which include Canada, Mexico, Israel, Turkey, China, Australia, New +Zealand, UAE, Kuwait, Egypt, Bahrain, Qatar, Oman, several countries in +southeast Asia, including Indonesia and Thailand, Morocco, South Africa and +several countries in Central and South America. +Competition +The +fashion footwear industry is highly competitive. We compete with specialty shoe +companies as well as companies with diversified footwear product lines. Many of +these competitors, including Nine West, Skechers, Kenneth Cole, Nike and Guess, +may have greater financial and other resources than us. We believe effective +advertising and marketing, fashionable styling, high quality, value and fast +manufacturing turnaround are the most important competitive factors and intend +to continue to employ these elements as we develop our products. +Marketing and Sales +We +have focused on creating an integrated brand building program to establish +Steve Madden as a leading designer of fashion footwear for style-conscious +young women and men. Principal marketing activities include product placements +in lifestyle and fashion magazines, personal appearances by Creative and Design +Chief, Steve Madden, and in-store promotions. In addition, we continue to +promote our website (www.stevemadden.com) where customers can purchase Steve +Madden ® , Steven ® and Steven Madden’s Fix ® +products, as well as view exclusive content, participate in contests and “live +chat” with customer service representatives. +Management Information Systems (MIS) Operations +Sophisticated +information systems are essential to our ability to maintain our competitive +position and to support continued growth. We operate on a dual AS/400 system +which provides system support for all aspects of our business including +manufacturing purchase orders, customer purchase orders, order allocations, +invoicing, accounts receivable management, quick response replenishment, +point-of-sale support and financial and management reporting functions. We have +a PKMS bar coded warehousing system that is integrated with the wholesale +system in order to provide accurate inventory positions and quick response size +replenishment for our customers. In addition, we have installed an EDI system +which provides a computer link between us and certain wholesale customers that +enables both the customer and us to monitor purchases, shipments and invoicing. +The EDI system also improves our ability to respond to customer inventory +requirements on a weekly basis. +6 +Receivables Financing; Line of Credit +Under +the terms of our factoring agreement with GMAC Commercial Finance LLC, as +amended, we may request advances from the factor of up to 80% of aggregate +receivables purchased by the factor at an interest rate equal to the lower of +the prime rate less 0.875% or the 30-day London Interbank Offered Rate plus +1.375%. The agreement, which has no specific expiration date and can be +terminated by either party with sixty (60) days written notice after June 30, +2007, provides us with a $50 million credit facility with a $25 million +sub-limit on the aggregate face amount of Letters of Credit. We also pay a fee +that varies depending on the customer of between 0.15% and 0.25% of the gross +invoice amount of each receivable purchased. We sell and assign a substantial +portion of our receivables, principally without recourse, to the factor. As of +December 31, 2007 and 2006, $272 and $260 of factored receivables, +respectively, were sold by us with recourse. GMAC maintains a lien on all of +our receivables and assumes the credit risk for all assigned accounts approved +by them with certain restrictions. +Our +Daniel M. Friedman Division had a factoring agreement with Wells Fargo Century +that expired on June 30, 2007. Under the terms of the agreement, we were +eligible to draw down 85% of our invoiced receivables at an interest rate equal +to the prime rate. We paid a fee equal to 0.45% of the gross invoice amount of +each receivable purchased. Wells Fargo Century maintained a lien on all of +Daniel M. Friedman’s receivables and assumed the credit risk for all assigned +accounts approved by them with certain restrictions. As of July 1, 2007, Daniel +M. Friedman has been incorporated into the GMAC agreement. +Trademarks and Service Marks +The +STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and service marks have +been registered in numerous International Classes in the United States (Int’l +Cl. 25 for clothing and footwear; Int’l Cl. 18 for leather goods, such as +handbags and wallets; Int’l Cl. 9 for eyewear; Int’l Cl. 14 for jewelry; Int’l +Cl. 3 for cosmetics and fragrances; Int’l Cl. 20 for picture frames; Int’l Cl. +16 for paper goods; and Int’l Cl. 35 for retail store services). We also have +pending trademark applications in the United States for the mark STEVE MADDEN +and/or STEVE MADDEN (design) in numerous international classes (Class 14 for +watches, Class 18 for bags and leather goods, and Class 26 for hair +accessories). +We +also have trademark registrations in the United States for the marks EYESHADOWS +BY STEVE MADDEN (Int’l Cl. 9 for eyewear), ICE TEE (Int’l Cl. 25 for clothing +and footwear), SHOE BIZ BY STEVE MADDEN (Int’l Cl. 25 for clothing and +footwear; and Int’l Cl. 35 for retail store services) STEVEN M. (Int’l Class 25 +for clothing and footwear); and STEVEN (Int’l Cl. 25 for clothing and footwear, +Class 3 for cosmetics and fragrances, Class 14 for jewelry, Class 18 for +leather goods, Class 26 for hair accessories, Class 35 for retail store +services, and Class 9 for eyewear). We also own a registration for the mark +SOHO COBBLER and SOHO COBBLER (design) in the U.S. in Class 25 for clothing. +We +also have several pending applications in the U.S. for MADDEN in Class 18 for +bags, Class 14 for jewelry, and Class 25 for clothing and footwear. We also +have a registration in the U.S. for STEVEN BY STEVE MADDEN in Class 25 (belts), +and pending applications in the U.S. for STEVEN BY STEVE MADDEN or STEVEN BY +STEVE MADDEN (design) in Classes 9 (cd cases and cell phone cases), 14 (watches +and clocks), 18 (bags and small leather goods) 24 (bedding), and 25 (clothing +and footwear), 28 (video game cases), and for MADDEN BY STEVE MADDEN in Class +14 for jewelry and watches, and Class 18 for bags. +7 +Additionally, +we have trademark and service mark registrations and applications in the United +States for various marks, including STEVE MADDEN LUXE registered in Class 25 +for clothing and footwear and pending in Class 14 for watches and clocks; RULE +STEVE MADDEN pending (in Class 3 for perfume and cosmetics, Class 4 for +candles, Class 6 for key rings and key chains, Class 9 for eyewear and CDs, +Class 11 for lamps, Class 14 for jewelry, Class 16 for stationery and +notebooks, Class 18 for bags, Class 20 for furniture, Class 21 for housewares, +Class 24 for bedding, Class 25 for clothing and footwear, Class 26 for hair accessories, +Class 27 for carpets and rugs, Class 28 for toys and games, Class 32 for light +beverages, and Class 35 for retail store services); FIX, FIX (design), and +STEVE MADDEN’S FIX pending in Class 25 (clothing and footwear); LITTLE MISS +COMFORT pending in Class 18 (bags) and 25 (clothing); MADDEN ACTIVE, MADDEN +BOYZ, MADDEN GIRL, MADDEN GIRLZ, MADDEN KIDZ, MADDEN NEW YORK, and MADDEN SPORT +all pending in Class 25 (clothing and footwear); and NATURAL COMFORT registered +in Class 25 (footwear). +We +further own registrations for the STEVE MADDEN and/or STEVE MADDEN plus Design +trademarks and service marks in various International Classes in Argentina, +Armenia, Aruba, Australia, Bahrain, Belize, Brazil, Canada, Chile, China, +Colombia, El Salvador, Guatemala, Hong Kong, Israel, Italy, Japan, Korea, +Lebanon, Mexico, Netherland Antilles, New Zealand, the Netherlands, Nicaragua, +Norway, Oman, Panama, the Philippines, Qatar, Russia, Saudi Arabia, Singapore, +South Africa, Taiwan, Thailand, Turkey, the United Arab Emirates, Uzbekistan, +the European Union, and the Benelux countries and have pending applications for +registration of the STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and +service marks in Aruba, Azerbaijan, Bahamas, Belarus, Canada, China, Costa +Rica, Ecuador, Egypt, Estonia, Georgia, Guatemala, Honduras, India, Indonesia, +Jordan, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Latvia, Lithuania, Moldova, +Oman, Paraguay, Peru, the Philippines, Saudi Arabia, Tajikistan, Turkmenistan, +Ukraine, Venezuela, and the United Arab Emirates. +Additionally, +we own registrations for the STEVEN trademark and service mark in various +International Classes in Australia, Bahrain, Belize, China, the Dominican +Republic, El Salvador, Hong Kong, Israel, Japan, Lebanon, Malaysia, New +Zealand, Netherland Antilles, Norway, the Philippines, Qatar, Russia, Saudi +Arabia, South Africa, Thailand, Taiwan, Turkey, and the United Arab Emirates +and have pending applications for registration of the STEVEN trademark and service +mark in China, Columbia, Costa Rica, Ecuador, Egypt, the European Union, +Guatemala, India, Indonesia, Israel, Italy, Jordan, Korea, Kuwait, Malaysia, +Nicaragua, Oman, Philippines, Taiwan, Thailand, Turkey, Taiwan, and Venezuela. +We +further own registrations for the “torch stripe” design in Class 25 in the +European Union and Panama, and China. +We +further own registrations for the mark STEVEN BY STEVE MADDEN in various +international classes in the European Union, Hong Kong, Panama, and Taiwan, and +have pending applications for the mark STEVEN BY STEVE MADDEN in various +international classes in Aruba, Canada, China, Egypt, India, Israel, Korea, and +Venezuela. +We +further have pending applications for the mark STEVE MADDEN’S FIX* in +international class 25 in China, the European Union, Mexico, and Turkey. +We +further have pending applications for the mark MADDEN GIRL in international +class 25 in Egypt, India, Kuwait, and Saudi Arabia. +8 +We +further have pending applications for the mark NATURAL COMFORT in various +international classes in Egypt, India, Kuwait, and Saudi Arabia. +We +further own registrations for the mark SM NEW YORK and/or SM NEW YORK in +International Class 25 (clothing and footwear) in Aruba, Belize, the Dominican +Republic, Ecuador, El Salvador, Hong Kong, Guatemala, India, Netherland +Antilles, and New Zealand, Nicaragua, Panama, and has pending applications for +registration of the SM NEW YORK mark in International Class 25 (clothing and +footwear) in Australia, Columbia, Costa Rica, Indonesia, Saudi Arabia, South +Africa, and Venezuela. +Additionally, +we, through our Diva Acquisition Corp. and Diva International, Inc. +subsidiaries, own registrations for the DAVID AARON trademark in the United +States in Class 25 for clothing Class 18 for handbags and wallets, and Class 35 +for retail store services, and in Australia, Canada, the European Union, Hong +Kong, Japan, Panama and South Africa in some or all of Classes 3, 18, and 25, +and for our D. AARON trademark in Class 25 in Spain. Also, we own registrations +for our DAVID AARON trademark in International Class 3 for perfume and +cosmetics; International Class 9 for eyewear; International Class 14 for +jewelry; International Class 16 for paper goods; International Class 18 for +bags; International Class 24 for bed and bath products; International Class 25 +for clothing and footwear and International Class 26 hair accessories in Korea. +We, +through our Stevies, Inc. subsidiary, also own various registrations for the +STEVIES and /or STEVIES plus Design trademark and service mark in a number of +International Classes in the United States (Int’l Class 25 for clothing and +footwear; Int’l Class 18 for leather goods, such as handbags and wallets; +International Class 35 for retail store services; International Class 14 for +jewelry; International Class 28 for toys; Int’l Class 16 for magazines; Int’l +Class 3 for perfume and cosmetics, Int’l Class 9 for CDs and eyewear; Int’l Cl. +27 for rugs and carpets; and Int’l Class 26 for hair accessories), and for +STEVIES BY STEVE MADDEN in Class 14 for jewelry, Class 9 for eyewear, Class 3 +for perfume and cosmetics, Class 25 for clothing and footwear, Class 28 for +toys and games, Class 35 for retail services, Class 16 for magazines, Class 18 +for bags. +Additionally, +Stevies, Inc. has pending trademark and service mark applications and/or +existing registrations for the STEVIES and STEVIES plus Design marks in various +International Classes in Aruba, Argentina, Australia, Bahrain, Brazil, Canada, +China, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Egypt, El +Salvador, European Union, Guatemala, Hong Kong, Honduras, Indonesia, India, +Israel, Japan, Korea, Kuwait, Lebanon, Malaysia, Mexico, Netherland Antilles, +Nicaragua, New Zealand, Oman, Panama, Peru, Qatar, Saudi Arabia, Singapore, +South Africa, Taiwan, Thailand, Turkey, the United Arab Emirates and Venezuela. +We +believe that our trademarks have a significant value and are important to the +marketing of our products. There can be no assurance, however, that we will be +able to effectively obtain rights to our marks throughout all of the countries +of the world. Moreover, no assurance can be given that others will not assert +rights in, or ownership of, our trademarks and other proprietary rights or that +we will be able to successfully resolve such conflicts. Our failure to protect +such rights from unlawful and improper appropriation may have a material +adverse effect on our business and financial condition, results of operations +and liquidity. +Employees +On +February 5, 2008, we employed approximately one thousand five hundred and ten +(1,510) employees, of whom approximately seven hundred forty (740) work on a +full-time basis and approximately seven hundred seventy (770) work on a +part-time basis, most of whom work in the Retail Division. Our management +considers relations with our employees to be good. +9 +Seasonality +Historically, +our merchandising businesses have experienced holiday retail seasonality. In +addition to seasonal fluctuations, our operating results fluctuate quarter to +quarter as a result of the timing of holidays, weather, the timing of larger +shipments of footwear, market acceptance of our products, the mix, pricing and +presentation of the products offered and sold, the hiring and training of +additional personnel, inventory write downs for obsolescence, the cost of +materials, the product mix between wholesale, retail and licensing businesses, +the incurrence of other operating costs and factors beyond our control, such as +general economic conditions and actions of competitors. +Backlog +We +had unfilled wholesale customer orders of $113.8 million and $103.7 million, as +of February 21, 2008 and 2007, respectively. Our backlog at a particular time +is affected by a number of factors, including seasonality, timing of market +weeks and wholesale customer purchases of our core basic products through our +open stock program. Accordingly, a comparison of backlog from period to period +may not be indicative of eventual shipments. +ITEM 1A +RISK FACTORS +You +should carefully consider the risks and uncertainties we describe below and the +other information in this Annual Report or Form 10-K incorporated by reference +herein before deciding to invest in, sell or retain shares of our common stock. +These are not the only risks and uncertainties that we face. Additional risks +and uncertainties that we do not currently know about or that we currently +believe are immaterial, or that we have not predicted, may also harm our +business operations or adversely affect us. If any of these risks or +uncertainties actually occurs, our business, financial condition, results of +operations and liquidity could be materially harmed. +Fashion Industry Risks . Our success will +depend in significant part +upon our ability to anticipate and respond to product and fashion trends as +well as to anticipate, gauge and react to changing consumer demands in a timely +manner. There can be no assurance that our products will correspond to the +changes in taste and demand or that we will be able to successfully market +products that respond to such trends. If we misjudge the market for our +products, we may be faced with significant excess inventories for some products +and missed opportunities for others. In addition, misjudgments in merchandise +selection could adversely affect our image with our customers resulting in +lower sales and increased markdown allowances for customers which could have a +material adverse effect on our business, financial condition, results of +operations and liquidity. +The +industry in which we operate is cyclical, with purchases tending to decline +during recessionary periods when disposable income is low. Purchases of +contemporary shoes and accessories tend to decline during recessionary periods +and also may decline at other times. There can be no assurance that we will be +able to grow or even maintain our current level of revenues and earnings, or +remain profitable in the future. A recession in the national or regional +economies or uncertainties regarding future economic prospects, among other +things, could affect consumer-spending habits and have a material adverse +effect on our business, financial condition, results of operations and +liquidity. +In +recent years, the retail industry has experienced consolidation and other +ownership changes. In the future, retailers in the United States and in foreign +markets may further consolidate, undergo restructurings or reorganizations, or +realign their affiliations, any of which could decrease the number of storesthat carry our products or increase the ownership concentration within the +retail industry. While such changes in the retail industry to date have not had +a material adverse effect on our business or financial condition, results of +operations and liquidity, there can be no assurance as to the future effect of +any such changes. +10 +Inventory Management . The fashion-oriented +nature of our products +and the rapid changes in customer preferences leave us vulnerable to an +increased risk of inventory obsolescence. Thus, our ability to manage our +inventories properly is an important factor in our operations. Inventory +shortages can adversely affect the timing of shipments to customers and +diminish sales and brand loyalty. Conversely, excess inventories can result in +lower gross margins due to the excessive discounts and markdowns that might be +necessary to reduce inventory levels. Our inability to effectively manage our +inventory could have a material adverse effect on our business, financial +condition, results of operations and liquidity. +Dependence upon Customers and Risks Related to +Extending Credit to Customers . Our customers consist principally of +department stores and specialty stores, including shoe boutiques. Certain of +our department store customers, including some under common ownership, account +for significant portions of our wholesale business. +We +generally enter into a number of purchase order commitments with our customers +for each of our lines every season and do not enter into long-term agreements +with any of our customers. Therefore, a decision by a significant customer of +ours, whether motivated by competitive conditions, financial difficulties or +otherwise, to decrease the amount of merchandise purchased from us or to change +its manner of doing business could have a material adverse effect on our +business, financial condition, results of operations and liquidity. We sell our +products primarily to retail stores across the United States and extend credit +based on an evaluation of each customer’s financial condition, usually without +collateral. While various retailers, including some of our customers, have +experienced financial difficulties in the past few years which increased the +risk of extending credit to such retailers, our losses due to bad debts have +been limited. Pursuant to the terms of our factoring agreement, GMAC currently +assumes the credit risk related to approximately 84% of our accounts +receivable. However, financial difficulties of a customer could cause us to +curtail business with such customer or require us to assume more credit risk +relating to such customer’s accounts receivable. +Impact of Foreign Manufacturers . During the +year ended December 31, 2007, +approximately 99% of our products were purchased through arrangements with a +number of foreign manufacturers, primarily from China, Brazil, Italy and Spain. +Risks +inherent in foreign operations include work stoppages, transportation delays +and interruptions, changes in social, political and economic conditions which +could result in the disruption of trade from the countries in which our +manufacturers or suppliers are located, the imposition of additional +regulations relating to imports, the imposition of additional duties, taxes and +other charges on imports, significant fluctuations of the value of the dollar +against foreign currencies, or restrictions on the transfer of funds, any of +which could have a material adverse effect on our business, financial +condition, results of operations and liquidity. We do not believe that any such +economic or political condition will materially affect our ability to purchase products, +since a variety of materials and alternative sources are available. We cannot +be certain, however, that we will be able to identify such alternative sources +without delay (if ever) or without greater cost to us. Our inability to +identify and secure alternative sources of supply in this situation could have +a material adverse effect on our business, financial condition, results of +operations and liquidity. +Our +imported products are also subject to United States custom duties. The United +States and the countries in which our products are produced or sold, from time +to time, impose new quotas, duties, tariffs, or other restrictions, or may +adversely adjust prevailing quota, duty or tariff levels, any of which could +have a material adverse effect on our business, financial condition, results of +operations and liquidity. +11 +Possible Adverse Impact of Unaffiliated +Manufacturers’ +Inability to Manufacture in a Timely Manner, Meet Quality Standards or to Use +Acceptable Labor Practices . As is common in the footwear industry, we contract for the +manufacture of 99% of our products to our specifications through foreign +manufacturers. We do not own or operate any manufacturing facilities and we are +therefore dependent upon independent third parties for the manufacture of all +of our products. Our products are manufactured to our specifications by both +domestic and international manufacturers. The inability of a manufacturer to +ship orders of our products in a timely manner or to meet our quality standards +could cause us to miss the delivery date requirements of our customers for +those items, which could result in cancellation of orders, refusal to accept +deliveries or a reduction in purchase prices, any of which could have a +material adverse effect on our business, financial condition, results of +operations and liquidity. +Although +we enter into a number of purchase order commitments each season specifying a +time frame for delivery, method of payment, design and quality specifications and +other standard industry provisions, we do not have long-term contracts with any +manufacturer. As a consequence, any of these manufacturing relationships may be +terminated, by either party, at any time. Although we believe that other +facilities are available for the manufacture of our products, both within and +outside of the United States, there can be no assurance that such facilities +would be available to us on an immediate basis, if at all, or that the costs +charged to us by such manufacturers would not be greater than those presently +paid. +We +do not control our licensing partners or independent manufacturers or their +labor practices. The violation of labor or other laws by an independent +manufacturer of ours or by one of our licensing partners, or the divergence of +an independent manufacturer’s or licensing partner’s labor practices from those +generally accepted as ethical in the United States, could have a material +adverse effect on our business, financial condition, results of operations and +liquidity. +Intense Industry Competition . The fashion +footwear industry is highly +competitive and barriers to entry are low. Our competitors include specialty +companies as well as companies with diversified product lines. The recent +market growth in the sales of fashion footwear has encouraged the entry of many +new competitors and increased competition from established companies. Most of +these competitors, including Nine West, Skechers, Kenneth Cole, Nike and Guess +may have significantly greater financial and other resources than us and there +can be no assurance that we will be able to compete successfully with other +fashion footwear companies. Increased competition could result in pricing +pressures, increased marketing expenditures and loss of market share, and could +have a material adverse effect on our business, financial condition, results of +operations and liquidity. We believe effective advertising and marketing, +branding of the Steve Madden name, fashionable styling, high quality and value are +the most important competitive factors and we plan to continually employ these +elements as we develop our products. Our inability to effectively advertise and +market our products could have a material adverse effect on our business, +financial condition, results of operations and liquidity. +Expansion of Retail Business . Our continued +growth depends to a +significant degree on further developing the Steve Madden ® , Stevies ® , +Steven ® , Madden Girl, Steve Madden Mens, Natural Comfort and +Candie’s ® brands, creating new product categories and businesses and +operating company-owned Steve Madden ® and Steven ® stores +on a profitable basis. During the year ended December 31, 2007, we opened seven +(7) Steve Madden ® retail stores and have plans to open three (3) +additional stores in the year ending December 31, 2008. Our expansion plan +includes the opening of stores in new geographic markets as well as +strengthening existing markets. New markets have in the past presented, and +will continue to present, competitive and merchandising challenges that are +different from those faced by us in our existing markets. There can be no +assurance that we will be able to open new stores, and if opened, that such new +stores will be able to achieve sales and profitability levels consistent with +management’s expectations. Our retail expansion is dependent on a number of +factors, including our ability to locate and obtain favorable store sites, the +performance of our wholesale and retail operations, and our ability to manage +such expansion and hire and train personnel. Past comparable store sales +results may not be indicative of future results, and there can be no assurance +that our comparable store sales results can be maintained or will increase in +the future. In addition, there can be no assurance that our strategies to +increase other sources of revenue, which may include expansion of our licensing +activities, will be successful or that our overall sales or profitability will +increase or not be adversely affected as a result of the implementation of such +retail strategies. +12 +Management of Growth . Our operations have +increased and will +continue to increase demand on our managerial, operational and administrative +resources. We have recently invested significant resources in, amongst other +things, our management information systems and hiring and training new +personnel. However, in order to manage currently anticipated levels of future +demand, we may be required to, among other things, expand our distribution +facilities, establish relationships with new manufacturers to produce our +product, and continue to expand and improve our financial, management and +operating systems. There can be no assurance that we will be able to manage +future growth effectively and a failure to do so could have a material adverse +effect on our business, financial condition, results of operations and +liquidity. +Seasonal and Quarterly Fluctuations . Our +results may fluctuate quarter to +quarter as a result of the timing of holidays, weather, the timing of larger +shipments of footwear, market acceptance of our products, the mix, pricing and +presentation of the products offered and sold, the hiring and training of +additional personnel, inventory write downs for obsolescence, the cost of materials, +the product mix between wholesale, retail and licensing businesses, the +incurrence of other operating costs and factors beyond our control, such as +general economic conditions and actions of competitors. In addition, we expect +that our sales and operating results may be significantly impacted by the +opening of new retail stores and the introduction of new products. Accordingly, +the results of operations in any quarter will not necessarily be indicative of +the results that may be achieved for a full fiscal year or any future quarter. +Trademark and Service Mark Protection . We +believe that our trademarks and service +marks and other proprietary rights are important to our success and our +competitive position. Accordingly, we devote substantial resources to the +establishment and protection of our trademarks on a worldwide basis. +Nevertheless, there can be no assurance that the actions taken by us to +establish and protect our trademarks and other proprietary rights will be +adequate to prevent imitation of our products by others or to prevent others +from seeking to block sales of our products on the basis that they violate the +trademarks and proprietary rights of others. Moreover, no assurance can be +given that others will not assert rights in, or ownership of, trademarks and +other proprietary rights of ours or that we will be able to successfully +resolve such conflicts. In addition, the laws of certain foreign countries may +not protect proprietary rights to the same extent as do the laws of the United +States. Our failure to establish and then protect such proprietary rights from +unlawful and improper utilization could have a material adverse effect on our +business, financial condition, results of operations and liquidity. +Foreign Currency Fluctuations . We make +approximately 99% of our purchases +in U.S. dollars. However, we source substantially all of our products overseas +and, as such, the cost of these products may be affected by changes in the +value of the relevant currencies. Changes in currency exchange rates may also +affect the relative prices at which we and our foreign competitors sell +products in the same market. There can be no assurance that foreign currency +fluctuations will not have a material adverse effect on our business, financial +condition, results of operations and liquidity. +13 +Outstanding Options . As of March 6, 2008, +there were outstanding +options to purchase an aggregate of approximately 559,000 shares of our common +stock. Holders of such options are likely to exercise them when, in all +likelihood, the market price of our stock is significantly higher than the +exercise price of the options. Further, while options are outstanding, they may +adversely affect the terms on which we could obtain additional capital, if +required. +Economic and Political Risks . The present +economic condition in the +United States and concern about uncertainties could significantly reduce the +disposable income available to our customers for the purchase of our products. +In addition, current unstable political conditions, including the potential or +actual conflicts in Iraq, North Korea or elsewhere, or the continuation or +escalation of terrorism, could have a material adverse effect on our business, +financial condition, results of operations and liquidity. +ITEM 1B +UNRESOLVED STAFF COMMENTS +None. +ITEM 2 +PROPERTIES +We +maintain approximately 40,000 square feet for our executive offices and sample +production facilities at 52-16 Barnett Avenue, Long Island City, NY 11104. The +lease for our headquarters expires on June 30, 2013. +The +Steve Madden showroom is located at 1370 Avenue of the Americas, New York, NY. +All of our brands are displayed for sale from this 9,917 square foot space. The +lease for our showroom expires on February 28, 2013. +Daniel +M. Friedman maintains approximately 20,000 square feet for its offices and +showroom space at 10 West 33rd Street, New York, NY. The lease expires on +December 31, 2014. +We +maintain approximately 7,200 square feet as a storage facility at 25-15 Borough +Place, Woodside, NY. The lease for this space expires on October 31, 2008 and +can be extended, at our option, through October 31, 2010. +We +maintain approximately 1,400 square feet as a design facility in Boston, +Massachusetts. The lease for this space expires on February 28, 2010. +We +also maintain an 807 square foot showroom located at Fashion Center Dallas in +the World Trade Center, Dallas, Texas. The lease for this showroom expires on +April 30, 2010. We also currently engage three independent distributors to +warehouse and distribute our products. +All +of our retail stores are leased pursuant to leases that, under their original +term, extend for an average of ten years in length. A majority of the leases +include clauses that provide for contingent rental payments if gross sales +exceed certain targets. In addition, a majority of the leases enable us and/or +the landlord to terminate the lease in the event that our gross sales do not +achieve certain minimum levels during a prescribed period. Many of the leases +contain rent escalation clauses to compensate for increases in operating costs +and real estate taxes. +14 +The +current terms of our retail store leases expire as follows: +Years +Lease Terms Expire +Number +of Stores +2008 +6 +2009 +9 +2010 +7 +2011 +13 +2012 +9 +2013 +11 +2014 +7 +2015 +11 +2016 +6 +2017 +14 +2018 +7 +2019 +1 +ITEM 3 +LEGAL PROCEEDINGS +Except +as set forth below, no material legal proceedings are pending to which we or +any of our property is subject. +On +August 10, 2005, the U.S. Customs Department (“Customs”) issued a report that +asserts that certain commissions that we treated as “buying agents’ +commissions” (which are non-dutiable) should be treated as “selling agents’ +commissions” and hence are dutiable. In the report, Customs estimates that we +had underpaid duties during the calendar years of 1998 through 2004 in the +amount of $1million. As of June 30, 2006, based on discussions with legal +counsel, we believed that the liability in this case, including interest, was +not likely to exceed $1.5 million. Accordingly, as of December 31, 2006, we +recorded a reserve of $1.5 million. In September of 2007, Customs notified us +that it had finalized its assessment of the underpaid duties to be $1.4 +million. Pursuant to this assessment, management, with the advice of legal +counsel, has re-evaluated the liability in the case, including interest and +penalties, and believes that it is not likely to exceed $2.7 million. We +increased our reserve by $1.2 million in the third quarter of 2007. Such +reserve is subject to change to reflect the status of this matter. +We have been named as a defendant in certain other lawsuits in the normal +course of business. In the opinion of management, after consulting with legal +counsel, the liabilities, if any, resulting from these matters should not have +a material effect on our financial position or results of operations. It is the +policy of management to disclose the amount or range of reasonably possible +losses in excess of recorded amounts. +ITEM 4 +SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS +No +matters were submitted to a vote of the holders of our common stock during the +last quarter of our fiscal year ended December 31, 2007. +15 +PART II +ITEM 5 +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS +AND ISSUER PURCHASES OF EQUITY SECURITIES +Our +shares of common stock have traded on The NASDAQ Global Select Market since +August 1, 2006 and were traded on The NASDAQ National Market prior to that +date. The following table sets forth the range of high and low closing sales +prices for our common stock during each fiscal quarter during the two-year +period ended December 31, 2007 as reported by The NASDAQ Global Select and The +NASDAQ National Market. The trading volume of our securities fluctuates and may +be limited during certain periods. As a result, the liquidity of an investment +in our securities may be adversely affected. +Common Stock +High +Low +High +Low +2007 +2006 +Quarter ended March 31, 2007 +37.00 +28.12 +Quarter ended March 31, 2006 +24.53 +18.63 +Quarter ended June 30, 2007 +33.51 +29.49 +Quarter ended June 30, 2006 +37.17 +23.20 +Quarter ended September 30, 2007 +32.96 +18.11 +Quarter ended September 30, 2006 +40.69 +26.59 +Quarter ended December 31, 2007 +24.01 +17.50 +Quarter ended December 31, 2006 +44.70 +33.99 +As +of March 6, 2008, there were 20,120,983 shares of common stock outstanding and +86 holders of record. +Equity +Compensation Plans . +Information regarding our equity compensation plans as of December 31, 2007 is +disclosed in Item 12, “Security Ownership of Certain Beneficial Owners and +Management and Related Stockholder Matters.” +Issuer +Repurchases of Equity Securities. We did not repurchase any shares of common stock during the fourth +quarter of fiscal 2007. In February and August of 2007, our Board of Directors +authorized increases of our previously announced share repurchase program of +$30 million and $37 million, respectively. At December 31, 2007, an aggregate +of $46 million remained authorized to repurchase our Common Stock. The program has no set expiration or termination +date. +Pursuant +to an agreement reached on February 2, 2005 with an 8% shareholder, we agreed +to commit $25 million during the twelve months ended January 31, 2006 and $10 +million during the twelve months ended January 31, 2007 to a combination of +share repurchases and/or dividends, such programs to be implemented at such +time and such manner as determined by the board of directors in its sole +discretion. As of January 31, 2007, we satisfied this agreement by the +repurchase of 909,000 shares for $14.7 million and the payment of dividends in +the amount of $34.9 million. +16 +Performance +Graph . The following +graph compares the yearly percentage change in the cumulative total stockholder +return on our common stock during the period beginning on December 31, 2002 and +ending on December 31, 2007 with the cumulative total return on the Russell +2000 Index and the S&P 500 Footwear Index. The comparison assumes that $100 +was invested on December 31, 2002 in our common stock and in the foregoing +indices and assumes the reinvestment of dividends. +12/31/2002 +12/31/2003 +12/31/2004 +12/31/2005 +12/31/2006 +12/31/2007 +Steven +Madden, Ltd. +$ +100.00 +$ +112.89 +$ +104.37 +$ +161.76 +$ +291.28 +$ +166.02 +Russell 2000 +Index +$ +100.00 +$ +145.37 +$ +170.08 +$ +175.73 +$ +205.61 +$ +199.96 +S&P 500 +Footwear Index +$ +100.00 +$ +151.33 +$ +196.87 +$ +195.74 +$ +226.36 +$ +293.67 +17 +ITEM 6 +SELECTED FINANCIAL DATA +The +following selected financial data has been derived from our audited +Consolidated Financial Statements. The Income Statement Data relating to 2007, +2006 and 2005, and the Balance Sheet Data as of December 31, 2007 and 2006 +should be read in conjunction with our audited Consolidated Financial +Statements and notes thereto appearing elsewhere herein. +Year Ended December 31, +2007 +2006 +2005 +2004 +2003 +INCOME STATEMENT DATA: +Net sales +$ +431,050,000 +$ +475,163,000 +$ +375,786,000 +$ +338,144,000 +$ +324,204,000 +Cost of sales +257,646,000 +276,734,000 +236,631,000 +218,601,000 +201,487,000 +Gross profit +173,404,000 +198,429,000 +139,155,000 +119,543,000 +122,717,000 +Commissions and licensing fee - net +18,351,000 +14,246,000 +7,119,000 +4,588,000 +5,742,000 +Operating expenses +(138,841,000 +) +(134,377,000 +) +(114,185,000 +) +(105,150,000 +) +(94,833,000 +) +Impairment of goodwill +— +— +(519,000 +) +— +— +Income from operations +52,914,000 +78,298,000 +31,570,000 +18,981,000 +33,626,000 +Interest income +3,876,000 +3,703,000 +2,554,000 +2,009,000 +1,611,000 +Interest expense +(65,000 +) +(100,000 +) +(164,000 +) +(68,000 +) +(54,000 +) +Gain (loss) on sale of marketable +securities +(589,000 +) +(967,000 +) +(500,000 +) +32,000 +136,000 +Income before provision for income taxes +56,136,000 +80,934,000 +33,460,000 +20,954,000 +35,319,000 +Provision for income taxes +20,446,000 +34,684,000 +14,260,000 +8,679,000 +14,865,000 +Net Income +$ +35,690,000 +$ +46,250,000 +$ +19,200,000 +$ +12,275,000 +$ +20,454,000 +Basic income per share +$ +1.73 +$ +2.21 +$ +0.95 +$ +0.62 +$ +1.05 +Diluted income per share +$ +1.68 +$ +2.09 +$ +0.92 +$ +0.58 +$ +0.96 +Basic weighted average shares of common +stock +20,647,181 +20,905,673 +20,111,576 +19,723,304 +19,477,898 +Effect of potential shares of common stock +from exercise of options +645,010 +1,195,394 +806,487 +1,611,120 +1,729,869 +Diluted weighted average shares of common +stock outstanding +21,292,191 +22,101,067 +20,918,063 +21,334,424 +21,207,767 +At December 31 , +2007 +2006 +2005 +2004 +2003 +BALANCE SHEET DATA: +Total assets +$ +266,521,000 +$ +251,392,000 +$ +211,728,000 +$ +186,430,000 +$ +177,870,000 +Working capital +121,138,000 +151,711,000 +114,066,000 +101,417,000 +105,140,000 +Noncurrent liabilities +3,470,000 +3,136,000 +2,757,000 +2,088,000 +1,828,000 +Stockholders’ equity +$ +215,334,000 +$ +211,924,000 +$ +182,065,000 +$ +164,665,000 +$ +159,187,000 +18 +ITEM 7 +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND +RESULTS OF OPERATIONS +The +following discussion of our financial condition and results of operations +should be read in conjunction with the audited Consolidated Financial +Statements and Notes thereto appearing elsewhere in this document. +Statements +in this “ Management’s Discussion and +Analysis of Financial Condition and Results of Operations ” and +elsewhere in this document as well as statements made in press releases and +oral statements that may be made by us or our officers, directors or employees +acting on our behalf that are not statements of historical or current fact +constitute “forward-looking statements” within the meaning of the Private +Securities Litigation Reform Act of 1995. Such forward-looking statements +involve known and unknown risks, uncertainties and other unknown factors that +could cause our actual results to be materially different from the historical +results or from any future results expressed or implied by such forward-looking +statements. In addition to statements which explicitly describe such risks and +uncertainties, readers are urged to consider statements labeled with the terms +“believes,” “belief,” “expects,” “intends,” “anticipates,” “projects” or +“plans” and statements in the future tense to be uncertain forward-looking +statements. The forward-looking statements contained herein are also subject +generally to risks set forth in “Item 1A-A Risk Factors” and to other risks and +uncertainties that are described from time to time in our reports and +registration statements filed with the Securities and Exchange Commission. +Overview +($ in thousands, except retail sales data per square foot, share and earnings per +share data) +Steven Madden, +Ltd. (and its subsidiaries) designs, sources, markets and retails +fashion-forward footwear for women, men and children. In addition, we design, +source, market and retail name brand and private label fashion handbags and +accessories through our Daniel M. Friedman Division. We distribute products through +our retail stores, our e-commerce website, department and specialty stores +throughout the United States and through special distribution arrangements in +Canada, Europe, Central and South America, Australia and Asia. Our product line +includes a broad range of updated styles which are designed to establish or +capitalize on market trends, complemented by core products. We have established +a reputation for our creative designs, popular styles and quality products at +affordable price points. +The year 2007 +proved to be a challenging year for the Company. The absence of fashion trends +in the marketplace and the lack of big items that would drive significant sales +volume resulted in a decrease in sales across several of our divisions. The +weakening economy also adversely affected sales volume. In addition, net sales +for the year ended December 31, 2006 included approximately $15,251 in net +sales from Rule, l.e.i. and Jump, three brands that were discontinued late in +2006. For the year ended December 31, 2007, consolidated net sales decreased to +$431,050 compared to $475,163 in the prior year. Gross margin in 2007 decreased +to 40.2% compared to 41.8% in 2006. Including a one-time benefit of $2,498 +resulting from tax savings related to prior periods and a one-time charge of +$1,208 ($737 net of tax effect) related to the provision for prior years’ +custom duties, net income for the year was $35,690 compared to $46,250 last +year. Including a one-time benefit of $0.12 per share resulting from the above +mentioned tax savings offset by a one-time charge of $0.03 per share related to +the provision for prior years’ customs duties, diluted EPS for 2007 was $1.68 +per share on 21,292,000 diluted weighted average shares outstanding compared to +$2.09 per share on 22,101,000 diluted weighted average shares outstanding last +year. +The recent +expansion and growth of our international business, as well as the increase in +private label business, resulted in an increase in the commission and licensing +income. For the year ended December 31, 2007, income from operations in this +segment increased to $14,674 from $11,321 in the prior year. +We have +pursued a number of initiatives to enhance gross margins such as reducing +freight costs, closeouts, store-to-store transfers and inventory shrinkage combined +with better inventory controls. As a result, the gross margin in the Retail +Division has increased to 56.8% in 2007 from 54.0% in 2006. This increase in +gross margin was achieved despite the decrease in comparative sales results. +Same store sales (sales of those stores, including the e-commerce website, that +were in operation throughout all of 2007 and 2006) decreased 7.6%. Sales per +square foot declined to $655 in 2007 compared to sales per square foot of $719 +achieved in 2006. +19 +A recent +growth in our New York based income, combined with revisions in state and local +tax law, prompted us to re-evaluate our tax filing strategies. We have elected +to file our New York State and New York City tax returns on a combined basis +which maximized the tax benefits provided by recent changes in New York State +allocation regulations. We filed combined returns in 2006 and we were able to +file amended New York State and New York City returns for 2003 through 2005 +resulting in an additional one-time tax benefit in 2007. The election to file +combined New York State and City returns in concert with the one-time benefit +of filing past years’ amended returns has reduced our effective tax rate to +36.4% in 2007 from 42.9% in 2006. We anticipate that our effective tax rate in +2008 will be approximately 39%. +Pursuant to +developments in the case with U.S. Customs, we have, in conjunction with +legal counsel’s advice, increased the provision for the liability in +the case from the $1,500 previously recorded to $2,700. Accordingly, an +additional provision of $1,208 was made during the year ended December 31, +2007. +Our inventory +turnover increased to 7.4 times in 2007 from 7.2 in 2006, because of our +ability to manage inventory levels during a period of decreasing sales volume. +Our accounts receivable average collection days improved to 58 days as of +December 31, 2007 from 59 days on December 31, 2006. As of December 31, 2007, +we had $109,857 in cash, cash equivalents and marketable securities, no short- +or long-term debt, and total stockholders’ equity of $215,334. Working capital +decreased to $121,138 as of December 31, 2007, compared to $151,711 on December +31, 2006, primarily due to our purchase during 2007 of $50,094 of our common +stock for treasury. During the year ended December 31, 2007, net cash provided +by operating activities increased to $59,907 as compared to $43,408 in the same +period last year. +In line with +prior commitments to enhance shareholders value, on February 19, 2008, we +announced a tender offer to purchase up to 2,600,000 shares of our +common stock at a price not greater than $20.00 nor less than $16.50 per share. +As of December 31, 2007, there were 20,117,983 shares of our common stock +issued and outstanding, not including 5,662,055 of our issued shares held in +treasury. The 2,600,000 shares that we are offering to purchase represent +approximately 13% of the total number of issued shares. We anticipate that we +will pay for the shares tendered in the offer from our available cash. +20 +The +following tables set forth information on operations for the periods indicated: +Years Ended +December 31 +($ in thousands) +2007 +2006 +2005 +CONSOLIDATED : +Net sales +$ +431,050 +100 +% +$ +475,163 +100 +% +$ +375,786 +100 +% +Cost of sales +257,646 +60 +276,734 +58 +236,631 +63 +Gross profit +173,404 +40 +198,429 +42 +139,155 +37 +Other operating income – net of expenses +18,351 +4 +14,246 +3 +7,119 +2 +Operating expenses +138,841 +32 +134,377 +28 +114,185 +31 +Impairment of goodwill +— +— +— +— +519 +0 +Income from operations +52,914 +12 +78,298 +16 +31,570 +8 +Interest and other income- net +3,222 +1 +2,636 +1 +1,890 +1 +Income before income taxes +56,136 +13 +80,934 +17 +33,460 +9 +Net income +35,690 +8 +46,250 +10 +19,200 +5 +By Segment: +WHOLESALE DIVISION : +Net sales +$ +310,405 +100 +% +$ +347,509 +100 +% +$ +254,275 +100 +% +Cost of sales +205,584 +66 +218,014 +63 +175,292 +69 +Gross profit +104,821 +34 +129,495 +37 +78,983 +31 +Other operating income +3,677 +1 +2,925 +1 +2,286 +1 +Operating expenses +73,362 +24 +75,328 +22 +59,958 +24 +Income from operations +35,136 +11 +57,092 +16 +21,311 +8 +RETAIL DIVISION : +Net sales +$ +120,645 +100 +% +$ +127,654 +100 +% +$ +121,511 +100 +% +Cost of sales +52,062 +43 +58,720 +46 +61,339 +50 +Gross profit +68,583 +57 +68,934 +54 +60,172 +50 +Operating expenses +65,479 +54 +59,049 +46 +54,227 +45 +Impairment of goodwill +— +— +— +— +519 +0 +Income from operations +3,104 +3 +9,885 +8 +5,426 +5 +Number of stores +101 +96 +98 +FIRST COST DIVISION : +Other commission income - net of expenses +$ +14,674 +100 +% +$ +11,321 +100 +% +$ +4,833 +100 +% +21 +RESULTS OF OPERATIONS +($ in thousands) +Year Ended December 31, 2007 vs. Year Ended +December 31, 2006 +Consolidated : +Total net +sales for the year ended December 31, 2007 decreased by 9% to $431,050 from +$475,163 for the comparable period of 2006. Net sales generated by the Retail +Division decreased by 5% while net sales generated by the Wholesale Division +decreased by 11%. Overall gross profit margin decreased to 40% for the year +ended December 31, 2007 from 42% for the prior year. A decrease in the +Wholesale gross profit margin to 34% in 2007 compared to 37% in the same period +in the prior year was partially offset by an increase in the Retail gross +profit margin to 57% in 2007 from 54% in the same period last year. Operating +expenses increased in 2007 to $138,841, or 32% of net sales, from $134,377, or +28% of net sales, in 2006, primarily due to the incremental costs associated +with the new retail stores opened this year. Commission and licensing fee +income was $18,351 for the year ended December 31, 2007 compared to $14,246 for +the prior year. Including a one-time charge of $1,208 related to the provision +for prior years’ custom duties, operating income for the year ended December 31, +2007 was $52,914, compared to $78,298 in the prior year. Our effective tax rate +decreased to 36.4% in 2007 compared to 42.9% in the prior year due to a +reduction in the effective tax rate and a one-time tax benefit related to prior +periods, connected to our election to file combined tax returns for both New +York State and New York City and certain recent changes in tax law. Including +the above-mentioned one-time tax benefit of $2,498 and the one-time charge of +$1,208 ($737 net of tax effect) related to prior years’ custom duties, net +income for the year ended December 31, 2007 was $33,929, compared to $46,250 in +2006. The decrease in income was primarily due to the decrease in net sales and +gross profit margins. +Wholesale Division : +Net sales +generated by the Wholesale Division was $310,405, or 72%, and $347,509, or 73%, +of our total net sales for the years ended December 31, 2007 and 2006, +respectively. The decrease in sales was driven primarily by declines in four of +our wholesale brands. In the Steve Madden Womens Division and the Steven +Division, the decrease in sales was due primarily to an absence of fashion +trends in the marketplace and the lack of big items that would drive +significant sales volume. In the Steve Madden Mens Division, the continued +weakness in the sport casual business resulted in disappointing net sales. Net +sales in the Candie’s Division decreased due to a significant increase in +markdown allowances to Kohl’s. In addition, net sales for the year ended +December 31, 2006 included approximately $15,251 in net sales from Rule, l.e.i. +and Jump, three brands that were discontinued late in 2006. These decreases +were partially offset by the double-digit net sales increases achieved in both +the Madden Girl and the Stevies Divisions and a 6% net sales increase in the +Daniel M. Friedman Division. +Gross profit +margin decreased to 34% in the year ended December 31, 2007 from 37% in the +prior year, due primarily to a significant increase in markdown allowances in +the Candie’s and Steven Divisions. Our remaining wholesale divisions also experienced +increases in markdown activities as well as an increase in promotional selling +reflective of the difficult retail environment in 2007. Operating expenses +decreased in 2007 to $73,362 compared to $75,328 in the prior year due to a +decrease in variable selling expenses that were partially offset by an increase +in non-cash stock based compensation. Income from operations for the Wholesale +Division decreased to $35,136 for the year ended December 31, 2007 compared to +$57,092 for the year ended December 31, 2006. +Retail +Division : +Net Sales +generated by the Retail Division accounted for $120,645, or 28%, and $127,654, +or 27%, of total Company net sales for the years ended December 31, 2007 and +2006, respectively. We opened seven new stores and closed two under-performing +stores during the year ended December 31, 2007. As a result, we had +101 retail stores as of December 31, 2007 compared to 96 stores as of December +31, 2006. The 101 stores currently in operation include 94 under the Steve +Madden brand, six under the Steven brand and one e-commerce website. Comparable +store sales (sales of those stores, including the e-commerce website, that were +open for all of 2007 and 2006) decreased 8% for the year ended December 31, +2007 due primarily to the lack of any significant fashion trends and the +softening retail environment in the second half of the year. We have pursued a +number of initiatives to enhance gross margins such as reducing freight costs, +closeouts, store-to-store transfers and inventory shrinkage combined with better +inventory controls. As a result, the gross margin in the Retail Division has +increased to 57% for the year ended December 31, 2007 from 54% in the +comparable period of 2006. Income from operations for the Retail Division was +$3,104 for the current year compared to $9,885 for the same period of 2006. +22 +First Cost Division : +The First Cost +Division generated net commission income and design fees of $14,674 for the +year ended December 31, 2007, compared to $11,321 for the comparable period of 2006. The increase was +the result of the continued growth in our private label business as well as the +recent expansion of our international business. +Year Ended December 31, 2006 vs. Year Ended +December 31, 2005 +Consolidated : +Total net +sales for the year ended December 31, 2006 increased by 26% to $475,163 from +$375,786 for the comparable period of 2005. The total increase resulted from a +37% growth in the Wholesale Division combined with a 5% growth in the Retail +Division. +Gross profit +margin increased to 42% for the year ended December 31, 2006 from 37% for the +prior year. Both the Wholesale and the Retail Divisions achieved significant +increases in their gross profit margins. The gross profit margin for the +Wholesale Division increased to 37% for the year ended December 31, 2006 from 31% +for the comparable period of 2005, and in the Retail Division, the gross profit +margin increased to 54% as compared to 50% for the comparable period of 2005. A +portion of the increased gross margin was the result of improved inventory +management which resulted in fewer markdowns. +Operating +expenses increased to $134,377 in the year ended December 31, 2006 from +$114,185 in the same period of 2005. The increase in dollars was primarily +caused by the incremental costs associated with the acquisition of Daniel M. +Friedman and the addition of the SMNY/Madden Girl Division, an increase in +sales growth related variable expenses such as warehouse and distribution +costs, and an increase in incentive based employee compensation. As a +percentage of net sales, operating expenses decreased to 28% for the year ended +December 31, 2006 from 31% in the same period of 2005, reflecting our ability +to leverage our expense structure against the increase in sales. +Income from +operations was $78,298 for the year ended December 31, 2006 compared to $31,570 +for the comparable period of 2005. Net income increased by 141% to $46,250 for +the year ended December 31, 2006 compared to $19,200 for the year ended +December 31, 2005. This increase in income was primarily due to the increase in +net sales, the higher gross profit margin, a substantial increase in commission +income and the contribution of the Daniel M. Friedman Division. +Wholesale Division : +Net sales from +the Wholesale Division accounted for $347,509, or 73%, and $254,275, or 68%, of +total net sales for the years ended December 31, 2006 and 2005, respectively. +This increase resulted from the incremental sales contributed by the recently +acquired Daniel M. Friedman and significant sales growth in Madden Womens, +Madden Mens, Candie’s and Steven as well as the contribution of the new brands, +SMNY/Madden Girl and Natural Comfort. Gross profit margin increased to 37% of +net sales for the year ended December 31, 2006 from 31% in the prior year, +primarily due to a significant decrease in off-price sales and lower inventory +markdowns and allowances. Operating expenses increased to $75,328 for the year +ended December 31, 2006 from $59,958 in the comparable period of 2005. This +increase is primarily due to an increase in direct selling expenses reflective +of the 37% growth in sales, incentive bonuses and the incremental costs +associated with the new brands SMNY/Madden Girl and Natural Comfort, as well as +the acquisition of Daniel M. Friedman. As a percentage of net sales, operating +expenses decreased to 22% for the year ended December 31, 2006 from 24% for the +prior year, reflecting our ability to leverage our expense structure against +the increase in sales. Income from operations for the Wholesale Division +increased to $57,092 for the year ended December 31, 2006 compared to $21,311 +for the year ended December 31, 2005. +23 +Retail Division : +Net sales from +the Retail Division accounted for $127,654, or 27%, and $121,511, or 32%, of +total net sales for the years ended December 31, 2006 and 2005, respectively. +We opened four new stores and closed six under-performing stores during the +current year. As a result, we had 96 retail stores as of December 31, 2006 +compared to 98 stores as of December 31, 2005. The 96 stores in operation +include 93 under the Steve Madden name, two under the Steven name and one +e-commerce website. Comparable store sales (sales of those stores, including +the internet store, that were open for all of 2006 and 2005) for the year ended +December 31, 2006 increased 4% over the same period of 2005. Gross profit as a +percentage of net sales increased to 54% for the year ended December 31, 2006 +from 50% in the comparable period of 2005, primarily due to a significant +decrease in promotional sales, improved inventory controls and freight savings. +Operating expenses for the Retail Division were $59,049 for the year ended +December 31, 2006 and $54,227 for the comparable period of 2005. This increase +was primarily due to the non-cash write off of unamortized assets associated with +the remodeling of nine stores and the closing of six stores in the current +period that accounted for $1,858. Income from operations for the Retail +Division was $9,885 for the year ended December 31, 2006 compared to $5,426 for +the same period in 2005. +First Cost Division : +The First Cost +Division generated net commission income and design fees of $11,321 for year +ended December 31, 2006, compared to $4,833 for the comparable period of 2005. +The increase was the result of growth in the private label business and, in +addition, our ability to leverage the strength of our Steve Madden brands and +product designs resulting in a partial recovery of its design, product and +development costs through its suppliers. +LIQUIDITY AND CAPITAL RESOURCES +($ in thousands) +Working +capital was $121,138 at December 31, 2007 compared to $151,711 at December 31, +2006. The decrease was primarily due to the repurchase of approximately 1,962,000 shares of +our common stock at a total cost of $50,094. +Under the +terms of a factoring agreement with GMAC, we are eligible to borrow 80% +against its receivables at an interest rate equal to the lower of the prime +rate less 0.875% or the 30-day London Interbank Offered Rate plus 1.375%. This +agreement, which has no specific expiration date and can be terminated by +either party with 60 days written notice after June 30, 2009, provides us with +a $50 million credit facility with a $25 million sub-limit on the aggregate +face amount of Letters of Credit with some other stipulations. +As of December +31, 2007, we held marketable securities valued at $80,411, consisting primarily +of corporate and municipal bonds, U.S. Treasury notes, auction rate securities, +certificates of deposit and equities. +At December +31, 2007, we held $37,325 in auction rate securities. The contractual +maturities of the investments underlying the auction rate securities mature at +various dates through 2046, however, all our auction rate securities, or ARSs, +have a reset period of less than 30 days. Through March 7, 2008, we +had reduced our total holdings in ARSs to $16,300, principally by investing in +other short-term investments as individual ARS reset periods came due and the +securities were once again subject to the auction process. Through March 7, +2008, auctions for $8,800 of these securities were not successful, resulting in +our continuing to hold these securities and the issuers paying interest at the +maximum contractual rate. Based on current market conditions, it is likely that +auctions related to more of these securities will be unsuccessful in the near +term. Unsuccessful auctions could result in our holding securities beyond their +next scheduled auction reset dates if a secondary market does not develop, +therefore limiting the short-term liquidity of these investments. Accordingly, +$16,300 of auction rate securities are classified as long term as of December +31, 2007. While these failures in the auction process have affected our +ability to access these funds in the near term, we do not believe +that the underlying securities or collateral have been affected. We believe +that the higher reset rates on failed auctions provide sufficient +incentive for the security issuers to address this lack of liquidity. If the +credit rating of the security issuers deteriorates, we may be required +to adjust the carrying value of these investments through an impairment charge. +We expect to continue to earn interest at the prevailing rates on the +ASR’s that we hold. +24 +On February +19, 2008, we announced a tender offer to purchase up to 2,600,000 shares of our +common stock at a price not greater than $20.00 nor less than $16.50 per share. +As of December 31, 2007, there were 20,117,983 shares of our common stock +issued and outstanding, not including 5,662,055 of our issued shares held in +treasury. The 2,600,000 shares that we are offering to purchase represent +approximately 13% of the total number of issued shares. We anticipate that we +will pay for the shares tendered in the offer from our available cash. +Management +believes that, based upon our current financial position and available cash, +cash equivalents and marketable securities, we will meet all of our financial +commitments and operating needs, including the tender offer, for at least the +next twelve months. +OPERATING ACTIVITIES +($ in thousands) +During the +year ended December 31, 2007, net cash provided by operating activities was +$59,907. The primary sources of cash were net income of $35,690, increases in +accounts payable and accrued expenses of $9,443, decrease in inventories of +$6,463, and decreases in the amount due from factor of $5,409. The primary uses +of cash were increases in prepaid expenses, prepaid taxes, deposits and other +assets of $3,189, a decrease in accrued incentive compensation of $3,359 and an +increase in note receivable of $3,126. +INVESTING ACTIVITIES +($ in thousands) +During the +year ended December 31, 2007, we invested $66,505 in marketable securities and +received $76,192 from the maturities and sales of securities. Also, we invested +$9,080 in the acquisition of privately held Compo Enhancements, LLC, which +served as a third party provider of e-commerce solutions for us since +late in 2005. The acquisition enables us to fully integrate our +e-commerce business into our Retail Division and operate its online +business internally. Additionally, we made capital expenditures of $12,965, +principally for the seven new stores opened in the current period, the +construction of two new stores scheduled to open in the early part of 2008, and +the remodeling of ten existing stores, additional office space and upgrades to +the telephone and management information systems. +FINANCING ACTIVITIES +($ in thousands) +During the +year ended December 31, 2007, we repurchased approximately 1,962,000 shares of our common +stock at an average price of $25.53 for a total cost of $50,094. We received +$5,607 in cash and also realized a tax benefit of $7,180 in connection with the +exercise of stock options. +25 +CONTRACTUAL OBLIGATIONS +($ in thousands) +Our +contractual obligations as of December 31, 2007 were as follows: +Payment due by period +Contractual Obligations +Total +2008 +2009-2010 +2011-2012 +2013 and +after +Operating lease obligations +$ +126,172 +$ +16,560 +$ +32,765 +$ +29,997 +$ +46,850 +Purchase obligations +48,558 +48,558 +0 +0 +0 +Other long-term liabilities (future minimum +royalty payments) +1,936 +522 +1,414 +0 +0 +Total +$ +176,666 +$ +65,640 +$ +34,179 +$ +29,997 +$ +46,850 +At December +31, 2007, we had un-negotiated open letters of credit for the purchase of +inventory of approximately $1,974. +We have an employment agreement with Steven Madden, our Creative and Design Chief, +which provides for an annual base salary of $600 subject to certain specified +adjustments through June 30, 2015. The agreement also provides for annual bonuses +based on EBITDA, revenue of any new business, and royalty income over $2 million, +plus an equity grant and a non-accountable expense allowance. +On May 16, +2007, we acquired all of the outstanding equity interest of privately held +Compo. The acquisition was completed for a consideration of $9,679, including +transaction costs. +On February 7, +2006 we acquired all of the equity interest of Daniel M. Friedman. The +acquisition was completed for a consideration of $18,710 including transaction +costs. In addition, the purchase agreement includes certain earn-out provisions +based on financial performance through 2008. The 2007 earn-out provision of +$3,956 was charged to goodwill and increased the total acquisition cost to +$22,666. +We have +employment agreements with certain executive officers, which provide for the +payment of compensation aggregating approximately $2,372 in 2008 and $1,080 in +2009. In addition, some of the employment agreements provide for a +discretionary bonus and some provide for incentive compensation based on various +performance criteria as well as other benefits including stock options. Our +Chief Operating Officer is entitled to deferred compensation calculated as a +percentage of his base salary. +Ninety-nine +percent (99%) of our products are produced at overseas locations, the majority +of which are located in China, with a small percentage located in Brazil, +Italy, India and Spain. We have not entered into any long-term manufacturing or +supply contracts with any of these foreign companies. We believe that a sufficient +number of alternative sources exist outside of the United States for the +manufacture of our products. We currently make approximately 99% of our +purchases in U.S. dollars. +INFLATION +We do not +believe that the relatively low rates of inflation experienced over the last +few years in the United States, where we primarily compete, have had a +significant effect on sales, expenses or profitability. +26 +CRITICAL ACCOUNTING POLICIES AND THE USE OF +ESTIMATES +Management’s +Discussion and Analysis of Financial Condition and Results of Operations is +based upon our Consolidated Financial Statements which have been prepared in +accordance with generally accepted accounting principles in the United States. +The preparation of these financial statements requires management to make +estimates and judgments that affect the reported amounts of assets, +liabilities, sales and expenses, and related disclosure of contingent assets +and liabilities. Estimates by their nature are based on judgments and available +information. Estimates are made based upon historical factors, current +circumstances and the experience and judgment of management. Assumptions and +estimates are evaluated on an ongoing basis and we may employ outside experts +to assist in evaluations. Therefore, actual results could materially differ +from those estimates under different assumptions and conditions. Management +believes the following critical accounting estimates are more significantly +affected by judgments and estimates used in the preparation of our Condensed +Consolidated Financial Statements: allowance for bad debts, returns and +customer chargebacks; inventory reserves; valuation of intangible assets; +litigation reserves and cost of sales. +Allowances for bad debts, returns and +customer chargebacks . We provide reserves against our +trade accounts receivables for future customer chargebacks, co-op advertising +allowances, discounts, returns and other miscellaneous deductions that relate +to the current period. The reserve against our non-factored trade receivables +also includes estimated losses that may result from customers’ inability to +pay. The amount of the reserve for bad debts, returns, discounts and compliance +chargebacks are determined by analyzing aged receivables, current economic +conditions, the prevailing retail environment and historical dilution levels +for customers. As a result of a reevaluation of the retail environment, we +revised our method for evaluating our allowance for customer markdowns and +advertising chargebacks in the fourth quarter of 2005. In the past, we would +look at historical dilution levels for customers to determine the allowance +amount. Under the new methodology, we evaluate anticipated chargebacks by +reviewing several performance indicators for our major customers. These performance +indicators (which include inventory levels at the retail floors, sell through +rates and gross margin levels) are analyzed by key account executives and the +Vice President of Wholesale Sales to estimate the amount of the anticipated +customer allowance. Failure to correctly estimate the amount of the reserve +could materially impact our results of operations and financial position. +Inventory reserves . +Inventories are stated at lower of cost or market, on a first-in, first-out +basis. We review inventory on a regular basis for excess and slow moving +inventory. The review is based on an analysis of inventory on hand, prior sales +and expected net realizable value through future sales. The analysis includes a +review of inventory quantities on hand at period-end in relation to +year-to-date sales and projections for sales in the foreseeable future as well +as subsequent sales. We consider quantities on hand in excess of estimated +future sales to be at risk for market impairment. The net realizable value, or +market value, is determined based on the estimate of sales prices of such +inventory through off-price or discount store channels. The likelihood of any +material inventory write-down is dependent primarily on the expectation of +future consumer demand for our product. A misinterpretation or misunderstanding +of future consumer demand for our product, the economy, or other failure to +estimate correctly, in addition to abnormal weather patterns, could result in +inventory valuation changes, either favorably or unfavorably, compared to the +valuation determined to be appropriate as of the balance sheet date. +Valuation of intangible assets . +SFAS No. 142, “Goodwill and Other Intangible Assets”, which was adopted by us +on January 1, 2002, requires that goodwill and intangible assets with +indefinite lives no longer be amortized, but rather be tested for impairment at +least annually. This pronouncement also requires that intangible assets with +finite lives be amortized over their respective lives to their estimated +residual values, and reviewed for impairment in accordance with SFAS No. 144, +“Accounting for Impairment or Disposal of Long-lived Assets.” In accordance +with SFAS No. 144, long-lived assets, such as property, equipment, leasehold +improvements and goodwill subject to amortization, are reviewed for impairment +annually or whenever events or changes in circumstances indicate that the +carrying amount of an asset may not be recoverable. Recoverability of assets to +be held and used is measured by a comparison of the carrying amount of an asset +to the estimated undiscounted future cash flows expected to be generated by the +asset. If the carrying amount of an asset exceeds its estimated future cash +flows, an impairment charge is recognized by the amount by which the carrying amount +of the asset exceeds the fair value of the asset. +Litigation reserves . +Estimated amounts for litigation claims that are probable and can be reasonably +estimated are recorded as liabilities in our Consolidated Financial Statements. +The likelihood of a material change in these estimated reserves would be +dependent on new claims as they may arise and the favorable or unfavorable +events of a particular litigation. As additional information becomes available, +management will assess the potential liability related to the pending +litigation and revise its estimates. Such revisions in management’s estimates +of the contingent liability could materially impact our results of operation +and financial position. +27 +Cost of sales. All +costs incurred to bring finished products to our distribution center and, in +the Retail Division, the costs to bring products to our stores, are included in +the cost of sales line item on our Consolidated Statement of Income. These +include the cost of finished products, purchase commissions, letter of credit +fees, brokerage fees, material and labor and related items, sample expenses, +custom duty, inbound freight, royalty payments on licensed products, labels and +product packaging. All warehouse and distribution costs are included in the +operating expenses line item of our Consolidated Statement of Income. We +classify shipping costs, if any, to customers as operating expenses. Our gross +profit margins may not be comparable to other companies in the industry because +some companies may include warehouse and distribution as a component of cost of +sales, while other companies report on the same basis as we do and include them +in operating expenses. +ITEM 7A +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +($ in thousands) +We do not +engage in the trading of market risk sensitive instruments in the normal course +of business. Our financing arrangements are subject to variable interest rates +primarily based on the prime rate and LIBOR. An analysis of our credit +agreement with GMAC and Wells Fargo Century can be found in Note C, “Due From +Factors” to the Consolidated Financial Statements included in this Annual +Report on Form 10-K. +As of December +31, 2007, we held marketable securities valued at $80,411, which consist +primarily of corporate and municipal bonds, U.S. treasury notes, certificates +of deposit and auction rate securities that have various maturities through +December 2046, as well as marketable equity securities. These securities are +subject to interest rate risk and will decrease in value if interest rates +increase. We currently have the ability to hold these securities until +maturity. In addition, any decline in interest rates would be expected to +reduce our interest income. +At December +31, 2007, we held $37,325 in auction rate securities. The contractual +maturities of the investments underlying the auction rate securities mature at +various dates through 2046, however, all our auction rate securities, or ARSs, +have a reset period of less than 30 days. Through March 7, 2008, we +had reduced our total holdings in ARSs to $16,300, principally by investing in +other short-term investments as individual ARS reset periods came due and the +securities were once again subject to the auction process. Through March 7, 2008, +auctions for $8,800 of these securities were not successful, resulting in our +continuing to hold these securities and the issuers paying interest at the +maximum contractual rate. Based on current market conditions, it is likely that +auctions related to more of these securities will be unsuccessful in the near +term. Unsuccessful auctions could result in our holding securities beyond their +next scheduled auction reset dates if a secondary market does not develop, +therefore limiting the short-term liquidity of these investments. Accordingly, +$16,300 of auction rate securities is classified as long term as of December +31, 2007. While these failures in the auction process have affected our +ability to access these funds in the near term, we do not +believe that the underlying securities or collateral have been affected. We believe +that the higher reset rates on failed auctions provide +sufficient incentive for the security issuers to address this lack of +liquidity. If the credit rating of the security issuers deteriorates, we +may be required to adjust the carrying value of these investments +through an impairment charge. We expect to continue to earn interest +at the prevailing rates on the ASR’s that we hold. +ITEM 8 +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +See +the financial statements following Item 15 of this Annual Report on Form 10-K. +ITEM 9 +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND +FINANCIAL DISCLOSURE +None. +28 +ITEM 9A +CONTROLS AND PROCEDURES +Disclosure Controls and Procedures +As required by +Rule 13a-15(b) of the Exchange Act, our management, including our Chief +Executive Officer and Chief Financial Officer, has evaluated the effectiveness +of our disclosure controls and procedures as of the end of the fiscal year +covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief +Executive Officer and Chief Financial Officer have concluded that our +disclosure controls and procedures (as defined in Rule 13a-15(e) under the +Exchange Act) were effective as of the end of the fiscal year covered by this +Annual Report on Form 10-K. +Management’s Annual Report on Internal +Control Over Financial Reporting +Management of +Steven Madden, Ltd. is responsible for establishing and maintaining adequate +internal control over financial reporting (as defined in Rule 13a-15(f) of the +Securities Exchange Act of 1934). +Our 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 purpose in accordance with U.S. generally +accepted accounting principles. Our internal control over financial reporting +includes those policies and procedures that (1) pertain to maintenance of +records that, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of our assets; (2) provide reasonable assurance +that transactions are recorded as necessary to permit preparation of financial +statements in accordance with U.S. generally accepted accounting principles, +and that our receipts and expenditures are being made only in accordance with +authorizations of management and directors; and (3) provide reasonable assurance +regarding prevention or timely detection of unauthorized acquisition, use, or +disposition of our 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. +Under the supervision of and with the +participation of the Chief Executive Officer and the Chief Financial Officer, +our management conducted an assessment of the effectiveness of our internal +control over financial reporting based on the framework and criteria +established in Internal Control–Integrated Framework, issued by the Committee +of Sponsoring Organizations of the Treadway Commission. Based on this +assessment our management has concluded that, as of December 31, 2007, our internal +control over financial reporting was effective. +Attestation Report of our Independent +Registered Public Accounting Firm +Our +Independent Registered Public Accounting Firm, Eisner LLP, has audited and +issued a report on our internal control over financial reporting. The report of +Eisner LLP appears below. +To the Board +of Directors and Stockholders +Steven Madden, Ltd. +We have +audited Steven Madden, Ltd. and subsidiaries’ (the “Company”) internal control +over financial reporting as of December 31, 2007, based on criteria established +in Internal Control-Integrated Framework issued by the Committee of Sponsoring +Organizations of the Treadway Commission (“COSO”). The Company’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, included in the accompanying Management’s Annual Report on Internal +Control over Financial Reporting. Our responsibility is to express an opinion +on the Company’s internal control over financial reporting based on our audit. +29 +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, assessing the risk that a material weakness exists, and testing and +evaluating the design and operating effectiveness of internal control based on +the assessed risk. Our audit also included 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 (i) pertain to +the maintenance of records that, in reasonable detail, accurately and fairly +reflect the transactions and dispositions of the assets of the company; (ii) +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 (iii) 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, Steven Madden, Ltd. and subsidiaries maintained, in all material +respects, effective internal control over financial reporting as of December +31, 2007, based on criteria established in Internal Control - Integrated +Framework issued by COSO. +We also have +audited, in accordance with the standards of the Public Company Accounting +Oversight Board (United States), the consolidated balance sheets of Steven +Madden, Ltd. and subsidiaries as of December 31, 2007 and 2006, and the related +consolidated statements of income, changes in stockholders’ equity, and cash +flows for the years in the three-year period ended December 31, 2007, and our +report dated March 10, 2008 expressed an unqualified opinion on those +consolidated financial statements. +Eisner LLP +New York, New +York +March 10, 2008 +Changes in Internal Control Over Financial +Reporting +As +required by Rule 13a-15(d) under the Exchange Act, our management, including +our Chief Executive Officer and Chief Financial Officer, has evaluated our +internal controls over financial reporting to determine whether any changes +occurred during the fourth quarter of 2007 that have materially affected, or +are reasonably likely to materially affect, our internal control over financial +reporting. Based on that evaluation, there has been no such material change +during the fourth quarter of 2007. +ITEM 9B +OTHER INFORMATION +None. +30 +PART III +ITEM 10 +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The +information required to be furnished pursuant to this item will be set forth in +our proxy statement for the 2008 Annual Meeting of Stockholders, and is +incorporated herein by reference. +ITEM 11 +EXECUTIVE COMPENSATION +The +information required to be furnished pursuant to this item will be set forth in +our proxy statement for the 2008 Annual Meeting of Stockholders, and is +incorporated herein by reference. +ITEM 12 +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND +RELATED STOCKHOLDER MATTERS +The +information required to be furnished pursuant to this item will be set forth in +our proxy statement for the 2007 Annual Meeting of Stockholders, and is +incorporated herein by reference. +ITEM 13 +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR +INDEPENDENCE +The +information required to be furnished pursuant to this item will be set forth in +our proxy statement for the 2008 Annual Meeting of Stockholders, and is +incorporated herein by reference. +ITEM 14 +PRINCIPAL ACCOUNTANT FEES AND SERVICES +The +information required to be furnished pursuant to this item will be set forth in +our proxy statement for the 2008 Annual Meeting of Stockholders, and is +incorporated herein by reference. +PART IV +ITEM 15 +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a)(1) Financial Statements +The following consolidated financial statements of +Steven Madden, Ltd. and subsidiaries are included in Item 8: +31 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Contents +Page +Consolidated Financial Statements +Report +of Independent Registered Public Accounting Firm +F-2 +Balance +sheets as of December 31, 2007 and 2006 +F-3 +Statements +of income for the years ended December 31, 2007, 2006 and 2005 +F-4 +Statements +of changes in stockholders’ equity for the years ended December 31, 2007, +2006 and 2005 +F-5 +Statements +of cash flows for the years ended December 31, 2007, 2006 and 2005 +F-7 +Notes +to financial statements +F-8 +F-1 +REPORT +OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Board of Directors and Stockholders +Steven Madden, Ltd. +We have audited the accompanying consolidated balance +sheets of Steven Madden, Ltd. and subsidiaries (the “Company”) as of December +31, 2007 and 2006, and the related consolidated statements of income, changes +in stockholders’ equity and cash flows for the years in the three-year period +ended December 31, 2007. These +financial statements are the responsibility of the Company’s management. Our +responsibility is to express an opinion on these financial statements 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 Steven Madden, Ltd. and subsidiaries as of December 31, 2007 and +2006, and the consolidated results of their operations and their consolidated +cash flows for each of the years in the three-year period ended December 31, +2007 in conformity with U.S. generally accepted accounting principles. +As discussed in Notes K and +G to the consolidated financial statements, the Company adopted the provisions +of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, +an Interpretation of FASB Statement No. 109”, effective January 1, 2007 and its method of accounting for stock-based +compensation in accordance with Statement of Financial Accounting Standards No. +123, (Revised 2004) “Share-Based +Payment”, effective January 1, +2006, respectively. +We also have audited, in accordance with the standards +of the Public Company Accounting Oversight Board (United States), Steven +Madden, Ltd. and subsidiaries’ internal control over financial reporting as of +December 31, 2007, based on criteria established in Internal Control–Integrated +Framework issued by the Committee of Sponsoring Organizations of the Treadway +Commission (COSO), and our report dated March 10, 2008 expressed an unqualified +opinion thereon. +/s/ Eisner LLP +New York, New York +March 10, 2008 +F-2 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Balance +Sheets +(in thousands, except per share data) +December 31, +2007 +2006 +ASSETS +Current assets: +Cash and cash +equivalents +$ +29,446 +$ +19,204 +Accounts +receivable - net of allowances of $1,967 and $1,009 +8,351 +7,317 +Due from factors +- net of allowances of $13,479 and $11,499 +32,819 +40,208 +Inventories +27,197 +33,660 +Marketable +securities - available for sale +51,028 +72,542 +Prepaid expenses +and other current assets +5,840 +5,929 +Prepaid taxes +4,819 +1,084 +Deferred taxes +9,355 +8,099 +Total current +assets +168,855 +188,043 +Note receivable – related party +3,126 +— +Property and equipment, net +28,653 +22,842 +Deferred taxes +7,232 +6,794 +Deposits and other +3,202 +2,965 +Marketable securities - available for sale +29,383 +17,139 +Goodwill - net +15,922 +6,465 +Intangibles - net +10,148 +7,144 +Total assets +$ +266,521 +$ +251,392 +LIABILITIES +Current liabilities: +Accounts payable +$ +24,827 +$ +12,784 +Accrued expenses +16,757 +14,056 +Accrued +incentive compensation +6,133 +9,492 +Total current +liabilities +47,717 +36,332 +Deferred rent +3,470 +3,136 +Total liabilities +51,187 +39,468 +Commitments, contingencies and other – see notes J +& L +STOCKHOLDERS’ EQUITY +Preferred stock - $.0001 par value, 5,000 shares +authorized; none issued; Series A Junior Participating preferred stock - +$.0001 par value, 60 shares authorized; none issued +Common stock - $.0001 par value, 90,000 shares +authorized, 25,780 and 24,806 shares issued, 20,118 and 21,106 shares +outstanding at December 31, 2007 and 2006, respectively +3 +2 +Additional paid-in capital +129,913 +112,692 +Retained earnings +169,263 +133,561 +Other comprehensive loss: +Unrealized loss on marketable securities (net of +taxes) +(61 +) +(641 +) +Treasury stock – 5,662 and 3,700 shares at cost at +December 31, 2007 and 2006, respectively +(83,784 +) +(33,690 +) +Total stockholders’ equity +215,334 +211,924 +Total liabilities and stockholders’ equity +$ +266,521 +$ +251,392 +See +notes to financial statements +F-3 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements +of Income +(in thousands, except per share data) +Years Ended December 31, +2007 +2006 +2005 +Net sales: +Wholesale +$ +310,405 +$ +347,509 +$ +254,275 +Retail +120,645 +127,654 +121,511 +431,050 +475,163 +375,786 +Cost of sales: +Wholesale +205,584 +218,014 +175,292 +Retail +52,062 +58,720 +61,339 +257,646 +276,734 +236,631 +Gross profit: +Wholesale +104,821 +129,495 +78,983 +Retail +68,583 +68,934 +60,172 +173,404 +198,429 +139,155 +Commission and licensing fee income – net +18,351 +14,246 +7,119 +Operating expenses +(138,841 +) +(134,377 +) +(114,185 +) +Impairment of goodwill +— +— +(519 +) +Income before other income (expenses) and provision +for income taxes +52,914 +78,298 +31,570 +Other income (expenses): +Interest income +3,876 +3,703 +2,554 +Interest expense +(65 +) +(100 +) +(164 +) +Loss on sale of +marketable securities +(589 +) +(967 +) +(500 +) +Income before provision for income taxes +56,136 +80,934 +33,460 +Provision for income taxes +20,446 +34,684 +14,260 +Net income +$ +35,690 +$ +46,250 +$ +19,200 +Basic income per share +$ +1.73 +$ +2.21 +$ +0.95 +Diluted income per share +$ +1.68 +$ +2.09 +$ +0.92 +Basic weighted average shares of common stock +outstanding +20,647 +20,906 +20,112 +Effect of dilutive securities – options and +restricted stock +645 +1,195 +806 +Diluted weighted average shares of common stock +outstanding +21,292 +22,101 +20,918 +Dividends paid per share of common stock +$ +0.00 +$ +1.00 +$ +0.67 +See +notes to financial statements +F-4 +STEVEN MADDEN, LTD. +AND SUBSIDIARIES +Consolidated Statements of Changes in Stockholders’ Equity +(in thousands) +Common Stock +Additional Paid-in +Retained +Unearned +Shares +Amount +Capital +Earnings +Compensation +Balance - December 31, 2004 +21,912 +$ +1 +$ +80,631 +$ +103,451 +$ +(703 +) +Exercise of stock options +2,133 +1 +16,482 +Tax benefit from exercise of options +4,604 +Issuance of fully vested restricted stock +180 +Cash in lieu of +restricted stock +(1,767 +) +Amortization of unearned compensation +703 +Unrealized holding loss on marketable +securities (net of taxes of $199) +Net income +19,200 +Comprehensive income +Cash dividend paid +(13,813 +) +Common stock purchased for treasury +Balance - December 31, 2005 +24,225 +2 +99,950 +108,838 +— +Exercise of stock options +551 +6,837 +Tax benefit from exercise of options +3,611 +Issuance of fully vested restricted stock +30 +Stock-based compensation +2,294 +Unrealized holding loss on marketable +securities (net of taxes of $476) +Net income +46,250 +Comprehensive income +Cash dividend paid +(21,527 +) +Common stock purchased for treasury +Balance - December 31, 2006 +24,806 +2 +112,692 +133,561 +— +Exercise of stock options +863 +1 +5,607 +Tax benefit from exercise of options +7,180 +Issuance of fully vested restricted stock +111 +Stock-based compensation +4,434 +Unrealized holding gain on marketable securities (net of taxes of $426) +Net income +35,690 +Comprehensive income +Forfeiture of accrued dividends +12 +Common stock purchased for treasury +Balance - December 31, 2007 +25,780 +$ +3 +$ +129,913 +$ +169,263 +$ +— +See notes to financial statements +F-5 +STEVEN MADDEN, LTD. +AND SUBSIDIARIES +Consolidated Statements of Changes in Stockholders’ Equity (Continued) +(in thousands) +Accumulated +Other Comprehensive +Gain (Loss) +Treasury Stock +Total +Stockholders’ +Equity +Comprehensive +Income +Shares +Amount +Balance - December 31, 2004 +$ +(1,024 +) +2,685 +$ +(17,691 +) +$ +164,665 +Exercise of stock options +16,483 +Tax benefit from exercise of options +4,604 +Issuance of fully vested restricted stock +Cash in lieu of restricted +stock +(1,767 +) +Amortization of unearned compensation +703 +Unrealized holding loss on marketable +securities (net of taxes of $199) +(275 +) +(275 +) +(275 +) +Net income +19,200 +19,200 +Comprehensive income +$ +18,925 +Cash dividend paid +(13,813 +) +Common stock purchased for treasury +666 +(7,735 +) +(7,735 +) +Balance - December 31, 2005 +(1,299 +) +3,351 +(25,426 +) +182,065 +Exercise of stock options +6,837 +Tax benefit from exercise of options +3,611 +Issuance of fully vested restricted stock +Stock-based compensation +2,294 +Unrealized holding loss on marketable +securities (net of taxes of $476) +658 +658 +658 +Net income +46,250 +46,250 +Comprehensive income +$ +46,908 +Cash dividend paid ($421 of which is +payable to holders of restricted stock pending the vesting of these shares) +(21,527 +) +Common stock purchased for treasury +349 +(8,264 +) +(8,264 +) +Balance - December 31, 2006 +(641 +) +3,700 +(33,690 +) +211,924 +Exercise of stock options +5,608 +Tax benefit from exercise of options +7,180 +Issuance of fully vested restricted stock +Stock-based compensation +4,434 +Unrealized holding gain on marketable +securities (net of taxes of $426) +580 +580 +580 +Net income +35,690 +35,690 +Comprehensive income +$ +36,270 +Forfeiture of accrued dividends +12 +Common stock purchased for treasury +1,962 +(50,094 +) +(50,094 +) +Balance - December 31, 2007 +$ +(61 +) +5,662 +$ +(83,784 +) +$ +215,334 +See notes to financial statements +F-6 +STEVEN MADDEN, LTD. +AND SUBSIDIARIES +Consolidated Statements of Cash Flows +(in thousands) +Years Ended December 31, +Cash flows from operating activities: +2007 +2006 +2005 +Net income +$ +35,690 +$ +46,250 +$ +19,200 +Adjustments to reconcile net income to net +cash provided by operating activities: +Stock-based compensation +4,434 +2,294 +703 +Excess tax benefits from the exercise of +options +(7,180 +) +(3,611 +) +(4,604 +) +Depreciation and amortization +8,435 +6,705 +5,120 +Loss on disposal of fixed assets +760 +1,857 +535 +Impairment of goodwill +— +— +519 +Deferred taxes +(2,120 +) +(4,210 +) +(2,691 +) +Provision for doubtful accounts and +chargebacks +2,938 +3,048 +5,485 +Deferred rent expense +334 +379 +669 +Realized loss on sale of marketable +securities +589 +967 +500 +Changes in: +Accounts receivable +(1,992 +) +(2,275 +) +(1,197 +) +Due from factors +5,409 +(10,136 +) +(3,282 +) +Notes receivable – related +party +(3,126 +) +— +— +Inventories +6,463 +635 +5,972 +Prepaid expenses, prepaid taxes, deposits +and other assets +3,189 +1,478 +3,980 +Accounts payable and accrued expenses +9,443 +(6,136 +) +4,320 +Accrued incentive compensation +(3,359 +) +6,163 +2,909 +Net cash provided by operating activities +59,907 +43,408 +38,138 +Cash flows from investing activities: +Purchase of property and equipment +(12,965 +) +(9,511 +) +(5,822 +) +Purchases of marketable securities +(66,505 +) +(44,690 +) +(27,252 +) +Maturity/sale of marketable securities +76,192 +21,434 +9,153 +Acquisitions, net of cash acquired +(9,080 +) +(15,357 +) +— +Net cash used in investing activities +(12,358 +) +(48,124 +) +(23,921 +) +Cash flows from financing activities: +Proceeds from exercise of stock options +5,607 +6,837 +16,483 +Excess tax benefit from the exercise of +options +7,180 +3,611 +4,604 +Cash dividend paid +— +(21,106 +) +(13,813 +) +Cash in lieu of restricted stock +— +— +(1,767 +) +Common stock purchased for treasury +(50,094 +) +(8,264 +) +(7,735 +) +Net cash used in financing activities +(37,307 +) +(18,922 +) +(2,228 +) +Net increase (decrease) in cash and cash +equivalents +10,242 +(23,638 +) +11,989 +Cash and cash equivalents - beginning of year +19,204 +42,842 +30,853 +Cash and cash equivalents – end of year +$ +29,446 +$ +19,204 +$ +42,842 +Supplemental disclosures of cash flow +information: +Cash paid during the year for: +Interest +$ +65 +$ +100 +$ +164 +Income taxes +$ +20,178 +$ +33,886 +$ +12,536 +Non-cash transactions +Dividend accrual (forfeitures) related to +restricted stock +$ +(16 +) +$ +421 +$ +— +See notes to financial statements +F-7 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE A – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES +[1] +Organization: +Steven +Madden, Ltd., a Delaware corporation, designs, sources, markets and retails +women’s, men’s and children’s shoes, for sale through its wholesale and +retail channels under the Steve Madden, Steven and Madden Mens and through +its wholesale channels under the Stevies, Madden Girl and Candie’s (under +license) brand names. In addition, +the Company designs, sources, markets and sells name brand and private label +fashion handbags and accessories to customers located in the United States +through its Daniel M. Friedman domestic and foreign Divisions. Revenue is generated predominately through +the sale of the Company’s brand name merchandise and certain licensed +products. At December 31, 2007 and 2006, +the Company operated 101 and 96 retail stores (including its website as a store), +respectively. Revenue is subject to +seasonal fluctuations. See Note M for +operating segment information. +[2] +Principles of consolidation: +The +Consolidated Financial Statements include the accounts of Steven Madden, Ltd. +and its wholly owned subsidiaries Steven Madden Retail, Inc., Diva +Acquisition Corp., Adesso Madden, Inc., Stevies, Inc. and Daniel M. Friedman +and Associates, Inc. (collectively referred to as the “Company”). All significant intercompany balances and +transactions have been eliminated. +[3] +Use of estimates: +The +preparation of financial statements in conformity with accounting principles +generally accepted in the United States of America requires management to +make estimates and assumptions that affect the reported amounts of assets and +liabilities and disclosure of contingent assets and liabilities at the date +of the financial statements and the reported amounts of revenue and expenses +during the reporting period. Actual results +could differ from those estimates. +The +significant areas involving management estimates include allowances for bad +debts, returns and customer chargebacks. +The Company provides reserves on trade accounts receivables for future +customer chargebacks and markdown allowances, discounts, returns and other +miscellaneous compliance related deductions that relate to the current period +sales. The Company evaluates +anticipated chargebacks by reviewing several performance indicators of its +major customers. These performance +indicators, which include retailers’ inventory levels, sell through rates and +gross margin levels, are analyzed by key account executives and the Vice +President of Wholesale Sales to estimate the amount of the anticipated +customer allowance. +[4] +Cash equivalents: +Cash +equivalents at December 31, 2007 and 2006 amounted to approximately $10,765 +and $11,121, respectively, and consisted of money market accounts and +commercial paper. The Company +considers all highly liquid instruments with an original maturity of three months +or less when purchased to be cash equivalents. +F-8 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE A – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (CONTINUED) +[5] +Marketable securities: +Marketable +securities consist primarily of corporate and municipal bonds, U.S. treasury +notes, certificates of deposit and auction rate securities with maturities +greater than three months and up to five years at the time of purchase, as +well as marketable equity securities. +These securities, which are classified as available for sale, are +carried at fair value, with unrealized gains and losses net of any tax effect +reported in stockholders’ equity as accumulated other comprehensive income, +and are held at an investment bank with the schedule of maturities at +December 31, 2007 as follows: +3 +Maturities as of +Maturities as of +December 31, 2007 +December 31, 2006 +1 Year or Less +1 to 5 Years +1 Year or Less +1 to 5 Years +Schedule of maturities: +Municipal bonds +$ +12,227 +$ +7,682 +$ +21,869 +$ +7,072 +U.S. Government and Federal agency bonds +3,240 +— +1,980 +3,175 +Corporate bonds +3,475 +5,401 +7,326 +4,849 +Auction rate securities +21,025 +16,300 +33,175 +— +Certificates of deposit +2,320 +— +— +2,043 +42,287 +29,383 +64,350 +17,139 +Marketable equity securities +8,741 +— +8,192 +— +$ +51,028 +$ +29,383 +$ +72,542 +$ +17,139 +At December +31, 2007, the Company held $37,325 in auction rate securities. The contractual maturities of the +investments underlying the auction rate securities mature at various dates +through 2046, however, all the Company's auction rate securities, or ARSs, have a reset +period of less than 30 days. Through +March 7, 2008, the Company had reduced its total holdings in ARSs to $16,300, +principally by investing in other short-term investments as individual ARS +reset periods came due and the securities were once again subject to the +auction process. Through March 7, +2008, auctions for $8,800 of these securities were not successful, resulting +in the Company continuing to hold these securities and the issuers paying interest at +the maximum contractual rate. Based +on current market conditions, it is likely that auctions related to more of +these securities will be unsuccessful in the near term. Unsuccessful auctions could result in the Company +holding securities beyond their next scheduled auction reset dates if a +secondary market does not develop, therefore limiting the short-term +liquidity of these investments. Accordingly, +$16,300 of auction rate securities are classified as long term as of December +31, 2007. While these failures in the +auction process have affected the Company’s ability to access these funds in +the near term, the Company does not believe that the underlying securities or +collateral have been affected. The +Company believes that the higher reset rates on failed auctions provide +sufficient incentive for the security issuers to address this lack of +liquidity. If the credit rating of +the security issuers deteriorates, the Company may be required to adjust the +carrying value of these investments through an impairment charge. The Company expects to continue to earn +interest at the prevailing rates on the ASR’s that we hold. +[6] +Inventories: +Inventories, +which consist of finished goods on hand and in transit, are stated at the +lower of cost (first-in, first-out method) or market. +[7] +Property and equipment: +Property and +equipment are stated at cost less accumulated depreciation and +amortization. Depreciation is +computed utilizing the straight-line method based on estimated useful lives +ranging from three to ten years. +Leasehold improvements are amortized utilizing the straight-line +method over the shorter of their estimated useful lives or the remaining +lease term. Depreciation and +amortization include amounts relating to property and equipment under capital +leases. +F-9 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE A – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (CONTINUED) +Impairment +losses are recognized for long-lived assets, including certain intangibles, +used in operations when indicators of impairment are present and the +undiscounted cash flows estimated to be generated by those assets are not +sufficient to recover the assets’ carrying amount. Impairment losses are measured by comparing the fair value of +the assets to their carrying amount. +[8] +Goodwill: +The Company +accounts for goodwill and intangible assets in accordance with SFAS No. 142, +“Goodwill and Other Intangible Assets” (“SFAS 142”). Under SFAS 142, amortization of goodwill +and indefinite lived intangible assets are not amortized, rather they are +tested for impairment on an annual basis or more often if events or +circumstances change that could cause these assets to become impaired. +During 2005, +the balance of the goodwill of $519 relating to the Shoe Biz name was +considered impaired and was recognized as a reduction of income. +The Company +completed its annual impairment test on the goodwill relating to the Daniel +M. Friedman acquisition in the third quarter of 2007. No impairment was recognized. +[9] +Net income per share: +Basic income +per share is based on the weighted average number of shares of common stock +outstanding during the year. Diluted +income per share reflects: a) the potential dilution assuming shares of +common stock were issued upon the exercise of outstanding in-the-money +options and the proceeds thereof were used to purchase treasury stock at the +average market price during the period, and b) the vesting of granted +nonvested restricted stock awards for which the assumed proceeds upon grant +are deemed to be the amount of compensation cost attributable to future +services and are not yet recognized using the treasury stock method, to the +extent dilutive. For the years ended +December 31, 2007, 2006 and 2005, no options exercisable into shares of +common stock have been excluded in the calculation of diluted income per +share. For the years ended December 31, 2007, 2006 and 2005, the unvested +restricted stock awards were dilutive. +[10] +Advertising costs: +The Company +expenses costs of print, radio and billboard advertisements as of the first +date the advertisements take place. +Advertising expense included in operating expenses amounted to +approximately $4,831 in 2007, $7,187 in 2006 and $8,354 in 2005. +[11] +Fair value of financial instruments: +The carrying +value of the Company’s financial instruments approximates fair value due to +their short-term nature or their underlying terms. Marketable securities are carried at quoted market prices which +represent fair value. +F-10 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE A – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (CONTINUED) +[12] +Revenue recognition: +The Company +recognizes revenue on wholesale sales when products are shipped pursuant to +its standard terms which are freight on board (FOB) warehouse or when +products are delivered to the consolidators as per the terms of the +customers’ purchase order. Sales +reductions for anticipated discounts, allowances and other deductions are +recognized when sales are recorded. +Customers retain the right to replacement of the product for +poor quality or +improper or short shipments, which have historically been +immaterial. Retail sales are +recognized when the payment is received from customers and are recorded net +of returns. The Company also +generates commission income acting as a buying agent by arranging to +manufacture private label shoes to the specifications of its clients. The Company’s revenue includes partial +recovery of its design, product and development costs for the services +provided to certain suppliers in connection with the Company’s private label +business. Commission revenue and +product and development cost recoveries are recognized as earned when title +of the product transfers from the manufacturer to the customer and is +reported on a net basis after deducting operating expenses. +The Company +licenses its trademarks for use in connection with the manufacturing, +marketing and sale of cold weather accessories, sunglasses, eyewear, +outerwear, hosiery and children’s apparel. The license agreements require the +licensee to pay the Company a royalty and, in substantially all of the +agreements, an advertising fee based on the higher of a minimum or a net +sales percentage as defined in the various agreements. In addition, under the terms of retail +selling agreements, most of the Company’s international distributors are +required to pay the Company a royalty based on a percentage of net sales, in +addition to a commission on the purchases of the Company’s products. Licensing revenue is recognized on the +basis of net sales reported by the licensees and international +distributors, or the minimum guaranteed royalties, if higher. In substantially all of the Company’s +license agreements, the minimum guaranteed royalty is earned and payable on a +quarterly basis. +[13] +Taxes collected from customers: +In June of +2006, the FASB issued Emerging Issues Task Force 06-03, “How Taxes Collected +from Customers and Remitted to Governmental Authorities Should Be Presented +in the Income Statement” (“EITF 06-03”). +The consensus reached in EITF 06-03 allows companies to adopt a policy +of presenting taxes in the income statement on either a gross basis (included +in revenues and costs) or net basis (excluded from revenues). Taxes within the scope of EITF 06-03 would +include taxes that are imposed on a revenue transaction between a seller and +a customer, for example, sales taxes, use taxes, value-added taxes and some +types of excise taxes. The Company +records taxes within the scope of EITF 06-03 on a net basis. +[14] +Sales deductions: +The Company +supports retailers’ initiatives to maximize sales of the Company’s products +on the retail floor by subsidizing the co-op advertising programs of such +retailers, providing them with inventory markdown allowances and +participating in various other marketing initiatives of its major +customers. Such expenses are +reflected in the financial statements as deductions to net sales. For the years ended December 31, 2007, +2006 and 2005 the total deductions to net sales for these expenses were +$43,691, $35,267 and $36,356, respectively. +[15] +Cost of sales: +All costs +incurred to bring finished products to the Company’s distribution center and, +in the Retail Division, the costs to bring products to the Company’s stores, +are included in the cost of sales line on the Consolidated Statement of +Income. These include the cost of +finished products, purchase commissions, letter of credit fees, brokerage +fees, sample expenses, custom duty, inbound freight, royalty payments on +licensed products, labels and product packaging. All warehouse and distribution costs related to the Wholesale +Division and freight to customers, if any, are included in the operating +expenses line item of the Company’s Consolidated Statement of Income. The Company’s gross margins may not be +comparable to other companies in the industry because some companies may +include warehouse and distribution costs as a component of cost of sales, +while other companies report on the same basis as the Company and include +them in operating expenses. +F-11 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE A – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (CONTINUED) +[16] +Warehouse and shipping costs: +The Company +includes all warehouse and distribution costs for the Wholesale Division in +the Operating Expenses line on the Consolidated Statements of Income. For the years ended December 31, 2007, +2006 and 2005, the total warehouse and distribution costs included in +Operating Expenses were $8,957, $8,901 and $6,229 respectively. The Company’s standard terms of sales are +“FOB Steve Madden warehouse” and thus the Company’s wholesale customers +absorb most shipping costs. Shipping +costs to wholesale customers incurred by the Company are not considered +significant and are included in the Operating Expense line in the +Consolidated Statements of Income. +[17] +Impairment of long-lived assets: +The Company +reviews long-lived assets, including amortizable intangible assets, for +impairment whenever events or changes in business circumstances indicate that +the carrying amount of the asset may not be fully recoverable. If facts and circumstances indicate that +the Company’s long-lived assets might be impaired, the estimated future +undiscounted cash flows associated with the long-lived asset would be +compared to its carrying amounts to determine if a write-down to fair value +is necessary. If a write-down is +required, the amount is determined by estimation of the present value of net +discounted cash flows in accordance with SFAS No. 144, “Accounting for the +Impairment or Disposal of Long-Lived Assets”. +[18] +401(k) Plan: +The Company +maintains a tax-qualified 401(k) plan which is available to each of the +Company’s eligible employees who elect to participate after meeting certain +length-of-service requirements. The +Company makes discretionary matching contributions of 25% in 2006 and 2005, +and 50% in 2007, of employees’ contributions up to a maximum of 6% of +employees’ compensation which vest to the employees over a period of +time. Total matching contributions to +the plan for 2007, 2006 and 2005 were approximately $513, $180 and $176, +respectively. +[19] +Prior years’ reclassifications: +Royalty payments. The Company has reclassified royalty payments on its +Consolidated Statements of Income from operating expenses to cost of +sales. This reclassification resulted +in an increase in the wholesale cost of sales for the year ended December 31, +2005 of $3,345, with a corresponding decrease to operating expenses in the +same periods. This reclassification had +no impact on the net income of the Company. +Balance Sheet reclassifications . Certain +prior period amounts on the balance sheet have been reclassified to conform +to the current period presentation. +F-12 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE A – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (CONTINUED) +[20] +Recently issued accounting standards: +In September +2006, the FASB issued Statement of Financial Accounting Standards No. 157, +“Fair Value Measurements” (“SFAS No. 157”). +SFAS No. 157 clarifies the principle that fair value should be based +on the assumptions market participants would use when pricing an asset or liability +and establishes a fair value hierarchy that prioritizes the information used +to develop those assumptions. On +December 14, 2007, the FASB issued proposed FASB Staff Position No. FAS +157-b, “Effective Date of FASB Statement No. 157” (the proposed FSP). The +proposed FSP would amend FASB Statement No. 157, +“Fair Value Measurements” +(Statement 157), to delay the effective date of Statement 157 for all +nonfinancial assets and nonfinancial liabilities, except those that are +recognized or disclosed at fair value in the financial statements on a +recurring basis (that is, at least annually). The proposed FSP defers the +effective date of Statement 157 to fiscal years beginning after November 15, +2008, and interim periods within those fiscal years for items within the +scope of the proposed FSP. We have +not yet determined the impact, if any, that the implementation of SFAS No. +157 will have on our results of operations or financial condition. +In February +2007, the FASB issued Statement of Financial Accounting Standards No. 159, +“The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS +No. 159”). SFAS No. 159 permits +entities to choose to measure many financial instruments and certain other +items at fair value that are not currently required to be measured at fair +value. SFAS No. 159 also establishes +presentation and disclosure requirements designed to facilitate comparisons +between entities that chose different measurement attributes for similar +assets and liabilities. SFAS No. 159 +is effective for financial statements issued for fiscal years beginning after +November 15, 2007. We have not yet +determined the impact, if any, that the implementation of SFAS No. 159 will +have on our results of operations or financial condition. +In December +of 2007, the FASB issued Statement of Financial Accounting Standards No. +141R, “Business Combinations” (“SFAS No. 141R”), which replaces FASB +Statement No. 141. Under SFAS No. +141R, an acquiring entity will be required to recognize all the assets +acquired and liabilities assumed in a transaction at the acquisition-date +fair value with limited exceptions. SFAS No. 141R establishes principles and +requirements for how an acquirer recognizes and measures in its financial +statements the identifiable assets acquired, the liabilities assumed, any +non-controlling interest in the acquiree and the goodwill acquired. This statement also establishes disclosure +requirements which will enable users to evaluate the nature and financial +effects of the business combination. +SFAS No. 141R is effective for financial statements issued for fiscal +years beginning after December 15, 2008. +Early adoption is prohibited. +We have not yet determined the impact, if any, that the implementation +of SFAS No. 141R will have on our results of operations or financial +condition. +In December +2007, the FASB issued Statement of Financial Accounting Standards No. 160, +“Noncontrolling Interests in Consolidated Financial Statements – An Amendment +of ARB No. 51” (SFAS No. 160”). SFAS +No. 160 establishes new accounting and reporting standards for the +noncontrolling interest in a subsidiary and for the deconsolidation of a +subsidiary. Specifically, this +statement requires the recognition of a noncontrolling interest (minority +interest) as equity in the Consolidated Financial Statements and separate +from the parent’s equity. The amount +of net income attributable to the noncontrolling interest will be included in +consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a +parent’s ownership interest in a subsidiary that do not result in +deconsolidation are equity transactions if the parent retains its controlling +financial interest. In addition, this +statement requires that a parent recognize a gain or loss in net income when +a subsidiary is deconsolidated. Such +gain or loss will be measured using the fair value of the noncontrolling +equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements +regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years +beginning on or after December 15, 2008. +Earlier adoption is prohibited. +N OTE B – A CQUISITIONS +Compo Enhancements +On May 16, +2007, the Company acquired all of the outstanding membership interests of +privately held Compo Enhancements, LLC (“Compo”), a Connecticut Limited +Liability Company. Compo was founded +in late 2005 as a third party provider of e-commerce solutions for the +Company. The acquisition enables the +Company to fully integrate its e-commerce business into the Company’s Retail +Division and operate its online business internally. +F-13 +STEVEN +MADDEN, LTD. AND SUBSIDIARIES +Notes to +Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE B – A CQUISITIONS ( CONTINUED ) +The acquisition, which +was accounted for using the purchase method of accounting as required by SFAS +Statement No. 141, “Business Combinations”, +was completed for a consideration of $8,982, inclusive of transaction +costs, subject to adjustments which include certain earn-out provisions based +on the Company’s financial performance through 2012. In December of 2007, Jeffrey Silverman, the founder and CEO of +Compo, reached an agreement with the Company to surrender his rights under the +earn-out agreement in exchange for a cash payment which, combined with other +purchase adjustments, increased the total consideration to $9,679. The +total purchase price has been allocated as follows: +Current assets +$ +50 +Property and equipment +143 +Intangible assets +4,744 +Goodwill +5,501 +Liabilities assumed +(759 +) +Net assets acquired +$ +9,679 +The results of operations of +Compo have been included in the Company’s Condensed Consolidated Statements of +Income from the date of the acquisition. +Unaudited pro forma information related to this acquisition is not +included, as the impact of this transaction is not material to the Company’s +consolidated results. In connection +with the acquisition, Mr. Silverman has been appointed President of the +Company. Mr. Silverman’s contract, +which was to expire on December 31, 2009, provides for an annual salary of $600 +and an annual bonus based on EBIT. In +addition, Mr. Silverman was granted 150,000 stock options with an exercise +price of $45 and an additional 150,000 stock options with an exercise price of +$50, all of which were to vest over three years. In December of 2007, an amendment to Mr. Silverman’s contract +shortened the expiration date to June 30, 2008, eliminated the bonus provision +of the contract and cancelled all of the stock options. +Daniel +M. Friedman +On February 7, 2006, the Company +acquired all of the equity interest of privately held Daniel M. Friedman and +Associates, Inc. and D.M.F. International (collectively, “Daniel M. +Friedman”). Founded in 1995, Daniel M. +Friedman designs, sources and markets name brand fashion handbags and +accessories. The acquisition was +completed for consideration of $18,710, including transaction costs. In addition, the purchase agreement includes +certain earn-out provisions based on financial performance through 2010. On April 10, 2007, an amendment to +the agreement shortened the earn-out period by one year through December 31, +2008 and advanced the earn-out payments from 2008 to 2007. The 2007 earn-out provision of $3,956 was +charged to goodwill and increased the total acquisition cost to $22,666. +F-14 +STEVEN +MADDEN, LTD. AND SUBSIDIARIES +Notes to +Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE B – A CQUISITIONS ( CONTINUED ) +The Daniel M. Friedman acquisition was accounted for +using the purchase method of accounting as required by SFAS Statement No. 141, +“Business Combinations”. Accordingly, +the assets and liabilities of Daniel M. Friedman were adjusted to their fair +values, and the excess of the purchase price over the fair value of the assets +acquired, including identified intangible assets, was recorded as +goodwill. The fair values assigned to +tangible and intangible assets acquired and liabilities assumed are based on +management’s estimates and assumptions, as well as third-party independent +valuations. The total purchase price +has been allocated as follows: +Current assets +$ +9,772 +Property and equipment +289 +Deposits +62 +Intangible assets +8,400 +Goodwill +8,874 +Liabilities assumed +(4,731 +) +Net assets acquired +$ +22,666 +The purchase price and related allocation may be +revised as a result of adjustments made to the purchase price pursuant to the +earn-out provisions. +Pursuant to the acquisition, the Company has a note +receivable from the former owner and namesake of Daniel M. Friedman in the +amount of $1,250. The note, which has +an interest rate of 5%, is due and payable on the same day that the final +earn-out payment is due. The note +allows the maker to offset the principal and interest due on the note against +any earn-out monies that might be due to him. +The note is included in the “Deposits and other” category on the +Company’s Consolidated Balance Sheets. +The results of operations for Daniel M. Friedman have +been included in the Company’s Consolidated Statements of Income from the date +of the acquisition. The following +unaudited pro forma information presents the results of the Company’s +operations as though the Daniel M. Friedman acquisition had occurred on January +1, 2004. The pro forma information, as +presented below, is not indicative of the results that would have been obtained +had the transaction occurred on January 1, 2004, nor is it indicative of the +Company’s future results. +Years +Ended December 31, +(unaudited) +2006 +2005 +Net sales +$ +479,195 +$ +417,299 +Operating income +$ +78,993 +$ +31,216 +Net income +$ +46,631 +$ +18,988 +Basic earnings per share +$ +2.23 +$ +0.94 +Diluted earnings per share +$ +2.11 +$ +0.91 +N OTE C – D UE F ROM F ACTORS +Under the terms of its +factoring agreement with GMAC +Commercial Finance LLC (“GMAC”), as amended, the Company may request +advances from the factor of up to 80% of aggregate receivables purchased by the +factor at an interest rate equal to the lower of the prime rate less 0.875% or +the 30-day London Interbank Offered Rate (“LIBOR”) plus 1.375%. The agreement, which has no specific +expiration date and can be terminated by either party with sixty (60) days written +notice after June 30, 2009, provides the Company with a $50 million credit +facility with a $25 million sub-limit on the aggregate face amount of Letters +of Credit. The Company also pays a fee +that varies depending on the customer of between 0.15% and 0.25% of the gross +invoice amount of each receivable purchased. +The Company sells and assigns a substantial portion of its receivables, +principally without recourse, to the factor. +As of December 31, 2007 and 2006, $272 and $260 of factored +receivables, respectively, were sold by the Company with recourse. GMAC +maintains a lien on all of the Company’s receivables and assumes the credit +risk for all assigned accounts approved by them with certain restrictions. +F-15 +STEVEN +MADDEN, LTD. AND SUBSIDIARIES +Notes to +Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE C – D UE F ROM F ACTORS ( CONTINUED ) +The Company’s Daniel M. +Friedman Division had a factoring agreement with Wells Fargo Century that +expired on June 30, 2007. Under +the terms of the agreement, the Company was eligible to draw down 85% of its +invoiced receivables at an interest rate equal to the prime rate. The +Company paid a fee equal to 0.45% of the gross invoice amount of each +receivable purchased. Wells Fargo Century maintained a lien on all of +Daniel M. Friedman’s receivables and assumed the credit risk for all assigned +accounts approved by them with certain restrictions. As of July 1, 2007, Daniel M. Friedman has +been incorporated into the GMAC agreement. +A “factored” sale (whether “with” or “without” +recourse) is substantially the same as a non-factored sale and the Company +accounts for its factored sales/receivables in the same manner as its +non-factored sales/receivables. The +factor services the collection of the Company’s accounts receivable. Funds collected by the factor are applied +against advances owed to the factor (if any), and the balance is due and +payable to the Company, net of any fees. +The allowance against “due from factor” is a projected provision based +on certain formulas and prior approvals for markdowns, allowances, discounts, +advertising and other deductions that customers may deduct against their +payments. +N OTE D – N OTE R ECEIVABLE – RELATED PARTY +On June 25, 2007, the +Company made a loan to Steve Madden, its Creative and Design Chief and a +principal shareholder of the Company, in the amount of $3,000, in order for Mr. +Madden to exercise options that were due to expire and hold the underlying +Company stock. Mr. Madden executed a +secured promissory note in favor of the Company that bears interest at an +annual rate of 8% and is due on the earlier of the date Mr. Madden ceases to be +employed by the Company or December 31, 2007. +An amendment to the note dated December 19, 2007 extended the due date +to March 31, 2009. As of December 31, +2007, $126 of interest has accrued on the note and has been reflected on the +Company’s Consolidated Financial Statements. +Pursuant to a pledge agreement between the Company and Mr. Madden, the +note is secured by 510,000 shares of the Company’s common stock. +N OTE E – P ROPERTY AND E QUIPMENT +The +major classes of assets and total accumulated depreciation and amortization are +as follows: +December +31, +2007 +2006 +Leasehold improvements +$ +37,421 +$ +31,790 +Machinery and +equipment +3,620 +1,119 +Furniture and +fixtures +4,595 +4,563 +Computer +equipment +11,578 +9,238 +57,214 +46,710 +Less accumulated +depreciation and amortization +(28,561 +) +(23,868 +) +Property and +equipment - net +$ +28,653 +$ +22,842 +F-16 +STEVEN +MADDEN, LTD. AND SUBSIDIARIES +Notes to +Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE F – G OODWILL AND I NTANGIBLE +A SSETS +The following is a summary of +the carrying amount of goodwill by segment for the year ended December 31, +2007: +Wholesale +Net Carrying +Women’s +Accessories +Retail +Amount +Balance at +January 1, 2007 +$ +1,547 +$ +4,918 +$ +0 +$ +6,465 +Acquisition of +Compo +0 +0 +5,501 +5,501 +Additional +purchase price - DMF +0 +3,956 +0 +3,956 +Balance at December 31, 2007 +$ +1,547 +$ +8,874 +$ +5,501 +$ +15,922 +The following table details identifiable intangible +assets as of December 31, 2007: +Estimated lives +Cost basis +Accumulated +Amortization +Net Carrying Amount +Trade name +6 years +$ +200 +$ +65 +$ +135 +Customer relationships +10 years +6,400 +740 +5,660 +License +agreements +3-6 years +5,600 +2,059 +3,541 +Non-compete +agreement +5 years +930 +129 +801 +Other +3 years +14 +3 +11 +$ +13,144 +$ +2,996 +$ +10,148 +The amortization of intangible +assets is included in operating expenses on the Company’s Consolidated +Statements of Income. The estimated +future amortization expense of purchased intangibles as of December 31, 2007 is +as follows: +2008 +$ +1,962 +2009 +1,859 +2010 +1,856 +2011 +1,380 +2012 +642 +Thereafter +2,449 +$ +10,148 +F-17 +STEVEN +MADDEN, LTD. AND SUBSIDIARIES +Notes to +Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE G – S TOCK -B ASED C OMPENSATION +In March 2006, the Board of Directors approved the +Steven Madden, Ltd. Stock Incentive Plan (the “Plan”) under which nonqualified +stock options, stock appreciation rights, performance shares, restricted stock, +other stock-based awards and performance-based cash awards may be granted to +employees, consultants and non-employee directors. The shareholders approved the Plan on May 26, 2006. The number of shares that +may be issued or +used under the Plan cannot exceed 1,200,000 shares. On May 25, 2007, the stockholders approved an amendment to the +Plan to increase the maximum number of shares that may be issued under the Plan +to 1,550,000. The following table +summarizes the number of Common Stock shares authorized for use in the Plan, +the amount of stock-based awards issued (net of expired or cancelled) and the +amount of Common Stock available for the grant of stock-based awards under the +Plan: +Common Stock +authorized +1,550,000 +Stock based awards, including restricted stock and stock options, granted net of expired or cancelled +623,000 +Common Stock +available for grant of stock based awards as of December 31, 2007 +927,000 +The Company has established various stock option plans +entitled “The 1993 Incentive Stock Option Plan”, “The 1995 Stock Plan”, “The +1996 Stock Plan”, “The 1997 Stock Plan” and “The 1999 Stock Plan” under which +options to purchase shares of common stock may be granted to employees, directors, +officers, agents, consultants and independent contractors. The plans provide that the option price +shall not be less than the fair market value of the common stock on the date of +grant and that no portion of the option may be exercised beyond ten years from +that date. No incentive stock option +can be granted and exercised beyond five years to a stockholder owning 10% or +more of the Company’s outstanding common stock. Options granted under the plans during the three years ended +December 31, 2007 vest between four months and three years from the date +of grant. The 1993 Incentive Stock +Option Plan, The 1995 Stock Plan, The 1996 Stock plan and The 1997 Stock Plan +expired in 2003, 2005, 2006 and 2007, respectively. +The following table summarizes the amount of options +authorized, the amount of options granted (net of expired or cancelled options) +and the amount of options available for grant for The 1999 Stock Plan: +Options +authorized +4,830,000 +Options granted +net of expired or cancelled +4,828,500 +Available for +grant as of December 31, 2007 +1,500 +F-18 +STEVEN +MADDEN, LTD. AND SUBSIDIARIES +Notes to +Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE G – S TOCK -B ASED C OMPENSATION (CONTINUED) +Effective January 1, 2006, +the Company adopted the provisions of Statement of Financial Accounting +Standards No. 123R, “Accounting for Stock-Based Compensation” (“SFAS No. +123R”), which requires stock-based compensation to be measured based on the +fair value of the awards on the grant date. +The Company elected the “modified prospective method” of transition as +permitted by SFAS No. 123R. Under this +transition method, the Company is required to record compensation expense for +all awards granted after the date of adoption and for the unvested portion of +previously granted awards that were outstanding at the date of adoption, and +accordingly, periods prior to adoption are not restated. Equity-based compensation is included in +operating expenses on the Company’s Consolidated Statements of Income. For the years ended December 31, 2007, 2006 +and 2005, total equity-based compensation was as follows: +Years Ended December 31, +2007 +2006 +2005 +Stock +options +$ +5 +$ +120 +$ +703 +Restricted +stock +4,429 +2,174 +— +Total +$ +4,434 +$ +2,294 +$ +703 +SFAS +No. 123R requires the Company to apply an estimated forfeiture rate in +calculating the period expense (and revised, if necessary, in subsequent +periods if actual forfeitures differ from those estimates), as opposed to +recognizing forfeitures as an expense reduction as they occur, which was the +method used by the Company prior to adoption. The adjustment to apply estimated +forfeitures to previously recognized stock-based compensation was considered +immaterial and, as such, was not classified as a cumulative effect of a change +in accounting principle. +Prior to the adoption of +SFAS No. 123R, the Company presented cash flows resulting from the tax benefits +of deductions from the exercise of stock options as operating cash flows in the +Statements of Cash Flows. SFAS No. 123R +requires cash flows resulting from the tax benefits from tax deductions in +excess of the compensation costs recognized for those options (tax benefits) to +be classified as financing cash flows. +For the years ended December 31, 2007, 2006 and 2005, the Company +realized a tax benefit from the exercise of stock options of $7,180, $3,611 and $4,604, respectively. +F-19 +STEVEN +MADDEN, LTD. AND SUBSIDIARIES +Notes to +Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE G – S TOCK -B ASED C OMPENSATION (CONTINUED) +Prior to adopting SFAS No. +123R, the Company’s equity-based compensation expense was accounted for under +the provisions of APB Opinion No. 25, “Accounting for Stock Issued to +Employees”, as permitted by SFAS No. 123. +The following table illustrates the effect on net income and earnings +per share if the Company had applied the fair value recognition provision of +SFAS No. 123R to equity-based employee compensation for the year ended December +31, 2005: +2005 +Reported net +income +$ +19,200 +Stock-based +employee compensation included in reported net income, net of tax +407 +Stock-based +employee compensation determined under the fair value based method, net of +tax +(2,246 +) +Pro forma net +income +$ +17,361 +Basic income per +share: +As reported +$ +0.95 +Pro forma +$ +0.86 +Diluted income +per share: +As reported +$ +0.92 +Pro forma +$ +0.83 +Stock Options +During the years ended +December 31, 2007 and 2006, there were 863,000 and 551,000 options exercised, +respectively, with a total intrinsic value of $20,825 and $10,674 for the +corresponding periods. No options +vested during the year ended December 31, 2007 compared to 30,000 options with +a weighted average exercise price of $11.84 that vested during the prior year. As of December 31, 2007, there were 5,000 +unvested options which were granted during the year ended December 31, +2007. As of December 31, 2007, there +was $24 of total unrecognized compensation cost related to stock options that +will be recognized during the year ended December 31, 2008. +The Company estimates the fair value of options +granted using the Black-Scholes option-pricing model, which requires several +assumptions. The expected term of the +options represents the estimated period of time until exercise and is based on +historical experience of similar awards. +Expected volatility is based on the historical volatility of the +Company’s stock. The risk free interest +rate is based on the U.S Treasury yield curve in effect at the time of the +grant. With the exception of a special +dividend paid in November of 2005 and in November of 2006, the Company +historically has not paid dividends and thus the expected dividend rate is +assumed to be zero. The weighted +average fair value of options granted in 2007 and 2005 (no options were granted +in 2006) was approximately $5.02 and $4.07, respectively, using the +Black-Scholes option-pricing model with the following assumptions: +2007 +2005 +Volatility +37% to 40% +43% +Risk free interest rate +4.29% to 4.73% +3.86% +Expected life in years +3 +3 +Dividend yield +0 +0 +F-20 +STEVEN +MADDEN, LTD. AND SUBSIDIARIES +Notes to +Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE G – S TOCK -B ASED C OMPENSATION (CONTINUED) +Activity relating to stock options granted under the +Company’s plans and outside the plans during the three years ended +December 31, 2007 is as follows: +Number of Shares +Weighted Average Exercise Price +Weighted Average Remaining +Contractual Term +Aggregate Intrinsic Value +Outstanding at +January 1, 2005 +3,770,000 +$ +8.47 +Granted +478,000 +11.93 +Exercised +(2,133,000 +) +7.73 +Cancelled/Forfeited +(165,000 +) +12.55 +Outstanding at +December 31, 2005 +1,950,000 +$ +9.79 +Granted +— +— +Exercised +(551,000 +) +12.41 +Cancelled/Forfeited +(3,000 +) +8.00 +Outstanding at +December 31, 2006 +1,396,000 +$ +8.75 +Granted +305,000 +47.01 +Exercised +(863,000 +) +6.50 +Cancelled/Forfeited +(300,000 +) +47.50 +Outstanding at +December 31, 2007 +538,000 +$ +12.45 +6.1 +$ +4,005 +Exercisable at +December 31, 2007 +533,000 +$ +12.40 +6.1 +$ +3,915 +The following table summarizes information about stock +options at December 31, 2007: +Options Outstanding +Options Exercisable +Range of Exercise Price +Number Outstanding +Weighted Average Remaining +Contractual Life +(in Years) +Weighted Average Exercise Price +Number Exercisable +Weighted +Average +Exercise +Price +$4.67 to $6.37 +22,000 +3.3 +5.68 +22,000 +5.68 +$11.61 to $12.50 +214,000 +7.0 +11.99 +214,000 +11.99 +$12.65 to $13.99 +297,000 +5.6 +13.20 +297,000 +13.20 +$17.68 +5,000 +9.8 +17.68 +— +— +538,000 +6.1 +12.45 +533,000 +12.40 +F-21 +STEVEN +MADDEN, LTD. AND SUBSIDIARIES +Notes to +Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE G – S TOCK -B ASED C OMPENSATION (CONTINUED) +Restricted Stock +The following table summarizes +restricted stock activity during the year ended December 31, 2007: +Number of +Shares +Weighted +Average +Fair +Value at Grant +Date +Outstanding at December 31, +2006 +391,000 +$ +32.07 +Granted +234,000 +29.71 +Vested +(111,000 +) +32.34 +Forfeited +(7,000 +) +34.05 +Outstanding at December 31, 2007 +507,000 +$ +30.90 +As of December 31, 2007, there +was $11,930 of total unrecognized compensation cost related to restricted stock +awards granted under the Plan. This +cost is expected to be recognized over a weighted-average of 3 years. During the year ended December 31, 2006, +165,000 restricted stock awards were granted to the Company’s Creative and +Design Chief. The Company determines +the fair value of its restricted stock awards based on the market price of its +common stock on the date of grant. +In July 2004, the Company and several of its salesmen +mutually agreed to replace restricted stock awards due to vest in January 2006 +with cash awards to be paid on the vesting date. No shares had been issued under the original award. These cash rewards retained +the same +characteristics as the original restricted stock awards. The vesting date (i.e., the payment date) of +the cash awards was the same as the vesting date of the restricted stock, and +the payment was contingent upon the recipient still being employed with the +Company on the vesting date. The cash +awards, which totaled $183, were charged to operations through December 31, +2005. In April and October of 2002, two +executives of the Company were granted restricted stock awards pursuant to +their employment agreements. The awards +vested on June 30, 2005 and were contingent on the employee’s continuous employment +through the vesting date. Under the +terms of the agreements, the issuance of the shares of common stock required +shareholder approval. At the annual +meeting of stockholders held on May 27, 2005, the shareholders did not approve +the issuance of the shares. As stated +in the Company’s proxy statement, the executives were paid $1,776 equal to the +fair value of the restricted stock when first granted. +N OTE H – P REFERRED S TOCK +The Company has authorized 5,000,000 shares of +preferred stock. The Board of Directors +has designated 60,000 shares of such preferred stock as Series A Junior +Participating Preferred Stock (“Series A Preferred”). Holders of the shares of Series A Preferred are entitled to +dividends equal to 1,000 times dividends declared or paid on the Company’s +common stock. Each share of Series A +preferred entitles the holder to 1,000 votes on all matters submitted to the +holders of common stock. The Series A +Preferred has a liquidation preference of $1,000 per share, and is not +redeemable by the Company. No preferred +shares have been issued. +F-22 +STEVEN +MADDEN, LTD. AND SUBSIDIARIES +Notes to +Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE I – R IGHTS A GREEMENT +On October 30, 2001, the +Company declared a dividend distribution of one preferred stock purchase right +(a “Right”) for each outstanding share of common stock. Each Right entitles the holder to purchase +from the Company seven ten-thousandths (7/10,000) of a share of Series A +Preferred at a price of $50 per seven ten-thousandth (7/10,000) of a +share. Initially, the Rights will not +be exercisable and will automatically trade with the common stock. The Rights become exercisable, in general, +ten days following the announcement of a person or group acquiring beneficial +ownership of at least 15% of the outstanding voting stock of the Company. +N OTE J – O PERATING L EASES +The Company leases office, showroom and retail +facilities under noncancelable operating leases with terms expiring at various +times through 2019. Future minimum +annual lease payments under noncancelable operating leases consist of the +following at December 31: +2008 +$ +16,560 +2009 +16,668 +2010 +16,097 +2011 +15,476 +2012 +14,521 +Thereafter +46,850 +$ +126,172 +A majority of the retail store leases provide for +contingent rental payments if gross sales exceed certain targets. In addition, many of the leases contain rent +escalation clauses to compensate for increases in operating costs and real +estate taxes. +Rent expense for the years ended December 31, +2007, 2006 and 2005 was approximately $18,071, $16,419 and $15,592, +respectively. Included in such amounts +are contingent rents of $29, $240 and $182 in 2007, 2006 and 2005, respectively. +Rent expense is calculated by amortizing total rental +payments (net of any rental abatements, construction allowances and other +rental concessions), on a straight-line basis, over the lease term. Accordingly, rent expense charged to +operations differs from rent paid resulting in the Company recording deferred +rent. +F-23 +STEVEN +MADDEN, LTD. AND SUBSIDIARIES +Notes to +Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE K – I NCOME T AXES +The components of income before income taxes is as +follows: +2007 +2006 +2005 +Domestic +$ +48,456 +$ +77,686 +$ +33,460 +Foreign +7,680 +3,248 +— +$ +56,136 +$ +80,934 +$ +33,460 +The income tax provision (benefit) consists of the +following: +2007 +2006 +2005 +Current: +Federal +$ +21,850 +$ +27,929 +$ +12,690 +State and local +517 +10,437 +4,260 +Foreign +1,229 +520 +— +23,596 +38,886 +16,950 +Deferred: +Federal +(2,827 +) +(3,500 +) +(2,241 +) +State and local +(323 +) +(702 +) +(449 +) +(3,150 +) +(4,202 +) +(2,690 +) +$ +20,446 +$ +34,684 +$ +14,260 +A recent growth in the Company's New York based income, combined +with revisions in state and local tax law, prompted the Company to re-evaluate +its tax filing strategies. As a result +of such changes, the Company has determined that electing to file each of the +New York State and New York City tax returns on a combined basis would maximize +the tax benefits to the Company. The +election to file combined returns has reduced the Company’s expected effective +tax rate to approximately 36.4% in 2007 from 42.9% in 2006. The Company filed combined returns in 2006 +and was able to amend New York State and New York City returns for 2003 through +2005 resulting in an additional one-time tax benefit recognized in 2007. +A reconciliation between taxes computed at the federal +statutory rate and the effective tax rate is as follows: +December 31, +2007 +2006 +2005 +Income taxes at +federal statutory rate +35.0 +% +35.0 +% +35.0 +% +State and local +income taxes - net of federal income tax benefit +4.3 +7.8 +7.4 +Nondeductible +items +0.2 +0.1 +0.3 +Nondeductible +impairment charges +— +— +0.5 +One-time benefit for filing prior years’ NY +State and NY City amended +returns on a combined basis +(2.3 +) +— +— +Other +(0.8 +) +— +(0.6 +) +Effective rate +36.4 +% +42.9 +% +42.6 +% +F-24 +STEVEN +MADDEN, LTD. AND SUBSIDIARIES +Notes to +Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE K – I NCOME T AXES (CONTINUED) +The Company applies the asset and liability method of +accounting for income taxes. Under this +method, deferred tax assets and liabilities are determined based on differences +between financial reporting and tax bases of assets and liabilities and are measured +using the enacted tax rates and laws that are expected to be in effect when the +differences are expected to reverse. +Effective January 1, 2007, +the Company adopted the provisions of the Financial Accounting Standards +Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income +Taxes” (“FIN 48”), which addresses the accounting for uncertainty in income +taxes recognized in the financial statements in accordance with FASB Statement +No. 109, “Accounting for Income Taxes.” +FIN 48 provides guidance on the financial statement recognition and +measurement of a tax position taken on the Company’s tax return. Pursuant to FIN 48, the Company has opted to +classify interest and penalties that would accrue according to the provisions +of relevant tax law as income tax expense on the Consolidated Statements of +Income. The Company determines the +amount of interest expense to be recognized by applying the applicable +statutory rate of interest to the difference between the tax position +recognized in accordance with FIN 48 and the amount previously taken or +expected to be taken on a tax return. +As required by FIN 48, the Company applied the “more-likely-than-not” +recognition threshold to all tax positions at the adoption date, which resulted +in no required adjustment to the opening balance of retained earnings. The adoption of FIN 48 did not have a +material impact on the Company’s results of operations and earnings per +share. The Company’s tax years 2003 +through 2006 remain open to examination for most taxing authorities. +The components of deferred tax assets and liabilities +are as follows: +December 31, +2007 +2006 +Current deferred +tax assets: +Receivable +allowances +$ +6,032 +$ +5,262 +Inventory +1,594 +1,434 +Unrealized +(gain) loss +(66 +) +112 +Deferred accruals +1,098 +675 +Other +697 +616 +9,355 +8,099 +Non-current +deferred tax assets: +Depreciation and +amortization +4,973 +3,868 +Deferred +compensation +1,169 +1,379 +Deferred rent +1,353 +1,320 +Amortization of +goodwill +(368 +) +(126 +) +Unrealized loss +105 +353 +7,232 +6,794 +Deferred tax +assets +$ +16,587 +$ +14,893 +F-25 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE L – C OMMITMENTS, +C ONTINGENCIES AND O THER +[1] +Legal proceedings: +(a) +On August +10, 2005, the U.S. Customs Department (“Customs”) issued a report that +asserts that certain commissions which the Company treated as “buying agents’ +commissions” (which are non-dutiable) should be treated as “selling agents’ +commissions” and hence are dutiable. In the report, Customs estimates that +the Company had underpaid duties during the calendar years of 1998 through +2004 in the amount of $1,051. As of June 30, 2007, based on discussions with +legal counsel, the Company believed that the liability in this case, +including interest, was not likely to exceed $1,500. Accordingly, as of +December 31, 2006 the Company recorded a reserve of $1,500. In September of +2007, Customs notified the Company that it had finalized its assessment of +the underpaid duties to be $1,400. Pursuant to this assessment, the Company, +with the advice of legal counsel, has re-evaluated the liability in the case, +including interest and penalties, and believes that it is not likely to +exceed $2,700. The Company increased its reserve by $1,208 in the third quarter +of 2007. Such reserve is subject to change to reflect the status of this +matter. +(b) +The Company +has been named as a defendant in certain other lawsuits in the normal course +of business. In the opinion of management, after consulting with legal +counsel, the liabilities, if any, resulting from these matters should not +have a material effect on the Company’s financial position or results of +operations. It is the policy of management to disclose the amount or range of +reasonably possible losses in excess of recorded amounts. +[2] +Employment agreements: +Effective as +of July 1, 2005, the Company amended its employment agreement with Steven +Madden, the Company’s Creative and Design Chief. The agreement provides for +an annual salary of $600, subject to certain specified adjustments, through +June 30, 2015. The agreement also provides for annual bonuses based on +EBITDA, on revenue for any new business, and royalty income over $2,000, and +an annual option grant at exercise prices equal to the market price on the +date of grant and a non-accountable expense allowance. +Effective as +of July 1, 2005, the Company entered into an employment agreement with +Awadhesh Sinha, pursuant to which Mr. Sinha will serve as the Company’s Chief +Operating Officer. The initial term of the agreement is three years through +June 30, 2008, with successive one-year automatic renewal terms. The +agreement provides for an annual salary of $425 with annual increases and +performance bonuses. The agreement requires the Company to accrue deferred +cash compensation equal to 25% of the annual salary, payable to Mr. Sinha at +the end of the term of the agreement. On November 6, 2007, an amendment to +the agreement extended the initial term of the agreement to December 31, +2008. +Effective January 1, 2006, +the Company amended its employment agreement with Jamieson Karson, the +Company’s Chief Executive Officer and Chairman of the Board. The agreement +provides for an annual salary of $500 through December 31, 2008. The agreement +also provides for an annual bonus at the discretion of the Board of +Directors. +Effective February 1, +2006, the Company amended its employment agreement with Arvind Dharia, the +Company’s Chief Financial Officer. The agreement provides for an annual +salary of $425, with annual increases through December 31, 2009. The +agreement also provides for an annual bonus at the discretion of the Board of +Directors. +F-26 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE L – C OMMITMENTS, +C ONTINGENCIES AND O THER (C ONTINUED ) +The Company +has employment agreements with other executives (the “executives”) which +expire between June 30, 2008 and December 31, 2009. These agreements provide +for cash bonuses based primarily upon a percentage of year-to-year increases +in earnings before interest, taxes, depreciation and amortization, option +grants and non-accountable expense allowances as defined. Base salary +commitments for these executives are as follows: +2008 +$ +2,372 +2009 +1,080 +$ +3,452 +In +connection with their employment agreements, five executives received an +aggregate of 170,000 and 132,000 shares of restricted common stock from the +Company in 2007 and 2006, respectively. The restricted shares vest equally +each year over a period of between four to five years and, accordingly, the +Company has recorded a charge to operations in the amount of $1,726 and $680 +for the years ended December 31, 2007 and 2006, respectively. +In addition, +the Company accrued aggregate cash obligations of approximately $1,000 for +bonuses under these agreements for the year ended December 31, 2007. +[4] +Letters of credit: +At +December 31, 2007 and 2006, the Company had open letters of credit for +the purchase of imported merchandise of approximately $1,974 and $1,981, +respectively. +[5] +Royalty agreements: +On May 12, +2003, the Company entered into a long-term license agreement with Candie’s, +Inc. to design, manufacture and distribute Candie’s branded footwear for +women and children worldwide. The initial term of the agreement expires on +December 31, 2009, with four 3-year renewal terms, the last of which expires +on December 31, 2021. The agreement required the Company to make royalty and +advertising payments equal to a percentage of net sales of licensed products +and a minimum royalty and advertising payment in the event that specified net +sales targets were not achieved. On December 6, 2004, the agreement was +amended to reflect Candie’s decision to name Kohl’s Corporation the exclusive +provider of a new line of Candie’s apparel. The amendment extended the +initial term of the agreement to December 31, 2010, and eliminated the +renewal term options. Pursuant to the amendment, commencing on January 1, +2007, the Company no longer has the exclusive right to market Candie’s +branded footwear and will be permitted to sell Candie’s branded footwear only +to Kohl’s. Under the terms of the amendment, Candie’s guarantees that the +Company will achieve minimum sales levels with Kohl’s during the term of the +agreement. In the event such minimum sales levels are not achieved, Candie’s +is required to compensate the Company in an amount based on a percentage of +the sales shortfall. Effective January 1, 2005, all royalty and advertising +payments were eliminated. As an inducement to execute the amendment, the +Company was required to pay Candie’s a total of $3,000 payable in eight equal +quarterly installments that began in February of 2005 and concluded with a +final payment in May 2007. +On March 28, +2007, the Company, through its Daniel M. Friedman Division, entered into a +license agreement to design, manufacture and distribute handbags and belts +and related accessories under the “DF Daisy Fuentes” and the “Daisy Fuentes” +brands. The agreement requires the Company to pay the licensor a royalty and +brand management fees based on a percentage of net sales and a minimum +royalty in the event that specified net sales targets are not achieved. The +agreement expires on December 31, 2010. +F-27 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE L – C OMMITMENTS, +C ONTINGENCIES AND O THER (C ONTINUED ) +On September +14, 2006, the Company, through its Daniel M. Friedman Division, entered into +a license agreement to design, manufacture and distribute handbags and belts +and related accessories under the “Tracy Reese” and the “Plenty” brands. In +addition, the Company has the right to use the phrase “Plenty by Tracy +Reese”. The agreement requires the Company to pay the licensor a royalty +based on net sales and a minimum royalty in the event that specified net +sales targets are not achieved. The agreement expires on December 31, 2009, +with two three-year renewal terms which, if certain provisions are met, are +at the option of the Company. +On July 20, +2004, Daniel M. Friedman entered into a long-term license agreement with B.J. +Vines, Inc., under which the Company has the right to use the “Betsey +Johnson” trademark in connection with the sale and marketing of handbags, +small leather goods, belts and umbrellas. The agreement requires the Company +to make royalty and advertising payments equal to a percentage of net sales +and a minimum royalty and advertising payment in the event that specified net +sales targets are not achieved. The initial term of the agreement expired on +December 31, 2007, however, the Company exercised its option to extend the +agreement until December 31, 2010. +Royalty +expenses are included in the “cost of goods sold” section of the Company’s +Consolidated Statements of Income. Aggregate minimum future royalties under +these agreements are as follows: +Year Ending +December 31, +2008 +$ +522 +2009 +712 +2010 +702 +$ +1,936 +[6] +Related Party Transactions: +In January +2004, the Company entered into an agreement with JLM Consultants, a company +wholly-owned by John Madden, one of the Company’s directors. Under this +agreement, Mr. Madden provides consulting services with respect to the +development of international sales of the Company. Pursuant to this +agreement, JLM Consultants received a fee and expenses of $661, $511 and $392 +in 2007, 2006 and 2005 respectively, in addition to fees that Mr. Madden +received for service to the Company as a director. +In July +2001, the Company entered into a consulting agreement with Peter J. Solomon +& Company (“Solomon”), a financial advisory firm of which Marc Cooper, +one of the Company’s directors, is a managing director. Under this agreement, +the firm provided financial advisory and investment banking services to the +Company. This agreement, which was amended in March 2004, was terminated on +July 11, 2006. Pursuant to this agreement, the Company paid fees and expenses +to Solomon of $412 (related to the acquisition of Daniel M. Friedman), and +$66 for 2006 and 2005, respectively. The Company paid fees and expenses of $67 +to Solomon in 2007 for a limited consulting engagement. Mr. Cooper resigned +from the board on February 25, 2008. +F-28 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE L – C OMMITMENTS, +C ONTINGENCIES AND O THER (C ONTINUED ) +In October +2002, the Company entered into an arrangement with Jeff Birnbaum, a director +of the Company from June 2003 through October 2007. Under this arrangement, +Mr. Birnbaum provided consulting services with respect to the design and +manufacturing of shoes and general consulting services to the Company. +Pursuant to this arrangement, Mr. Birnbaum received a fee of $200, $200 and +$200 in 2007, 2006 and 2005 respectively, in addition to fees received for +service to the Company as a director. Mr. Birnbaum has been the Product +Development Manager of Dolphin Shoe Company since August 1982. Dolphin Shoe +Company, which is equally owned by Mr. Birnbaum, his father and his brother, +is one of the Company’s domestic suppliers. In July of 2006, the Company +acquired the Natural Comfort brand from Dolphin Shoe Company for $100. +[7] +Concentrations: +The Company +maintains cash and cash equivalents with various major financial institutions +which at times are in excess of the amount insured. In addition, the +Company’s marketable securities and money market accounts are principally +held at two brokerage companies. +During the +year ended December 31, 2007, the Company purchased approximately 24% +and 12% of its merchandise from two suppliers in China. Total inventory +purchases from China for the year ended December 31, 2007 was +approximately 81%. +During the +year ended December 31, 2006, the Company purchased approximately 36% +and 16% of its merchandise from two suppliers in China. Total inventory +purchases from China for the year ended December 31, 2006 was +approximately 88%. +During the +year ended December 31, 2005, the Company purchased approximately 21% +and 12% of its merchandise from two suppliers in China. Total inventory +purchases from China for the year ended December 31, 2005 was +approximately 82%. +Sales to one +customer accounted for 12% of total net sales for the year ended +December 31, 2007. This customer represented 17% of accounts receivable +at December 31, 2007. +Sales to one +customer accounted for 13% of total net sales for the year ended +December 31, 2006. This customer represented 18% of accounts receivable +at December 31, 2006. +Sales to one +customer accounted for 19% of total net sales for the year ended +December 31, 2005. This customer represented 24% of accounts receivable +at December 31, 2005. +Sales to +such customers are included in the wholesale segment (see Note M). +Purchases are made primarily in United States dollars. +[8] +Valuation and qualifying accounts: +The +following is a summary of the allowance for doubtful accounts related to +accounts receivable and the allowance for chargebacks related to the amount +Due from Factor for the years ended December 31: +2007 +2006 +2005 +Balance at +beginning of year +$ +12,508 +$ +8,400 +$ +2,915 +Increase in +reserve +2,938 +4,108 +5,485 +Balance at +end of year +$ +15,446 +$ +12,508 +$ +8,400 +F-29 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE L – C OMMITMENTS, +C ONTINGENCIES AND O THER (C ONTINUED) +The following +is a summary of the reserve for slow moving inventory for the years ended +December 31: +2007 +2006 +2005 +Balance at beginning of year +$ +2,065 +$ +1,143 +$ +608 +Charged to reserve +— +— +— +Increase to the reserve +75 +922 +535 +Balance at end of year +$ +2,140 +$ +2,065 +$ +1,143 +The following +is a summary of goodwill and the related accumulated amortization for the years +ended December 31: +2007 +2006 +2005 +Cost basis +Balance at beginning of year +$ +7,063 +$ +2,145 +$ +2,780 +Acquisitions and purchase price adjustments +9,457 +4,918 +— +Write-off of impaired assets +— +— +(635 +) +Balance at end of year +16,520 +7,063 +2,145 +Accumulated amortization +Balance at beginning of year +598 +598 +714 +Write-off of impaired assets +— +— +(116 +) +Balance at end of year +598 +598 +598 +Goodwill +$ +15,922 +$ +6,465 +$ +1,547 +[9] +Other: +Pursuant to +an agreement reached on February 2, 2005 with an 8% shareholder, the Company +agreed to commit $25 million during the twelve months ended January 31, 2006 +and $10 million during the twelve months ended January 31, 2007 to a +combination of share repurchases and/or dividends, such programs to be +implemented at such time and in such manner as determined by the board of +directors in its sole discretion. As of January 31, 2007, the Company has +satisfied this agreement via the repurchase of 909,000 shares for $14,680 and +the payment of dividends of $34,919. +N OTE M – S UBSEQUENT +E VENT +On February +19, 2008, the Company announced a Tender Offer to purchase up to 2,600,000 shares of our +common stock at a price not greater than $20.00 nor less than $16.50 per share. +As of December 31, 2007, there +were 20,117,983 shares of our +common stock issued and outstanding, not including 5,662,055 of our issued shares held in treasury. The 2,600,000 shares that we +are +offering to purchase hereunder represent approximately 13% of the total number of issued shares. The Company anticipates +that we will pay for the shares tendered in the Offer from our available cash. +F-30 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE N – O PERATING +S EGMENT I NFORMATION +The Company’s reportable segments are primarily determined based on +distribution channels of its various brands. The wholesale segment markets its +products through department and specialty stores throughout the country and the +retail segment thru the operation of various Company owned stores and the +Company’s website. The First Cost segment represents activities of a subsidiary +which earns commissions for acting as a buying agent to mass-market +merchandisers, shoe chains and other off-price retailers with respect to their +purchase of footwear. +The accounting +policies of the segments are the same as those described in the summary of +significant accounting policies. The Company evaluates performance based on +profit or loss from operations before other income (expense) and the provision +for income taxes. The following is information for the Company’s reportable +segments: +Wholesale Segments +Women’s +Men’s +Accessories +Total +Wholesale +Retail +First Cost +Consolidated +Year ended, December 31, 2007: +Net sales to external customers +$ +204,699 +$ +51,237 +$ +54,469 +$ +310,405 +$ +120,645 +$ +431,050 +Gross profit +68,074 +19,862 +16,885 +104,821 +68,583 +173,404 +Commissions and licensing fees - net +3,677 +— +— +3,677 +— +$ +14,674 +18,351 +Income from operations +24,884 +5,771 +4,481 +35,136 +3,104 +14,674 +52,914 +Depreciation and amortization +3,668 +4,766 +1 +8,435 +Segment assets +$ +130,342 +$ +22,031 +$ +29,618 +181,991 +56,120 +28,410 +266,521 +Capital expenditures +$ +3,210 +$ +9,513 +$ +242 +$ +12,965 +December 31, 2006: +Net sales to external customers +$ +233,564 +$ +62,629 +$ +51,316 +$ +347,509 +$ +127,654 +$ +475,163 +Gross profit +89,407 +26,112 +13,976 +129,495 +68,934 +198,429 +Commissions and licensing fees - net +2,925 +— +— +2,925 +— +$ +11,321 +14,246 +Income from operations +42,458 +10,668 +3,966 +57,092 +9,885 +11,321 +78,298 +Depreciation and amortization +2,655 +4,025 +26 +6,706 +Segment assets +$ +165,543 +$ +10,621 +$ +27,022 +203,186 +41,933 +6,273 +251,392 +Capital expenditures +$ +3,739 +$ +5,765 +$ +7 +$ +9,511 +December 31, 2005: +Net sales to external customers +$ +199,664 +$ +54,611 +— +$ +254,275 +$ +121,511 +$ +375,786 +Gross profit +56,962 +22,021 +— +78,983 +60,172 +139,155 +Commissions and licensing fees - net +2,286 +— +— +2,286 +— +$ +4,833 +7,119 +Income from operations +12,211 +9,100 +— +21,311 +5,426 +4,833 +31,570 +Depreciation and amortization +1,361 +3,750 +9 +5,120 +Segment assets +$ +152,607 +$ +18,709 +— +171,316 +38,576 +1,836 +211,728 +Capital expenditures +$ +1,456 +$ +4,366 +$ +— +$ +5,822 +F-31 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Financial Statements +December 31, 2007 and 2006 +($ in thousands except share and per share data) +N OTE O – Q UARTERLY +R ESULTS OF O PERATIONS (UNAUDITED) +The following +is a summary of the quarterly results of operations for the years ended +December 31, 2007 and 2006: +March 31, +June 30, +September 30, +December 31, +2007: +Wholesale, net +$ +82,299 +$ +78,616 +$ +85,998 +$ +63,492 +Retail, net +24,355 +29,640 +27,397 +39,253 +Net sales +106,654 +108,256 +113,395 +102,745 +Cost of sales +64,460 +62,836 +66,577 +63,773 +Gross profit +42,194 +45,420 +46,818 +38,972 +Commissions and licensing fee income - +net +5,446 +5,669 +4,335 +2,901 +Net income +$ +9,533 +$ +10,518 +$ +10,939 +$ +4,700 +Net income per share: +Basic +0.45 +0.51 +0.52 +0.23 +Diluted +0.43 +0.49 +0.52 +0.23 +2006: +Wholesale, net +$ +82,982 +$ +96,194 +$ +91,751 +$ +76,582 +Retail, net +25,333 +33,306 +31,489 +37,526 +Net sales +108,315 +129,500 +123,240 +114,108 +Cost of sales +62,032 +74,945 +72,217 +67,540 +Gross profit +46,283 +54,555 +51,023 +46,568 +Commissions and licensing fee income - +net +3,762 +2,825 +3,850 +3,809 +Net income +$ +10,860 +$ +12,696 +$ +12,647 +$ +10,047 +Net income per share: +Basic +0.52 +0.61 +0.61 +0.48 +Diluted +0.49 +0.58 +0.57 +0.45 +F-32 +(b) Exhibits. +3.01 +Certificate of Incorporation of Steven Madden, +Ltd. (incorporated by reference to Exhibit 1 to Steven Madden, +Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange +Commission on November 23, 1998). +3.02 +Amended & Restated By-Laws of Steven Madden, +Ltd. (incorporated by reference to Exhibit 3.02 to Steven Madden, +Ltd.’s Annual Report on Form 10-K for its fiscal year ended December 31. +2001). +4.01 +Specimen Certificate for shares of Common Stock +(incorporated by reference to Exhibit 4.01 to Steven Madden, Ltd.’s +Registration Statement on Form SB-2/A filed with the Securities and Exchange +Commission on September 29, 1993 (File No. 033-67162)). +4.02 +Rights Agreement between Steven Madden, Ltd. and +American Stock Transfer and Trust Company (incorporated by reference +to Exhibit 4.1 to Steven Madden, Ltd.’s Current Report on Form 8-K +filed with the Securities and Exchange Commission on November 16, 2001). +10.01 +Third Amended Employment Agreement between Steven Madden, Ltd. and Steven Madden (incorporated by reference to Exhibit +10.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with +the Securities and Exchange Commission on July 20, 2005).# +10.02 +Employment Agreement of Jamieson Karson +(incorporated by reference to Exhibit 10.1 to Steven Madden, Ltd.’s +Current Report on Form 8-K filed with the Securities and Exchange Commission +on January 6, 2006).# +10.03 +Employment Agreement of Arvind Dharia (incorporated +by reference to Exhibit 10.07 to Steven Madden, Ltd.’s Annual Report on +Form 10-K for its fiscal year ending December 31, 2000).# +10.04 +Amendment No. 1 to Employment Agreement of Arvind +Dharia (incorporated by reference to Exhibit 99.4 to Steven Madden, +Ltd.’s Quarterly Report on Form 10-Q for its fiscal quarter ending June 30, +2001).# +10.05 +Amendment No. 2 to Employment Agreement of Arvind +Dharia (incorporated by reference to Exhibit 10.16 to Steven Madden, +Ltd.’s Quarterly Report on Form 10-Q for its fiscal quarter ending September +30, 2002).# +10.06 +Amendment No. 3 to Employment Agreement of Arvind +Dharia (incorporated by reference to Exhibit 10.1 to Steven Madden, +Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission +on February 3, 2006).# +10.07 +Employment Agreement between Steven Madden, Ltd. +and Awadhesh Sinha, dated as of June 15, 2005 (incorporated by reference to +Exhibit 10.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed +with the Securities and Exchange Commission on June 21, 2005).# +10.08 +Amendment No. 1 to Employment Agreement between +Steven Madden, Ltd. and Awadhesh Sinha, dated as of November 6, 2007 +(incorporated by reference to Exhibit 10.1 to Steven Madden, Ltd.’s +Current Report on Form 8-K filed with the Securities and Exchange Commission +on November 6, 2007). +10.09 +Stock Purchase Agreement, dated as of February 7, +2006, by and between Steven Madden, Ltd. and the sole shareholder of +Daniel M. Friedman & Associates, Inc. and DMF International, Ltd. (incorporated +by reference to Exhibit 10.1 to Steven Madden, Ltd.’s Current Report on +Form 8-K filed with the Securities and Exchange Commission on February 13, +2006). +10.10 +Earn-Out Agreement, dated as of February 7, 2006, by +and among Steven Madden, Ltd., Daniel M. Friedman & Associates, Inc., +DMF International, Ltd. and Daniel M. Friedman (incorporated by reference to +Exhibit 10.2 to Steven Madden, Ltd.’s Current Report on Form 8-K filed +with the Securities and Exchange Commission on February 13, 2006). +10.11 +Amendment to Earn-Out +Agreement, dated as of April 10, 2006, by and between Steven Madden, Ltd. +and Daniel M. Friedman (incorporated by reference to Exhibit 10.1 to +Steven Madden, Ltd.’s Current Report on Form 8-K filed with the +Securities and Exchange +Commission on April 13, 2006). +10.12 +Amendment to Earn-Out Agreement, dated as of April +10, 2007, by and among Steven Madden, Ltd., Daniel M. Friedman & +Associates, Inc. and DMF International, Ltd. (incorporated by reference to +Exhibit 10.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed +with the Securities and Exchange Commission on April 16, 2007). +10.13 +Employment Agreement with Robert Schmertz dated +March 9, 2007 (incorporated by reference to Exhibit 10.1 to Steven +Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and +Exchange Commission on March 13, 2007). +10.14 +Membership Interest Purchase Agreement, dated as of +May 16, 2007, by and among Steven Madden, Ltd. and the members of Compo +Enhancements, LLC (incorporated by reference to Exhibit 10.1 to Steven +Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and +Exchange Commission on May 18, 2007). +10.15 +Earn-Out Agreement, dated as of May 16, 2007, by and +among Steven Madden, Ltd. and the members of Compo Enhancements, LLC +(incorporated by reference to Exhibit 10.2 to Steven Madden, Ltd.’s +Current Report on Form 8-K filed with the Securities and Exchange Commission +on May 18, 2007). +10.16 +Employment Agreement, dated as of May 16, 2007, by +and between Steven Madden, Ltd. and Jeffrey Silverman (incorporated by +reference to Exhibit 10.3 to Steven Madden, Ltd.’s Current Report on Form +8-K filed with the Securities and Exchange Commission on May 18, 2007). +10.17 +Amendment to Employment Agreement, dated as of +December 21, 2007, by and between Steven Madden, Ltd. and Jeffrey +Silverman (incorporated by reference to Exhibit 10.3 to Steven Madden, +Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange +Commission on December 21, 2007). +10.18 +Settlement and Release Agreement, dated as of +December 21, 2007, by and between Steven Madden, Ltd. and Jeffrey +Silverman (incorporated by reference to Exhibit 10.1 to Steven Madden, +Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange +Commission on December 21, 2007). +10.19 +Settlement and Release Agreement, dated as of +December 21, 2007, by and between Steven Madden, Ltd. and James Randel +(incorporated by reference to Exhibit 10.2 to Steven Madden, Ltd.’s +Current Report on Form 8-K filed with the Securities and Exchange Commission +on December 21, 2007). +10.20 +1996 Stock Plan, approved and adopted on March 6, +1996 (incorporated by reference to Exhibit 10.27 to Steven Madden, Ltd.’s +Registration Statement on Form S-8 filed with the Securities and Exchange Commission +on November 3, 1997).# +10.21 +The 1997 Stock Plan, approved and adopted on May 10, +1997 (incorporated by reference to Exhibit 10.28 to Steven Madden, Ltd.’s +Registration Statement on Form S-8 filed with the Securities and Exchange Commission +on November 3, 1997).# +10.22 +The 1998 Stock Plan, approved and adopted on January +16, 1998 (incorporated by reference to Exhibit 10.2 to Steven Madden, +Ltd.’s Registration Statement on Form S-8 filed with the Securities and +Exchange Commission on July 28, 1998).# +10.23 +The 1999 Stock Plan, approved and adopted on March +15, 1999, amended as of March 20, 2000 and March 30, 2001 (incorporated by +reference to Exhibit 10.A to Steven Madden, Ltd.’s Registration Statement +on Form S-8 filed with the Securities and Exchange Commission on July 26, +2004).# +10.24 +2006 Stock Incentive Plan approved and adopted on +May 26, 2006 (incorporated by reference to Exhibit 10.1 to Steven Madden, +Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange +Commission on July 3, 2006). +10.25 +Secured Promissory Note dated June 25, 2007, of +Steven Madden to Steven Madden, Ltd. (incorporated by reference to +Exhibit 10.1 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed +with the Securities and Exchange Commission on November 9, 2007). +10.26 +Form of Non-Qualified +Stock Option Agreement (Chief Executive Officer) under Steven Madden, +Ltd.’s 2006 Stock Incentive Plan, as amended (the “Plan”), as adopted October +30, 2007 (incorporated by reference to Exhibit 10.2 to Steven Madden, +Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and +Exchange Commission on +November 9, 2007). +10.27 +Form of Non-Qualified +Stock Option Agreement (Employee without Employment Agreement) under the +Plan, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.3 +to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities +and Exchange Commission on November +9, 2007). +10.28 +Form of Non-Qualified +Stock Option Agreement (Employee with Employment Agreement) under the Plan, +as adopted October 30, 2007 (incorporated by reference to Exhibit 10.4 to +Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities +and Exchange Commission on +November 9, 2007). +10.29 +Form of Restricted Stock +Agreement (Chief Executive Officer) under the Plan, as adopted October 30, +2007 (incorporated by reference to Exhibit 10.5 to Steven Madden, Ltd.’s +Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007). +10.30 +Form of Restricted Stock +Agreement (Employee without Employment Agreement) under the Plan, as adopted +October 30, 2007 (incorporated by reference to Exhibit 10.6 to Steven +Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities +and Exchange Commission on +November 9, 2007). +10.31 +Form of Restricted Stock +Agreement (Employee with Employment Agreement) under the Plan, as adopted +October 30, 2007 (incorporated by reference to Exhibit 10.7 to Steven +Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities +and Exchange Commission on +November 9, 2007). +10.32 +Form of Restricted Stock +Agreement under the Plan used for grants made to non- employee directors from +March 2006 through May 2007, with a schedule setting forth the name of each +of the recipients, the date of the grant and the number of shares +(incorporated by reference to Exhibit 10.8 to Steven Madden, Ltd.’s Quarterly +Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007). +10.33 +Restricted Stock Agreement +dated March 24, 2006, between Jamieson A. Karson and Steven Madden, Ltd. +(incorporated by reference to Exhibit 10.9 to Steven Madden, Ltd.’s +Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007). +10.34 +Restricted Stock Agreement +dated March 27, 2007, between Jamieson A. Karson and Steven Madden, Ltd. +(incorporated by reference to Exhibit 10.10 to Steven Madden, Ltd.’s +Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007). +10.35 +Amendments to Restricted +Stock Agreements, dated as of March 23, 2007, between Jamieson A. Karson and +Steven Madden, Ltd. (incorporated by reference to Exhibit 10.11 to +Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities +and Exchange Commission on +November 9, 2007). +10.36 +Restricted Stock Agreement +dated March 24, 2006, between Steven H. Madden and Steven Madden, Ltd. +(incorporated by reference to Exhibit 10.12 to Steven Madden, Ltd.’s +Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007). +10.37 +Restricted Stock Agreement +dated June 9, 2006, between Steven H. Madden and Steven Madden, Ltd. +(incorporated by reference to Exhibit 10.13 to Steven Madden, Ltd.’s +Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007). +10.38 +Restricted Stock Agreement +dated March 24, 2006, between Arvind Dharia and Steven Madden, Ltd. +(incorporated by reference to Exhibit 10.14 to Steven Madden, Ltd.’s +Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007). +10.39 +Restricted Stock Agreement +dated March 20, 2006, between Amelia Newton Varela and Steven Madden, +Ltd. (incorporated by reference to Exhibit 10.15 to Steven Madden, Ltd.’s +Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007). +10.40 +Restricted Stock Agreement +dated March 20, 2006, between Robert Schmertz and Steven Madden, Ltd. +(incorporated by reference to Exhibit 10.16 to Steven Madden, Ltd.’s +Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007). +10.41 +Restricted Stock Agreement +dated March 6, 2007, between Arvind Dharia and Steven Madden, Ltd. +(incorporated by reference to Exhibit 10.17 to Steven Madden, Ltd.’s +Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007). +10.42 +Restricted Stock Agreement +dated March 9, 2007, between Robert Schmertz and Steven Madden, Ltd. +(incorporated by reference to Exhibit 10.18 to Steven Madden, Ltd.’s +Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007). +10.43 +Restricted Stock Agreement +dated April 25, 2007, between Awadhesh Sinha and Steven Madden, Ltd. +(incorporated by reference to Exhibit 10.19 to Steven Madden, Ltd.’s +Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007). +10.44 +Non-Qualified Stock Option +Agreement dated May 16, 2007, between Jeffrey Silverman and Steven +Madden, Ltd. (incorporated by reference to Exhibit 10.20 to Steven +Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities +and Exchange Commission on +November 9, 2007). +10.45 +Non-Qualified Stock Option +Agreement dated May 16, 2007, between Jeffrey Silverman and Steven +Madden, Ltd. (incorporated by reference to Exhibit 10.21 to Steven +Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities +and Exchange Commission on +November 9, 2007). +10.46 +Employment Agreement +between Steven Madden, Ltd. and Amelia Newton Varela, effective as of +October 1, 2004 (incorporated by reference to Exhibit 10.29 to Steven +Madden, Ltd.’s Annual Report on Form 10-K/A for its fiscal year ended +December 31. 2005). # +21.01 +Subsidiaries of Registrant. † +23.01 +Consent of Eisner LLP† +24.01 +Power of Attorney (included on signature page +hereto). +31.01 +Certification of Chairman Chief Executive Officer +pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as +adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.† +31.02 +Certification of Chief Financial Officer pursuant to +Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted +pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.† +32.01 +Certification of Chairman & Chief Executive +Officer pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of +the Sarbanes-Oxley Act of 2002.† +32.02 +Certification of Chief Financial Officer pursuant to +18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley +Act of 2002.† +† +Filed herewith. +# +Indicates management contract or compensatory plan +or arrangement required to be identified pursuant to Item 15(b). +SIGNATURE +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. +Dated: +New York, New York +March 12, 2008 +STEVEN MADDEN, LTD. +By: +/s/ JAMIESON A. KARSON +Jamieson A. Karson +Chairman and Chief Executive Officer +KNOW ALL PERSONS BY THESE PRESENTS , that each person whose signature appears +below constitutes and appoints Jamieson A. Karson and Arvind Dharia, and each +of them, as his true and lawful attorneys-in-fact and agents, with full power +of substitution and re-substitution, for him in any and all capacities, to sign +any and all amendments to this Annual Report on Form 10-K and to file the same, +with all exhibits thereto, and other documents in connection therewith, with +the Securities and Exchange Commission hereby ratifying and confirming that +each of said attorneys-in-fact and agents, or his substitute or substitutes, +may lawfully do or cause to be done by virtue hereof. +Pursuant to the +requirements of the Securities Exchange Act of 1934, this report has been +signed below by the following persons on behalf of the registrant in the +capacities and on the dates indicated. +Signature +Title +Date +/S/ JAMIESON A. KARSON +Chairman, Chief Executive Officer and Director +March 12, 2008 +Jamieson A. Karson +/S/ ARVIND DHARIA +Chief Financial Officer +March 12, 2008 +Arvind Dharia +/S/ JOHN L. MADDEN +Director +March 12, 2008 +John L. Madden +/S/ PETER MIGLIORINI +Director +March 12, 2008 +Peter Migliorini +/S/ RICHARD P. RANDALL +Director +March 12, 2008 +Richard P. Randall +/S/ EDWARD R. ROSENFELD +Director +March 12, 2008 +Edward R. Rosenfeld +/S/ THOMAS H. SCHWARTZ +Director +March 12, 2008 +Thomas H. Schwartz +/S/ WALTER YETNIKOFF +Director +March 12, 2008 +Walter Yetnikoff \ No newline at end of file diff --git a/raw/filings/0000913241/2007/0001019056-08-000394/filing_metadata.csv b/raw/filings/0000913241/2007/0001019056-08-000394/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..0aebcd6a75dd7b9ac7fa1e34569b75638391cfce --- /dev/null +++ b/raw/filings/0000913241/2007/0001019056-08-000394/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000913241,SHOO,"STEVEN MADDEN, LTD.",10-K,2008-03-12,2007-12-31,2008-03-12T21:08:00.000Z,0001019056-08-000394,smadden_10k07.htm,FORM 10K,1064771,0,0,https://www.sec.gov/Archives/edgar/data/913241/000101905608000394/smadden_10k07.htm,https://www.sec.gov/Archives/edgar/data/913241/000101905608000394/,2007,2007,1 diff --git a/raw/filings/0000913241/2007/0001019056-08-000394/item1.txt b/raw/filings/0000913241/2007/0001019056-08-000394/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..d6da64a2e8c6ca7543111a4eb7c3e5b81234bb34 --- /dev/null +++ b/raw/filings/0000913241/2007/0001019056-08-000394/item1.txt @@ -0,0 +1,570 @@ +ITEM 1 +BUSINESS +Steven +Madden, Ltd. (and its subsidiaries) designs, sources, markets and retails +fashion-forward footwear for women, men and children. In addition, we design, +source, market and retail name brand and private label fashion handbags and +accessories through our Daniel M. Friedman Division. We distribute products +through our retail stores, our e-commerce website, department and specialty +stores throughout the United States and through special distribution +arrangements in Canada, Europe, Central and South America, Australia and Asia. +Our product line includes a broad range of updated styles which are designed to +establish or capitalize on market trends, complemented by core products. We +have established a reputation for our creative designs, popular styles and +quality products at affordable price points. +Our +business is comprised of three (3) distinct divisions (Wholesale, Retail and +First Cost). Our Wholesale Division includes eight (8) core segments: Steve +Madden Womens, Steve Madden Mens, Candie’s ® , +Madden Girl, Steve Madden’s Fix, Steven ® , Stevies ® and +Daniel M. Friedman. The Daniel M. Friedman Division, through license +agreements, includes the Daisy Fuentes, Betsey Johnson and Tracy Reese +accessories brands. Steven Madden Retail, Inc., our wholly-owned retail +subsidiary, operates Steve Madden ® and Steven ® retail +stores as well as our e-commerce website. Our wholly-owned subsidiary, +Adesso-Madden, Inc., acts as a buying agent for footwear products under private +labels for many of the country’s large mass merchandisers. We also license our +Steve Madden ® and Steven ® trademarks for several +accessory and apparel categories. +Steven +Madden, Ltd. was incorporated as a New York corporation on July 9, 1990 and reincorporated +under the same name in Delaware in November 1998. We completed our initial +public offering in December 1993 and our shares of common stock currently trade +on The NASDAQ Global Select Market under the symbol “SHOO”. +We +maintain our principal executive offices at 52-16 Barnett Avenue, Long Island +City, NY 11104, telephone number (718) 446-1800. +Our +website is http://www.stevemadden.com. We file our annual, quarterly and +current reports and other information with the Securities and Exchange +Commission. We make available, free of charge, on our website our Annual +Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form +8-K, any amendments to such reports filed or furnished pursuant to Section +13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and our +Proxy Statement for our Annual Meeting as soon as reasonably practicable after +such material is electronically filed with, or furnished to, the Securities and +Exchange Commission. We will provide paper copies of such filings free of +charge upon request. The public may read and copy any materials filed by us +with the Securities and Exchange Commission at the Securities and Exchange +Commission’s Public Reference Room at 100 R Street, NE, Washington, DC, 20549. +The public may also obtain information on the operation of the Public Reference +Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. In +addition, the Securities and Exchange Commission maintains an Internet site +that contains reports, proxy and information statements and other information +regarding us, which is available at http://www.sec.gov. +1 +Wholesale Divisions +Steve Madden Womens Wholesale Division +The +Steve Madden ® Womens Wholesale Division designs, sources and markets +our Steve Madden ® brand to major department stores, better specialty +stores and independently owned boutiques throughout the United States. The +Steve Madden ® brand has become a leading life-style brand in the +fashion conscious marketplace. To serve our customers (primarily women ages 16 +to 35), Madden Womens creates and markets fashion forward footwear designed to +appeal to customers seeking exciting, new footwear designs at affordable +prices. +As +our largest division, Madden Womens generated net sales of $127.8 million for +the year ended December 31, 2007, or approximately 30% of our total net sales. +New products for Madden Womens are test marketed at our retail stores. +Typically, within a few days, we can determine if the test product appeals to +customers. This enables us to use our flexible sourcing model to rapidly +respond to changing trends which we believe is essential for success in the +fashion arena. +Steve Madden Mens Wholesale Division +The +Steve Madden Mens Wholesale Division designs, sources and markets a full +collection of directional men’s shoes and fashion forward athletic shoes to +major department stores, better specialty stores and independent shoe stores +throughout the United States. Price points range from $70 to $100 at retail, +targeted at men ages 20 to 40 years old. Madden Mens generated net sales of +$51.2 million for the year ended December 31, 2007, or approximately 12% of our +total net sales. Madden Mens maintains open stock inventory positions in select +patterns to serve the replenishment programs of its wholesale customers. +Candie’s Wholesale Division +Pursuant +to our license agreement with Candie’s, Inc., we design, source and market +Candie’s ® branded footwear for women and kids through our Candie’s +Wholesale Division. Our Candie’s Wholesale Division generated net sales of +$22.1 million for the year ended December 31, 2007, or approximately 5% of our +total net sales. +On +December 6, 2004, the license agreement with Candie’s was amended to reflect +Candie’s decision to name Kohl’s Corporation as the exclusive provider of a new +line of Candie’s apparel. Pursuant to the amendment, commencing on January 1, +2007, we no longer have the exclusive right to market Candie’s ® +branded footwear and we are permitted to sell Candie’s ® branded +footwear only to Kohl’s. Under the terms of the amendment, Candie’s has +guaranteed that we will achieve minimum sales levels with Kohl’s during the +term of the agreement, which runs through December 31, 2010. In the event such +minimum sales levels are not achieved, Candie’s is required to compensate us in +an amount based on a percentage of the sales shortfall. For the year ended +December 31, 2007, the minimum sales level was met. +Madden Girl - Wholesale Division +The +Madden Girl Wholesale Division designs, sources and markets a full collection +of directional young women’s shoes. Madden Girl is geared for young women ages +13 to 20 and is an “opening price point” brand that is currently being sold at +department stores, mid-tier retailers and specialty stores. Madden Girl +generated net sales of $29.3 million for the year ended December 31, 2007, or +approximately 7% of our total net sales. +Steve Madden’s Fix - Wholesale Division +We +introduced Steve Madden’s Fix in the fourth quarter of 2007. The Fix Division +designs, sources and markets a line of fashion-forward athletic sneakers to +major department stores, better specialty stores and independently owned +boutiques throughout the United States. Fix is targeted at women ages 16 to 35 +with average price points that range from $60 to $80 at retail. Fix generated +net sales of $0.4 million in the fourth quarter, as well as for the year ended +December 31, 2007. +2 +Diva Acquisition Corp. - Steven ® Wholesale +Division +Diva +Acquisition Corp. designs, sources and markets women’s fashion footwear under +the Steven ® trademark through major department and better footwear +specialty stores throughout the United States. Priced a tier above the Steve Madden ® +brand, Steven ® products are designed to appeal principally to +fashion conscious women, ages 26 to 45, who shop at department stores and +footwear boutiques. Steven ® generated net sales of $16.1 million for +the year ended December 31, 2007, or approximately 4% of our total net sales. +Stevies ® Wholesale Division +Our +Stevies ® Wholesale Division designs, sources and markets footwear +for young girls to major department stores, such as Nordstrom, specialty +stores, such as Limited Too, and independent boutiques throughout the United +States. Stevies ® generated net sales of $8.9 million for the year +ended December 31, 2007 or approximately 2% of our total net sales. +Daniel M. Friedman Wholesale Division +Our +Daniel M. Friedman Wholesale Division designs, sources and markets name brand +and private label fashion handbags and accessories to major department stores, value price +retailers and better specialty stores throughout the United States. Daniel M. +Friedman generated net sales of $54.5 million for the year ended December 31, +2007, or approximately 13% of our total net sales. +Retail Division +Steven Madden Retail, Inc. +As +of December 31, 2007, we owned and operated one hundred (100) retail stores +including ninety-four (94) stores under the Steve Madden ® name and +six (6) under the Steven ® name. In addition, we operate one (1) +e-commerce website (through the www.stevemadden.com). In 2007, we opened seven +(7) new stores and closed two (2) underperforming stores. Steve Madden stores are +located in major shopping malls and in street locations across the United +States. In 2007, the retail stores generated annual sales in excess of $655 per +square foot. Sales are from our Steve Madden ® and Steven ® +products. Comparative store sales (sales of those stores, including the +e-commerce website, that were open for all of 2007 and 2006) decreased 7.6% in +2007 compared to 2006. The Retail Division generated net sales of $120.6 +million for the year ended December 31, 2007, or approximately 28% of our total +net sales. +We +believe that the Retail Division will continue to enhance overall sales and +profitability while building equity in the Steve Madden brand. We plan to add +three new retail stores during 2008. The expansion of the Retail Division +enables us to test and react to new products and classifications which, in +turn, strengthens the product development efforts of the Steve Madden Wholesale +Division. +First Cost Division +Adesso-Madden, Inc. +In +September 1995, we incorporated Adesso-Madden, Inc (“A-M”). as a wholly owned +subsidiary. A-M was formed to serve as a buying agent to mass-market merchants, +shoe store chains and other value-priced retailers in connection with the +procurement of footwear. As a buying agent, A-M utilizes its expertise and its +relationships with shoe manufacturers to facilitate the production of private +label shoes to its customers’ specifications. We believe that by operating in +the private label, mass merchandising market, we are able to maximize additional +non-branded sales opportunities. This leverages our overall sourcing and design +capabilities. Currently, this division serves as a buying agent for the +procurement of women’s, men’s and children’s footwear for large retailers, +including Target, Wal-Mart, Mervyns, J.C. Penney and Sears. A-M receives buying +agent’s commissions from its customers. In addition, we have leveraged the +strength of our Steve Madden brands and product designs resulting in a partial +recovery of our design, product and development costs from our suppliers. The +First Cost Division generated operating income of $14.7 million for the year +ended December 31, 2007. +3 +Licensing +As +of December 31, 2007, we licensed our Steve Madden ® and Steven ® +trademarks for use in connection with the manufacturing, marketing and sale of +cold weather accessories, sunglasses, eyewear, hosiery, outerwear and girl’s +apparel. Most of the license agreements require the licensee pay to us a +royalty based on actual net sales, a minimum royalty in the event that +specified net sales targets are not achieved and a percentage of sales for +advertising the brand. Licensing income for the year ended December 31, 2007 +was $3.7 million. +Design +We +have established a reputation for our creative designs, marketing and trendy +products at affordable price points. We believe that our future success will +substantially depend on our ability to continue to anticipate and react to +changing consumer demands in a timely manner. To meet this objective, we have +developed an unparalleled design process that allows us to recognize and act +quickly to changing consumer demands. Our design team strives to create designs +which it believes fit our image, reflect current or future trends and can be +manufactured in a timely and cost-effective manner. Once the initial design is +complete, a prototype is developed, which is reviewed and refined prior to the +commencement of initial production. Most new products are then tested in +selected Steve Madden ® retail stores. Winners are then offered for +wholesale and retail distribution nationwide. We believe that our design and +testing process and flexible sourcing model is a significant competitive +advantage allowing us to mitigate the risk of production costs and the +distribution of less desirable designs. +Product Sourcing and Distribution +We +source each of our product lines separately based on the individual design, +styling and quality specifications of the products in such product lines. We do +not own or operate manufacturing facilities; rather, we source our branded +products through agents and our own sourcing office with independently owned +manufacturers in China, Brazil, Italy, Mexico, Spain and India. We have +established relationships with a number of manufacturers and agents in each of +these countries. Although we have not entered into any long-term manufacturing +or supply contracts, we believe that a sufficient number of alternative sources +exist for the manufacture of our products. We continually monitor the availability +of the principal materials used in our footwear, which are available from a +number of sources in various parts of the world. We track inventory flow on a +regular basis, monitor sell-through data and incorporate input on product +demand from wholesale customers. We use retailers’ feedback to adjust the +production or manufacture of new products on a timely basis, which minimizes +the close out of slow-moving products. +We +distribute our products from three (3) third-party distribution warehouse +centers located in California and New Jersey. By utilizing distribution +facilities that specialize in distributing products to certain wholesale +accounts, Steve Madden ® retail stores and internet fulfillment, we +believe that our customers are better served. +Customers +Our +wholesale customers consist principally of department stores and specialty +stores, including independent boutiques. Approximately 86% of our wholesale +revenue is generated from department and specialty stores, including Macy’s, +Nordstrom, DSW, Kohl’s, Famous Footwear, and Dillard’s and catalog retailers, +including Victoria’s Secret. For the year ended December 31, 2007, Macy’s +accounted for approximately $51.2 million, or 17% of our wholesale net sales +and 12% of our total net sales. +4 +Distribution Channels +We +sell our products principally through department stores, specialty stores and +discount stores in the United States and through our company-owned retail +stores. For the year ended December 31, 2007, our Retail Division and our +Wholesale Division generated net sales of approximately $120.6 million and +$310.4 million, or 28% and 72% of our total net sales, respectively. Each of +these distribution channels are described below. +Steve Madden and Steven Retail Stores +As +of December 31, 2007, we operated ninety-four (94) company-owned retail stores +under the Steve Madden ® name and six (6) under the Steven ® +name and one (1) e-commerce website (through the www.stevemadden.com website). +We believe that our retail stores will continue to enhance overall sales, +profitability, and our ability to react to changing consumer trends. The stores +are also a marketing tool that allows us to strengthen brand recognition and to +showcase selected items from our full line of branded and licensed products. +Furthermore, the retail stores provide us with a venue to test and introduce +new products and merchandising strategies. Specifically, we often test new +designs at our Steve Madden ® retail stores before scheduling them +for mass production and wholesale distribution. In addition to these test +marketing benefits, we have been able to leverage sales information gathered at +Steve Madden ® retail stores to assist our wholesale customers in +order placement and inventory management. +A +typical Steve Madden ® store is approximately 1,400 to 1,600 square +feet and is located in a mall or street location that we expect will attract +the highest concentration of our core demographic, style-conscious customer +base. The Steven ® stores, which are generally the same size as our +Steve Madden stores, have a more sophisticated design and format styled to +appeal to their more mature target audience. In addition to carefully analyzing +mall demographics and locations, we also set profitability guidelines for each +potential store site. Specifically, we target well trafficked sites at which +the demographics fit our consumer profile and seek new locations where the +projected fixed annual rent expense stays within our guidelines. By setting these +guidelines, we seek to identify stores that will contribute to our overall +profitability both in the near and longer terms. +Department Stores +We +currently sell to over 3,414 doors of 20 department stores throughout the +United States. Our major accounts include Macy’s, Nordstrom, Dillard’s and Lord +& Taylor. +We +provide merchandising support to our department store customers which includes +in-store fixtures and signage, supervision of displays and merchandising of our +various product lines. Our wholesale merchandising effort includes the creation +of in-store concept shops, where a broader collection of our branded products +are showcased. These in-store concept shops create an environment that is +consistent with our image and are designed to enable the retailer to display +and sell a greater volume of our products per square foot of retail space. In +addition, these in-store concept shops encourage longer term commitment by the +retailer to our products and enhance consumer brand awareness. +In +addition to merchandising support, our key account executives maintain weekly +communications with their respective accounts to guide them in placing orders +and to assist them in managing inventory, assortment and retail sales. We +leverage our sell-through data gathered at our retail stores to assist +department stores in allocating their open-to-buy dollars to the most popular +styles in the product line and to phase out styles with weaker sell-throughs, +which minimizes markdown exposure at season’s end. +5 +Specialty Stores/Catalog Sales +We +currently sell to specialty store locations throughout the United States. Our +major specialty store accounts include DSW, Famous Footwear and Journeys. We +offer our specialty store accounts the same merchandising, sell-through and +inventory tracking support offered to our department store accounts. Sales of +our products are also made through various catalogs, such as Victoria’s Secret. +Internet Sales +We +operate an Internet website, www.stevemadden.com, where customers can purchase +numerous styles of our Steve Madden ® , Steven ® and Steve +Madden Mens footwear and accessory products. +Distribution Agreements +Steve +Madden ® products are available in many countries and territories worldwide +via several retail selling and distribution agreements. Under the terms of the +agreements, the distributors and retailers are required to open a minimum +number of stores each year and to pay us a fee for each pair of footwear +purchased, and in many cases, an additional fixed amount per pair or an +additional amount based on a percentage of sales. Under the terms of the +distribution agreements, the distributor is required to purchase certain +minimum amounts of Steve Madden ® shoes. These agreements, which +expire at various times through December 31, 2012 with renewal options at the +election of the distributors and retailers, are exclusive in their specific +territories which include Canada, Mexico, Israel, Turkey, China, Australia, New +Zealand, UAE, Kuwait, Egypt, Bahrain, Qatar, Oman, several countries in +southeast Asia, including Indonesia and Thailand, Morocco, South Africa and +several countries in Central and South America. +Competition +The +fashion footwear industry is highly competitive. We compete with specialty shoe +companies as well as companies with diversified footwear product lines. Many of +these competitors, including Nine West, Skechers, Kenneth Cole, Nike and Guess, +may have greater financial and other resources than us. We believe effective +advertising and marketing, fashionable styling, high quality, value and fast +manufacturing turnaround are the most important competitive factors and intend +to continue to employ these elements as we develop our products. +Marketing and Sales +We +have focused on creating an integrated brand building program to establish +Steve Madden as a leading designer of fashion footwear for style-conscious +young women and men. Principal marketing activities include product placements +in lifestyle and fashion magazines, personal appearances by Creative and Design +Chief, Steve Madden, and in-store promotions. In addition, we continue to +promote our website (www.stevemadden.com) where customers can purchase Steve +Madden ® , Steven ® and Steven Madden’s Fix ® +products, as well as view exclusive content, participate in contests and “live +chat” with customer service representatives. +Management Information Systems (MIS) Operations +Sophisticated +information systems are essential to our ability to maintain our competitive +position and to support continued growth. We operate on a dual AS/400 system +which provides system support for all aspects of our business including +manufacturing purchase orders, customer purchase orders, order allocations, +invoicing, accounts receivable management, quick response replenishment, +point-of-sale support and financial and management reporting functions. We have +a PKMS bar coded warehousing system that is integrated with the wholesale +system in order to provide accurate inventory positions and quick response size +replenishment for our customers. In addition, we have installed an EDI system +which provides a computer link between us and certain wholesale customers that +enables both the customer and us to monitor purchases, shipments and invoicing. +The EDI system also improves our ability to respond to customer inventory +requirements on a weekly basis. +6 +Receivables Financing; Line of Credit +Under +the terms of our factoring agreement with GMAC Commercial Finance LLC, as +amended, we may request advances from the factor of up to 80% of aggregate +receivables purchased by the factor at an interest rate equal to the lower of +the prime rate less 0.875% or the 30-day London Interbank Offered Rate plus +1.375%. The agreement, which has no specific expiration date and can be +terminated by either party with sixty (60) days written notice after June 30, +2007, provides us with a $50 million credit facility with a $25 million +sub-limit on the aggregate face amount of Letters of Credit. We also pay a fee +that varies depending on the customer of between 0.15% and 0.25% of the gross +invoice amount of each receivable purchased. We sell and assign a substantial +portion of our receivables, principally without recourse, to the factor. As of +December 31, 2007 and 2006, $272 and $260 of factored receivables, +respectively, were sold by us with recourse. GMAC maintains a lien on all of +our receivables and assumes the credit risk for all assigned accounts approved +by them with certain restrictions. +Our +Daniel M. Friedman Division had a factoring agreement with Wells Fargo Century +that expired on June 30, 2007. Under the terms of the agreement, we were +eligible to draw down 85% of our invoiced receivables at an interest rate equal +to the prime rate. We paid a fee equal to 0.45% of the gross invoice amount of +each receivable purchased. Wells Fargo Century maintained a lien on all of +Daniel M. Friedman’s receivables and assumed the credit risk for all assigned +accounts approved by them with certain restrictions. As of July 1, 2007, Daniel +M. Friedman has been incorporated into the GMAC agreement. +Trademarks and Service Marks +The +STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and service marks have +been registered in numerous International Classes in the United States (Int’l +Cl. 25 for clothing and footwear; Int’l Cl. 18 for leather goods, such as +handbags and wallets; Int’l Cl. 9 for eyewear; Int’l Cl. 14 for jewelry; Int’l +Cl. 3 for cosmetics and fragrances; Int’l Cl. 20 for picture frames; Int’l Cl. +16 for paper goods; and Int’l Cl. 35 for retail store services). We also have +pending trademark applications in the United States for the mark STEVE MADDEN +and/or STEVE MADDEN (design) in numerous international classes (Class 14 for +watches, Class 18 for bags and leather goods, and Class 26 for hair +accessories). +We +also have trademark registrations in the United States for the marks EYESHADOWS +BY STEVE MADDEN (Int’l Cl. 9 for eyewear), ICE TEE (Int’l Cl. 25 for clothing +and footwear), SHOE BIZ BY STEVE MADDEN (Int’l Cl. 25 for clothing and +footwear; and Int’l Cl. 35 for retail store services) STEVEN M. (Int’l Class 25 +for clothing and footwear); and STEVEN (Int’l Cl. 25 for clothing and footwear, +Class 3 for cosmetics and fragrances, Class 14 for jewelry, Class 18 for +leather goods, Class 26 for hair accessories, Class 35 for retail store +services, and Class 9 for eyewear). We also own a registration for the mark +SOHO COBBLER and SOHO COBBLER (design) in the U.S. in Class 25 for clothing. +We +also have several pending applications in the U.S. for MADDEN in Class 18 for +bags, Class 14 for jewelry, and Class 25 for clothing and footwear. We also +have a registration in the U.S. for STEVEN BY STEVE MADDEN in Class 25 (belts), +and pending applications in the U.S. for STEVEN BY STEVE MADDEN or STEVEN BY +STEVE MADDEN (design) in Classes 9 (cd cases and cell phone cases), 14 (watches +and clocks), 18 (bags and small leather goods) 24 (bedding), and 25 (clothing +and footwear), 28 (video game cases), and for MADDEN BY STEVE MADDEN in Class +14 for jewelry and watches, and Class 18 for bags. +7 +Additionally, +we have trademark and service mark registrations and applications in the United +States for various marks, including STEVE MADDEN LUXE registered in Class 25 +for clothing and footwear and pending in Class 14 for watches and clocks; RULE +STEVE MADDEN pending (in Class 3 for perfume and cosmetics, Class 4 for +candles, Class 6 for key rings and key chains, Class 9 for eyewear and CDs, +Class 11 for lamps, Class 14 for jewelry, Class 16 for stationery and +notebooks, Class 18 for bags, Class 20 for furniture, Class 21 for housewares, +Class 24 for bedding, Class 25 for clothing and footwear, Class 26 for hair accessories, +Class 27 for carpets and rugs, Class 28 for toys and games, Class 32 for light +beverages, and Class 35 for retail store services); FIX, FIX (design), and +STEVE MADDEN’S FIX pending in Class 25 (clothing and footwear); LITTLE MISS +COMFORT pending in Class 18 (bags) and 25 (clothing); MADDEN ACTIVE, MADDEN +BOYZ, MADDEN GIRL, MADDEN GIRLZ, MADDEN KIDZ, MADDEN NEW YORK, and MADDEN SPORT +all pending in Class 25 (clothing and footwear); and NATURAL COMFORT registered +in Class 25 (footwear). +We +further own registrations for the STEVE MADDEN and/or STEVE MADDEN plus Design +trademarks and service marks in various International Classes in Argentina, +Armenia, Aruba, Australia, Bahrain, Belize, Brazil, Canada, Chile, China, +Colombia, El Salvador, Guatemala, Hong Kong, Israel, Italy, Japan, Korea, +Lebanon, Mexico, Netherland Antilles, New Zealand, the Netherlands, Nicaragua, +Norway, Oman, Panama, the Philippines, Qatar, Russia, Saudi Arabia, Singapore, +South Africa, Taiwan, Thailand, Turkey, the United Arab Emirates, Uzbekistan, +the European Union, and the Benelux countries and have pending applications for +registration of the STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and +service marks in Aruba, Azerbaijan, Bahamas, Belarus, Canada, China, Costa +Rica, Ecuador, Egypt, Estonia, Georgia, Guatemala, Honduras, India, Indonesia, +Jordan, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Latvia, Lithuania, Moldova, +Oman, Paraguay, Peru, the Philippines, Saudi Arabia, Tajikistan, Turkmenistan, +Ukraine, Venezuela, and the United Arab Emirates. +Additionally, +we own registrations for the STEVEN trademark and service mark in various +International Classes in Australia, Bahrain, Belize, China, the Dominican +Republic, El Salvador, Hong Kong, Israel, Japan, Lebanon, Malaysia, New +Zealand, Netherland Antilles, Norway, the Philippines, Qatar, Russia, Saudi +Arabia, South Africa, Thailand, Taiwan, Turkey, and the United Arab Emirates +and have pending applications for registration of the STEVEN trademark and service +mark in China, Columbia, Costa Rica, Ecuador, Egypt, the European Union, +Guatemala, India, Indonesia, Israel, Italy, Jordan, Korea, Kuwait, Malaysia, +Nicaragua, Oman, Philippines, Taiwan, Thailand, Turkey, Taiwan, and Venezuela. +We +further own registrations for the “torch stripe” design in Class 25 in the +European Union and Panama, and China. +We +further own registrations for the mark STEVEN BY STEVE MADDEN in various +international classes in the European Union, Hong Kong, Panama, and Taiwan, and +have pending applications for the mark STEVEN BY STEVE MADDEN in various +international classes in Aruba, Canada, China, Egypt, India, Israel, Korea, and +Venezuela. +We +further have pending applications for the mark STEVE MADDEN’S FIX* in +international class 25 in China, the European Union, Mexico, and Turkey. +We +further have pending applications for the mark MADDEN GIRL in international +class 25 in Egypt, India, Kuwait, and Saudi Arabia. +8 +We +further have pending applications for the mark NATURAL COMFORT in various +international classes in Egypt, India, Kuwait, and Saudi Arabia. +We +further own registrations for the mark SM NEW YORK and/or SM NEW YORK in +International Class 25 (clothing and footwear) in Aruba, Belize, the Dominican +Republic, Ecuador, El Salvador, Hong Kong, Guatemala, India, Netherland +Antilles, and New Zealand, Nicaragua, Panama, and has pending applications for +registration of the SM NEW YORK mark in International Class 25 (clothing and +footwear) in Australia, Columbia, Costa Rica, Indonesia, Saudi Arabia, South +Africa, and Venezuela. +Additionally, +we, through our Diva Acquisition Corp. and Diva International, Inc. +subsidiaries, own registrations for the DAVID AARON trademark in the United +States in Class 25 for clothing Class 18 for handbags and wallets, and Class 35 +for retail store services, and in Australia, Canada, the European Union, Hong +Kong, Japan, Panama and South Africa in some or all of Classes 3, 18, and 25, +and for our D. AARON trademark in Class 25 in Spain. Also, we own registrations +for our DAVID AARON trademark in International Class 3 for perfume and +cosmetics; International Class 9 for eyewear; International Class 14 for +jewelry; International Class 16 for paper goods; International Class 18 for +bags; International Class 24 for bed and bath products; International Class 25 +for clothing and footwear and International Class 26 hair accessories in Korea. +We, +through our Stevies, Inc. subsidiary, also own various registrations for the +STEVIES and /or STEVIES plus Design trademark and service mark in a number of +International Classes in the United States (Int’l Class 25 for clothing and +footwear; Int’l Class 18 for leather goods, such as handbags and wallets; +International Class 35 for retail store services; International Class 14 for +jewelry; International Class 28 for toys; Int’l Class 16 for magazines; Int’l +Class 3 for perfume and cosmetics, Int’l Class 9 for CDs and eyewear; Int’l Cl. +27 for rugs and carpets; and Int’l Class 26 for hair accessories), and for +STEVIES BY STEVE MADDEN in Class 14 for jewelry, Class 9 for eyewear, Class 3 +for perfume and cosmetics, Class 25 for clothing and footwear, Class 28 for +toys and games, Class 35 for retail services, Class 16 for magazines, Class 18 +for bags. +Additionally, +Stevies, Inc. has pending trademark and service mark applications and/or +existing registrations for the STEVIES and STEVIES plus Design marks in various +International Classes in Aruba, Argentina, Australia, Bahrain, Brazil, Canada, +China, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Egypt, El +Salvador, European Union, Guatemala, Hong Kong, Honduras, Indonesia, India, +Israel, Japan, Korea, Kuwait, Lebanon, Malaysia, Mexico, Netherland Antilles, +Nicaragua, New Zealand, Oman, Panama, Peru, Qatar, Saudi Arabia, Singapore, +South Africa, Taiwan, Thailand, Turkey, the United Arab Emirates and Venezuela. +We +believe that our trademarks have a significant value and are important to the +marketing of our products. There can be no assurance, however, that we will be +able to effectively obtain rights to our marks throughout all of the countries +of the world. Moreover, no assurance can be given that others will not assert +rights in, or ownership of, our trademarks and other proprietary rights or that +we will be able to successfully resolve such conflicts. Our failure to protect +such rights from unlawful and improper appropriation may have a material +adverse effect on our business and financial condition, results of operations +and liquidity. +Employees +On +February 5, 2008, we employed approximately one thousand five hundred and ten +(1,510) employees, of whom approximately seven hundred forty (740) work on a +full-time basis and approximately seven hundred seventy (770) work on a +part-time basis, most of whom work in the Retail Division. Our management +considers relations with our employees to be good. +9 +Seasonality +Historically, +our merchandising businesses have experienced holiday retail seasonality. In +addition to seasonal fluctuations, our operating results fluctuate quarter to +quarter as a result of the timing of holidays, weather, the timing of larger +shipments of footwear, market acceptance of our products, the mix, pricing and +presentation of the products offered and sold, the hiring and training of +additional personnel, inventory write downs for obsolescence, the cost of +materials, the product mix between wholesale, retail and licensing businesses, +the incurrence of other operating costs and factors beyond our control, such as +general economic conditions and actions of competitors. +Backlog +We +had unfilled wholesale customer orders of $113.8 million and $103.7 million, as +of February 21, 2008 and 2007, respectively. Our backlog at a particular time +is affected by a number of factors, including seasonality, timing of market +weeks and wholesale customer purchases of our core basic products through our +open stock program. Accordingly, a comparison of backlog from period to period +may not be indicative of eventual shipments. \ No newline at end of file diff --git a/raw/filings/0000913241/2007/0001019056-08-000394/item13.txt b/raw/filings/0000913241/2007/0001019056-08-000394/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..6088d19e390641c2508231949b005ebc9d9081a7 --- /dev/null +++ b/raw/filings/0000913241/2007/0001019056-08-000394/item13.txt @@ -0,0 +1,7 @@ +ITEM 13 +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR +INDEPENDENCE +The +information required to be furnished pursuant to this item will be set forth in +our proxy statement for the 2008 Annual Meeting of Stockholders, and is +incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000913241/2007/0001019056-08-000394/item9a.txt b/raw/filings/0000913241/2007/0001019056-08-000394/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..69ed73ba1dfa56aefbc206eded72d9d63a61b54c --- /dev/null +++ b/raw/filings/0000913241/2007/0001019056-08-000394/item9a.txt @@ -0,0 +1,127 @@ +ITEM 9A +CONTROLS AND PROCEDURES +Disclosure Controls and Procedures +As required by +Rule 13a-15(b) of the Exchange Act, our management, including our Chief +Executive Officer and Chief Financial Officer, has evaluated the effectiveness +of our disclosure controls and procedures as of the end of the fiscal year +covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief +Executive Officer and Chief Financial Officer have concluded that our +disclosure controls and procedures (as defined in Rule 13a-15(e) under the +Exchange Act) were effective as of the end of the fiscal year covered by this +Annual Report on Form 10-K. +Management’s Annual Report on Internal +Control Over Financial Reporting +Management of +Steven Madden, Ltd. is responsible for establishing and maintaining adequate +internal control over financial reporting (as defined in Rule 13a-15(f) of the +Securities Exchange Act of 1934). +Our 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 purpose in accordance with U.S. generally +accepted accounting principles. Our internal control over financial reporting +includes those policies and procedures that (1) pertain to maintenance of +records that, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of our assets; (2) provide reasonable assurance +that transactions are recorded as necessary to permit preparation of financial +statements in accordance with U.S. generally accepted accounting principles, +and that our receipts and expenditures are being made only in accordance with +authorizations of management and directors; and (3) provide reasonable assurance +regarding prevention or timely detection of unauthorized acquisition, use, or +disposition of our 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. +Under the supervision of and with the +participation of the Chief Executive Officer and the Chief Financial Officer, +our management conducted an assessment of the effectiveness of our internal +control over financial reporting based on the framework and criteria +established in Internal Control–Integrated Framework, issued by the Committee +of Sponsoring Organizations of the Treadway Commission. Based on this +assessment our management has concluded that, as of December 31, 2007, our internal +control over financial reporting was effective. +Attestation Report of our Independent +Registered Public Accounting Firm +Our +Independent Registered Public Accounting Firm, Eisner LLP, has audited and +issued a report on our internal control over financial reporting. The report of +Eisner LLP appears below. +To the Board +of Directors and Stockholders +Steven Madden, Ltd. +We have +audited Steven Madden, Ltd. and subsidiaries’ (the “Company”) internal control +over financial reporting as of December 31, 2007, based on criteria established +in Internal Control-Integrated Framework issued by the Committee of Sponsoring +Organizations of the Treadway Commission (“COSO”). The Company’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, included in the accompanying Management’s Annual Report on Internal +Control over Financial Reporting. Our responsibility is to express an opinion +on the Company’s internal control over financial reporting based on our audit. +29 +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, assessing the risk that a material weakness exists, and testing and +evaluating the design and operating effectiveness of internal control based on +the assessed risk. Our audit also included 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 (i) pertain to +the maintenance of records that, in reasonable detail, accurately and fairly +reflect the transactions and dispositions of the assets of the company; (ii) +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 (iii) 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, Steven Madden, Ltd. and subsidiaries maintained, in all material +respects, effective internal control over financial reporting as of December +31, 2007, based on criteria established in Internal Control - Integrated +Framework issued by COSO. +We also have +audited, in accordance with the standards of the Public Company Accounting +Oversight Board (United States), the consolidated balance sheets of Steven +Madden, Ltd. and subsidiaries as of December 31, 2007 and 2006, and the related +consolidated statements of income, changes in stockholders’ equity, and cash +flows for the years in the three-year period ended December 31, 2007, and our +report dated March 10, 2008 expressed an unqualified opinion on those +consolidated financial statements. +Eisner LLP +New York, New +York +March 10, 2008 +Changes in Internal Control Over Financial +Reporting +As +required by Rule 13a-15(d) under the Exchange Act, our management, including +our Chief Executive Officer and Chief Financial Officer, has evaluated our +internal controls over financial reporting to determine whether any changes +occurred during the fourth quarter of 2007 that have materially affected, or +are reasonably likely to materially affect, our internal control over financial +reporting. Based on that evaluation, there has been no such material change +during the fourth quarter of 2007. \ No newline at end of file diff --git a/raw/filings/0000913241/2007/0001019056-08-000394/rp_note.txt b/raw/filings/0000913241/2007/0001019056-08-000394/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000913241/2007/0001019056-08-000394/rpt_disclosure.txt b/raw/filings/0000913241/2007/0001019056-08-000394/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..4231742400a8d20b6e84402b70a493b79b5bf432 --- /dev/null +++ b/raw/filings/0000913241/2007/0001019056-08-000394/rpt_disclosure.txt @@ -0,0 +1,149 @@ +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS +In July +2001, the Company entered into a consulting agreement with Peter J. Solomon +& Company, a financial advisory firm of which Marc S. Cooper, a director of +the Company until his resignation on February 25, 2008, was a managing +director. Under this agreement, the firm provided financial advisory and +investment banking services to the Company. This agreement was amended in March +2004. The amended agreement expired on March 31, 2005, but pursuant to its +terms was automatically renewed until the Company terminated it on July 11, +2006. In June 2007, the Company entered into a new consulting agreement with +Peter J. Solomon & Company, pursuant to which the firm is to provide +financial advisory and investment banking services to the Company. This +agreement was amended in February 2008, and, as amended, expired on December +31, 2008. The relationship with Peter J. Solomon & Company currently +continues on a month-to-month basis. During 2008, the Company paid Peter J. +Solomon & Company $46,402 in consulting fees. +In January +2004, the Company entered into an agreement with John Madden and JLM +Consultants, a company wholly-owned by John Madden, one of the Company’s +directors, which was amended in 2005. Under this agreement, Mr. Madden provided +consulting services with respect to the development of international sales of +the Company. This agreement expired on December 31, 2005 but Mr. Madden continued +to provide consulting services and the Company continued to make payments +consistent with those that would have been required under the expired +consulting agreement through December 31, 2007. For the 2008 fiscal year, Mr. +Madden has continued to provide consulting services and the Company has +continued to make payments for such services. In accordance with the foregoing, +JLM Consultants received a commission equal to 2.5% on international sales. JLM +Consultants received a monthly draw in the amount of $25,000 with recourse +against such commissions, as well as a $1,000 per month travel allowance and +$2,812 per month toward health insurance premiums. Pursuant to this +arrangement, JLM Consultants received a total of $760,270 in 2008. +Effective +as of July 1, 2005, the Company amended its employment agreement with Steven +Madden, pursuant to which Mr. Madden agreed to serve as the Company’s Creative +and Design Chief. The term of Mr. Madden’s employment under his amended +employment agreement commenced July 1, 2005 and ends on June 30, 2015. The +agreement provides for an annual salary of $600,000, with a 7% increase of base +salary on a compound basis in each of the third, fifth, seventh and ninth years +of the agreement. The agreement also provides for an annual bonus in an amount +determined by the Board of Directors, which will be at least 2% of the +Company’s EBITDA (the “Annual Bonus”). Additionally, the Company shall pay Mr. +Madden an annual cash bonus in relation to “new business” (as defined in the +agreement) in an amount to be determined by the Board of Directors, which will +be at least (i) 2.5% of new business gross direct revenues, and (ii) 10% of all +license or other fee income above $2,000,000 (the “New Business Bonus”). In +addition, Mr. Madden is eligible to receive annually an option grant to +purchase shares of Common Stock in an amount equal to not less than 100% of the +largest aggregate amount of options granted to any other continuing full-time +employee of the Company during the annual period; provided, however, that a +grant in excess of 150% of the options grant to such other continuing full-time +employee shall require shareholder approval. The agreement provides, in the +event of Mr. Madden’s death, for the payment to Mr. Madden’s estate of his base +salary for the 12-month period immediately subsequent to the date of Mr. +Madden’s death. In the +-34- +event that Mr. Madden’s employment agreement is terminated due to Mr. +Madden’s total disability (as defined in the agreement), “for cause” (as +defined in the agreement) or due to Mr. Madden’s resignation, the Company is +obligated to pay Mr. Madden the amount of compensation that is accrued and +unpaid through the date of termination. In the event Mr. Madden’s employment +agreement is terminated for any reason (other than “for cause” or due to his +death or total disability or due to Mr. Madden’s resignation), the Company is +obligated to pay Mr. Madden, in installments, the balance of his base salary +that would have been paid by the Company under the agreement for the full term +of the agreement. In the event that there is a “change of control” (as defined +in the agreement) transaction, all unvested options to purchase shares of +Common Stock held by Mr. Madden will vest on the date of termination and Mr. +Madden will be entitled to receive a lump sum cash payment equal to (1) the +amount of compensation that is accrued and unpaid through the date of +termination, (2) an amount equal to the product of (A) the number of years +remaining in the term of the agreement (but not less than 5), and (B) the sum +of (w) the base salary for the 12-month period ended on the preceding December +31 (or for the 12-month period ending on December 31, 2002, if greater), (x) +the amount of the Annual Bonus earned (paid or accrued or which should have +been paid or accrued) for the 12-month period ended on the preceding December +31 (or for the 12-month period ended on December 31, 2002, if greater), (y) the +non-accountable expense allowance provided for under the agreement for the +12-month period ended on the preceding December 31, and (z) the amount of the +New Business Bonus earned (paid or accrued or which should have been paid or +accrued) for the 12-month period ended on the preceding December 31 (or for the +12-month period ending on December 31 during the agreement in which Mr. Madden +received the greatest New Business Bonus, if greater). Mr. Madden’s employment +agreement contains other customary provisions, including provisions regarding +expense reimbursement, confidentiality, solicitation and competition. For the +fiscal year ending December 31, 2008, Mr. Madden earned (i) $642,000 in base +salary, (ii) $200,000 in non-accountable expense allowance, (iii) a bonus of +$1,139,020 representing 2% of the Company’s earnings before interest, tax, +depreciation and amortization, (iv) a bonus of $3,340,525 earned based on 2.5% +of the Company’s new business, and (v) a bonus of $72,744 based on 10% of +Royalty/Licensing income over $2,000,000. +On June 25, +2007, the Company made a loan to Steve Madden, its Creative and Design Chief +and a principal shareholder of the Company, in the amount of $3,000,000, in +order for Mr. Madden to exercise options that were due to expire and hold the +underlying Company stock. Mr. Madden executed a secured promissory note in +favor of the Company that bears interest at an annual rate of 8% and originally +was due on the earlier of the date Mr. Madden ceases to be employed by the +Company or December 31, 2008. An amendment to the note dated December 19, 2007 +extended the due date to March 31, 2009. As of December 31, 2008 $370,000 of +interest has accrued on the note. Pursuant to a pledge agreement between the +Company and Mr. Madden, the note is secured by 510,000 shares of the Company’s +common stock. On April 6, 2009, the Note was further amended and restated to +(i) extend the due date to the earlier of the date that Mr. Madden ceases to be +employed by the Company and June 30, 2015 (the “Maturity Date”), and (ii) amend +the rate of interest to accrue at a rate of 8% per annum from June 25, 2007 +until April 6, 2009, and 6% per annum from April 7, 2009 until the Maturity +Date. Mr. Madden is the brother of John Madden, who has been a director of the +Company since the Company’s inception. +-35- +On May 16, +2007, the Company entered into a Membership Interest Purchase Agreement (the +“Purchase Agreement”) whereby it purchased all of the outstanding membership +interests of Compo Enhancements, LLC, a provider of e-commerce services to the +Company (“Compo”), from its owners Jeffrey Silverman, James Randel, Ron Offir, +Godfrey Baker, Alyse Nathan and Andrew Rosca (collectively, the “Owners”). +Jeffrey Silverman became President of the Company on May 16, 2007. +In +connection with the Purchase Agreement, on May 16, 2007, the Company also +entered into an Earn-Out Agreement with the Owners (the “Earn-Out Agreement”). +Pursuant to the Earn-Out Agreement, as additional consideration for their +membership interests in Compo, the Owners collectively have the right to two +contingent purchase price payments of 168,000 shares of the Company’s common +stock, which shall be paid (if at all) if and when the Company achieves (or +exceeds), in two consecutive years, beginning with fiscal year 2008 and ending with +fiscal year 2012, certain EBIT Goals (as defined in the Earn-Out Agreement) and +certain Diluted EPS Goals (as defined in the Earn-Out Agreement), all as +specified in the Earn-Out Agreement. Promptly following the execution of the +Earn-Out Agreement, the Company purchased, for $200,000, 20.875% of any future +earn-out payment from Mr. Randel. +On December +21, 2007, the Company and Mr. Silverman, and the Company and Mr. Randel, each +entered into a Settlement and Release Agreement, dated as of December 18, 2007 +(each, a “Settlement Agreement”, and together, the “Settlement Agreements”). +Each of the Settlement Agreements provides for: the settlement of all disputes +between the parties relating to the pre-May 16, 2007 arrangement between Compo +and the Company (the “Pre-Transaction Arrangement”); the forgiveness by the +Company of all amounts in respect of the Working Capital Refund (as such term +is defined in the Purchase Agreement) that Messrs. Silverman and Randel may be +obligated to pay under the Purchase Agreement; and the payment by the Company +of certain amounts owed by Compo to the U.S. Customs Service and several +vendors to Compo. In addition, the Company and Mr. Silverman agreed that the +Company would have no further obligation to Mr. Silverman under the Earn-Out +Agreement, and the Company would pay $600,000 to Mr. Silverman on June 30, +2008. Mr. Randel released the Company and others from any claims arising from +or related to the Pre-Transaction Arrangement. Mr. Silverman and Mr. Randel +released the Company and others (and the Company released Mr. Silverman, Mr. +Randel and others) from any claims arising from or related to the Earn-Out +Agreement, the Purchase Agreement, the Pre-Transaction Arrangement and all \ No newline at end of file diff --git a/raw/filings/0000913241/2012/0001445305-13-000408/filing.txt b/raw/filings/0000913241/2012/0001445305-13-000408/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..a1dfbabc6ecbb7e3f3164a8129c77588c9e6c715 --- /dev/null +++ b/raw/filings/0000913241/2012/0001445305-13-000408/filing.txt @@ -0,0 +1,3774 @@ +10-K +1 +shoo-20121231x10k.htm +10-K +SHOO-2012.12.31-10K +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +WASHINGTON, D.C. 20549 +FORM 10-K +(Mark One) +x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2012 +or +o 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 0-23702 +STEVEN MADDEN, LTD. +(Exact name of registrant as specified in its charter) +Delaware +13-3588231 +(State or other jurisdiction of +(I.R.S. Employer Identification No.) +incorporation or organization) +52-16 Barnett Avenue, Long Island City, New York 11104 +(Address of principal executive offices) (Zip Code) +(718) 446-1800 +(Registrant's Telephone Number, Including Area Code) +Securities Registered Pursuant to Section 12(b) of the Act: +Title of Each Class +Name of Each Exchange on Which Registered +Common Stock, par value $.0001 per share +The NASDAQ Stock Market LLC +Preferred Stock Purchase Rights +The NASDAQ Stock Market LLC +Securities Registered Pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +Yes x No o +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act. +Yes o No x +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 o +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). +Yes x No o +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) 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. o +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer x +Accelerated filer o +Non-accelerated filer o (do not check if smaller reporting company) +Smaller reporting company o +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). +Yes o No x +The aggregate market value of the common equity held by non-affiliates of the registrant (assuming for these purposes, but without conceding, that all executive officers and directors are “affiliates” of the registrant) as of June 30, 2012, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $1,266,789,000 (based on the closing sale price of the registrant's common stock on that date as reported on The NASDAQ Global Select Market). +The number of outstanding shares of the registrant's common stock as of February 26, 2013 was 44,003,418 shares. +DOCUMENTS INCORPORATED BY REFERENCE: +PART III INCORPORATES CERTAIN INFORMATION BY REFERENCE FROM THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE REGISTRANT'S 2013 ANNUAL MEETING OF STOCKHOLDERS. +TABLE OF CONTENTS +SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS +1 +PART I +ITEM 1 BUSINESS +1 +ITEM 1A RISK FACTORS +9 +ITEM 1B UNRESOLVED STAFF COMMENTS +14 +ITEM 2 PROPERTIES +14 +ITEM 3 LEGAL PROCEEDINGS +15 +ITEM 4 MINE SAFETY DISCLOSURES +16 +PART II +ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER +MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +16 +ITEM 6 SELECTED FINANCIAL DATA +18 +ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION +AND RESULTS OF OPERATIONS +19 +ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +29 +ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +29 +ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON +ACCOUNTING AND FINANCIAL DISCLOSURE +29 +ITEM 9A CONTROLS AND PROCEDURES +29 +ITEM 9B OTHER INFORMATION +30 +PART III +ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +30 +ITEM 11 EXECUTIVE COMPENSATION +30 +ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND +MANAGEMENT AND RELATED STOCKHOLDER MATTERS +30 +ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND +DIRECTOR INDEPENDENCE +30 +ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES +31 +PART IV +ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +31 +SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K contains “forward-looking statements” (as that term is defined in the federal securities laws), which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with regard to future revenue, projected 2013 results, earnings, spending, margins, cash flow, orders, expected timing of shipment of products, inventory levels, future growth or success in specific countries, categories or market sectors, continued or expected distribution to specific retailers, liquidity, capital resources and market risk, strategies and objectives and other future events. More generally, forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or simply state future results, performance or achievements, and can be identified by the use of forward looking language such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will be,” “will continue,” “will result,” “could,” “may,” “might,” or any variations of such words with similar meanings. Factors that may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 1A of this Annual Report on Form 10-K. +Any such forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based and could cause our actual results to differ materially from those projected in forward-looking statements. As such, we strongly caution you that these forward-looking statements are not guarantees of future performance or events. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise. +PART I +ITEM 1 BUSINESS +Overview +Steven Madden, Ltd. and its subsidiaries (collectively, the “Company”) design, source, market and sell fashion-forward name brand and private label footwear for women, men and children and name brand and private label fashion handbags and accessories and license our trademarks for use in connection with the manufacture, marketing and sale of various products of our licensees. Our products are marketed through our retail stores and our e-commerce websites, as well as better department stores, major department stores, mid-tier department stores, specialty stores, luxury retailers, value priced retailers, national chains, mass merchants and catalog retailers throughout the United States and Canada. In addition, we have special distribution arrangements for the marketing of our products in Asia, Europe, the Middle East, Mexico, Australia, South Africa, South America and India. We offer a broad range of updated styles designed to establish or complement and capitalize on market trends. We have established a reputation for design creativity and our ability to offer quality products in popular styles at affordable prices, delivered in an efficient manner and time frame. +The Company was incorporated as a New York corporation on July 9, 1990, reincorporated under the same name in Delaware in November 1998 and completed its initial public offering in December 1993. Shares of the Company's common stock, $.0001 par value per share, currently trade on the NASDAQ Global Select Market under the symbol “SHOO”. Our principal executive offices are located at 52-16 Barnett Avenue, Long Island City, NY 11104. Our telephone number is (718) 446-1800 and our website address is http://www.stevemadden.com. +We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and information with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). These reports, any amendments to such reports, and our proxy statements for our stockholders' meetings are available free of charge, on the "Investor Relations" section of our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We will provide paper copies of such filings free of charge upon request. The public may read and copy any materials filed by us with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information regarding the operation of the SEC's Public Reference Room is available by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding us, which is available at http://www.sec.gov. +Fiscal year 2012 represents the fourth consecutive year that the Company achieved record sales and earnings. Net sales for 2012 increased 27% to $1,227,072 from $968,549 in the same period of last year. Net income attributable to Steven Madden, Ltd. increased 23% to 119,626 in 2012 compared to $97,319 in the same period of last year. Net income attributable to Steven +1 +Madden, Ltd. in 2012 included $5.93 million of impairment charges related to the bankruptcies of Betsey Johnson LLC and Bakers Footwear Group, Inc. and $2.5 million for the settlement of a class action lawsuit. The Company's effective tax rate for 2012 decreased to 35.1% compared to 38.8% recorded in 2011 due primarily to a tax benefit of $6.0 million related to a portion of earnings from the Company's foreign operations that has been invested indefinitely in the acquisition and expansion of our SM Canada business. Inclusive of the impairment charges, the settlement of the lawsuit and the bad debt expense, which negatively impacted earnings per share by $0.13, diluted earnings per share in 2013 increased to $2.71 per share on 44,170,000 diluted weighted average shares outstanding compared to $2.25 per share on 43,239,000 diluted weighted average shares outstanding in the prior year. See Item 3, "Legal Proceedings," below for a description of the class action and its settlement and Note D to our Consolidated Financial Statements for additional information concerning the bankruptcy-related charges. +As part of our strategic initiative to grow the Company's International business, on February 21, 2012, we purchased all of the assets of Steve Madden Canada Inc., Steve Madden Retail Canada Inc., Pasa Agency Inc. and Gelati Imports Inc. (collectively, “SM Canada”), the Company's sole distributor in Canada since 1994, comprising SM Canada's footwear, handbags and accessories wholesale and retail businesses. Management believes that Canada represents a strong and growing market for the Company. The transaction was completed for consideration consisting of a cash payment at closing of approximately $29.13 million (Canadian dollars, which converts to approximately the same in U.S. dollars) plus potential earn-out payments of up to a maximum of $38 million (Canadian dollars, which converts to approximately the same in U.S. dollars), in the aggregate, based on achievement of certain earnings targets over a five-year period. The fair value of contingent payments was estimated based on management's projections of the financial results of SM Canada during the earn-out period. As of December 31, 2012, the Company estimates the fair value of the contingent consideration to be $19.98 million in U.S. dollars. +Product Distribution Segments +Our business is comprised of five distinct segments: Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing. +Our Wholesale Footwear segment is comprised of the following brands: Steve Madden Women's, Madden Girl, Steve Madden Men's, Steven, l.e.i.® (under license), Elizabeth and James® (under license), Olsenboye® (under license), Stevies, Steve Madden Kids, Madden, Betsey Johnson shoes, Report, Superga® (under license), International business and certain private label business. Our Wholesale Accessories segment includes Big Buddha, Betseyville, Betsey Johnson, Steve Madden, Steven by Steve Madden, Cejon and, through license agreements, Daisy Fuentes® and Olsenboye® accessories brands and includes our private label business. Steven Madden Retail, Inc., our wholly-owned retail subsidiary, operates Steve Madden, Steven, Superga and Betsey Johnson retail stores and e-commerce websites. Three additional Steve Madden stores are operated under license to a third party. The First Cost segment represents activities of a subsidiary that earns commissions for serving as a buying agent for footwear products under private labels and licensed brands (such as Candie's®) for many of the country's large mass-market merchandisers, shoe chains and other value priced retailers. Our Licensing segment is engaged in the licensing of the Steve Madden and Steven by Steve Madden marks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery, women's fashion apparel, jewelry and luggage. In addition, we license our Betsey Johnson® and Betseyville® marks for use in connection with the manufacture, marketing and sale of apparel, jewelry, swimwear, eyewear, watches, fragrances and outerwear. +Wholesale Footwear Segment +Steve Madden Women's. We design, source and market our Steve Madden brand to department stores, specialty stores, luxury retailers, value priced retailers, national chains, mass merchants and catalog retailers throughout the United States. The Steve Madden brand has become a leading life-style brand in the fashion conscious marketplace. To serve our customers (primarily women ages 16 to 35), Steve Madden Women's creates and markets fashion forward footwear designed to appeal to customers seeking exciting, new footwear designs at affordable prices. New products for Steve Madden Women's are test marketed at Company-owned retail stores. Typically, within a few days, we can determine if the test product appeals to our customers. This enables us to use our flexible sourcing model to rapidly respond to changing trends and customer preferences, which we believe is essential for success in the fashion industry. +Madden Girl. We design, source and market a full collection of directional young women's shoes under the Madden Girl brand. Madden Girl is geared for young women ages 13 to 20, and is an “opening price point” brand currently sold at major department stores, mid-tier retailers and specialty stores. +Steve Madden Men's. We design, source and market a full collection of directional men's shoes and fashion forward athletic shoes targeted at men ages 18 to 40 years old under the Steve Madden® brand and sold in major department stores, mid- +2 +tier department stores, better specialty stores and independent shoe stores throughout the United States as well as in our retail stores. Price points for Steve Madden Men's products range from $70 to $125 at retail. The division maintains open stock inventory positions in select patterns to serve the replenishment programs of its wholesale customers. +Steven. We design, source and market women's fashion footwear under the Steven® trademark through major department and better footwear specialty stores throughout the United States as well as in our retail stores. Priced a tier above the Steve Madden brand, Steven products are designed to appeal principally to fashion conscious women, ages 25 to 45, who shop at department stores and footwear boutiques. +l.e.i. On July 1, 2008, we entered into a license agreement with Jones Investment Co. Inc., under which we have the right to use the l.e.i.® trademark in connection with the sale and marketing of footwear exclusively to Wal-Mart. +Elizabeth and James. On September 10, 2008, we entered into a license agreement with Dualstar Entertainment Group, LLC, under which we have the right to use the Elizabeth and James® trademark in connection with the sale and marketing of footwear. Our footwear bearing the Elizabeth and James® brand, which was created by Mary-Kate and Ashley Olsen, is distributed through luxury retailers to women ages 25 to 36 with average retail price points ranging from $200 to $350 for shoes and from $350 to $500 for boots. +Olsenboye. On September 2, 2009, we entered into a license agreement with Dualstar Entertainment Group, under which we have the right to use the Olsenboye® trademark in connection with the sale and marketing of footwear exclusively to J.C. Penney. Pursuant to the customer's request that we sell directly to the customer, in 2011 we transitioned our Olsenboye® footwear business from the commission model to the wholesale model. +Stevies and Steve Madden Kids. Our Stevies® and Steve Madden Kids brands are designed, sourced and marketed to appeal to young girls, ages six to twelve, and are sold at department stores, specialty stores and independent boutiques throughout the United States. +Madden. Our Madden brand, which began shipping in the first quarter of 2010, includes a full collection of men's shoes. Madden is an “opening price point” brand that is currently sold at major department stores, mid-tier retailers and specialty stores. +Betsey Johnson Shoes . On October 5, 2010, the Company acquired the Betsey Johnson® trademark and substantially all other intellectual property of Betsey Johnson LLC. Shoes are sold under the Betsey Johnson and Betseyville brands and are distributed through department stores such as Nordstrom, Dillard's and J.C. Penney and online retailers such as Amazon.com and Zappos. +Superga. On February 9, 2011, the Company entered into a license agreement with Basic Properties America Inc. and BasicNet S.p.A., for the use of the Superga® trademark in connection with the marketing and sale of footwear. Founded in Italy in 1911, Superga is known for its fashion sneakers that come in a wide range of colors, fabrics and prints. +Report. The Report and Report Signature brand was part of our May 2011 acquisition of Topline. We design, manufacture, market and sell our Report brand to major department stores, mid-tier department stores, better specialty stores and independently owned boutiques throughout the United States. +Mad Love. Formed in April 2011 as a joint venture, the Mad Love® brand is an exclusive beach to-the-street life style brand for Target, created to appeal to women with a young attitude and active lifestyle. +International Division. Prior to 2009, our international business (the “International Division”) operated under the “first cost” model and, as a result, the revenues derived from the International Division business were included in Commissions and Licensing Fees in the Consolidated Statements of Income included in our Financial Statements. In order to improve operating efficiencies, and to give our international partners better visibility in the process, as of January 2009, we have changed the operating model for our International Division to the “wholesale” model. The International Division ships products to Asia, Canada, Europe, the Middle East, Mexico, Australia and Central and South America. +Private label business. We design, source and market private label footwear primarily to specialty retailers, mid-tier chains and mass market merchants. In addition, we design, source and market footwear for third party brands, such as Material Girl and Candies. +3 +Wholesale Accessories Segment +Our Wholesale Accessories segment designs, sources and markets name brands (including Daisy Fuentes® and Olsenboye®, each under license, and our Steve Madden®, Steven by Steve Madden®, Betsey Johnson®, Betseyville® and Big Buddha® brands) and private label fashion handbags and accessories to department stores, mass merchants, value priced retailers and specialty stores throughout the United States. In addition, we market and sell cold weather accessories, fashion scarves, wraps and other trend accessories primarily under our Cejon and the Steve Madden brand names and private labels to department stores and specialty stores. +Retail Segment +As of December 31, 2012 , the Company's wholly-owned subsidiary, Steven Madden Retail, Inc., owned and operated 109 retail stores including 91 Steve Madden full price stores, eleven Steve Madden outlet stores, two Steven stores, one Report store, one Superga store and three e-commerce websites. In 2012 , we opened twenty new stores, acquired seven stores as part of the acquisition of SM Canada, established Superga® and Betsey Johnson online stores and closed four under-performing stores. Steve Madden stores are located in major shopping malls and in urban street locations across the United States and Canada. In 2012 , our retail stores generated annual sales in excess of $890 per square foot compared to $853 (recomputed using current year methodology) per square foot generated in 2011 . Comparative store sales (sales of those stores, including the e-commerce websites, that were open for all of 2012 and 2011 ) increased 7.9% in fiscal year 2012 . +We anticipate that the Retail segment will continue to enhance the Company's overall sales and profitability while increasing recognition for the brand. Additionally, our retail stores enable us to evaluate the appeal of new products and designs to our customers and respond accordingly, which, in turn, strengthens the product development efforts of our two Wholesale segments. We expect to open between ten and fourteen new retail stores and we do not anticipate closing any stores in 2013 . +First Cost Segment +The First Cost segment represents activities of a wholly owned subsidiary of the Company that earns commissions for serving as a buying agent for footwear products under private labels and licensed brands (such as Candie's®) for many of the large mass-market merchandisers, shoe chains and other mid-tier retailers. As a buying agent, we utilize our expertise and our relationships with shoe manufacturers to facilitate the production of private label shoes to our customers' specifications. We believe that by operating in the private label, mass merchandising market, we are able to maximize additional non-branded sales opportunities. This leverages our overall sourcing and design capabilities. Currently, our First Cost segment serves as a buying agent for the procurement of women's, men's and children's footwear for large retailers, including Kohl's, K-Mart, Sears and Bakers. The First Cost segment receives buying agent's commissions from its customers. In addition, by leveraging the strength of our Steve Madden brands and product designs, we have been able to partially recover our design, product and development costs from our suppliers. +Licensing Segment +We license our Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery and women's fashion apparel, jewelry and luggage. In addition, the Company licenses the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, swimwear, eyewear, watches, fragrances and outerwear. Most of our license agreements require the licensee to pay us a royalty based on actual net sales, a minimum royalty in the event that specified net sales targets are not achieved and a percentage of sales for advertising the brand. +See Note P to our Consolidated Financial Statements for additional information relating to our five operating segments. +Product Design and Development +We have established a reputation for our creative designs, marketing and trendy products at affordable price points. We believe that our future success will substantially depend on our ability to continue to anticipate and react to changing consumer demands in a timely manner. To meet this objective, we have developed what we believe is an unparalleled design process that allows us to recognize and respond quickly to changing consumer demands. Our design team strives to create designs which it believes fit our image, reflect current or future trends and can be manufactured in a timely and cost-effective manner. Most new Steve Madden products are tested in select Steve Madden retail stores. Based on these tests, among other things, management selects the Steve Madden products that are then offered for wholesale and retail distribution nationwide. We believe that our +4 +design and testing process and flexible sourcing models provide the Steve Madden brand with a significant competitive advantage allowing us to mitigate the risk of incurring costs associated with the production and distribution of less desirable designs. +Product Sourcing and Distribution +We source each of our product lines separately based on the individual design, style and quality specifications of the products in such product lines. We do not own or operate manufacturing facilities; rather, we use agents and our own sourcing office to source our products from independently owned manufacturers in China, Mexico, Brazil, Taiwan, Italy and India. We have established relationships with a number of manufacturers and agents in each of these countries. Although we have not entered into any long-term manufacturing or supply contracts, we believe that a sufficient number of alternative sources exist for the manufacture of our products. We continually monitor the availability of the principal materials used in our footwear, which are currently available from a number of sources in various parts of the world. We track inventory flow on a regular basis, monitor sell-through data and incorporate input on product demand from wholesale customers. We use retailers' feedback to adjust the production or manufacture of new products on a timely basis, which helps reduce the close out of slow-moving products. +We distribute our products from four third-party distribution warehouse centers, two located in California, one located in Texas, and one located in New Jersey, and through two Company owned warehouses located in New Jersey and Canada. By utilizing distribution facilities specializing in distribution fulfillment to effect distribution to certain wholesale accounts, Steve Madden retail stores and Internet customers, we believe that our customers are served more promptly and efficiently. +Customers +Our wholesale customers consist principally of better department stores, major department stores, mid-tier department stores, national chains, mass merchants, value priced retailers, specialty stores and catalog retailers. Our customers include Macy's, DSW, Nordstrom, Dillard's, J.C. Penney, Kohl's, Famous Footwear, Marshall's, TJ Maxx, Ross and Belks. +Distribution Channels +United States and Canada +We sell our products principally through department stores, specialty stores, luxury retailers, national chains and mass merchants and in our Company-owned retail stores in the United States and Canada and our e-commerce websites. For the year ended December 31, 2012 , our Retail segment and our two Wholesale segments generated net sales of approximately $191.2 million and $1,035.8 million, or 16% and 84% of our total net sales, respectively. Each of these distribution channels is described below. +Steve Madden and Steven Retail Stores. As of December 31, 2012 , we operated 91 Steve Madden full price stores, 11 Steve Madden outlet stores, 2 Steven stores, one Report store, one Superga store and three e-commerce websites. We believe that our retail stores will continue to enhance overall sales, profitability, and our ability to react to changing consumer trends. Our stores are also a marketing tool that allows us to strengthen brand recognition and to showcase selected items from our full line of branded and licensed products. Furthermore, our retail stores provide us with venues through which to test and introduce new products, designs and merchandising strategies. Specifically, we often test new designs at our Steve Madden retail stores before scheduling them for mass production and wholesale distribution. In addition to these test marketing benefits, we have been able to leverage sales information gathered at Steve Madden retail stores to assist our wholesale customers in order placement and inventory management. +A typical Steve Madden store is approximately 1,400 to 1,600 square feet and is located in a mall or street location that we expect will attract the highest concentration of our core demographic, style-conscious customer base. The Steven stores, which are generally the same size as our Steve Madden stores, have a more sophisticated design and format styled to appeal to a more mature target audience. In addition to carefully analyzing mall demographics and locations, we set profitability guidelines for each potential store site. Specifically, we target well trafficked sites at which the demographics fit our consumer profile and seek new locations where the projected fixed annual rent expense stays within our guidelines. By setting these guidelines, we seek to identify stores that will contribute to our overall profitability both in the near and longer terms. +Department Stores. We currently sell to over 4,400 doors of 15 department stores throughout the United States and Canada. Our major accounts include Macy's, Nordstrom, Bloomingdale's, Dillard's and Lord & Taylor. +5 +We provide merchandising support to our department store customers which includes in-store fixtures and signage, supervision of displays and merchandising of our various product lines. Our wholesale merchandising effort includes the creation of in-store concept shops in which a broader collection of our branded products are showcased. These in-store concept shops create an environment that is consistent with our image and are designed to enable the retailer to display and sell a greater volume of our products per square foot of retail space. In addition, these in-store concept shops encourage longer term commitment by the retailer to our products and enhance consumer brand awareness. +In addition to merchandising support, our key account executives maintain weekly communications with their respective accounts to guide them in placing orders and to assist them in managing inventory, assortment and retail sales. We leverage our sell-through data gathered at our retail stores to assist department stores in allocating their open-to-buy dollars to the most popular styles in the product line and phasing out styles with weaker sell-throughs, which, in turn, reduces markdown exposure at season's end. +Specialty Stores/Catalog Sales. We currently sell to specialty store locations throughout the United States. Our major specialty store accounts include DSW, Famous Footwear and Journeys. We offer our specialty store accounts the same merchandising, sell-through and inventory tracking support offered to our department store accounts. Sales of our products are also made through various catalogs, such as Victoria's Secret. +Internet Sales. We operate three Internet website stores, where customers can purchase numerous styles of our Steve Madden Women's, Steven, Madden Men's, Big Buddha, and Report, as well as selected styles of Madden Girl, footwear and accessory products. +International +Our products are available in many countries and territories worldwide via several retail selling and distribution agreements. Under the terms of the various agreements, the distributors and retailers are generally required to open a minimum number of stores each year and to pay us a fee for each pair of footwear purchased and an additional sales royalty as a percentage of sales or a predetermined amount per unit of sale. Most of the distributors are required to purchase a specified minimum number of products within specified periods. The agreements we have in place expire at various times through February 14, 2031 and include automatic renewals at the distributors' option if certain conditions are met. These agreements are exclusive in their specific territories, which include Asia, the Middle East, South America, Europe, Mexico, Australia, South Africa and India. +Competition +The fashion industry is highly competitive. We compete with specialty shoe and accessory companies as well as companies with diversified footwear product lines, such as Nine West, Jessica Simpson, Guess, Ugg and Aldo. Our competitors may have greater financial and other resources than we do. We believe effective advertising and marketing, favorable brand image, fashionable styling, high quality, value and fast manufacturing turnaround are the most important competitive factors and intend to continue to employ these elements as we develop our products. However, we cannot be certain that we will be able to compete successfully against our current and future competitors, or that competitive pressures will not have a material adverse effect on our business, financial condition and results of operations. +Marketing and Sales +We have focused on creating an integrated brand building program to establish Steve Madden as a leading designer of fashion footwear for style-conscious young women and men. Principal marketing activities include product placements in lifestyle and fashion magazines, personal appearances by our founder and Creative and Design Chief, Steve Madden, and in-store promotions. We continue to promote our e-commerce website (www.stevemadden.com) where customers can purchase products under the brands Steve Madden, Steven, Steve Madden Men's and selected styles of Madden Girl footwear, as well as view exclusive content, participate in contests and “live chat” with customer service representatives. We also connect with our customers through social media forums including Twitter and Facebook. +Management Information Systems (MIS) Operations +Sophisticated information systems are essential to our ability to maintain our competitive position and to support continued growth. We operate on a dual AS/400 system which provides system support for all aspects of our business, including manufacturing, purchase orders, customer purchase orders, order allocations, invoicing, accounts receivable management, quick response +6 +replenishment, point-of-sale support and financial and management reporting functions. We have a PKMS bar coded warehousing system that is integrated with the wholesale system in order to provide accurate inventory positions and quick response size replenishment for our customers. In addition, we have installed an electronic data interchange (“EDI”) system which provides a computer link between us and certain wholesale customers that enables both the customer and us to monitor purchases, shipments and invoicing. The EDI system also improves our ability to respond to customer inventory requirements on a weekly basis. We are currently implementing a new Company-wide ERP system which we expect to go live in the summer of this year. We expect the new system to provide operating efficiencies and enhance customer service. +Intellectual Property +Trademarks +We own numerous trademarks, including, among others: +• +Steve Madden® +• +Steve Madden plus Design® +• +STEVE MADDEN in Chinese Characters® +• +Madden Girl® +• +Madden Girl By Steve Madden® +• +Steven® +• +Steven by Steve Madden® +• +SM New York® +• +Madden Girl by Steve Madden® +• +Eyeshadows by Steve Madden® +• +Soho Cobbler® +• +Steve Madden Luxe® +• +Natural Comfort® +• +Arc Stripe Design® +• +Asterisk with Shaded Circle Design® +• +Trissino® +• +Stacey and Steve® +• +Stacey and Steve Stylized Design® +• +Heart Design by Steve Madden® +• +Steve Madden and Heart Design® +• +Steve Madden's Fix® (logo and various trademarks) +• +PEACE LOVE SHOES® (logo and various trademarks) +• +Stevies® +• +Stevies by Steve Madden® +• +Stevies plus Design® +• +Big Buddha® +• +BIG BUDDHA plus Design® +• +Buddha Lux® +• +Betsey Johnson® +• +Betseyville® +• +BETSEYVILLE BY BETSEY JOHNSON® +7 +• +Betsey Johnson (Stylized) ® +• +THE WILD PAIR (word mark)® +• +WILD PAIR (word mark)® +• +WILD PAIR (stylized mark)® (logo and various trademarks) +• +THE WILD PAIR plus Circle Design® +• +Cejon® +• +Report® +• +Report Signature® +• +R2® +• +Mad Love® +We consider these marks to be among our most valuable assets and have registered these marks in numerous countries and in numerous International Classes. From time to time we adopt new trademarks in connection with the marketing of new product lines. We believe that our trademarks have significant value and are important for purposes of identifying the Company, the marketing of our products and the products of our licensees, distinguishing them from the products of others. We act aggressively to register and vigorously protect our trademarks against infringement. There can be no assurance, however, that we will be able to effectively obtain rights to our marks throughout all of the countries of the world. Moreover, no assurance can be given that others will not assert rights in or ownership of, our marks and other proprietary rights or that we will be able to resolve any such conflicts successfully. Our failure to protect such rights from unlawful and improper appropriation may have a material adverse effect on our business, financial condition, results of operations and liquidity. +Trademark Licensing +Our strategy for the continued growth of the Company's business includes expanding the Company's presence beyond footwear and accessories through the selective licensing of our brands. As of December 31, 2012 , we license our Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery and women's fashion apparel, jewelry and luggage. In addition, the Company licenses the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, swimwear, eyewear, watches, fragrances and outerwear. Most of our license agreements require the licensee to pay us a royalty based on actual net sales, a minimum royalty in the event that specified net sales targets are not achieved and a percentage of sales for advertising the brand. See Notes A[12] and O[4] to our Consolidated Financial Statements included in this Annual Report on Form 10-K for additional disclosure regarding these licensing arrangements. +In addition to the licensing of our trademarks, we also license from third parties trademarks used in connection with certain of our product lines. Under licenses from Dualstar Entertainment Group, LLC, the Company has the right to use the Olsenboye® trademark in connection with the sale and marketing of footwear and accessories and the Elizabeth and James® trademark in connection with the sale and marketing of footwear. The term of these licenses expire on December 31, 2013 and March 31, 2015, respectively. In addition, we hold licenses from Jones Investment Co. Inc. under which the Company has the right to use the GLO Jeans® trademark in connection with the marketing and sale of women's footwear exclusively to K-Mart and the l.e.i.® trademark in connection with the marketing and sale of women's footwear exclusively to Wal-Mart. The term of the licenses from Jones Investment Co, Inc. expire on December 31, 2015 and December 31, 2014, respectively. We also hold a license from Basic Properties America Inc. and BasicNet S.p.A under which we have the right to use the Superga® trademark in connection with the marketing and sale of footwear. The initial term of our license with Basic Properties America Inc. and BasicNet S.p.A expires on December 31, 2013, with a four year renewal term at our option if certain provisions are met. We also hold a license from G-III Apparel Group to design, manufacture and distribute eyewear and sunglasses under the Andrew Marc brand. The initial term of the license with G-III Apparel Group expires on July 31, 2013, with a three year renewal term at our option if certain provisions are met. Substantially all of these licensing agreements require us to make royalty and advertising payments to the licensor equal to a percentage of our net sales or a minimum royalty and advertising payment in the event that specified net sales targets are not achieved. +8 +Employees +On February 1, 2013 , we employed approximately 2,650 employees, of whom approximately 1,800 work on a full-time basis and approximately 850 work on a part-time basis, with most of the part-time employees being employed in the Retail segment. Approximately 1,860 of our employees are located in the United States, approximately 590 employees are located in Hong Kong, China and Taiwan, and approximately 200 employees are located in Canada. None of our employees are represented by a union. Our management considers relations with our employees to be good. The Company has never experienced a material interruption of its operations due to a labor dispute. +Seasonality +Historically, some of our businesses, including our Retail segment, have experienced holiday retail seasonality. In addition to seasonal fluctuations, our operating results fluctuate from quarter to quarter as a result of the timing of holidays, weather, the timing of larger shipments of footwear, market acceptance of our products, product mix, pricing and presentation of the products offered and sold, the hiring and training of additional personnel, inventory write downs for obsolescence, the cost of materials, the product mix between wholesale, retail and licensing businesses, the incurrence of other operating costs and factors beyond our control, such as general economic conditions and actions of competitors. +Backlog +We had unfilled wholesale customer orders of $302.3 million and $280.8 million, as of February 1, 2013 and 2012 , respectively. Our backlog at a particular time is affected by a number of factors, including seasonality, timing of market weeks and wholesale customer purchases of our core products through our open stock program. Accordingly, a comparison of backlog from period to period may not be indicative of eventual shipments. +ITEM 1A RISK FACTORS +You should carefully consider the risks and uncertainties we describe below and the other information in this Annual Report on Form 10-K before deciding to invest in, sell or retain shares of our common stock. These are not the only risks and uncertainties that we face. Other sections of this report may discuss factors that could adversely affect our business. The retail industry is highly competitive and subject to rapid change. There may be additional risks and uncertainties that we do not currently know about or that we currently believe are immaterial, or that we have not predicted, which may also harm our business or adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition, results of operations and liquidity could be materially harmed. +Risks Related to the Industry in Which the Company Operates +Constantly Changing Fashion Trends and Consumer Demands. Our success depends in significant part upon our ability to anticipate and respond to product and fashion trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. There can be no assurance that our products will correspond to the changes in taste and demand or that we will be able to successfully market products that respond to such trends. If we misjudge the market for our products, we may be faced with significant excess inventories for some products and missed opportunities as to others. In addition, misjudgments in merchandise selection could adversely affect our image with our customers resulting in lower sales and increased markdown allowances for customers which could have a material adverse effect on our business, financial condition, results of operations and liquidity. +Intense Fashion Industry Competition . The fashion footwear industry is highly competitive and barriers to entry are low. Our competitors include specialty companies as well as companies with diversified product lines. The recent market growth in the sales of fashion footwear and accessories has encouraged the entry of many new competitors and increased competition from established companies. Many of these competitors, including Nine West, Guess, Jessica Simpson, Ugg and Aldo, may have significantly greater financial and other resources than we do and there can be no assurance that we will be able to compete successfully with other fashion footwear and accessories companies. Increased competition could result in pricing pressures, increased marketing expenditures and loss of market share, and could have a material adverse effect on our business, financial condition, results of operations and liquidity. We believe effective advertising and marketing, favorable branding of the Steve Madden® and our other trademarks, fashionable styling, high quality and value are the most important competitive factors and +9 +we plan to continue to employ these elements as we develop new products and businesses. Our inability to effectively advertise and market our products could have a material adverse effect on our business, financial condition, results of operations and liquidity. +Cyclical Nature of Fashion Business . The overall fashion industry is cyclical, and purchasing tends to decline during recessionary periods when disposable income is low. Likewise, purchases of contemporary shoes and accessories tends to decline during recessionary periods and also may decline at other times. There can be no assurance that we will be able to grow or even maintain our current level of revenues and earnings, or remain profitable in the future. Continuing recession in the international, national or regional economies and uncertainties regarding future economic prospects, among other things, could affect consumer spending habits. The volatility and disruption of global economic and financial market conditions that began in 2008 has caused lingering declines in consumer confidence and spending in the United States and internationally. A further deterioration or a continued weakness of economic and financial market conditions for an extended period of time could have a material adverse effect on our business, financial condition, results of operations and liquidity. +Consolidation Among Retailers . In recent years, the retail industry has experienced consolidation and other ownership changes. In the future, retailers in the United States and in foreign markets may further consolidate, undergo restructurings or reorganizations, or realign their affiliations, any of which could decrease the number of stores that carry our products or increase the ownership concentration within the retail industry. While such changes in the retail industry to date have not had a material adverse effect on our business or financial condition, results of operations and liquidity, there can be no assurance as to the future effect of any such changes. +Economic Uncertainty and Political Risks . Our opportunities for long-term growth and profitability are accompanied by significant challenges and risks, particularly in the near term. Specifically, our business is dependent on consumer demand for our products. We believe that declining consumer confidence accompanied with the tightening of credit standards, higher energy and food prices and unemployment rates and a decrease in consumers' disposable income has negatively impacted the level of consumer spending for discretionary items during the years ended December 31, 2010, 2011 and 2012. During the three year period ended December 31, 2012 we achieved substantial revenue growth in both our Wholesale and Retail segments but we cannot assume that this will be maintained. A continued weak economic environment could have a negative effect on the Company's sales and results of operations during the year ending December 31, 2013 and thereafter. In addition, the European sovereign debt crisis and its implications for interconnected global financial systems, as well as the unstable political conditions in the Middle East and some other parts of the world, including potential or actual international conflicts, or the continuation or escalation of terrorism, could have a material adverse effect on our business, financial condition, results of operations and liquidity. +Risks Related to Our Business +Dependence on Key Personnel. The growth and success of our Company since its inception almost a quarter century ago is attributable, to a significant degree, to the talents, skills and efforts of our founder and Creative and Design Chief, Steven Madden. An extended or permanent loss of the services of Mr. Madden could severely disrupt our business and have a material adverse effect on the Company. Our senior executives have substantial experience and expertise in our business and industry and have made significant contributions to our growth and success as well. Competition for key executives in the apparel, footwear and accessories industries is intense. While our employment agreements with Mr. Madden and most of our senior executives include a non-compete provision in the event of the termination of employment, the non-compete periods are of limited duration. While we believe we have depth within our senior management team, if we lose the services of our Creative and Design Chief or any of our senior executives, and especially if any of these individuals joins a competitor or forms a competing company, our business and financial performance could be seriously harmed. A loss of the skills, industry knowledge, contacts and expertise of our Creative and Design Chief or any of our senior executives could cause a setback to our operating plan and strategy. +Dependence Upon Significant Customers . Our customers consist principally of major department stores, mid-tier department stores, better specialty stores and independently owned boutiques. Certain of our department store customers, including some under common ownership, account for significant portions of our wholesale business. We generally enter into a number of purchase order commitments with our customers for each of our lines every season and do not enter into long-term agreements with any of our customers. Therefore, a decision by a significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to decrease the amount of merchandise purchased from us or to change its manner of doing business could have a material adverse effect on our business, financial condition, results of operations and liquidity. +Risks Associated with Extending Credit to Customers. We sell our products primarily to retail stores across the United States and extend credit based on an evaluation of each customer's financial condition, usually without collateral. Various retailers, including some of our customers, have experienced financial difficulties as a result of the financial crisis that began in 2008, which +10 +has increased the risk of extending credit to such retailers. However, our losses due to bad debts have been limited. Pursuant to the terms of our collection agency agreement, our factor, Rosenthal & Rosenthal, Inc., currently assumes the credit risk related to approximately 58% of our trade accounts receivable. In addition, we have letters of credit for approximately 22% of our trade accounts receivable. Still, if any of our customers experiences a shortage of liquidity, the risk that the customer's outstanding payables to us would not be paid could cause us to curtail business with the customer or require us to assume more credit risk relating to the customer's account payable. +Risks Associated with Expansion of Retail Business . Our continued growth depends to a significant degree on whether we are successful in further developing and marketing the Steve Madden, Stevies, Steven, Madden Girl, Steve Madden Men's, Big Buddha, Elizabeth and James, Olsenboye, l.e.i., Betsey Johnson and Betseyville brands, and creating new brands, product categories and businesses that are appealing to our customers. The operation of company-owned Steve Madden and Steven stores is a significant part of our growth strategy. During the year ended December 31, 2012, we opened 20 new stores, acquired seven stores in connection with the acquisition of SM Canada, established Superga and Betsey Johnson online stores and closed four under-performing stores. We have plans to open between ten and fourteen new retail stores and we do not anticipate closing any stores in 2013. Our future expansion plan includes the opening of stores in new geographic markets as well as strengthening existing markets. New markets have in the past presented, and will continue to present, competitive and merchandising challenges that are different from those faced by us in our existing markets. There can be no assurance that we will be able to open new stores, and if opened, that such new stores will be able to achieve sales and profitability levels consistent with management's expectations. Our retail expansion is dependent on the performance of our wholesale and retail operations, generally, as well as on a number of other factors, including our ability to: +• +locate and obtain favorable store sites; +• +negotiate favorable lease terms; +• +hire, train and retain competent store personnel; +• +anticipate the preferences of our retail customers in new geographic areas; +• +successfully integrate new stores into our existing operations. +Past comparable store sales results may not be indicative of future results and there can be no assurance that our comparable store sales results will increase or even be maintained in the future. +Management of Growth . The size of our business continues to grow organically and as a result of business acquisitions. In order to gain from our acquisitions, we must be effective in integrating the businesses acquired into our overall operations. Further, the expansion of our operations has increased and will continue to increase the demand on our managerial, operational and administrative resources. In recent years, we have invested significant resources in, among other things, our management information systems and hiring and training of new personnel. However, in order to manage currently anticipated levels of future demand, we may be required to, among other things, expand our distribution facilities, establish relationships with new manufacturers to produce our product, and continue to expand and improve our financial, management and operating systems. We may experience difficulty integrating acquired businesses into our operations and may not achieve anticipated synergies from such integration. There can be no assurance that we will be able to manage future growth effectively and a failure to do so could have a material adverse effect on our business, financial condition, results of operations and liquidity. +Inventory Management . The trend-focused nature of the fashion industry and the rapid changes in customer preferences leave us vulnerable to an increased risk of inventory obsolescence. Thus, our ability to manage our inventories properly is an important factor in our operations. Inventory shortages can adversely affect the timing of shipments to customers and diminish sales and brand loyalty. Conversely, excess inventories can result in lower gross margins due to the excessive discounts and markdowns that may be necessary to reduce high inventory levels. Our inability to effectively manage our inventory could have a material adverse effect on our business, financial condition, results of operations and liquidity. +Foreign Sourcing and Manufacturing. Virtually all of our products are purchased through arrangements with a number of foreign manufacturers, primarily from China, Mexico, Brazil, Taiwan, Italy and India. Risks inherent in foreign operations including work stoppages, transportation delays and interruptions and changes in social, political and economic conditions, can result in the disruption of trade from the countries in which our manufacturers or suppliers are located, the imposition of additional regulations relating to imports, the imposition of additional duties, taxes and other charges on imports, significant fluctuations of the value of the dollar against foreign currencies, or restrictions on the transfer of funds, any of which could have a material adverse effect on our business, financial condition, results of operations and liquidity. While we believe that we manage our exposure to the risk that any such economic or political condition will materially affect our ability to purchase products because we are aware of a variety of materials and alternative sources that are available, we cannot be certain that we will be able to identify such alternative materials and/or sources without delay or without greater cost to us. Our inability to identify and secure alternative +11 +sources of supply in this situation could have a material adverse effect on our business, financial condition, results of operations and liquidity. +Impact of Custom Duties and Other Import Regulations . Our products, virtually all of which are imported, are also subject to United States custom duties. The United States and the countries in which our products are produced or sold, from time to time, impose new quotas, duties, tariffs or other restrictions on imports or exports, may adversely adjust prevailing quotas, duties or tariff levels, or impose sanctions in the form of additional duties to remedy perceived illegal actions, any of which could have a material adverse effect on our business, financial condition, results of operations and liquidity. +Manufacturers' Inability to Manufacture Our Goods in a Timely Manner or Meet Quality Standards . As is common in the footwear and accessories industries, we contract for the manufacture of virtually all of our products to our specifications through foreign manufacturers. We do not own or operate any manufacturing facilities and, therefore, we are dependent upon third parties for the manufacture of all of our products. The inability of a manufacturer to ship orders of our products in a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our customers for those items, which, in turn, could result in cancellation of orders, refusal to accept deliveries, a reduction in purchase prices and, ultimately, termination of a customer relationship, any of which could have a material adverse effect on our business, financial condition, results of operations and liquidity. +Difficulty in Locating Replacement Manufacturers. Although we enter into a number of purchase order commitments each season specifying a time frame for delivery, method of payment, design and quality specifications and other standard industry provisions, we do not have long-term contracts with any manufacturer. As a consequence, any of these manufacturing relationships may be terminated, by either party, at any time. In addition, we may seek replacement manufacturers for various reasons, including a significant increase in the prices we are required to pay to existing manufacturers of our goods. Although we believe that other facilities are available for the manufacture of our products, there can be no assurance that such facilities would be available to us on an immediate basis, if at all, or be able to meet our quality standards and delivery requirements, or that the costs charged to us by such manufacturers would not be significantly greater than those presently paid. +Manufacturers' Failure to Use Acceptable Labor Practices . and Comply with Local Laws and Other Standards . Our products are manufactured by numerous independent manufacturers outside of the United States. We also have license agreements that permit our licensees to manufacture or contract to manufacture products using our trademarks. We impose, and require that our licensees impose, on these manufacturers environmental, health, and safety standards for the benefit of their labor force. In addition, we require these manufacturers to comply with applicable standards for product safety. However, we do not control our independent manufacturers or licensing partners or their labor, product safety and other business practices and, from time to time, our independent manufacturers may not comply with such standards or applicable local law or our licensees may not require their manufacturers to comply with such standards or applicable local law. The violation of such standards and laws by one of these independent manufacturers with whom we contract or by one of our licensing partners, or the divergence of a manufacturer's or a licensing partner's labor practices from those generally accepted as ethical in the United States, could harm our reputation, result in a product recall or require us to curtail our relationship with and locate a replacement for such manufacturer, which, as noted in the immediately preceding risk factor, could be challenging. Any of these events could have a material adverse effect on our business, financial condition, results of operations and liquidity. +Seasonal and Quarterly Fluctuations . Our results of operations may fluctuate from quarter to quarter and are affected by a variety of factors, including: +• +the timing of holidays; +• +weather conditions; +• +the timing of larger shipments of footwear; +• +market acceptance of our products; +• +the mix, pricing and presentation of the products offered and sold; +• +the hiring and training of additional personnel; +• +inventory write downs for obsolescence; +• +the cost of materials; +• +the product mix between wholesale, retail and licensing businesses; +• +the incurrence of other operating costs; and +• +factors beyond our control, such as general economic conditions and actions of competitors. +12 +In addition, we expect that our sales and operating results may be significantly impacted by the opening of new retail stores and the introduction of new products. Accordingly, the results of operations in any quarter will not necessarily be indicative of the results that may be achieved for a full fiscal year or any future quarter. +Inadequate Trademark Protections . We believe that our trademarks and other proprietary rights are of major significance to our success and our competitive position and consider some of our trademarks, such as Steve Madden, to be integral to our business and among our most valuable assets. Accordingly, we devote substantial resources to the establishment and protection of our trademarks on a worldwide basis. Nevertheless, there can be no assurance that the actions taken by us to establish and protect our trademarks and other proprietary rights will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products on the basis that our products violate the trademarks and proprietary rights of others. Moreover, no assurance can be given that others will not assert rights in, or ownership of, trademarks and other proprietary rights of ours or that we will be able to successfully resolve such conflicts. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the United States. Our failure to establish and then protect such proprietary rights from unlawful and improper utilization could have a material adverse effect on our business, financial condition, results of operations and liquidity. +Litigation and Other Legal Proceedings. We are involved in various claims, litigations and other legal and regulatory proceedings and governmental investigations that arise from time to time in the ordinary course of our business. Due to the inherent uncertainties of litigation and such other proceedings and investigations, we cannot predict with accuracy the ultimate outcome of any such matters. An unfavorable outcome could have an adverse impact on our business, financial condition and results of operations and the amount of insurance coverage we maintain to address such matters may be inadequate to cover these or other claims. In addition, any significant litigation, investigation or proceeding, regardless of its merits, could divert financial and management resources that would otherwise be used to benefit our operations. See Item 3 “Legal Proceedings,” below for additional information regarding certain of the matters in which we are involved. +Exposure to Foreign Currency Fluctuations . We make approximately 99% of our purchases in U.S. dollars. However, we source substantially all of our products overseas and, as such, the cost of these products may be affected by changes in the value of the relevant currencies. Changes in currency exchange rates may also affect the relative prices at which we and our foreign competitors sell products in the same market. There can be no assurance that foreign currency fluctuations will not have a material adverse effect on our business, financial condition, results of operations and liquidity. +Disruption of Information Technology Systems and Websites. We are heavily dependent upon our information technology systems to record and process transactions and manage and operate all aspects of our business ranging from product design and testing , production, forecasting, ordering, manufacturing, transportation, sales and distribution, invoicing and accounts receivable management, quick response replenishment, point of sale support and financial management reporting functions In addition, we have e-commerce and other Internet websites. Given the nature of our business and the significant number of transactions that we engage in on an annual basis, it is essential that we maintain constant operation of our information technology systems and websites and that these systems and our websites operate effectively. We depend on our in-house information technology employees and outside vendors to maintain and periodically upgrade these systems and our websites to support the growth of our business. Despite our preventative efforts, our information technology systems and websites are vulnerable from time to time to damage or interruption from events such as difficulties in replacing or integrating new systems, computer viruses, security breaches and power outages. Cybersecurity attacks are becoming increasingly sophisticated and run the gamut from malicious software to electronic security breaches to corruption of data and beyond. We are continually evaluating, improving and upgrading our information technology systems and websites in an effort to address these concerns. Any such problems or interruptions may result in loss of valuable business data, our customers' or employees' personal information, disruption of our operations and other adverse impact to our business and require significant expenditures by us to remediate any such failure, problem or breach. In addition, we must comply with increasingly complex regulatory standards enacted to protect business and personal data and an inability to maintain compliance with these regulatory standards could subject us to legal risks and penalties. +Breach of Customer Privacy. A routine part of our business includes the gathering, processing and retention of sensitive and confidential information pertaining to our customers. While we believe that adequate security measures have been established and are maintained by us to protect against privacy breaches, the Company's facilities and information technology systems, and those of our third party service providers, may be vulnerable to security breaches, acts of vandalism, software viruses, misplaced or lost data, programming or human error, or other similar events. Such a breach that results in misappropriation, loss or other unauthorized disclosure of a customer's confidential information, whether by the Company or a third party service provider, could severely damage our reputation and relationship with our customers and adversely affect our business, as well as expose the Company to risks of litigation and liability. +13 +Declines in Our Stock Price Due to Inaccurate Predictions. The trading price of our common stock periodically may rise or fall based on the accuracy of predictions of our future performance. As one of our primary objectives, we strive to maximize the long-term strength, growth and profitability of our Company, rather than to achieve an earnings target in any particular fiscal quarter. We believe that this longer-term goal is in the best interests of the Company and our stockholders, but recognize that it may be helpful to our stockholders and potential investors for us to provide guidance as to our quarterly and annual forecast of net sales and earnings. While we endeavor to provide meaningful and considered guidance at the time it is provided and generally expect to provide updates to our guidance when we report our results each fiscal quarter, actual results may differ from our predictions as the guidance is based on assumptions and expectations that may or may not come to pass and, as such, we assume no responsibility to update any of our forward-looking statements at such times or otherwise. If and when we announce actual results that differ from those that have been predicted by us, the market price of our common stock could be adversely affected. Investors who rely on these predictions in making investment decisions with respect to our common stock do so at their own risk. We take no responsibility for any losses suffered as a result of such changes in the prices of our common stock. +In addition, at any given time outside securities analysts may follow our financial results and issue reports that discuss our historical financial results and the analysts' predictions of our future performance, which our stockholders and potential investors may choose to rely on in making investment decisions. These analysts' predictions are based upon their own opinions and are often different from our own forecasts. Our stock price could decline if our results are below the estimates or expectations of these outside analysts. +ITEM 1B UNRESOLVED STAFF COMMENTS +None. +ITEM 2 PROPERTIES +We lease space for our headquarters, our retail stores, showrooms and office facilities in various locations in the United States, as well as overseas. We own one improved real property parcel in Long Island City, New York. We believe that our existing facilities are in good operating condition and are adequate for our present level of operations. The following table sets forth information with respect to our key properties: +Location +Leased/Owned +Primary Use +Approximate Area Square Feet +Dongguan, Guangdong Province, China +Leased +Offices and sample production +180,000 +Long Island City, NY +Leased +Executive offices +66,600 +Bayonne, NJ +Leased +Warehouse +50,000 +Bellevue, WA +Leased +Offices, Topline +41,500 +Montreal, Canada +Leased +Offices, warehouse +27,000 +Putian City, Guangdong Province, China +Leased +Offices +23,800 +New York, NY +Leased +Offices and showroom, Accessories +20,000 +New York, NY +Leased +Showroom +14,000 +New York, NY +Leased +Offices, Cejon +12,400 +Long Island City, NY +Leased +Storage +7,200 +New York, NY +Leased +Offices, Accessories private label +6,500 +New York, NY +Leased +Showroom, Topline +6,400 +Guangdong Province, China +Leased +Offices +4,800 +Los Angeles, CA +Leased +Showroom +4,600 +Kwai Chung, Hong Kong +Leased +Offices +3,800 +Taichung, Taiwan, ROC +Leased +Offices +3,200 +Long Island City, NY +Owned +Offices +2,200 +14 +All of our retail stores are leased pursuant to leases that, under their original terms, extend for an average of ten years. Many of the leases contain rent escalation clauses to compensate for increases in operating costs and real estate taxes over the base year. The current terms of our retail store leases expire as follows: +Years Initial Lease Terms Expire +Number of Stores +2013 +12 +2014 +6 +2015 +9 +2016 +4 +2017 +13 +2018 +10 +2019 +10 +2020 +4 +2021 +13 +2022 +20 +2023 +14 +ITEM 3 LEGAL PROCEEDINGS +On February 2, 2012, two individuals purporting to be stockholders of the Company commenced separate civil actions in the Supreme Court of New York, Queens County, Mark Ioffe, Derivatively on Behalf of Nominal Defendant Steven Madden, Ltd. v. Steven Madden, et. al , No. 700188-2012 (the “Ioffe Action”) and Catherine L. Phillips, Derivatively on Behalf of Nominal Defendant Steven Madden, Ltd. v. Steven Madden, et. al , No. 700189-2012 (together with the Ioffe Action, the “Actions”). The Actions asserted derivative claims challenging the decision of the Company's Board of Directors in January 2012 to amend Steven Madden's employment agreement dated July 15, 2005, and amended as of December 14, 2009 and to amend the promissory note setting forth Mr. Madden's obligations in respect of a loan made by the Company to Mr. Madden in 2007 and amended in 2009 and claimed, among other things, that the Board violated its duties of loyalty and good faith by approving the amendments. The Actions also asserted claims of unjust enrichment against Mr. Madden. The Company and the other defendants filed a motion for dismissal of the Actions, which was granted by the court on September 13, 2012. The plaintiffs did not file a notice of appeal with respect to the dismissal of the Actions and the time period for filing an appeal has now expired. +On July 19, 2011, an individual purporting to act on behalf of a class of similarly situated individuals commenced a civil action in the United States District Court for the Central District of California, Samantha Ellison, individually and on behalf of a class of similarly situated individuals v. Steven Madden, Ltd., No. CV11-05935 (the “Ellison Action”) asserting that the Company made unsolicited commercial text calls to wireless telephone numbers of the class in violation of the Telephone Consumers Protection Act (the “TCPA”), and seeking, on behalf of the class, an injunction requiring the Company to cease all wireless text messages without prior written consent as required by the TCPA, as well as the recovery of statutory damages to the class members, together with costs and reasonable attorneys' fees. The Company responded by challenging the suit on several grounds. Settlement discussions resulted in a settlement being reached on July 30, 2012, subject to final court approval, for an aggregate gross settlement fund amount of $10 million, including all settlement costs and administration fees, as well as fees recoverable by class counsel. As the settlement calls for the reversion of all monies not paid to class claimants, it is possible that the actual settlement amount paid will be substantially less than $10 million. In addition, the Company's insurance coverage will cover a portion of the settlement at the rate of 45% of the initial settlement payment of $5 million and 30% of amounts over and above the initial settlement payment. On September 25, 2012, the court certified the class for settlement purposes only and approved the settlement on a preliminary basis. The court further ordered all litigants to make further submissions to the court concerning, among other thing, the merits and value of the case and to deliver notice of the proposed settlement to all class members prior to a fairness hearing and final approval of the settlement. Based on the settlement as contemplated and applying the insurance coverage as applicable, the maximum exposure to the Company is approximately $6.25 million; however, in light of historical "take rates" in cases of this type, counsel estimates that the actual liability to the Company will likely be $2.5 million or less. Accordingly, the Company has recorded a liability in the amount of $2.5 million in the fiscal year ended December 31, 2012 and paid this amount in 2012 pursuant to the preliminary settlement agreement. +On August 10, 2005, following the conclusion of an audit of the Company conducted by auditors for U.S. Customs and Border Protection (“U.S. Customs”) during 2004 and 2005, U.S. Customs issued a report that asserts that certain commissions that the Company treated as “buying agents' commissions” (which are non-dutiable) should be treated as “selling agents' +15 +commissions” and hence are dutiable. Subsequently, U.S. Immigration and Customs Enforcement notified the Company's legal counsel that a formal investigation of the Company's importing practices had been commenced as a result of the audit. In September 2007, U.S. Customs notified the Company that it had finalized its assessment of the underpaid duties at $1.4 million. The Company, with the advice of legal counsel, evaluated the liability in the case, including additional duties, interest and penalties, and believed that it was not likely to exceed $3.05 million and, accordingly, a reserve for this amount was recorded as of December 31, 2009. The Company contested the conclusions of the U.S. Customs audit and filed a request for review and issuance of rulings thereon by U.S. Customs Headquarters, Office of Regulations and Rulings, under internal advice procedures. On September 20, 2010, U.S. Customs issued a ruling in the matter, concluding that the commissions paid by the Company pursuant to buying agreements entered into by the Company and one of its two buying agents under review were bona fide buying-agent commissions and, therefore, were non-dutiable. With respect to the second buying agent, U.S. Customs also ruled that beginning in February, 2002, commissions paid by the Company were bona fide buying agent commissions and, therefore, were non-dutiable. However, U.S. Customs found that the Company's pre-2002 buying agreements with the second agent were legally insufficient to substantiate a buyer-buyer's agent relationship between the Company and the agent and that commissions paid to the second agent under such buying agreements, in fact, were dutiable. On the basis of the U.S. Customs ruling, the Company reevaluated the liability in the case and believes that it is not likely to exceed $1.248 million and the reserve was reduced from $3.05 million to such amount as of September 30, 2010. +On November 21, 2011, U.S. Customs issued a pre-penalty notice to the Company in which it alleges that gross negligence by the Company resulted in an underpayment of duties with respect to certain pre-2002 buying agreements and claims that the Company owes $341,677 as an additional duty and $1.367 million in monetary penalties. In its February 16, 2012 response to the pre-penalty notice, the Company submitted that it owes no additional duty and, further, did not through negligence or gross negligence fail to pay any duty or engage in conduct amounting to either gross negligence or negligence. The Company requested that U.S. Customs withdraw its proposal to issue a notice of penalty and take no further adverse action against the Company. In the event that U.S. Customs is not inclined to withdraw the pre-penalty notice after review of the Company's response, the Company has requested the opportunity to make an oral presentation to U.S. Customs prior to the issuance of a notice of penalty. In the event that U.S. Customs determines to issue a notice of penalty, the Company intends to file a petition for relief requesting a reduction of the level of culpability and mitigation of the penalty amount assessed. The maximum total amount of damages related to this matter is approximately $1.7 million for which the Company has accrued $1.248 million. +We have been named as a defendant in certain other lawsuits in the normal course of business. In the opinion of management, after consulting with legal counsel, the liabilities, if any, resulting from these matters should not have a material effect on our financial position or results of operations. +ITEM 4 MINE SAFETY DISCLOSURES +Not applicable. +PART II +ITEM 5 +MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Market Information. Our shares of common stock have traded on the NASDAQ Global Select Market since August 1, 2007 and were traded on the NASDAQ National Market prior to that date. The following table sets forth the range of high and low closing sales prices for our common stock during each fiscal quarter during the two-year period ended December 31, 2012 as reported by the NASDAQ Global Select Market. The trading volume of our securities fluctuates and may be limited during certain periods. As a result, the liquidity of an investment in our securities may be adversely affected. +16 +Common Stock +High +Low +High +Low +2012 +2011 +Quarter ended +March 31, 2012 +$45.08 +$34.33 +Quarter ended +March 31, 2011 +$31.29 +$25.15 +Quarter ended +June 30, 2012 +$44.27 +$31.75 +Quarter ended +June 30, 2011 +$37.96 +$31.73 +Quarter ended +September 30, 2012 +$45.05 +$31.69 +Quarter ended +September 30, 2011 +$41.02 +$30.10 +Quarter ended +December 31, 2012 +$44.98 +$41.07 +Quarter ended +December 31, 2011 +$37.55 +$28.36 +Holders. As of February 26, 2013, there were 113 holders of record of our common stock. +Dividends . With the exception of a special cash dividend paid in November 2005 and in November 2006, we have not declared or paid any cash dividends in the past to the holders of our common stock. We intend to retain earnings, if any, for potential future dividends and to finance the development and expansion of our business. Future dividend policy will be subject to the discretion of our Board of Directors and will be contingent upon future earnings, if any, our financial condition, capital requirements, general business conditions, and other factors. Therefore, we can give no assurance that any cash dividends of any kind will be paid to holders of our common stock in the future. +Equity Compensation Plans . Information regarding our equity compensation plans as of December 31, 2012 is disclosed in Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” +Issuer Repurchases of Equity Securities. We did not repurchase any shares of our common stock during the fourth quarter of the year ended December 31, 2012 . In February and August 2007, our Board of Directors authorized increases of our previously announced share repurchase program of $30 million and $37 million, respectively. In May 2010, the Board authorized an additional increase of $50 million to the share repurchase program. At December 31, 2012 , an aggregate of $47 million remained authorized to repurchase our common stock. The program has no set expiration date. +Performance Graph . The following graph compares the yearly percentage change in the cumulative total stockholder return on our common stock during the period beginning on December 31, 2007, and ending on December 31, 2012, with the cumulative total return on the Russell 2000 Index and the S&P 500 Footwear Index. The comparison assumes that $100 was invested on December 31, 2007 in our common stock and in the foregoing indices and assumes the reinvestment of dividends. +17 +12/31/2007 +12/31/2008 +12/31/2009 +12/31/2010 +12/31/2011 +12/31/2012 +Steven Madden, Ltd. +$100.00 +$106.59 +$206.18 +$312.87 +$388.15 +$475.56 +Russell 2000 Index +$100.00 +$66.20 +$84.20 +$106.81 +$102.33 +$119.05 +S&P 500 Footwear Index +$100.00 +$80.63 +$106.37 +$139.60 +$160.31 +$174.19 +ITEM 6 SELECTED FINANCIAL DATA +The following selected financial data has been derived from our audited Consolidated Financial Statements. The Income Statement Data relating to 2012, 2011 and 2010, and the Balance Sheet data as of December 31, 2012 and 2011 should be read in conjunction with the information provided in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K. +18 +INCOME STATEMENT DATA +Year Ended December 31, +(in thousands, except per share data) +2012 +2011 +2010 +2009 +2008 +Net sales +$ +1,227,072 +$ +968,549 +$ +635,418 +$ +503,550 +$ +457,046 +Cost of sales +771,370 +606,601 +359,564 +287,361 +270,222 +Gross profit +455,702 +361,948 +275,854 +216,189 +186,824 +Commissions and licensing fee income - net +15,395 +18,715 +22,629 +19,928 +14,294 +Operating expenses +(283,689 +) +(226,893 +) +(176,859 +) +(157,149 +) +(156,212 +) +Impairment charges and provision for litigation +(8,432 +) +— +— +— +— +Income from operations +178,976 +153,770 +121,624 +78,968 +44,906 +Interest income +3,067 +4,885 +4,208 +2,096 +2,620 +Interest expense +(49 +) +(51 +) +(4 +) +(93 +) +(207 +) +Other income (expense) - net +2,193 +188 +29 +(182 +) +(1,013 +) +Income before provision for income taxes +184,187 +158,792 +125,857 +80,789 +46,306 +Provision for income taxes +64,623 +61,591 +50,132 +30,682 +18,330 +Net income +119,564 +97,201 +75,725 +50,107 +27,976 +Net loss attributable to noncontrolling interests +62 +118 +— +— +— +Net income attributable to Steven Madden, Ltd. +$ +119,626 +$ +97,319 +$ +75,725 +$ +50,107 +$ +27,976 +Basic income per share +$2.78 +$2.30 +$1.83 +$1.23 +$0.68 +Diluted income per share +$2.71 +$2.25 +$1.78 +$1.22 +$0.67 +Basic weighted average shares of common stock +43,019 +42,264 +41,477 +40,602 +41,232 +Effect of dilutive securities - options and restricted stock +1,151 +975 +966 +626 +437 +Diluted weighted average shares of common stock outstanding +44,170 +43,239 +42,443 +41,228 +41,669 +BALANCE SHEET DATA +At December 31 , +2012 +2011 +2010 +2009 +2008 +Total assets +$ +804,039 +$ +639,786 +$ +447,696 +$ +326,859 +$ +284,693 +Working capital +306,776 +211,469 +138,636 +139,007 +122,086 +Noncurrent liabilities +43,161 +29,940 +18,967 +6,710 +5,801 +Stockholders' equity +$ +626,400 +$ +474,758 +$ +357,298 +$ +267,787 +$ +206,242 +19 +ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +The following discussion of our Financial Condition and Results of Operations should be read in conjunction with our audited Consolidated Financial Statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. +Overview: +($ in thousands, except retail sales data per square foot, earnings per share and per share data) +Steven Madden, Ltd. and its subsidiaries (collectively the “Company”) design, source, market and sell fashion-forward branded and private label footwear for women, men and children. In addition, we design, source, market and sell name brand and private label fashion handbags and accessories, through our Accessories Division. We distribute our products through better department stores, major department stores, mid-tier department stores, specialty stores, luxury retailers, value priced retailers, national chains, mass merchants, catalog retailers and in our retail stores and our e-commerce websites throughout the United States and Canada and under special distribution arrangements in Asia, Europe, the Middle East, Mexico, Australia, India, South Africa and South America. Our product line includes a broad range of contemporary styles designed to establish or capitalize on market trends, complemented by core product offerings. We have established a reputation for design creativity and our ability to offer quality products in popular styles at accessible price points, delivered in an efficient manner and time frame. +Our business is comprised of five distinct segments (Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing). Our Wholesale Footwear segment includes the following brands: Steve Madden Women's, Madden Girl, Steve Madden Men's, Steven, Betsey Johnson shoes, Olsenboye (under license), Stevies, Superga (under license), Elizabeth and James (under license), Madden, Report, l.e.i. (under license), and includes our private label and International businesses. Our Wholesale Accessories segment includes Steve Madden, Steven by Steve Madden, Big Buddha, Betseyville, Betsey Johnson, Cejon and, through license agreements, Daisy Fuentes® and Olsenboye® accessories brands and includes our private label business. Steven Madden Retail, Inc., our wholly owned retail subsidiary, operates Steve Madden and Steven retail stores as well as our e-commerce website (www.stevemadden.com). The First Cost segment represents activities of a subsidiary which earns commissions for serving as a buying agent for footwear products under private labels for many of the country's large mass-market merchandisers, shoe chains and other value priced retailers. Our Licensing segment is engaged in the licensing of the Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery, and women's fashion apparel, jewelry and luggage. In addition, the Company licenses the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, swimwear, eyewear, watches, fragrances and outerwear. +Fiscal year 2012 represents the fourth consecutive year that the Company achieved record sales and earnings. Net sales for 2012 increased 27% to $1,227,072 from $968,549 in the same period of last year. Net income increased 23% to $119,626 in 2012 compared to $97,319 in the same period of last year. Net income attributable to Steven Madden, Ltd. in 2012 was impacted by $5,932 of impairment charges related to the bankruptcies of Betsey Johnson LLC and Bakers Footwear Group, Inc. ("Bakers") and $2,500 for settlement of a class action lawsuit. The Company's effective tax rate for 2012 decreased to 35.1% compared to 38.8% recorded in 2011 due primarily to a tax benefit of $6,000 related to a portion of earnings from the Company's foreign operations that have been invested indefinitely in the acquisition and expansion of SM Canada. Inclusive of the impairment charges, the settlement of the lawsuit and the bad debt expense, which negatively impacted earnings per share by $0.13, diluted earnings per share in 2012 increased to $2.71 per share on 44,170,000 diluted weighted average shares outstanding compared to $2.25 per share on 43,239,000 diluted weighted average shares outstanding in the prior year. +As part of our strategic initiative to grow our International business, on February 21, 2012, the Company purchased all of the assets of Steve Madden Canada Inc., Steve Madden Retail Canada Inc., Pasa Agency Inc. and Gelati Imports Inc. (collectively, “SM Canada”), the Company's sole distributor in Canada since 1994, comprising SM Canada's footwear, handbags and accessories wholesale and retail businesses. Management believes that Canada represents a strong and growing market for the Company. The transaction was completed for consideration consisting of a cash payment at closing of approximately $29,129 (Canadian dollars, which converts to approximately the same in U.S. dollars) plus potential earn-out payments of up to a maximum of $38,000 (Canadian dollars, which converts to approximately the same in U.S. dollars), in the aggregate, based on achievement of certain earnings targets over a five-year period. The fair value of contingent payments was estimated based on management's projections of the financial results of SM Canada during the earn-out period. As of December 31, 2012, the Company estimates the fair value of the contingent consideration to be $19,975 in U.S. dollars. +20 +In our Retail segment, same store sales (sales of those stores, including the e-commerce websites, that were in operation throughout 2012 and 2011) increased 7.9%, and sales per square foot increased to $890 in 2012 compared to sales per square foot of $853 (recomputed using the current year's methodology) in 2011. As of December 31, 2012, we had 109 stores in operation, compared to 84 stores as of December 31, 2011. In 2012, we made significant progress on our strategic initiative to expand our e-commerce business. We introduced two new e-commerce websites for the marketing and sale of Betsey Johnson and Superga brand products and we realized a 16% growth in e-commerce sales during fiscal 2012. +Our total inventory turnover increased to 10.6 times compared to 10.2 times in the comparable period of last year. Our accounts receivable average collection days were 66 days in 2012 compared to 65 days in 2011, primarily due to the significant growth in our private label business and our International business, both of which have, customarily, customers with longer payment terms. As of December 31, 2012, we had $266,264 in cash, cash equivalents and marketable securities, no short or long-term debt and total stockholders’ equity of $ 626,400 . Working capital increased to $ 306,776 as of December 31, 2012, compared to $ 211,469 on December 31, 2011. +21 +The following tables set forth information on operations for the periods indicated: +Years Ended December 31 +($ in thousands) +2012 +2011 +2010 +CONSOLIDATED: +Net sales +$ +1,227,072 +100.0 +% +$ +968,549 +100.0 +% +$ +635,418 +100 +% +Cost of sales +771,370 +62.9 +% +606,601 +62.6 +% +359,564 +57 +% +Gross profit +455,702 +37.1 +% +361,948 +37.4 +% +275,854 +43 +% +Other operating income – net of expenses +15,395 +1.3 +% +18,715 +1.9 +% +22,629 +4 +% +Operating expenses +283,689 +23.1 +% +226,893 +23.4 +% +176,859 +28 +% +Impairment charges and provision for litigation +8,432 +0.7 +% +— +— +% +— +— +% +Income from operations +178,976 +14.6 +% +153,770 +15.9 +% +121,624 +19.1 +% +Interest and other income – net +5,211 +0.4 +% +5,022 +0.5 +% +4,233 +0.7 +% +Income before income taxes +184,187 +15.0 +% +158,792 +16.4 +% +125,857 +19.8 +% +Net income attributable to Steven Madden, Ltd. +119,626 +9.7 +% +97,319 +10.0 +% +75,725 +11.9 +% +By Segment: +WHOLESALE FOOTWEAR SEGMENT: +Net sales +$ +794,486 +100.0 +% +$ +636,809 +100.0 +% +$ +402,567 +100.0 +% +Cost of sales +544,939 +68.6 +% +431,430 +67.7 +% +245,964 +61.1 +% +Gross profit +249,547 +31.4 +% +205,379 +32.3 +% +156,603 +38.9 +% +Operating expenses +145,221 +18.3 +% +118,703 +18.6 +% +81,060 +20.1 +% +Income from operations - before impairment charges and provision for litigation +104,326 +13.1 +% +86,676 +13.6 +% +75,543 +18.8 +% +WHOLESALE ACCESSORIES SEGMENT: +Net sales +$ +241,339 +100.0 +% +$ +176,824 +100.0 +% +$ +98,548 +100.0 +% +Cost of sales +154,284 +63.9 +% +115,350 +65.2 +% +60,622 +61.5 +% +Gross profit +87,055 +36.1 +% +61,474 +34.8 +% +37,926 +38.5 +% +Operating expenses +45,679 +18.9 +% +33,465 +18.9 +% +23,603 +24.0 +% +Income from operations - before impairment charges and provision for litigation +41,376 +17.1 +% +28,009 +15.8 +% +14,323 +14.5 +% +RETAIL SEGMENT: +Net sales +$ +191,247 +100.0 +% +$ +154,916 +100.0 +% +$ +134,303 +100.0 +% +Cost of sales +72,147 +37.7 +% +59,821 +38.6 +% +52,978 +39.4 +% +Gross profit +119,100 +62.3 +% +95,095 +61.4 +% +81,325 +60.6 +% +Operating expenses +92,789 +48.5 +% +74,725 +48.2 +% +72,196 +53.8 +% +Income from operations - before impairment charges and provision for litigation +26,311 +13.8 +% +20,370 +13.1 +% +9,129 +6.8 +% +Number of stores +109 +84 +84 +FIRST COST SEGMENT: +Other commission income – net of expenses +$ +7,778 +100.0 +% +$ +9,795 +100.0 +% +$ +17,258 +100.0 +% +LICENSING SEGMENT: +Licensing income – net of expenses +$ +7,617 +100.0 +% +$ +8,920 +100.0 +% +$ +5,371 +100.0 +% +RESULTS OF OPERATIONS +($ in thousands) +22 +Year Ended December 31, 2012 vs. Year Ended December 31, 2011 +Consolidated : +Total net sales for the year ended December 31, 2012 increased by 27% to $1,227,072 from $968,549 for fiscal year 2011. For the year ended December 31, 2012, gross margin as a percentage of net sales decreased to 37.1% compared to 37.4% in the prior year. Operating expenses increased in 2012 to $283,689 from $226,893 in 2011, primarily due to incremental costs associated with our new Topline and Cejon businesses (both acquired in May 2011) and our new SM Canada business (acquired in February 2012). As a percentage of sales, operating expenses decreased to 23.1% in the year ended December 31, 2012 compared to 23.4% in the previous year. In 2012, we recorded impairment charges of $5,932 related to the bankruptcies of Betsey Johnson LLC and Bakers, and recorded an expense of $2,500 for the settlement of a class action lawsuit. Commission and licensing fee income decreased to $15,395 in 2012 compared to $18,715 in 2011, partially due to a $852 bad debt expense related to the Bakers bankruptcy. During the year ended December 31, 2012, income from operations increased to $178,976 and net income attributable to Steven Madden, Ltd. increased to $119,626 compared to income from operations of $153,770 and a net income of $97,319 in 2011. +Wholesale Footwear Segment : +Net sales generated by the Wholesale Footwear segment was $794,486, or 65%, and $636,809, or 66%, of our total net sales for the years ended December 31, 2012 and 2011, respectively. This represents a $157,678, or 24.8% increase year over year. The increase reflects $103,285 due to our SM Canada business acquired during 2012 and our Topline business acquired in May 2011. Excluding sales attributable to Topline and our acquired SM Canada business in each year, organic net sales growth was 10.4%. Organic net sales growth was driven by a 40% increase in net sales in our wholesale private label business, as well as double digit sales increases in our Steve Madden® Women's brand. In addition, our Steve Madden Kids brand, Steve Madden Men's brand and our International business all realized increased sales revenue in 2012. Finally, our new Superga® brand, which began shipping in the first quarter of 2012 and our new Betseyville® shoe brand, which began shipping in the second quarter of 2012, contributed to the increase in net sales in 2012. +Gross profit margin decreased to 31.4% in 2012 from 32.3% in the prior year, primarily due to sales mix shifts as a result of the addition of the Topline business, and significant sales increases in our Target private label business and our International business, which typically achieve lower gross margins. Excluding the full year impact of Topline and our acquired SM Canada business, gross profit margin was 34.6% in 2012 and 35.3% in 2011. In the year ended December 31, 2012, operating expenses increased to $145,221 from $118,703 in the same period of 2011, primarily due to incremental costs associated with our recently acquired SM Canada business and our Topline business acquired in May 2011. As a percentage of sales, operating expenses improved to 18.1% in 2012 from 18.6% in 2011, reflecting leverage from increased sales. Income from operations for the Wholesale Footwear Segment increased to $104,326 for the year ended December 31, 2012 compared to $86,676 for the year ended December 31, 2011. +Wholesale Accessories Segment : +Net sales generated by the Wholesale Accessories segment accounted for $241,339 or 20%, and $176,824 or 18% of total Company net sales for the years ended December 31, 2012 and 2011, respectively. This represents a $64,515, or 36.5% increase year over year. The increase in net sales reflects sales growth of $15,615 contributed by our Cejon business, which we acquired in the second quarter of 2011. Exclusive of Cejon in each year, organic net sales growth in the Accessories segment was 43.1%. This increase in organic sales was driven by strong sales results across all the accessories product lines including a 118% net sales increase in Steve Madden® handbags followed by a 59% increase in Betsey Johnson® handbags, a 17% increase in our private label business, a 15% increase in Big Buddha® handbags and a 13% increase in our belt business. +Gross profit margin in the Wholesale Accessories segment increased to 36.1% in 2012 from 34.8% in the prior year. Excluding Cejon, gross profit margin increased to 38.3% in 2012 from 38.0%, primarily due to the significant growth of our Steve Madden® and Betsey Johnson® handbag businesses, which typically achieve higher gross margins. In the year ended December 31, 2012, operating expenses increased to $45,679 compared to $33,465 in the year ended December 31, 2011, primarily due to incremental costs associated with our new Cejon business acquired in May 2011. As a percentage of sales, operating expenses remained at 18.9% for both 2012 and 2011. Income from operations for the Wholesale Accessories segment increased 48% to $41,377 in 2012 compared to $28,009 in 2011. +23 +Retail Segment : +Net sales generated by the Retail segment accounted for $191,247, or 16%, and $154,916, or 16%, of total Company net sales for the years ended December 31, 2012 and 2011, respectively. This reflects a $36,330 or 23.5% increase, year over year. The increase reflects a $13,495 increase due to the inclusion of net sales from our 2012 acquisition of SM Canada. Excluding sales attributable to the acquisition, organic net sales growth was 14.7%. We opened twenty new stores, acquired seven stores as part of the acquisition of SM Canada, established Superga® and Betsey Johnson online stores and closed four under-performing stores during the year ended December 31, 2012. As a result, we had 109 retail stores as of December 31, 2012, compared to 84 stores as of December 31, 2011. The 109 stores currently in operation include 91 Steve Madden full price stores, eleven Steve Madden outlet stores, two Steven stores, one Report store, one Superga store and three e-commerce websites. Comparable store sales (sales of those stores, including the e-commerce websites, that were open for all of 2012 and 2011) for the year ended December 31, 2012 increased 7.9% when compared to the prior year. During the year ended December 31, 2012, gross margin increased to 62.3% from 61.4% in 2011, primarily due to the impact of the twelve new stores currently open in Canada which achieve significantly higher gross profit margins than stores located in the U.S. as well as improved operating efficiencies. Excluding the impact of the acquisition of SM Canada, gross profit margin slightly decreased to 61.3% from 61.4% . In 2012, operating expenses increased to $92,789 from $74,725 in 2011 primarily due to the incremental cost associated with the net year-over-year increase of 25 stores. As a percentage of sales, operating expenses increased to 48.5% in 2012 from 48.2% in the prior year. For the year ended December 31, 2012, income from operations for the Retail segment increased to $26,311 compared to $20,370 in the prior year. +First Cost Segment : +The First Cost segment generated income from operations of $7,778 for the year ended December 31, 2012, compared to $9,795 in the prior year. This decrease is primarily due to a $852 bad debt expense resulting from the Bakers bankruptcy as well as a decline in business with Bakers during the year ended December 31, 2012. +Licensing Segment: +During the year ended December 31, 2012, licensing income decreased to $7,617 from $8,920 in the prior year. The decrease in net licensing revenue is primarily due to a loss of revenue that occurred when we transitioned outerwear business from an under-performing licensee to a new licensee with whom we expect to increase revenues in future years. +Year Ended December 31, 2011 vs. Year Ended December 31, 2010 +Consolidated : +Total net sales for the year ended December 31, 2011 increased by 52% to $968,549 from $635,418 for the comparable period of 2010. For the year ended December 31, 2011, gross margin as a percentage of net sales decreased to 37.4% compared to 43.4% in the year ended December 31, 2010. Operating expenses increased in 2011 to $226,893 from $176,859 in 2010, primarily due to incremental costs associated with our acquisition of the Topline and Cejon businesses and our new Betsey Johnson® and Big Buddha® shoe businesses. As a percentage of sales, operating expenses decreased 4.4% to 23.4% in the year ended December 31, 2011 compared to 27.8% in the prior year, reflecting leverage from increased sales. Commission and licensing fee income decreased to $18,715 in 2011 compared to $22,629 in 2010, primarily due to the transition of our Target private label and Olsenboye® footwear businesses from the commission model to the wholesale model in the fourth quarter of 2010 and the first quarter of 2011, respectively. During the year ended December 31, 2011, income from operations increased to $153,770 and net income attributable to Steven Madden, Ltd. increased to $97,319 compared to income from operations of $121,624 and a net income of $75,725 in 2010. +Wholesale Footwear Segment : +Net sales generated by the Wholesale Footwear segment was $636,809, or 66%, and $402,567, or 63%, of our total net sales for the years ended December 31, 2011 and 2010, respectively. The 58% increase in net sales year over year was partially due to the inclusion of net sales from our Topline business acquired in 2011. The transition of our Target business to the wholesale model also contributed to the increase in net sales. Similarly, the inclusion of net sales from our Olsenboye® business, which since the fourth quarter of 2010 has been included in the net sales line, contributed to the increase in net sales. Excluding sales from the Topline acquisition and the full year impact of sales transition from first cost model to wholesale model for Target and +24 +Olsenboye, organic net sales growth was $46,627 or 11.6% driven by growth in our Steve Madden Women's and Madden Girl brands and a 53% sales increase in our International business contributed to the net sales increase in the fiscal year 2011. Finally, two new brands, Big Buddha® shoes, which began shipping in the third quarter of 2010, and Betsey Johnson® shoes, which began shipping in the first quarter of 2011, also contributed to the increase in net sales. +Gross profit margin decreased to 32.3% in 2011 from 38.9% in 2010, due to sales mix shifts as a result of the addition of the Topline business and the inclusion of the Company's Target private label and Olsenboye® footwear businesses in net sales, which typically achieve lower gross margins. Excluding the impact from the Topline acquisition and the full year impact of sales transition from first cost model to wholesale model for Target and Olsenboye, gross profit for 2011 was 38.8%. In the year ended December 31, 2011, operating expenses increased to $118,703 from $81,060 in the same period of 2010, primarily due to incremental costs associated with our Topline business and our Betsey Johnson® and Big Buddha® shoe businesses acquired in 2011. As a percentage of sales, operating expenses improved to 18.6% in 2011 from 20.1% in 2010, reflecting leverage from increased sales. Income from operations for the Wholesale Footwear Segment increased to $86,676 for the year ended December 31, 2011 compared to $75,543 for the year ended December 31, 2010. +Wholesale Accessories Segment : +Net sales generated by the Wholesale Accessories segment accounted for $176,824 or 18%, and $98,548 or 16% of total Company net sales for the years ended December 31, 2011 and 2010, respectively. The 79% increase in net sales period over period was primarily due to our new Cejon business, which we acquired in the second quarter of 2011. Excluding sales from the acquisition of Cejon, net sales increased by $14,959 or 15.2% driven by net sales increases in our Big Buddha®, Madden Zone and Steve Madden® handbags businesses during the year ended December 31, 2011. +Gross profit margin in the Wholesale Accessories segment decreased to 34.8% in 2011 from 38.5% in 2010, primarily due to the addition of our Cejon cold weather accessories business and the growth in our private label business, both of which typically achieve lower gross margins than our existing handbag and belt businesses. Excluding the impact of Cejon, gross profit margin was 38%. In the year ended December 31, 2011, operating expenses increased to $33,465 compared to $23,603 in the year ended December 31, 2010, primarily due to the incremental costs related to our Cejon business acquired in 2011. As a percentage of sales, operating expenses improved to 18.9% in 2011 from 24.0% in 2010. This improvement is partially due to our Cejon cold weather accessory business, acquired in May 2011, which does a significant percentage of its sales in the second half of the year, resulting in a lower operating expenses percentage during that period. Income from operations for the Wholesale Accessories segment increased 96% to $28,009 in 2011 compared to $14,323 in 2010. +Retail Segment : +Net sales generated by the Retail segment accounted for $154,916, or 16%, and $134,303, or 21%, of total Company net sales for the years ended December 31, 2011 and 2010, respectively. We opened nine new stores, acquired one store as part of the acquisition of Topline and closed ten under-performing stores during the year ended December 31, 2011. As a result, we had 84 retail stores as of both December 31, 2011 and 2010. The 84 stores in operation at the end of 2011 include 73 Steve Madden full price stores, six Steve Madden outlet stores, three Steven stores, one Report store and one e-commerce website. Comparable store sales (sales of those stores, including the e-commerce website, that were open for all of 2011 and 2010) for the year ended December 31, 2011 increased 13.3% when compared to the prior year. During the year ended December 31, 2011, gross margin increased to 61.4% from 60.6% in 2010, primarily due to a decrease in promotional selling. In 2011, operating expenses increased to $74,725 from $72,196 in 2010. As a percentage of sales, operating expenses improved to 48.2% in 2011 from 53.8% in 2010, reflecting leverage from increased sales, in addition to a charge of $1,750 in the third quarter of 2010 for the preliminary settlement of a class action lawsuit. For the year ended December 31, 2011, income from operations for the Retail segment increased 123% to $20,370 compared to $9,129 in the prior year. +First Cost Segment : +The First Cost segment generated income from operations of $9,795 for the year ended December 31, 2011, compared to $17,258 in the prior year. The primary reason for this decrease is the transition of our Target private label and Olsenboye® footwear businesses from the commission model to the wholesale model in the fourth quarter of 2010 and the first quarter of 2011, respectively. +25 +Licensing Segment: +During the year ended December 31, 2011, licensing income increased to $8,920 from $5,371 in the prior year, primarily due to the incremental licensing revenue generated by our Betsey Johnson® intellectual property assets which we acquired in the fourth quarter of the prior year. +LIQUIDITY AND CAPITAL RESOURCES +($ in thousands) +The Company has a collection agency agreement with Rosenthal & Rosenthal, Inc. (“Rosenthal”). The agreement provides us with a credit facility in the amount of $30,000, having a sub-limit of $15,000 on the aggregate face amount of letters of credit, at an interest rate based, at our election, upon either the prime rate or LIBOR. The agreement can be terminated by the Company or Rosenthal at any time with 60 days’ prior written notice. As of December 31, 2012 we had no borrowings against this credit facility. +As of December 31, 2012 , we had working capital of $306,776 . We had cash and cash equivalents of $168,777 , investments in marketable securities of $97,487 and we did not have any long term debt. +We believe that based upon our current financial position and available cash, cash equivalents and marketable securities, we will meet all of our financial commitments and operating needs for at least the next twelve months. +OPERATING ACTIVITIES +($ in thousands) +Cash provided by operations was $ 143,341 in 2012 compared to cash provided by operations of $ 74,968 in the prior year. The primary sources of cash were net income of $ 119,564 , a decrease in accounts receivable of $19,669 and an increase in accounts payable and other accrued expenses of $11,956. The primary uses of cash were an increase of due from factor of $35,670 and a decrease of accrued incentive compensation of $9,163. +INVESTING ACTIVITIES +($ in thousands) +During the year ended December 31, 2012, we invested $ 63,822 in marketable securities and received $ 46,447 from the maturities and sales of securities. Also in 2012, we paid approximately $29,367 for the acquisition of SM Canada and paid $22,867 for contingent liabilities related to acquisitions completed in prior years. We also made capital expenditures of $19,952, principally for twenty new stores opened in 2012, improvements to existing stores, systems enhancements and leasehold improvements to office space. +FINANCING ACTIVITIES +($ in thousands) +During the year ended December 31, 2012, net cash provided by financing activities was $ 13,879 , which consisted of proceeds from the exercise of stock options of $ 9,271 and the tax benefit from the exercise of options of $ 4,608 . +26 +CONTRACTUAL OBLIGATIONS +($ in thousands) +Our contractual obligations as of December 31, 2012 were as follows: +Payment due by period +Contractual Obligations +Total +2013 +2014-2015 +2016-2017 +2018 and after +Operating lease obligations +$ +188,775 +$ +27,423 +$ +52,184 +$ +45,607 +$ +63,561 +Purchase obligations +228,255 +228,255 +— +— +— +Contingent payment liability +41,960 +11,551 +17,877 +12,532 +— +Other long-term liabilities (future minimum royalty payments) +6,163 +3,361 +2,802 +— +— +Total +$ +465,153 +$ +270,590 +$ +72,863 +$ +58,139 +$ +63,561 +At December 31, 2012 , we had un-negotiated open letters of credit for the purchase of inventory of approximately $1,072. +On January 3, 2012, the Company and its Creative and Design Chief, Steven Madden, entered into an amendment, dated as of December 31, 2011, to Mr. Madden’s then existing employment agreement with the Company. The amended agreement, which extends the term of Mr. Madden's employment through December 31, 2023, provides for a base salary of approximately $5,416 in 2012, approximately $7,417 in 2013, approximately $9,667 in 2014, approximately $11,917 in 2015 and approximately $10,698 per annum for the period between January 1, 2016 through the expiration of the term of employment. The employment agreement provides Mr. Madden with the right, exercisable on certain specified dates in fiscal year 2012 only, to elect to receive a grant of restricted stock for a number of shares of the Company’s common stock valued at $40,000 in consideration for a reduction in his annual base salary in years subsequent to 2012 as follows: $4,000 in 2013, approximately $6,125 in 2014, approximately $8,250 in 2015 and approximately $7,026 per annum for the period between January 1, 2016 through the expiration of the employment agreement on December 31, 2023. On June 30, 2012, Mr. Madden exercised this right and on July 3, 2012 he was granted 1,262,228 restricted shares of the Company's common stock at the then market price of $31.69, which will vest in the same manner as the February 8, 2012 restricted stock grant received by Mr. Madden pursuant to the amended agreement. (See Note O to the Consolidated Financial Statements.) Accordingly, Mr. Madden's annual base salary was reduced as described above. In addition to the opportunity for cash bonuses at the sole discretion of the Board of Directors, Mr. Madden’s employment agreement entitles him to an annual life insurance premium payment as well as an annual stock option grant and the potential for an additional one-time stock option grant based on achievement of certain financial performance criteria. The employment agreement also provides for the elimination of interest accrued after December 31, 2011 on an outstanding loan in the original principal amount of $3,000 made by the Company to Mr. Madden, the extension of the maturity date of such loan until December 31, 2023, and the forgiveness of 1/10 th of the principal amount of the loan, together with accrued interest, annually over a ten-year period commencing on December 31, 2014 for so long as Mr. Madden continues to be employed by the Company on each such December 31. As a result of the elimination of further interest accumulation, the outstanding principal and the accrued interest as of December 31, 2011 has been discounted to reflect imputed interest, which will be amortized over the remaining life of the loan. +The Company has employment agreements with certain executive officers, which provide for the payment of compensation aggregating approximately $2,884 in 2013, $1,887 in 2014 and $638 in 2015. In addition, some of these employment agreements provide for discretionary bonuses and some provide for incentive compensation based on various performance criteria as well as other benefits including stock options. +Virtually all of our products are produced by independent manufacturers at overseas locations, the majority of which are located in China, with a small and growing percentage located in Mexico in addition to smaller amounts in Brazil, Taiwan, Italy and India. We have not entered into any long-term manufacturing or supply contracts with any of these foreign manufacturers. We believe that a sufficient number of alternative sources exist outside of the United States for the manufacture of our products. We currently make approximately 99% of our purchases in U.S. dollars. +INFLATION +We do not believe that the inflation experienced over the last few years in the United States, where we primarily compete, has had a significant effect on our sales or profitability. Historically, we have minimized the impact of product cost increases by increasing prices, changing suppliers and by improving operating efficiencies. However, no assurance can be given that we will be able to offset such inflationary cost increases in the future. +27 +OFF BALANCE SHEET ARRANGEMENTS +The Company has no off balance sheet arrangements. +CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES +Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements included in this Annual Report on Form 10-K, which have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. Estimates by their nature are based on judgments and available information. Our estimates are made based upon historical factors, current circumstances and the experience and judgment of management. Assumptions and estimates are evaluated on an ongoing basis and we may employ outside experts to assist in evaluations. Therefore, actual results could materially differ from those estimates under different assumptions and conditions. Management believes the following critical accounting estimates are more significantly affected by judgments and estimates used in the preparation of our Consolidated Financial Statements: allowance for bad debts, returns, and customer chargebacks; inventory valuation; valuation of intangible assets, litigation reserves, and contingent payment liabilities. +Allowances for bad debts, returns and customer chargebacks . We provide reserves against our trade accounts receivables for future customer chargebacks, co-op advertising allowances, discounts, returns and other miscellaneous deductions that relate to the current period. The reserve against our non-factored trade receivables also includes estimated losses that may result from customers’ inability to pay. The amount of the reserve for bad debts, returns, discounts and compliance chargebacks are determined by analyzing aged receivables, current economic conditions, the prevailing retail environment and historical dilution levels for customers. We evaluate anticipated customer markdowns and advertising chargebacks by reviewing several performance indicators for our major customers. These performance indicators (which include inventory levels at the retail floors, sell through rates and gross margin levels) are analyzed by management to estimate the amount of the anticipated customer allowance. Failure to correctly estimate the amount of the reserve could materially impact our results of operations and financial position. +Inventory valuation . Inventories are stated at lower-of-cost or market, on a first-in, first-out basis. We review inventory on a regular basis for excess and slow moving inventory. The review is based on an analysis of inventory on hand, prior sales, and expected net realizable value through future sales. The analysis includes a review of inventory quantities on hand at period-end in relation to year-to-date sales and projections for sales in the foreseeable future as well as subsequent sales. We consider quantities on hand in excess of estimated future sales to be at risk for market impairment. The net realizable value, or market value, is determined based on the estimate of sales prices of such inventory through off-price or discount store channels. The likelihood of any material inventory write-down is dependent primarily on the expectation of future consumer demand for our product. A misinterpretation or misunderstanding of future consumer demand for our product, the economy, or other failure to estimate correctly, in addition to abnormal weather patterns, could result in inventory valuation changes, compared to the valuation determined to be appropriate as of the balance sheet date. +Valuation of intangible assets . Accounting Standards Codification (“ASC”) Topic 350, “Intangible – Goodwill and Other”, requires that goodwill and intangible assets with indefinite lives no longer be amortized, but rather be tested for impairment at least annually. This pronouncement also requires that intangible assets with finite lives be amortized over their respective lives to their estimated residual values, and reviewed for impairment in accordance with ASC Topic 360, “Property, Plant and Equipment” (“ASC Topic 360”). In accordance with ASC Topic 360, long-lived assets, such as property, equipment, leasehold improvements and intangible assets subject to amortization, are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. +Litigation reserves . Estimated amounts for litigation claims that are probable and can be reasonably estimated are recorded as liabilities in our Consolidated Financial Statements. The likelihood of a material change in these estimated reserves would be dependent on new claims as they may arise and the favorable or unfavorable events of a particular litigation. As additional information becomes available, management will assess the potential liability related to the pending litigation and revise its estimates. Such revisions in management’s estimates of a contingent liability could materially impact our results of operation and financial position. +Contingent payment liabilities. Since February 2010, the Company has completed four acquisitions, all of which require the Company to make contingent payments to the sellers based on the future financial performance of the acquired businesses over +28 +a period of from one to five years. The fair value of the contingent payments was estimated using the present value of management's projections of the financial results of the acquired business. Failure to correctly project the financial results of the acquired businesses could materially impact our results of operations and financial position. +ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +($ in thousands) +We do not engage in the trading of market risk sensitive instruments in the normal course of business. Our financing arrangements are subject to variable interest rates primarily based on the prime rate and LIBOR. An analysis of our collection agency agreement with Rosenthal can be found in the “Liquidity and Capital Resources” section under Part II, Item 7, and in Note C to the Consolidated Financial Statements included in this Annual Report on Form 10-K under the caption “Factor Receivable.” +As of December 31, 2012 , we held marketable securities valued at approximately $ 97,487 , which consisted primarily of corporate bonds and certificates of deposit. These securities are subject to interest rate risk and will decrease in value if interest rates increase. We currently have the ability to hold these securities until maturity. +ITEM 8 +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +The information required by this Item is incorporated herein by reference to the Consolidated Financial Statements listed in response to Item 15 of Part IV of this Annual Report on Form 10-K. +ITEM 9 +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +ITEM 9A CONTROLS AND PROCEDURES +Disclosure Controls and Procedures +As required by Rule 13a-15(b) of the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal year covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of the end of the fiscal year covered by this Annual Report on Form 10-K. +Management's Annual Report on Internal Control Over Financial Reporting +Management of Steven Madden, Ltd. is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). +Our internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by the board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our 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. We have excluded SM Canada, which were acquired on February 21, 2012, from the scope of our annual report on internal control over +29 +financial reporting as of December 31, 2012. SM Canada represent approximately 8% of our total assets at December 31, 2012 and approximately 3% and 7% of our revenues and net income, respectively, for the year ended December 31, 2012. +With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness, as of the end of our fiscal year ended December 31, 2012, of our internal control over financial reporting based on the framework and criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation our management has concluded that, as of December 31, 2012, our internal control over financial reporting was effective. +Our independent registered public accounting firm, EisnerAmper LLP, has audited the Company's consolidated financial statements and the effectiveness of the Company's internal control over financial reporting as of December 31, 2012. Their report appears in this Annual Report on Form 10-K. +Changes in Internal Control Over Financial Reporting +There was no change in our internal control over financial reporting, identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act, that occurred during the fiscal quarter ended December 31, 2012, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +ITEM 9B OTHER INFORMATION +None +PART III +ITEM 11 +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +The information required to be furnished pursuant to this Item will be set forth in our proxy statement for the 2013 Annual Meeting of Stockholders, and is incorporated herein by reference. +ITEM 11 +EXECUTIVE COMPENSATION +The information required to be furnished pursuant to this Item will be set forth in our proxy statement for the 2013 Annual Meeting of Stockholders, and is incorporated herein by reference. +ITEM 12 +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +The information required to be furnished pursuant to this Item will be set forth in our proxy statement for the 2013 Annual Meeting of Stockholders, and is incorporated herein by reference. +ITEM 13 +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required to be furnished pursuant to this Item will be set forth in our proxy statement for the 2013 Annual Meeting of Stockholders, and is incorporated herein by reference. +30 +ITEM 14 +PRINCIPAL ACCOUNTING FEES AND SERVICES +The information required to be furnished pursuant to this Item will be set forth in our proxy statement for the 2013 Annual Meeting of Stockholders, and is incorporated herein by reference. +PART IV +ITEM 15 +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) Financial Statements and Financial Statements Schedules +See "Index to Consolidated Financial Statements which is included herein. +(b) Exhibits. See the exhibit index which is included herein. +31 +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. +DATE: March 1, 2013 +STEVEN MADDEN, LTD. +/s/ EDWARD R. ROSENFELD +Edward R. Rosenfeld +Chairman and Chief Executive Officer +/s/ ARVIND DHARIA +Arvind Dharia +Chief Financial Officer and Chief Accounting Officer +32 +POWER OF ATTORNEY +KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned constitutes and appoints Edward R. Rosenfeld and Arvind Dharia, and each of them, as attorneys-in-fact and agents, with full power of substitution and resubstitution, for and in the name, place and stead of the undersigned, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact or substitute or substitutes, may lawfully do or cause to be done by virtue hereof. +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. +Signature +Title +Date +/S/ EDWARD R. ROSENFELD +Chairman, Chief Executive Officer and Director +March 1, 2013 +Edward R. Rosenfeld +/S/ ARVIND DHARIA Arvind Dharia +Chief Financial Officer and Chief Accounting Officer +March 1, 2013 +/S/ JOHN L. MADDEN +Director +March 1, 2013 +John L. Madden +/S/ PETER MIGLIORINI +Director +March 1, 2013 +Peter Migliorini +/S/ RICHARD P. RANDALL +Director +March 1, 2013 +Richard P. Randall +/S/ RAVI SACHDEV +Director +March 1, 2013 +Ravi Sachdev +/S/ THOMAS H. SCHWARTZ +Director +March 1, 2013 +Thomas H. Schwartz +33 +STEVEN MADDEN, LTD. +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +Report of Independent Registered Public Accounting Firm +F-1 +Consolidated Balance Sheets as of December 31, 2012 and 2011 +F-2 +Consolidated Statements of Income for the years ended December 31, 2012, 2011 and 2010 +F-3 +Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010 +F-4 +Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2012, 2011 and 2010 +F-5 +Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010 +F-7 +Notes to Consolidated Financial Statements +F-8 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Board of Directors and Stockholders +Steven Madden, Ltd. and subsidiaries +We have audited the accompanying consolidated balance sheets of Steven Madden, Ltd. and subsidiaries (the "Company") as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2012. We also have audited the Company's internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting appearing under Item 9A of the Company's December 31, 2012 annual report on Form 10-K. Our responsibility is to express an opinion on these consolidated financial statements 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Steven Madden, Ltd. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the Company has maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by COSO. +As indicated in the accompanying Management's Annual Report on Internal Control over Financial Reporting, management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2012 did not include the internal controls of Steve Madden Canada, Inc., Steve Madden Retail Canada, Inc., and Pasa Agency, Inc. (collectively, “SM Canada”) because they were acquired by the Company in purchase business combinations during 2012. SM Canada constituted approximately 8% of total assets and approximately 3% and 7% of revenues and net income, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2012. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of SM Canada. +/s/ EisnerAmper LLP +New York, New York +February 28, 2013 +F-1 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Balance Sheets +(in thousands) +December 31, +2012 +2011 +ASSETS +Current assets: +Cash and cash equivalents +$ +168,777 +$ +102,830 +Accounts receivable, net of allowances of $4,581 and $5,894 +75,545 +91,407 +Factor accounts receivable, net of allowances of $17,856 and $12,325 +92,156 +62,017 +Inventories +63,683 +59,644 +Marketable securities – available for sale +16,285 +5,659 +Prepaid expenses and other current assets +13,404 +13,832 +Prepaid taxes +331 +1,457 +Deferred taxes +11,073 +9,711 +Total current assets +441,254 +346,557 +Notes receivable +3,085 +7,401 +Note receivable – related party +3,581 +4,090 +Property and equipment, net +45,285 +31,587 +Deferred taxes +— +2,428 +Deposits and other +2,305 +1,257 +Marketable securities – available for sale +81,202 +72,004 +Goodwill – net +91,559 +75,595 +Intangibles – net +135,768 +98,867 +Total Assets +$ +804,039 +$ +639,786 +LIABILITIES +Current liabilities: +Accounts payable +$ +83,427 +$ +69,747 +Accrued expenses +31,782 +34,327 +Contingent payment liability – current portion +11,551 +14,133 +Accrued incentive compensation +7,718 +16,881 +Total current liabilities +134,478 +135,088 +Contingent payment liability +30,409 +23,788 +Deferred rent +7,521 +6,004 +Deferred taxes +5,117 +— +Other liabilities +114 +148 +Total Liabilities +177,639 +165,028 +Commitments, contingencies and other +STOCKHOLDERS’ EQUITY +Preferred stock – $.0001 par value, 5,000 shares authorized; none issued; Series A Junior Participating preferred stock – $.0001 par value, 60 shares authorized; none issued +— +— +Common stock – $.0001 par value, 60,000 shares authorized, 54,530 and 51,408 shares issued, 46,127 and 43,005 shares outstanding at December 31, 2012 and 2011, respectively +5 +5 +Additional paid-in capital +217,638 +186,325 +Retained earnings +540,037 +420,411 +Other comprehensive income +1,443 +678 +Treasury stock – 8,403 shares at cost +(132,543 +) +(132,543 +) +Total Steven Madden, Ltd. stockholders’ equity +626,580 +474,876 +Noncontrolling interests +(180 +) +(118 +) +Total stockholders’ equity +626,400 +474,758 +Total Liabilities and Stockholders’ Equity +$ +804,039 +$ +639,786 +See accompanying notes to consolidated financial statements +F-2 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements of Income +(in thousands, except per share data) +Years Ended December 31, +2012 +2011 +2010 +Net sales +$ +1,227,072 +$ +968,549 +$ +635,418 +Cost of sales +771,370 +606,601 +359,564 +Gross profit +455,702 +361,948 +275,854 +Commission and licensing fee income – net +15,395 +18,715 +22,629 +Operating expenses +(283,689 +) +(226,893 +) +(176,859 +) +Impairment charges and provision for litigation +(8,432 +) +— +— +Income from operations +178,976 +153,770 +121,624 +Interest income +3,067 +4,885 +4,208 +Interest expense +(49 +) +(51 +) +(4 +) +Other income (expense) - net +2,193 +188 +29 +Income before provision for income taxes +184,187 +158,792 +125,857 +Provision for income taxes +64,623 +61,591 +50,132 +Net income +119,564 +97,201 +75,725 +Net loss attributable to noncontrolling interests +62 +118 +— +Net income attributable to Steven Madden, Ltd. +$ +119,626 +$ +97,319 +$ +75,725 +Basic net income per share +$ +2.78 +$ +2.30 +$ +1.83 +Diluted net income per share +$ +2.71 +$ +2.25 +$ +1.78 +Basic weighted average common shares outstanding +43,019 +42,264 +41,477 +Effect of dilutive securities – options/restricted stock +1,151 +975 +966 +Diluted weighted average common shares outstanding +44,170 +43,239 +42,443 +See accompanying notes to consolidated financial statements +F-3 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements of Comprehensive Income +(in thousands) +Years Ended December 31, +2012 +2011 +2010 +Net income +$ +119,564 +$ +97,201 +$ +75,725 +Other comprehensive income (loss) (net of tax): +Foreign currency translation adjustment +(21 +) +(209 +) +— +Cash flow hedges: +Gains on cash flow hedging derivatives +87 +— +— +Unrealized gain (loss) on marketable securities +699 +(85 +) +272 +Total other comprehensive income (loss) (net of tax) +765 +(294 +) +272 +Comprehensive income +120,329 +96,907 +75,997 +Comprehensive loss attributable to noncontrolling interests +62 +118 +— +Comprehensive income attributable to Steven Madden, Ltd. +$ +120,391 +$ +97,025 +$ +75,997 +See accompanying notes to consolidated financial statements +F-4 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements of Changes in Stockholders' Equity +(in thousands) +Common Stock +Additional Paid‑in Capital +Retained Earnings +Shares +Amount +Balance - December 31, 2009 +40,927 +3 +147,703 +247,365 +Exercise of stock options +646 +1 +5,081 +Tax benefit from stock based compensation +4,718 +Issuance of fully vested restricted stock +447 +Stock-based compensation +8,271 +Unrealized holding gain on marketable securities (net of taxes of $198) +Net income +75,725 +Forfeiture of accrued dividends +2 +Common stock purchased for treasury +Balance - December 31, 2010 +42,020 +4 +165,773 +323,092 +Exercise of stock options +439 +1 +4,994 +Tax benefit from exercise of options +4,154 +Issuance of restricted stock +546 +Stock-based compensation +11,404 +Foreign currency translation adjustment +Unrealized holding gain on marketable securities (net of taxes of $54) +Net income +97,319 +Balance - December 31, 2011 +43,005 +5 +186,325 +420,411 +Exercise of stock options +583 +— +9,271 +Tax benefit from exercise of options +4,608 +Issuance of restricted stock +2,539 +Stock-based compensation +17,434 +Foreign currency translation adjustment +Unrealized holding gain on marketable securities (net of taxes of $447) +Cash flow hedge (net of taxes of $75) +Net income +119,626 +Balance - December 31, 2012 +46,127 +$ +5 +$ +217,638 +$ +540,037 +See accompanying notes to consolidated financial statements +F-5 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements of Changes in Stockholders' Equity (Continued) +(in thousands) +Accumulated Other Comprehensive Gain (Loss) +Treasury Stock +Non-controlling interest +Total Stockholders' Equity +Shares +Amount +Balance - December 31, 2009 +700 +8,262 +(127,984 +) +— +267,787 +Exercise of stock options +5,082 +Tax benefit from stock based compensation +4,718 +Issuance of fully vested restricted stock +— +Stock-based compensation +8,271 +Unrealized holding gain on marketable securities (net of taxes of $198) +272 +272 +Net income +75,725 +Forfeiture of accrued dividends +2 +Common stock purchased for treasury +141 +(4,559 +) +(4,559 +) +Balance - December 31, 2010 +972 +8,403 +(132,543 +) +— +357,298 +Exercise of stock options +4,995 +Tax benefit from exercise of options +4,154 +Issuance of restricted stock +— +Stock-based compensation +11,404 +Foreign currency translation adjustment +(209 +) +(209 +) +Unrealized holding gain on marketable securities (net of taxes of $54) +(85 +) +(85 +) +Net income +(118 +) +97,201 +Balance - December 31, 2011 +678 +8,403 +(132,543 +) +(118 +) +474,758 +Exercise of stock options +9,271 +Tax benefit from exercise of options +4,608 +Issuance of restricted stock +— +Stock-based compensation +17,434 +Foreign currency translation adjustment +(21 +) +(21 +) +Unrealized holding gain on marketable securities (net of taxes of $447) +699 +699 +Cash flow hedge (net of taxes of $75) +87 +87 +Net income +(62 +) +119,564 +Balance - December 31, 2012 +$ +1,443 +8,403 +$ +(132,543 +) +$ +(180 +) +$ +626,400 +See accompanying notes to consolidated financial statements +F-6 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Consolidated Statements of Cash Flows +(in thousands) +Year Ended December 31, +2012 +2011 +2010 +Cash flows from operating activities: +Net income +$ +119,564 +$ +97,201 +$ +75,725 +Adjustments to reconcile net income to net cash provided by operating activities: +Stock-based compensation +17,434 +11,404 +8,271 +Tax benefit from stock-based compensation +(4,608 +) +(4,154 +) +(4,718 +) +Depreciation and amortization +12,642 +11,060 +9,999 +Loss on disposal of fixed assets +250 +726 +543 +Impairment charges +5,932 +— +— +Deferred taxes +1,528 +1,452 +(798 +) +Provision for doubtful accounts and chargebacks +4,218 +2,961 +1,576 +Accrued interest on note receivable – related party +509 +(241 +) +(281 +) +Deferred rent expense and other liabilities +1,538 +(357 +) +423 +Realized gain on sale of marketable securities +(2,110 +) +(1,254 +) +(29 +) +Changes in: +Accounts receivable +19,669 +(16,543 +) +(8,266 +) +Due from factor +(35,670 +) +(9,336 +) +(4,985 +) +Inventories +(1,819 +) +(9,210 +) +(8,804 +) +Prepaid expenses, prepaid taxes, deposits and other +1,557 +(2,068 +) +(4,420 +) +Accounts payable and accrued expenses +11,956 +(7,551 +) +19,572 +Accrued incentive compensation +(9,163 +) +964 +3,603 +Other liabilities +(86 +) +(86 +) +(538 +) +Net cash provided by operating activities +143,341 +74,968 +86,873 +Cash flows from investing activities: +Capital expenditures +(20,102 +) +(15,477 +) +(3,424 +) +Purchases of marketable securities +(63,822 +) +(17,968 +) +(72,663 +) +Purchase of notes receivable, net of collections +(1,562 +) +— +(7,004 +) +Payment of contingent liability +(22,867 +) +(4,151 +) +(1,628 +) +Maturity/sale of marketable securities +46,447 +67,885 +30,092 +Refundable cash acquired from seller +— +12,004 +— +Acquisitions, net of cash required +(29,367 +) +(89,730 +) +(40,602 +) +Net cash used in investing activities +(91,273 +) +(47,437 +) +(95,229 +) +Cash flows from financing activities: +Proceeds from exercise of stock options +9,271 +4,994 +5,082 +Tax benefit from the exercise of options +4,608 +4,154 +4,718 +Common stock purchased for treasury +— +— +(4,559 +) +Net cash provided by financing activities +13,879 +9,148 +5,241 +Net increase (decrease) in cash and cash equivalents +65,947 +36,679 +(3,115 +) +Cash and cash equivalents – beginning of period +102,830 +66,151 +69,266 +Cash and cash equivalents – end of period +$ +168,777 +$ +102,830 +$ +66,151 +Supplemental disclosures of cash flow information: +Cash paid during the year for: +Interest +$ +49 +$ +51 +$ +4 +Income taxes +$ +52,711 +$ +59,633 +$ +42,651 +Non-cash transactions +Dividend forfeitures related to restricted stock +$ +— +$ +— +$ +(2 +) +See accompanying notes to consolidated financial statements. +F-7 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands except share and per share data) +NOTE A – Summary of Significant Accounting Policies +[1] Organization: +Steven Madden, Ltd. and its subsidiaries (collectively, the “Company”), a Delaware corporation, design, source, market and sell name brand and private label women's, men's and children's shoes, worldwide through its wholesale and retail channels under the Steve Madden Women's, Steven and Madden Men's brand names and through its wholesale channels under the Stevies, Madden Girl, Madden, l.e.i. (under license), Elizabeth and James (under license), Report, Superga (under license), Betsey Johnson and Big Buddha brand names. In addition, the Company designs, sources, markets and sells name brand and private label fashion handbags and accessories to customers worldwide through its Wholesale Accessories segment. The Wholesale Accessories segment includes Big Buddha, Betsey Johnson, Betseyville, Cejon, Steve Madden and Steven by Steve Madden and, through license agreements, Daisy Fuentes and Olsenboye accessories brands. Revenue is generated predominantly through the sale of the Company's brand name and private label merchandise and certain licensed products. At December 31, 2012 and 2011, the Company operated 109 (including three e-commerce websites) and 84 (including one e-commerce website) retail stores, respectively. Revenue is subject to seasonal fluctuations. See Note P for operating segment information. +[2] Principles of consolidation: +The Consolidated Financial Statements include the accounts of Steven Madden, Ltd. and its wholly owned subsidiaries Steven Madden Retail, Inc., Diva Acquisition Corp., Adesso Madden, Inc., Stevies, Inc., Daniel M. Friedman and Associates, Inc., Big Buddha, Inc., the Topline Corporation, Cejon, Inc., SML Holdings S.a.r.l., Steve Madden Canada Inc., Steve Madden Retail Canada Inc. and Pasa Agency Inc. (collectively referred to as the "Company"). The accounts of Madlove LLC, a joint venture in which the Company is the primary beneficiary, is included in the Consolidated Financial Statements with the other members' interests reflected in “Net loss attributable to noncontrolling interests” in the Consolidated Statements of Income and “Noncontrolling interests” in the Consolidated Balance Sheets. All significant intercompany balances and transactions have been eliminated. +[3] Use of Estimates: +The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. +Significant areas involving management estimates include allowances for bad debts, returns and customer chargebacks, inventory valuation, valuation of intangible assets, litigation reserves, and contingent payment liabilities. The Company provides reserves on trade accounts receivables and factor receivables for future customer chargebacks and markdown allowances, discounts, returns and other miscellaneous compliance-related deductions that relate to the current period sales. The Company evaluates anticipated chargebacks by reviewing several performance indicators of its major customers. These performance indicators, which include retailers’ inventory levels, sell-through rates and gross margin levels, are analyzed by management to estimate the amount of the anticipated customer allowance. +[4] Cash equivalents: +Cash equivalents at December 31, 2012 and 2011 amounted to approximately $5,707 and $57,652 , respectively, and consisted of money market accounts held primarily at four brokerage companies. The Company considers all highly liquid instruments with an original maturity of three months or less when purchased to be cash equivalents. +F-8 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands except share and per share data) +NOTE A – Summary of Significant Accounting Policies (Continued) +[5] Marketable securities: +Marketable securities consist primarily of corporate bonds and certificates of deposit with maturities greater than three months and up to eight years at the time of purchase. These securities, which are classified as available for sale, are carried at fair value, with unrealized gains and losses net of any tax effect reported in stockholders' equity as accumulated other comprehensive income (loss) until realized. Amortization of premiums and discounts is included in interest income. For the years ended December 31, 2012 and 2011 , the amortization of bond premiums was $894 and $1,119 , respectively. The schedule of maturities at December 31, 2012 and 2011 are as follows: +Maturities as of +December 31, 2012 +Maturities as of +December 31, 2011 +1 Year or Less +1 to 10 Years +1 Year or Less +1 to 8 Years +Corporate bonds +$ +8,285 +$ +73,027 +$ +5,659 +$ +63,965 +Certificates of deposit +8,000 +8,175 +— +8,039 +Total +$ +16,285 +$ +81,202 +$ +5,659 +$ +72,004 +[6] Inventories: +Inventories, which consist of finished goods on hand and in transit, are stated at the lower of cost (first-in, first-out method) or market. +[7] Property and equipment: +Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed utilizing the straight-line method based on estimated useful lives ranging from three to ten years. Leasehold improvements are amortized utilizing the straight-line method over the shorter of their estimated useful lives or the remaining lease term. Impairment losses are recognized for long-lived assets, including certain intangibles, used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are not sufficient to recover the assets' carrying amount. Impairment losses are measured by comparing the fair value of the assets to their carrying amount. +[8] Goodwill and intangible assets: +The Company's goodwill and indefinite lived intangible assets are not amortized, rather they are tested for impairment on an annual basis or more often if events or circumstances change that could cause these assets to become impaired. The Company completed its annual impairment tests on goodwill, which relates to the retail, accessories and Steven reporting units, as well as the Betsey Johnson trademarks. No impairments were recognized. +[9] Net Income Per Share of Common Stock: +Basic net income per share is based on the weighted average number of shares of common stock outstanding during the period, which does not include unvested restricted stock subject to forfeiture. Diluted net income per share reflects: a) the potential dilution assuming shares of common stock were issued upon the exercise of outstanding in-the-money options and the proceeds thereof were used to purchase shares of the Company’s common stock at the average market price during the period, and b) the vesting of granted nonvested restricted stock awards for which the assumed proceeds upon vesting are deemed to be the amount of compensation cost not yet recognized attributable to future services using the treasury stock method, to the extent dilutive. For the years ended December 31, 2012 , 2011 and 2010 , options to +F-9 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands except share and per share data) +NOTE A – Summary of Significant Accounting Policies (Continued) +purchase approximately 99,000 , 182,000 and 39,000 shares of common stock, respectively, have been excluded in the calculation of diluted income per share as the result would have been anti-dilutive. For the years ended December 31, 2012 , 2011 and 2010 , all unvested restricted stock awards were dilutive. +[10] Comprehensive Income: +Comprehensive income is the total of net earnings and all other non-owner changes in equity. Except for net income, foreign currency translation adjustments, cash flow hedging and unrealized gains and losses on marketable securities, the Company does not have any transactions or other economic events that qualify as comprehensive income. +[11] Advertising costs: +The Company expenses costs of print, radio and billboard advertisements as incurred. Advertising expense included in operating expenses amounted to approximately $9,783 in 2012 , $7,312 in 2011 and $5,597 in 2010 . +[12] Revenue Recognition: +The Company recognizes revenue on wholesale sales when (i) products are shipped pursuant to its standard terms, which are freight on board (“FOB”) Company warehouse, or when products are delivered to the consolidators, or any other destination, as per the terms of the customers’ purchase order, (ii) persuasive evidence of an arrangement exists, (iii) the price is fixed and determinable and (iv) collection is reasonably assured. Sales reductions on wholesale sales for anticipated discounts, allowances and other deductions are recognized during the period when sales are recorded. Customers retain the right to replacement of the product for poor quality or improper or short shipments, which have historically been immaterial. Retail sales are recognized when the payment is received from customers and are recorded net of estimated returns. The Company also generates commission income acting as a buying agent by arranging to manufacture private label shoes to the specifications of its clients. The Company’s commission revenue includes fees charged for its design, product and development services provided to certain suppliers in connection with the Company’s private label business. Commission revenue and product and development fees are recognized as earned when title to the product transfers from the manufacturer to the customer and collections are reasonably assured and are reported on a net basis after deducting related operating expenses. +The Company licenses its Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery, women's fashion apparel, jewelry and luggage. In addition, the Company licenses the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, swimwear, eyewear, watches, fragrances and outerwear. The license agreements require the licensee to pay the Company a royalty and, in substantially all of the agreements, an advertising fee based on the higher of a minimum or a net sales percentage as defined in the various agreements. In addition, under the terms of retail selling agreements, most of the Company’s international distributors are required to pay the Company a royalty based on a percentage of net sales, in addition to a commission and a design fee on the purchases of the Company’s products. Licensing revenue is recognized on the basis of net sales reported by the licensees, or the minimum guaranteed royalties, if higher. +In substantially all of the Company’s license agreements, the minimum guaranteed royalty is earned and receivable on a quarterly basis. +F-10 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands except share and per share data) +NOTE A – Summary of Significant Accounting Policies (Continued) +[13] Taxes Collected From Customers: +The Company accounts for certain taxes collected from its customers in accordance with the accounting guidance which permits companies to adopt a policy of presenting taxes in the income statement on either a gross basis (included in revenues and costs) or a net basis (excluded from revenues). Taxes within the scope of this accounting guidance would include taxes that are imposed on a revenue transaction between a seller and a customer, for example, sales taxes, use taxes, value-added taxes and some types of excise taxes. The Company has consistently recorded all taxes on a net basis. +[14] Sales Deductions: +The Company supports retailers’ initiatives to maximize sales of the Company’s products on the retail floor by subsidizing the co-op advertising programs of such retailers, providing them with inventory markdown allowances and participating in various other marketing initiatives of its major customers. In addition, the Company accepts returns for damaged products for which the Company’s costs are normally charged back to the responsible third-party factory. Such expenses are reflected in the financial statements as deductions to net sales. +[15] Cost of Sales: +All costs incurred to bring finished products to the Company’s distribution center or to the customers’ freight forwarder and, in the Retail segment, the costs to bring products to the Company’s stores, are included in the cost of sales line on the Consolidated Statements of Income. These include the cost of finished products, purchase commissions, letter of credit fees, brokerage fees, sample expenses, custom duty, inbound freight, royalty payments on licensed products, labels and product packaging. All warehouse and distribution costs related to the Wholesale segments and freight to customers, if any, are included in the operating expenses line item of the Company’s Consolidated Statements of Income. The Company’s gross margins may not be comparable to those of other companies in the industry because some companies may include warehouse and distribution costs, as well as other costs excluded from cost of sales by the Company, as a component of cost of sales, while other companies report on the same basis as the Company and include them in operating expenses. +[16] Warehouse and shipping costs: +The Company includes all warehouse and distribution costs for the Wholesale segment in the Operating Expenses line on the Consolidated Statements of Income. For the years ended December 31, 2012 , 2011 and 2010 , the total warehouse and distribution costs included in Operating Expenses were $14,140 , $12,190 and $10,409 respectively. Since the Company's standard terms of sales are “FOB Steve Madden warehouse,” the Company's wholesale customers absorb most shipping costs. Shipping costs to wholesale customers incurred by the Company are not considered significant and are included in the Operating Expense line in the Consolidated Statements of Income. +[17] Employee benefit plan: +The Company maintains a tax-qualified 401(k) plan which is available to each of the Company's eligible employees who elect to participate after meeting certain length-of-service requirements. The Company made discretionary matching contributions of 50% of employees' contributions up to a maximum of 6% of employees' compensation which vest to the employees over a period of time. Total matching contributions to the plan for 2012 , 2011 and 2010 were approximately $1,206 , $844 and $675 , respectively. +F-11 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands except share and per share data) +NOTE A – Summary of Significant Accounting Policies (Continued) +[18] Derivative Instruments: +The Company uses derivative instruments to manage its exposure to cash-flow variability from foreign currency risk. Derivatives are carried on the balance sheet at fair value and included in prepaid expenses and other current assets. The Company applies cash flow hedge accounting for its derivative instruments. Net derivative gains and losses attributable to derivatives subject to cash flow hedge accounting reside in accumulated other comprehensive income and will be reclassified to earnings in future periods as the economic transactions to which the derivatives relate affect earnings. See Note L-Derivative Instruments. +Note B – Acquisitions +Steve Madden Canada +On February 21, 2012, the Company purchased all of the assets of Steve Madden Canada Inc., Steve Madden Retail Canada Inc., Pasa Agency Inc. and Gelati Imports Inc. (collectively, “SM Canada”), the Company’s sole distributor in Canada since 1994, comprising SM Canada’s footwear, handbags and accessories wholesale and retail businesses. The transaction was completed for cash consideration of approximately $29,367 plus potential earn-out payments of up to a maximum of $38,000 (Canadian dollars, which converts to approximately the same in U.S. dollars), in the aggregate, based on achievement of certain earnings targets for each of the twelve-month periods ending on March 31, 2013 through 2017, inclusive. The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of SM Canada during the earn-out period. As of December 31, 2012 , the Company estimates the fair value of the contingent consideration to be $19,975 . +The transaction was accounted for using the acquisition method required by GAAP. Accordingly, the assets and liabilities of SM Canada were adjusted to their fair values, and the excess of the purchase price over the fair value of the assets acquired, including identified intangible assets, was recorded as goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, which are subject to change. The purchase price, net of an estimated working capital adjustment of $2,681 , has been preliminarily allocated as follows: +Accounts receivable +$ +2,496 +Inventory +2,220 +Prepaid expenses and other assets +147 +Fixed assets +1,005 +Re-acquired right +35,200 +Customer relationships +4,400 +Non-compete agreement +455 +Accounts payable +(2,645 +) +Accrued expenses +(802 +) +Total fair value excluding goodwill +42,476 +Goodwill +4,185 +Net assets acquired +$ +46,661 +Prior to the acquisition, the Company and SM Canada had a preexisting relationship under which SM Canada had the exclusive right to use the Steve Madden brand throughout Canada in connection with the sale and distribution of merchandise. The settlement of the preexisting relationship is considered a re-acquired right and was valued based on the present value of estimated future cash flows. +F-12 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands except share and per share data) +Note B – Acquisitions (continued) +The purchase price and related allocation are preliminary and may be revised as a result of adjustments made to the purchase price as may be required as additional information regarding assets and liabilities is revealed. Contingent consideration, classified as a liability, will be remeasured at fair value at each reporting date, until the contingency is resolved, with changes recognized in earnings. The goodwill and other identifiable intangible assets related to this transaction are expected to be deductible for tax purposes over 15 years. +The Company incurred approximately $ 951 in acquisition-related costs applicable to the SM Canada transaction, $ 800 of which were incurred in 2012 . These expenses are included in operating expenses in the Company’s Consolidated Statements of Income. In connection with the acquisition, the Company provided an interest free loan to the seller of SM Canada in the principal amount of $ 3,107 Canadian dollars ($ 3,085 in U.S. dollars) pursuant to a promissory note. The note will be paid in five annual installments which are due on the dates the five annual earn-out payments are paid. To the extent the contingent consideration recorded above related to the earn-out is not achieved, the repayment terms of the note may result in less than the entire principal amount of the loan being paid. In such event, the unpaid principal amount of the note will be forgiven. The note was recorded net of the imputed interest, which will be amortized to income over the term of the note. +Cejon +On May 25, 2011, the Company acquired all of the outstanding shares of the capital stock of closely held Cejon, Inc. and Cejon Accessories, Inc. from the sole stockholder of these companies, as well as all of the outstanding membership interests in New East Designs, LLC (together with Cejon Inc. and Cejon Accessories, “Cejon”) from its members (together with the sole stockholder of Cejon, the “Cejon Sellers”). Founded in 1991, Cejon designs, markets and sells cold weather accessories, fashion scarves, wraps and other trend accessories primarily under the Cejon brand name, private labels and under the Steve Madden brand name. Cejon had been a licensee of the Company for cold weather and selected other fashion accessories since September 2006. Management expects the Cejon acquisition will further strengthen and expand the Company’s accessories platform. The acquisition was completed for consideration of approximately $29,502 cash plus potential contingent payments pursuant to an earn-out agreement with the Cejon Sellers. The earn-out agreement specifies two tiers of potential payments to the Cejon Sellers based on the financial performance of Cejon for each of the twelve-month periods ending on June 30, 2012 through 2016, inclusive. The tier one earn-out is based on a graduated percentage of EBITDA up to a maximum EBITDA of $11,000 in each of the earn-out periods, provided that the total aggregate payments under this tier do not exceed $25,000 . The tier two earn-out is based on a multiple of the amount that EBITDA exceeds certain levels in each of the earn-out periods, provided that the total aggregate payments under this tier do not exceed $33,000 . The earn-out payment for the period ended June 30, 2012 was paid in the third quarter of this year. +The transaction was accounted for using the acquisition method required by GAAP. Accordingly, the assets and liabilities of Cejon were adjusted to their fair values, and the excess of the purchase price over the fair value of the assets acquired, including identified intangible assets, was recorded as goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The purchase price, net of a working capital adjustment of $836 , has been allocated as follows: +F-13 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands except share and per share data) +Note B – Acquisitions (continued) +Accounts receivable +$ +3,631 +Inventory +3,998 +Prepaid expenses and other current assets +196 +Fixed assets +190 +Trade name +27,065 +Customer relationships +3,225 +Non-compete agreement +305 +Other assets +24 +Accounts payable +(1,318 +) +Accrued expenses +(2,242 +) +Total fair value excluding goodwill +35,074 +Goodwill +17,759 +Net assets acquired +$ +52,833 +Contingent consideration, classified as a liability, will be remeasured at fair value at each reporting date, until the contingency is resolved, with changes recognized in earnings. The goodwill and other identifiable intangibles related to this transaction are expected to be deductible for tax purposes over 15 years. +The Company incurred approximately $ 531 in acquisition-related costs applicable to the Cejon transaction during the year ended December 31, 2011. These expenses were included in operating expenses in the Company’s Consolidated Statements of Income for the year ended December 31, 2011. +Topline +On May 20, 2011, the Company acquired all of the outstanding shares of capital stock of the closely held company, The Topline Corporation ("Topline") from its sole stockholder (the “Topline Seller”). Founded in 1980, Topline and its subsidiaries design, manufacture, market and sell private label and branded women’s footwear primarily to value priced retailers, department stores, specialty retailers and mass merchants. Topline has sourcing capabilities, sample making facilities and product development capabilities in China, including personnel and facilities engaged in direct sourcing. Management believes that Topline is an excellent strategic fit for the Company. The acquisition was completed for consideration of approximately $56,128 cash, plus potential contingent payments pursuant to an earn-out agreement with the Topline Seller. The earn-out agreement provides for potential payments to the Topline Seller based on the financial performance of Topline for the twelve-month period ended on June 30, 2012. The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of Topline during the earn-out period (see Note F). +The transaction was accounted for using the acquisition method required by GAAP. Accordingly, the assets and liabilities of Topline were adjusted to their fair values, and the excess of the purchase price over the fair value of the assets acquired, including identified intangible assets, was recorded as goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The purchase price, net of working capital adjustment of $ 4,154 paid to the Topline Seller, has been allocated as follows: +F-14 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands except share and per share data) +Note B – Acquisitions (continued) +Accounts receivable +$ +55,950 +Inventory +8,460 +Prepaid expenses and other current assets +990 +Fixed assets +3,895 +Trade name +16,600 +Customer relationships +7,900 +Non-compete agreement +300 +Other assets +108 +Accounts payable +(40,475 +) +Accrued expenses +(7,784 +) +Income tax payable +(3,082 +) +Deferred tax liability +(8,491 +) +Total fair value excluding goodwill +34,371 +Goodwill +31,003 +Net assets acquired +$ +65,374 +Contingent consideration, classified as a liability, will be remeasured at fair value at each reporting date, until the contingency is resolved, with changes recognized in earnings. The trade name, customer relationships, non-compete agreement and goodwill related to this transaction are not deductible for tax purposes. +The Company incurred approximately $ 529 in acquisition related costs applicable to the Topline transaction during the year ended December 31, 2011. These expenses were included in operating expenses in the Company’s Consolidated Statements of Income. +The results of operations of SM Canada, Cejon and Topline have been included in the Company’s Consolidated Statements of Income from the date of the acquisitions. Unaudited pro forma information related to these acquisitions is not included, as the impact of these transactions is not material to the Company’s consolidated results. +Note C – Factor Receivable +The Company has a collection agency agreement with Rosenthal & Rosenthal, Inc. (“Rosenthal”) that became effective on September 15, 2009. The agreement can be terminated by the Company or Rosenthal at any time upon 60 days prior written notice. Under the agreement the Company can request advances from Rosenthal of up to 85% of aggregate receivables submitted to Rosenthal. The agreement provides the Company with a $30,000 credit facility with a $15,000 sub-limit for letters of credit at an interest rate based, at the Company’s election, upon either the prime rate or LIBOR. The Company also pays a fee based on a percentage of the gross invoice amount submitted to Rosenthal. Originally the fee was 0.275% of the gross invoice amount but, on July 10, 2012 the agreement was amended to reduce the fee to 0.25% . Rosenthal assumes the credit risk on a substantial portion of the receivables that the Company submits to it and, to the extent of any loans made to the Company, Rosenthal maintains a lien on all of the Company’s receivables to secure the Company’s obligations. +As of December 31, 2012 and 2011 , the Company assumed the credit risk on approximately $211 and $357 of factor receivables, respectively. +Rosenthal services the collection of the Company's accounts receivable. Funds collected by Rosenthal are applied against advances owed to Rosenthal (if any), and the balance is due and payable to the Company, net of any fees. The allowance against “factor receivables” is a projected provision based on certain formulas and prior approvals for markdowns, allowances, discounts, advertising and other deductions that customers may deduct against their payments. +F-15 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands except share and per share data) +Note D – Notes Receivable +As of December 31, 2012 and 2011, Notes Receivable were comprised of the following: +December 31, +2012 +December 31, +2011 +Due from Bakers Footwear Group, Inc. +$ +— +$ +4,092 +Due from Betsey Johnson LLC +— +3,309 +Due from seller of SM Canada (see Note B) +3,085 +— +Total +$ +3,085 +$ +7,401 +On August 26, 2010, the Company entered into a Debenture and Stock Purchase Agreement with Bakers Footwear Group, Inc. (“Bakers”) pursuant to which the Company paid $5,000 to acquire a subordinated debenture in the principal amount of $5,000 and 1,844,860 unregistered shares of Bakers common stock which traded on the Over-the-Counter Bulletin Board. The Company allocated $996 of the purchase price to the common stock and $4,004 to the subordinated debenture based upon their relative fair values. Interest accrues on the debenture at the rate of 11% per annum and is payable quarterly in cash. The principal amount of the debenture was payable by Bakers in four equal installments of $1,250 due on August 31, 2017, 2018, 2019 and 2020. The difference between the $4,004 purchase price of the debenture and the $5,000 principal amount of the debenture is considered original issue discount and is being amortized over the life of the debenture. During 2012 and 2011, the total amount of the discount amortized was $ 145 and $ 88 , bringing the value of the note to $ 4,148 and $ 4,092 , respectively. On October 3, 2012, Bakers filed for Chapter 11 protection in the United States Bankruptcy Court. As a consequence of the bankruptcy, the debenture due from Bakers (as well as the common stock) is considered impaired and, therefore, was deemed to have no value. Accordingly, a charge of $ 4,148 (as well as a charge of $996 for the write-off of Bakers common stock) was included in the Impairment charges and provision for litigation. In January 2013, Bakers announced it intends to liquidate or sell all of its remaining assets. +In April 2012, Betsey Johnson LLC filed for Chapter 11 protection in the United States Bankruptcy Court. Shortly thereafter, Betsey Johnson LLC announced that it would commence an orderly liquidation of all of its assets. As a consequence of the bankruptcy, the note receivable due from Betsey Johnson LLC is considered impaired, and accordingly, an impairment charge was recorded and the value of the note was reduced to its anticipated recovery of $ 500 in the second quarter of 2012. In the fourth quarter of 2012, the Company collected $ 1,522 and recorded a $ 1,022 benefit related to a greater-than-anticipated recovery of the notes receivable. +Note E – Note Receivable – Related Party +On June 25, 2007, the Company made a loan to Steve Madden, its Creative and Design Chief and a principal stockholder of the Company, in the amount of $3,000 in order for Mr. Madden to satisfy a personal tax obligation resulting from the exercise of options that were due to expire and to retain the underlying Company common stock, which he pledged to the Company as collateral to secure the loan. Mr. Madden executed a secured promissory note in favor of the Company bearing interest at an annual rate of 8% , which was due on the earlier of the date Mr. Madden ceases to be employed by the Company or December 31, 2007. The note was amended and restated as of December 19, 2007, to extend the maturity date to March 31, 2009, and amended and restated again as of April 1, 2009 to change the interest rate to 6% and extend the maturity date to June 30, 2015 at which time all principal and accrued interest would become due. On January 3, 2012, in connection with an amendment of Mr. Madden’s employment contract, the note was again amended and restated (the “Third Amended and Restated Note”) to extend the maturity date to December 31, 2023 and eliminate the accrual of interest after December 31, 2011. In addition, the Third Amended and Restated Note provides that, commencing on December 31, 2014, and annually on each December 31 thereafter through the maturity date, one-tenth of the principal amount thereof, together with accrued interest, will be cancelled by the Company, provided that Mr. Madden continues to be employed by the Company on each such December 31. As of December 31, 2011, $1,090 of interest has accrued on the principal amount of the loan related to the period prior to the elimination of the accrual of interest and has been reflected on the Company’s Consolidated Financial Statements. Due to the three-for-two stock split of the Company's common stock effected on May 3, 2010, the number of shares of the Company's common stock securing the loan increased from 510,000 shares to 765,000 shares. Based upon the increase in the market value of the Company’s common stock since the inception of the loan, on July 12, 2010, the Company released from its security interest 555,000 shares of the Company’s common stock, retaining +F-16 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands, except share and per share data) +Note E – Note Receivable – Related Party (continued) +210,000 shares with a total market value on that date of $6,798 , as collateral for the loan. Subsequently, pursuant to the three-for-two stock split of the Company's common stock effected on May 31, 2011, the number of shares of the Company's common stock securing the repayment of the loan has increased from 210,000 shares to 315,000 shares. On December 31, 2012 , the total market value of these shares was $ 13,315 . Pursuant to the elimination of further interest accumulation under the Third Amended and Restated Note, the outstanding principal and the accrued interest as of December 31, 2012 and 2011 has been discounted to reflect imputed interest, which will be amortized over the remaining life of the loan. +Note F – Fair Value Measurement +The accounting guidance under Accounting Standards Codification “Fair Value Measurements and Disclosures” (“ASC 820-10”) requires the Company to make disclosures about the fair value of certain of its assets and liabilities. ASC 820-10 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. ASC 820-10 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. A brief description of those three levels is as follows: +• +Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities. +• +Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. +• +Level 3: Significant unobservable inputs. +The Company’s financial assets and liabilities, subject to fair value measurements, as of December 31, 2012 and 2011 are as follows: +December 31, 2012 +Fair Value Measurements +Using Fair Value Hierarchy +Fair value +Level 1 +Level 2 +Level 3 +Assets: +Cash equivalents +$ +5,707 +$ +5,707 +$ +— +$ +— +Current marketable securities – available for sale +16,285 +16,285 +— +— +Forward contracts +161 +— +161 +— +Note receivable – related party +3,581 +— +— +3,581 +Note receivable – Seller of SM Canada +3,085 +— +— +3,085 +Long-term marketable securities – available for sale +81,202 +81,202 +— +— +Total assets +$ +110,021 +$ +103,194 +$ +161 +$ +6,666 +Liabilities: +Contingent consideration +$ +41,960 +— +— +$ +41,960 +Total liabilities +$ +41,960 +$ +— +$ +— +$ +41,960 +F-17 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands, except share and per share data) +Note F – Fair Value Measurement (continued) +December 31, 2011 +Fair Value Measurements +Using Fair Value Hierarchy +Fair value +Level 1 +Level 2 +Level 3 +Assets: +Cash equivalents +$ +57,652 +$ +57,652 +$ +— +$ +— +Current marketable securities – available for sale +5,659 +5,659 +— +— +Investment in Bakers +996 +— +996 +— +Note receivable – related party +4,090 +— +— +4,090 +Note receivable – Bakers +4,092 +— +— +4,092 +Note receivable – Betsey Johnson +3,309 +— +— +3,309 +Long-term marketable securities – available for sale +72,004 +72,004 +— +— +Total assets +$ +147,802 +$ +135,315 +$ +996 +$ +11,491 +Liabilities: +Contingent consideration +$ +37,921 +— +— +$ +37,921 +Total liabilities +$ +37,921 +$ +— +$ +— +$ +37,921 +Pursuant to the Debenture and Stock Purchase Agreement with Bakers (see Note D), the Company acquired 1,844,860 unregistered shares of Bakers common stock. At the time, Bakers common stock was thinly traded on the OTC Bulletin Board. These shares were valued using the quoted price of similar registered shares of Bakers common stock adjusted for the effect of the transfer restriction, considering factors such as the nature and duration of the transfer restriction, the volatility of the stock and the risk free interest rate. The shares were included in deposits and other assets on the Company’s Consolidated Balance Sheet for the fiscal year ended December 31, 2011. For the note receivable due from Bakers (see Note D), which was purchased at a substantial discount, the carrying value was determined to be the fair value. On October 3, 2012, Bakers filed for Chapter 11 protection in the United States Bankruptcy Court. As a consequence of the bankruptcy, Bakers common stock and the notes receivable, as well as account receivable due from Bakers, which had been valued at $996 , $4,148 and $852 , respectively, are considered impaired, and therefore were deemed to have no value. Accordingly, charges of $996 and $4,148 were included in the impairment charges and provision for litigation and a charge of $852 was included in commission and licensing fee income in the Consolidated Statements of Income for the fiscal year ended 2012. +Forward contracts are entered into to manage the risk associated with the volatility of future cash flows denominated in Mexican pesos. Fair vale of these instruments are based on observable market transactions of spot and forward rates. +For the note receivable due from related party (see Note D) and due from the sellers of SM Canada (see Note B), the carrying value was determined to be the fair value, based upon their actual interest rates, which approximate current market interest rates. +As of December 31, 2011 the Company had a note receivable related to the Betsey Johnson acquisition. In April 2012, Betsey Johnson LLC announced that it would commence an orderly liquidation under the protection of the United States Bankruptcy Court. During 2012, the note receivable due from Betsey Johnson LLC was reduced to reflect the anticipated future recoveries from the bankruptcy proceeding. During the fourth quarter of 2012, the Company received $ 1,522 in recoveries (see Note D). +The Company has recorded a liability for potential contingent consideration in connection with the February 21, 2012 acquisition of SM Canada (see Note B). Pursuant to the terms of an earn-out agreement between the Company and the seller of SM Canada, earn-out payments will be due annually to the seller of SM Canada based on the financial performance of SM Canada for each of the twelve-month periods ending on March 31, 2013 through 2017, inclusive. The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of SM Canada during the earn-out period. +F-18 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands, except share and per share data) +Note F – Fair Value Measurement (continued) +The Company has recorded a liability for potential contingent consideration in connection with the May 25, 2011 acquisition of Cejon (see Note B). Pursuant to the terms of an earn-out agreement between the Company and the sellers of Cejon, earn-out payments will be made annually to the sellers of Cejon, based on the financial performance of Cejon for each of the twelve-month periods ending on June 30, 2012 through 2016, inclusive. The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of Cejon during the earn-out period. The earn-out payment for the period ended June 30, 2012 was paid in the third quarter of this year. +The Company has recorded a liability for potential contingent consideration in connection with the May 20, 2011 acquisition of Topline (see Note B). Pursuant to the terms of the acquisition agreement, an earn-out payment was paid in 2012 to the Topline seller based on the financial performance of Topline for the twelve-month period ended June 30, 2012. The final payment approximated the liability recorded. +The Company has recorded a liability for contingent consideration as a result of the February 10, 2010 acquisition of Big Buddha, Inc. The contingent consideration will be payable to the seller of Big Buddha based on the financial performance of Big Buddha for the twelve-month period ending on March 31, 2013. The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of Big Buddha during the earn-out period. +Accounting guidance permits entities to choose to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The accounting guidance also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that chose different measurement attributes for similar assets and liabilities. The Company has elected not to measure any eligible items at fair value. +The carrying value of certain financial instruments such as accounts receivable, due from factor and accounts payable approximates their fair values due to the short-term nature of their underlying terms. The fair values of investment in marketable securities available for sale are determined by reference to market data and other valuation techniques, as appropriate. Fair value of the notes receivable held by the Company approximates their carrying value based upon their imputed or actual interest rate, which approximates current market interest rates. +Note G - Property and Equipment +The major classes of assets and total accumulated depreciation and amortization are as follows: +December 31, +2012 +2011 +Land and building +$ +767 +$ +767 +Leasehold improvements +55,005 +40,147 +Machinery and equipment +5,808 +5,833 +Furniture and fixtures +6,432 +5,893 +Computer equipment +30,676 +26,191 +98,688 +78,831 +Less accumulated depreciation and amortization +(53,403 +) +(47,244 +) +Property and equipment - net +$ +45,285 +$ +31,587 +Depreciation and amortization expense included in operating expenses amounted to approximately $ 8,501 in 2012 , $ 6,732 in 2011 and $ 5,824 in 2010 . +F-19 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands except share and per share data) +Note H – Goodwill and Intangible Assets +The following is a summary of the carrying amount of goodwill by segment as of December 31, 2012 and 2011: +Wholesale +Net Carrying +Footwear +Accessories +Retail +Amount +Balance at January 1, 2011 +$ +1,547 +$ +31,565 +5,501 +$ +38,613 +Acquisition of Cejon +— +17,590 +— +17,590 +Acquisition of Topline +19,392 +— +— +19,392 +Balance at December 31, 2011 +20,939 +49,155 +5,501 +75,595 +Purchase accounting adjustment +11,610 +169 +— +11,779 +Acquisition of SM Canada +3,841 +— +344 +4,185 +Balance at December 31, 2012 +$ +36,390 +$ +49,324 +$ +5,845 +$ +91,559 +Pursuant to the final reconciliation of assets and liabilities acquired in the Topline and Cejon acquisitions, adjustments to goodwill were recorded in the amount of $ 11,610 and $ 169 , respectively. +The following table details identifiable intangible assets as of December 31, 2012 and 2011: +2012 +Estimated Lives +Cost Basis +Accumulated Amortization +Net Carrying Amount +Trade names +6–10 years +$ +4,590 +$ +1,618 +$ +2,972 +Customer relationships +10 years +27,339 +7,541 +19,798 +License agreements +3–6 years +5,600 +5,600 +— +Non-compete agreement +5 years +2,440 +1,530 +910 +Other +3 years +14 +14 +— +39,983 +16,303 +23,680 +Re-acquired right +indefinite +35,200 +— +35,200 +Trade names +indefinite +76,888 +— +76,888 +$ +152,071 +$ +16,303 +$ +135,768 +2011 +Estimated Lives +Cost Basis +Accumulated Amortization +Net Carrying Amount +Trade names +6–10 years +$ +8,590 +$ +1,180 +$ +7,410 +Customer relationships +10 years +22,834 +4,999 +17,835 +License agreements +3–6 years +5,600 +5,600 +— +Non-compete agreement +5 years +1,985 +1,205 +780 +Other +3 years +14 +14 +— +39,023 +12,998 +26,025 +Trade names +indefinite +72,842 +— +72,842 +$ +111,865 +$ +12,998 +$ +98,867 +F-20 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands except share and per share data) +Note H – Goodwill and Intangible Assets (continued) +The amortization of intangible assets amounted to $ 3,305 for 2012 and $ 3,191 for 2011 and is included in operating expenses on the Company's Consolidated Statements of Income. The estimated future amortization expense of purchased intangibles for the next five years is as follows: +2013 +$ +3,351 +2014 +3,286 +2015 +3,101 +2016 +2,795 +2017 +2,554 +Thereafter +8,593 +Total +$ +23,680 +Note I – Stock-Based Compensation +In March 2006, the Board of Directors approved the Steven Madden, Ltd. 2006 Stock Incentive Plan (the “Plan”) under which nonqualified stock options, stock appreciation rights, performance shares, restricted stock, other stock-based awards and performance-based cash awards may be granted to employees, consultants and non-employee directors. The stockholders approved the Plan on May 26, 2006. On May 25, 2007, the stockholders approved an amendment to the Plan to increase the maximum number of shares that may be issued under the Plan from 2,700,000 to 3,487,500 . On May 22, 2009, the stockholders approved a second amendment to the Plan that increased the maximum number of shares that may be issued under the Plan to 9,144,000 . On May 25, 2012, the stockholders approved a third amendment to the Plan that increased the maximum number of shares that may be issued under the Plan to 15,644,000 . The following table summarizes the number of shares of common stock authorized for use under the Plan, the number of stock-based awards granted (net of expired or cancelled awards) under the Plan and the number of shares of common stock available for the grant of stock-based awards under the Plan: +Common stock authorized +15,644,000 +Stock-based awards, including restricted stock and stock options granted, net of expired or cancelled +(11,132,000 +) +Common stock available for grant of stock-based awards as of December 31, 2012 +4,512,000 +In accordance with accounting guidance relating to stock-based compensation, the Company records compensation for all awards based on the fair value of options and restricted stock on the date of grant. Equity-based compensation is included in operating expenses on the Company's Consolidated Statements of Income. For the years ended December 31, 2012 , 2011 and 2010 , total equity-based compensation was as follows: +Years Ended December 31, +2012 +2011 +2010 +Restricted stock +$ +11,622 +$ +5,787 +$ +3,724 +Stock options +5,812 +5,617 +4,547 +Total +$ +17,434 +$ +11,404 +$ +8,271 +The Company classifies cash flows resulting from the tax benefits from tax deductions in excess of the compensation costs recognized for those options (tax benefits) as financing cash flows. For the years ended December 31, 2012 , 2011 and 2010 , the Company realized a tax benefit from the exercise of stock options of $ 4,608 , $ 4,154 and $ 4,718 , respectively. +F-21 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands, except share and per share data) +Note I – Stock-Based Compensation (continued) +Stock Options +The total intrinsic value of options exercised during 2012 , 2011 and 2010 amounted to $ 15,386 , $ 10,768 and $ 11,684 respectively. During the years ended December 31, 2012 , 2011 and 2010 , 829,000 options with a weighted average exercise price of $19.15 , 860,000 options with a weighted average exercise price of $15.92 and 587,000 options with a weighted average exercise price of $ 11.20 vested, respectively. As of December 31, 2012 , there were unvested options relating to 1,158,000 shares of common stock with a total of $6,416 of unrecognized compensation cost and an average vesting period of 2 years. +The Company uses the Black-Scholes option-pricing model to estimate the fair value of options granted, which requires several assumptions. The expected term of the options represents the estimated period of time until exercise and is based on the historical experience of similar awards. Expected volatility is based on the historical volatility of the Company’s common stock. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. With the exception of special dividends paid in November 2005 and 2006, the Company historically has not paid regular cash dividends and thus the expected dividend rate is assumed to be zero. The following weighted average assumptions were used for stock options granted: +2012 +2011 +2010 +Volatility +40% to 47% +43% to 49% +47% to 52% +Risk-free interest rate +0.47% to 0.87% +0.61% to 1.78% +0.84% to 2.16% +Expected life in years +3 to 5 +2 to 4 +3 to 4 +Dividend yield +0.00% +0.00% +0.00% +Weighted average fair value +$14.15 +$10.97 +$8.53 +Activity relating to stock options granted under the Company’s plans and outside the plans during the three years ended December 31, 2012 is as follows: +Number of Shares +Weighted Average Exercise Price +Weighted Average Remaining Contractual Term +Aggregate Intrinsic Value +Outstanding at January 1, 2010 +2,423,000 +$ +9.12 +Granted +971,000 +$ +22.49 +Exercised +(647,000 +) +$ +8.00 +Cancelled/Forfeited +(44,000 +) +$ +16.03 +Outstanding at December 31, 2010 +2,703,000 +$ +14.08 +Granted +618,000 +$ +29.93 +Exercised +(439,000 +) +$ +11.39 +Cancelled/Forfeited +(179,000 +) +$ +19.42 +Outstanding at December 31, 2011 +2,703,000 +$ +17.79 +Granted +236,000 +40.63 +Exercised +(583,000 +) +15.91 +Cancelled/Forfeited +(87,000 +) +20.10 +Outstanding at December 31, 2012 +2,269,000 +$ +20.57 +4.0 years +$ +49,356 +Exercisable at December 31, 2012 +1,111,000 +$ +17.98 +3.7 years +$ +26,972 +F-22 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands, except share and per share data) +Note I – Stock-Based Compensation (continued) +The following table summarizes information about stock options at December 31, 2012: +Options Outstanding +Options Exercisable +Range of Exercise Price +Number Outstanding +Weighted Average Remaining Contractual Life (in Years) +Weighted Average Exercise Price +Number Exercisable +Weighted Average Exercise Price +$5.47 to $8.59 +851,000 +2.9 +$8.31 +565,000 +$8.27 +$13.07 to $18.33 +171,000 +3.9 +14.97 +58,000 +14.37 +$21.69 to $25.45 +602,000 +4.2 +23.87 +228,000 +23.46 +$25.75 to $31.75 +237,000 +5.2 +29.03 +49,000 +28.69 +$34.50 to $44.51 +408,000 +5.7 +38.70 +211,000 +36.60 +2,269,000 +4.0 +$20.57 +1,111,000 +$17.98 +Restricted Stock +The following table summarizes restricted stock activity during the three years ended December 31, 2012 : +Number of Shares +Weighted Average Fair Value at Grant Date +Outstanding at January 1, 2010 +671,000 +$ +13.98 +Granted +254,000 +$ +23.39 +Vested +(348,000 +) +$ +13.01 +Forfeited +(15,000 +) +$ +18.99 +Outstanding at December 31, 2010 +562,000 +$ +17.20 +Granted +383,000 +$ +31.65 +Vested +(239,000 +) +$ +15.56 +Forfeited +(35,000 +) +$ +28.44 +Outstanding at December 31, 2011 +671,000 +$ +25.44 +Granted +2,447,000 +$ +36.34 +Vested +(227,000 +) +$ +24.50 +Forfeited +(2,000 +) +$ +38.10 +Outstanding at December 31, 2012 +2,889,000 +$ +34.74 +As of December 31, 2012 , there was $90,642 of total unrecognized compensation cost related to restricted stock awards granted under the Plan. This cost is expected to be recognized over a weighted average of 9.9 years. +The Company determines the fair value of its restricted stock awards based on the market price of its common stock on the date of grant. The fair value of the restricted stock that vested during the years ended December 31, 2012 , 2011 and 2010 was $ 5,553 , $ 3,718 and $ 4,537 , respectively. +F-23 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands, except share and per share data) +Note I – Stock-Based Compensation (continued) +On January 3, 2012, the Company and its Creative and Design Chief, Steven Madden, entered into an amendment of Mr. Madden’s existing employment agreement, pursuant to which, on February 8, 2012, Mr. Madden was granted 975,371 restricted shares of the Company’s common stock at the then market price of $41.01 , which will vest in equal annual installments over a seven-year period commencing on December 31, 2017 and, thereafter, on each December 31 through December 31, 2023, subject to Mr. Madden’s continued employment on each such vesting date. Pursuant to the amended employment agreement, on June 30, 2012, Mr. Madden exercised his right to receive an additional restricted stock award, and on July 3, 2012 he was granted 1,262,228 restricted shares of the Company's common stock at the then market price of $31.69 , which will vest in the same manner as the prior grant. +Note J - Preferred Stock +The Company has authorized 5,000,000 shares of preferred stock. The Board of Directors has designated 60,000 shares of such preferred stock as Series A Junior Participating Preferred Stock (“Series A Preferred”). Holders of the shares of Series A Preferred are entitled to dividends equal to 1,000 times dividends declared or paid on the Company's common stock. Each share of Series A Preferred entitles the holder to 1,000 votes on all matters submitted to the holders of common stock. The Series A Preferred has a liquidation preference of $ 1,000 per share, and is not redeemable by the Company. No shares of preferred stock have been issued. +Note K - Rights Agreement +On October 30, 2001, the Company declared a dividend distribution of one preferred stock purchase right (a “Right”) for each outstanding share of common stock. Prior to a three-for-two stock split of the Company's outstanding shares of common stock on May 31, 2011, each Right entitled the holder to purchase from the Company four ten-thousandths (4/10,000) of a share of Series A Preferred at a price of $ 33.33 per four ten-thousandths (4/10,000) of a share. As a consequence of the aforementioned stock split, an automatic adjustment of each Right occurred pursuant to a Rights Agreement dated November 14, 2001 between the Company and American Stock Transfer and Trust Company (the “Rights Agreement”), following which each holder of a Right was then entitled to purchase from the Company three ten-thousandths (3/10,000) of a share of Series A Preferred at a price of $ 22.22 per three ten-thousandths (3/10,000) of a share. Initially, the Rights would not be exercisable and would automatically trade with the common stock. The Rights would become exercisable, in general, ten days following the announcement of a person or group acquiring beneficial ownership of at least 15% of the outstanding voting stock of the Company. Pursuant to the Rights Agreement, the Rights expired on November 14, 2011. +Note L - Derivative Instruments +The Company uses derivative instruments, specifically, forward foreign exchange contracts, to manage the risk associated with the volatility of future cash flows denominated in Mexican pesos. The foreign exchange contracts will be used to mitigate the impact of exchange rate fluctuations on forecasted purchases of inventory from Mexico and are designated as cash flow hedging instruments. As of December 31, 2012, the fair value of the Company's foreign currency derivatives, which is included on the Consolidated Balance Sheet in prepaid expenses and other current assets, is $161 . As of December 31, 2012, $87 of gains related to cash flow hedges are recorded in accumulated other comprehensive income, net of taxes and are expected to be recognized in earnings at the same time the hedged items affect earnings. As of December 31, 2012, none of the Company's hedging activities were considered ineffective and thus no gains and losses from hedging activities were recognized in the Consolidated Statement of Income. +F-24 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands, except share and per share data) +Note M - Operating Leases +The Company leases office, showroom and retail facilities under noncancelable operating leases with terms expiring at various times through 2023. Future minimum annual lease payments under noncancelable operating leases consist of the following at December 31: +2013 +$ +27,423 +2014 +26,760 +2015 +25,424 +2016 +24,172 +2017 +21,435 +Thereafter +63,561 +Total +$ +188,775 +A majority of the retail store leases provide for contingent rental payments if gross sales exceed certain targets. In addition, many of the leases contain rent escalation clauses to compensate for increases in operating costs and real estate taxes. Rent expense for the years ended December 31, 2012 , 2011 and 2010 was approximately $ 33,073 , $ 25,328 and $ 21,485 , respectively. Included in such amounts are contingent rents of $ 169 , $ 142 and $ 3 in 2012 , 2011 and 2010 , respectively. +Rent expense is calculated by amortizing total base rental payments (net of any rental abatements, construction allowances and other rental concessions), on a straight-line basis, over the lease term. Accordingly, rent expense charged to operations differs from rent paid resulting in the Company recording deferred rent. +Note N - Income Taxes +The components of income before income taxes are as follows: +2012 +2011 +2010 +Domestic +$ +123,691 +$ +117,497 +$ +88,308 +Foreign +60,496 +41,295 +37,549 +$ +184,187 +$ +158,792 +$ +125,857 +The income tax provision (benefit) consists of the following: +2012 +2011 +2010 +Current: +Federal +$ +41,280 +$ +43,953 +$ +36,482 +State and local +10,319 +8,560 +8,253 +Foreign +11,035 +6,814 +6,195 +62,634 +59,327 +50,930 +Deferred: +Federal +2,272 +1,588 +(651 +) +State and local +(396 +) +676 +(147 +) +Foreign +113 +— +— +1,989 +2,264 +(798 +) +$ +64,623 +$ +61,591 +$ +50,132 +F-25 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands, except share and per share data) +Note N - Income Taxes (continued) +A reconciliation between taxes computed at the federal statutory rate and the effective tax rate is as follows: +December 31, +2012 +2011 +2010 +Income taxes at federal statutory rate +35.0 +% +35.0 +% +35.0 +% +Effects of foreign operations +(3.3 +) +— +— +State and local income taxes - net of federal income tax benefit +3.4 +3.9 +3.9 +Nondeductible items +0.1 +0.3 +0.2 +Valuation allowance (reversal) +(0.3 +) +(0.4 +) +0.5 +Other +0.2 +— +0.2 +Effective rate +35.1 +% +38.8 +% +39.8 +% +The Company applies the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. +In accordance with accounting guidance, the Company has opted to classify interest and penalties that would accrue according to the provisions of relevant tax law as income tax expense on the Consolidated Statements of Income. The Company determines the amount of interest expense to be recognized by applying the applicable statutory rate of interest to the difference between the tax position recognized and the amount previously taken or expected to be taken on a tax return. The Company's tax years 2009 through 2012 remain open to examination by most taxing authorities. The Company has no unrecognized tax benefits recorded as of the year ended December 31, 2012. +F-26 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands, except share and per share data) +Note N - Income Taxes (continued) +The components of deferred tax assets and liabilities are as follows: +December 31, +2012 +2011 +Current deferred tax assets (liabilities): +Receivable allowances +$ +9,005 +$ +7,246 +Inventory +1,588 +1,975 +Unrealized (gain) loss +58 +(6 +) +Accrued expenses +496 +496 +Other +(74 +) +595 +Gross current deferred tax asset +11,073 +10,306 +Valuation allowance +— +(595 +) +11,073 +9,711 +Non-current deferred tax assets (liabilities): +Depreciation and amortization +(1,982 +) +(1,889 +) +Deferred compensation +8,200 +4,902 +Unremitted earnings of foreign subsidiaries +(10,224 +) +— +Deferred rent +2,991 +2,388 +Amortization of goodwill +(3,097 +) +(2,504 +) +Unrealized (gain) loss +(1,073 +) +(561 +) +Other +68 +92 +(5,117 +) +2,428 +Deferred tax assets +$ +5,956 +$ +12,139 +The Company's consolidated financial statements provide for any related tax liability on amounts that may be repatriated from foreign operations, aside from undistributed earnings of certain of the Company's foreign subsidiaries that are intended to be indefinitely reinvested in operations outside the U.S. The deferred tax liability of $ 10,224 reflects the amounts that may be repatriated from foreign operations. A portion of the amount established in the current year was based on the finalization of the purchase accounting in 2012 of Topline. The total amount of indefinitely reinvested earnings of foreign subsidiaries as of December 31, 2012 was $ 27,100 . Accordingly, no provision has been made for United States income taxes which may become payable if those undistributed earnings of foreign subsidiaries are paid as dividends. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, is subject to many variables and is dependent on circumstances existing if and when remittance occurs. +Note O – Commitments, Contingencies and Other +[1] Legal Proceedings: +(a) +On February 2, 2012, two individuals purporting to be stockholders of the Company commenced separate civil actions in the Supreme Court of New York, Queens County, Mark Ioffe, Derivatively on Behalf of Nominal Defendant Steven Madden, Ltd. v. Steven Madden, et. al , No. 700188-2012 (the “Ioffe Action”) and Catherine L. Phillips, Derivatively on Behalf of Nominal Defendant Steven Madden, Ltd. v. Steven Madden, et. al , No. 700189-2012 (together with the Ioffe Action, the “Actions”). The Actions asserted derivative claims challenging the decision of the Company's Board of Directors in January 2012 to amend Steven Madden's employment agreement dated July 15, 2005, and amended as of December 14, 2009 and to amend the promissory note setting forth Mr. Madden's +F-27 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands, except share and per share data) +Note O – Commitments, Contingencies and Other (continued) +obligations in respect of a loan made by the Company to Mr. Madden in 2007 and amended in 2009 and claimed, among other things, that the Board violated its duties of loyalty and good faith by approving the amendments. The Actions also asserted claims of unjust enrichment against Mr. Madden. The Company and the other defendants filed a motion for dismissal of the Actions, which was granted by the court on September 13, 2012. The plaintiffs did not file a notice of appeal with respect to the dismissal of the Actions and the time period for filing an appeal has now expired. +(b) +On July 19, 2011, an individual purporting to act on behalf of a class of similarly situated individuals commenced a civil action in the United States District Court for the Central District of California, Samantha Ellison, individually and on behalf of a class of similarly situated individuals v. Steven Madden, Ltd., No. CV11-05935 (the “Ellison Action”) asserting that the Company made unsolicited commercial text calls to wireless telephone numbers of the class members in violation of the Telephone Consumers Protection Act (the "TCPA") and seeking, on behalf of the class, an injunction requiring the Company to cease all wireless text messages without prior written consent as required by the TCPA, as well as the recovery of statutory damages to the class members together with costs and reasonable attorneys' fees. The Company responded by challenging the suit on several grounds. Settlement discussions resulted in a settlement being reached on July 30, 2012, subject to final court approval, for an aggregate gross settlement fund amount of $10,000 , including all settlement costs and administration fees, as well as fees recoverable by class counsel. As the settlement calls for the reversion of all monies not paid to class claimants, it is possible that the actual settlement amount paid will be substantially less than $10,000 . In addition, the Company's insurance coverage will cover a portion of the settlement at the rate of 45% of the initial settlement payment of $5,000 and 30% of amounts over and above the initial settlement payment. On September 25, 2012 the court certified the class for settlement purposes only and approved the settlement on a preliminary basis. The court further ordered all litigants to make further submissions to the court concerning, among other things, the merits and value of the case and to deliver notice of the proposed settlement to all class members prior to a fairness hearing and final approval of the settlement. Based on the settlement as contemplated and applying the insurance coverage as applicable, the maximum +exposure to the Company is approximately $6,250 ; however, in light of historical "take rates" in cases of this type, the Company's counsel estimates that the actual liability to the Company will likely be $2,500 or less. Accordingly, the Company recorded a liability in the amount of $2,500 in the second quarter of 2012 and subsequently paid this amount in 2012 pursuant to the preliminary settlement agreement. +(c) +On August 10, 2005, following the conclusion of an audit of the Company conducted by auditors for U.S. Customs and Border Protection (“U.S. Customs”) during 2004 and 2005, U.S. Customs issued a report that asserts that certain commissions that the Company treated as “buying agents’ commissions” (which are non-dutiable) should be treated as “selling agents’ commissions” and hence are dutiable. Subsequently, U.S. Immigration and Customs Enforcement notified the Company’s legal counsel that a formal investigation of the Company’s importing practices had been commenced as a result of the audit. In September 2007, U.S. Customs notified the Company that it had finalized its assessment of the underpaid duties at $1,400 . The Company, with the advice of legal counsel, evaluated the liability in the case, including additional duties, interest and penalties, and believed that it was not likely to exceed $3,045 , and accordingly, a liability for this amount was recorded as of December 31, 2009. The Company contested the conclusions of the U.S. Customs audit and filed a request for review and issuance of rulings thereon by U.S. Customs Headquarters, of Regulations and Rulings, under internal advice procedures. On September 20, 2010, U.S. Customs issued a ruling in the matter, concluding that the commissions paid by the Company pursuant to buying agreements entered into by the Company and one of its two buying agents under review were bona fide buying-agent commissions and, therefore, were non-dutiable. With respect to the second buying agent, U.S. Customs also ruled that beginning in February 2002, commissions paid by the Company were bona fide buying agent commissions and, therefore, were non-dutiable. However, U.S. Customs found that the Company’s pre-2002 buying agreements with the second agent were legally insufficient to substantiate a buyer-buyer’s agent relationship between the Company and the agent and that commissions paid to the second agent under such buying agreements, in fact, were dutiable. On the basis of the U.S. Customs ruling, the Company reevaluated the liability in the case and believes that it is not likely to exceed $1,248 and the liability was reduced from $3,045 to such amount as of September 30, 2010. +On November 21, 2011, U.S. Customs issued a pre-penalty notice to the Company in which it alleges that gross negligence by the Company resulted in an underpayment of duties with respect to certain pre-2002 buying agreements +F-28 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands, except share and per share data) +Note O – Commitments, Contingencies and Other (continued) +and claims that the Company owes $342 as an additional duty and $1,367 in monetary penalties. In its February 16, 2012 response to the pre-penalty notice, the Company submitted that it owes no additional duty and, further, did not through negligence or gross negligence fail to pay any duty or engage in conduct amounting to either gross negligence or negligence. The Company requested that U.S. Customs withdraw its proposal to issue a notice of penalty and take no further adverse action against the Company. In the event that U.S. Customs is not inclined to withdraw the pre-penalty notice after review of the Company’s response, the Company has requested the opportunity to make an oral presentation to U.S. Customs prior to the issuance of a notice of penalty. In the event that U.S. Customs determines to issue a notice of penalty, the Company intends to file a petition for relief requesting a reduction of the level of culpability and mitigation of the penalty amount assessed. The maximum total amount of damages related to this matter is approximately $1,700 for which the Company has accrued $1,248 . +(d) +The Company has been named as a defendant in certain other lawsuits in the normal course of business. In the opinion of management, after consulting with legal counsel, the liabilities, if any, resulting from these matters should not have a material effect on the Company’s financial position or results of operations. It is the policy of management to disclose the amount or range of reasonably possible losses in excess of recorded amounts. +[2] Employment agreements: +Robert Schmertz. Effective January 1, 2013, the Company entered into a new employment agreement with Robert Schmertz, the Company's Brand Director, to replace an existing employment agreement that expired at the end of 2012. The new agreement, which expires on December 31, 2014, provides for an annual salary of $ 725 . In addition, pursuant to his new employment agreement, on January 4, 2013, Mr. Schmertz received a grant of 16,667 shares of the Company's common stock subject to certain restrictions. The restricted shares were issued under the Company's 2006 Stock Incentive Plan, as amended, and will vest in five substantially equal annual installments over five years commencing on the first anniversary of the date of the grant. Additional compensation and bonuses, if any, are at the sole discretion of the Board of Directors. +Edward R. Rosenfeld. On December 31, 2012, the Company entered into a new employment agreement with Edward R. Rosenfeld, the Company's Chief Executive Officer and the Chairman of the Board of Directors, to replace an existing employment agreement that expired on December 31, 2012. The agreement, which expires on December 31, 2015, provides for an approximate annual salary of $ 579 through December 31, 2013, $ 608 in 2014 and $ 638 in 2015. In addition, pursuant to his new employment agreement, Mr. Rosenfeld received a grant of 100,000 shares of the Company's common stock subject to certain restrictions. The restricted shares were issued under the Company's 2006 Stock Incentive Plan, as amended, and will vest in equal annual installments over a five -year period commencing on December 1, 2013. Additional compensation and bonuses, if any, are at the sole discretion of the Board of Directors. +Steven Madden. On January 3, 2012, the Company and its Creative and Design Chief, Steven Madden, entered into an amendment, dated as of December 31, 2011, to Mr. Madden's existing employment agreement with the Company (the “Amended Madden Agreement”). The Amended Madden Agreement, which extends the term of Mr. Madden's employment through December 31, 2023, provides for an annual base salary of approximately $ 5,417 in 2012, approximately $ 7,417 in 2013, approximately $ 9,667 in 2014, approximately $ 11,917 in 2015 and approximately $ 10,698 in 2016 and in each year thereafter through the end of the term of employment. Effective in 2012, the Amended Madden Agreement eliminates the annual cash bonuses payable to Mr. Madden based on EBITDA and the annual cash bonus in relation to new business contained in Mr. Madden's previously existing employment agreement and provides that all future cash bonuses will be at the sole discretion of the Company's Board of Directors. Further, the Amended Madden Agreement eliminates the annual non-accountable expense allowance of up to $ 200 provided to Mr. Madden under the previously existing employment agreement. Pursuant to the Amended Madden Agreement, on February 8, 2012, Mr. Madden was granted 975,371 restricted shares of the Company's common stock valued at approximately $ 40,000 , which will vest in equal annual installments over seven years commencing on December 31, 2017 through December 31, 2023, subject to Mr. Madden's continued employment with the Company on each such vesting date. Pursuant to the Amended Madden Agreement, on June 30, 2012, Mr. Madden exercised his right to receive an additional restricted stock award, and on July 3, 2012 he was granted 1,262,228 restricted shares of the Company's common stock, which will vest in the same manner as the February 8, 2012 grant. As consideration for the additional restricted stock grant, Mr. Madden will +F-29 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands, except share and per share data) +Note O – Commitments, Contingencies and Other (continued) +receive a reduction in his annual base salary in years subsequent to 2012 as follows: approximately $ 4,000 in 2013, approximately $ 6,125 in 2014, approximately $ 8,250 in 2015 and approximately $ 7,026 in 2016 and in each year thereafter through the end of the term of employment. In addition to the opportunity for discretionary cash bonuses, the Amended Madden Agreement entitles Mr. Madden to an annual life insurance premium reimbursement of up to $ 200 , as well as an annual stock option grant and the potential for an additional one-time stock option grant based upon achievement of certain financial performance criteria. The Amended Madden Agreement also provides for the elimination of interest accrued after December 31, 2011 on an outstanding loan in the original principal amount of $ 3,000 made by the Company to Mr. Madden, the extension of the maturity date of such loan until December 31, 2023, and the forgiveness of 1/10th of the principal amount of the loan, together with accrued interest, annually over a ten-year period commencing on December 31, 2014 for so long as Mr. Madden continues to be employed by the Company on each such December 31st. +Arvind Dharia. On February 8, 2012, the Company and its Chief Financial Officer, Arvind Dharia, entered into an amendment of Mr. Dharia's existing employment agreement. The amendment, among other things, extends the term of Mr. Dharia's employment agreement, which was set to expire at the end of 2011, until December 31, 2014 and increases his annual base salary to $ 555 effective January 1, 2012 through the remainder of the term. Pursuant to the amendment, on February 8, 2012, Mr. Dharia received a restricted stock award for 10,000 restricted shares of the Company's common stock, which will vest in substantially equal annual installments over a three -year period commencing on February 8, 2013 through February 8, 2015. The agreement, as amended, provides for an annual bonus to Mr. Dharia at the discretion of the Board of Directors. +Amelia Newton Varela. Effective January 1, 2011, the Company entered into an employment agreement with Amelia Newton Varela, the Company's Executive Vice President of Wholesale, to replace an existing employment agreement that expired at the end of 2010. The agreement provides for an annual salary of $ 450 through December 31, 2013 and provides the opportunity for annual cash incentive bonuses. In addition, on February 1, 2011, Ms. Varela received an option to purchase 100,000 shares of common stock at the market value on the date of grant, which will vest in equal annual installments over a four-year period commencing on the first anniversary of the grant date. +Awadhesh Sinha. Effective January 1, 2011, the Company entered into a new employment agreement with Awadhesh Sinha, the Company's Chief Operating Officer, to replace an existing employment agreement that expired at the end of 2010. The agreement provides for an annual salary of $ 575 through December 31, 2013. In addition, on December 1, 2010, Mr. Sinha received a grant of 35,000 shares of restricted common stock, which will vest in equal annual installments over a three -year period commencing on the first anniversary of the grant date. Additional compensation and bonuses, if any, are at the discretion of the Board of Directors. +[3] Letters of credit: +At December 31, 2012 , the Company had open letters of credit for the purchase of imported merchandise of approximately $ 1,072 . +[4] License agreements: +On February 9, 2011, the Company entered into a license agreement with Basic Properties America Inc. and BasicNet S.p.A, under which the Company has the right to use the Superga® trademark in connection with the sale and marketing of women's footwear. The agreement requires the Company to pay the licensor a royalty equal to a percentage of net sales and a minimum royalty in the event that specified net sales targets are not achieved. The agreement expires on December 31, 2013, with one four-year renewal period, at the Company's option, if certain provisions are met. +On January 1, 2010, the Company entered into a license agreement with Jones Investment Co. Inc., under which the Company has the right to use the GLO Jeans® trademark in connection with the sale and marketing of women's footwear exclusively to K-Mart. The agreement requires the Company to pay the licensor a royalty and advertising payments +F-30 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands, except share and per share data) +Note O – Commitments, Contingencies and Other (continued) +equal to a percentage of net sales and a minimum royalty and advertising payment in the event that specified net sales targets are not achieved. The agreement which expired on December 31, 2012, was renewed for an additional three-year term and will now expire on December 31, 2015. +In September 2009, the Company entered into a license agreement with Dualstar Entertainment Group, LLC, under which the Company has the right to use the Olsenboye® trademark in connection with the marketing and sale of footwear and accessories. The agreement requires the Company to make royalty and advertising payments equal to a percentage of net sales and a minimum royalty and advertising payment in the event that specified net sales targets are not achieved. The initial term of this agreement, which expired on December 31, 2011, was renewed for an additional two-year term and will now expire on December 31, 2013. +On September 10, 2008, the Company entered into a license agreement with Dualstar Entertainment Group, LLC, under which the Company has the right to use the Elizabeth and James® trademark in connection with the sale and marketing of footwear. The agreement requires the Company to make royalty and advertising payments equal to a percentage of net sales and a minimum royalty and advertising payment in the event that specified net sales targets are not achieved. The agreement expires on March 31, 2015. +On July 1, 2008, the Company entered into a license agreement with Jones Investment Co. Inc., under which the Company has the right to use the l.e.i.® trademark in connection with the sale and marketing of women's footwear exclusively to Wal-Mart. The agreement requires the Company to pay the licensor a royalty and advertising payments equal to a percentage of net sales and a minimum royalty and advertising payment in the event that specified net sales targets are not achieved. The initial term of this agreement, which expired on December 31, 2011, was renewed for an additional three-year term, which will expire on December 31, 2014. +On March 28, 2007, the Company, through its Accessories Division, entered into a license agreement to design, manufacture and distribute handbags and belts and related accessories under the DF Daisy Fuentes® and the Daisy Fuentes® brands. The agreement requires the Company to pay the licensor a royalty and brand management fees based on a percentage of net sales and a minimum royalty in the event that specified net sales targets are not achieved. The agreement expired on December 31, 2012 and was not renewed. +Royalty expenses are included in the “cost of goods sold” section of the Company's Consolidated Statements of Income. +[5] Related Party Transactions: +On February 23, 2012, the Company entered into an agreement (the "2012 Consulting Agreement") with JLM Consultants, Inc., a company wholly owned by John Madden, one of the Company's directors and the brother of Steven Madden, the Company's founder and Creative and Design Chief, which replaced an earlier consulting agreement (the "2004 Consulting Agreement") between the Company and JLM Consultants, Inc. that had expired by its terms on December 31, 2005 but under which JLM Consultants, Inc. had continued to provide consulting services for the consideration provided in the 2004 Consulting Agreement. Under the 2012 Consulting Agreement, Mr. Madden and JLM Consultants, Inc. will continue to provide consulting services with respect to the development of international sales of the Company. JLM Consultants, Inc. received fees and expenses of $ 1,447 in fiscal year 2012 pursuant to the 2012 Consulting Agreement and $ 1,552 and $ 1,006 in 2011 and 2010 , respectively, pursuant to the 2004 Consulting Agreement, in addition to fees that Mr. Madden received for his service to the Company as a director in 2011 and 2010. +[6] Concentrations: +The Company maintains cash and cash equivalents with various major financial institutions which at times are in excess of the amount insured. In addition, the Company's marketable securities are principally held at four brokerage companies . +During the year ended December 31, 2012 , the Company did not purchase more that 10% of its merchandise from any single supplier. Total product purchases from China for the year ended December 31, 2012 was approximately 88% . +F-31 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands, except share and per share data) +Note O – Commitments, Contingencies and Other (continued) +During the year ended December 31, 2011 , the Company did not purchase more that 10% of its merchandise from any single supplier. Total product purchases from China for the year ended December 31, 2011 was approximately 90% . +During the year ended December 31, 2010 , the Company purchased approximately 13% and 12% of its merchandise from two suppliers in China. Total product purchases from China for the year ended December 31, 2010 was approximately 89% . +For the year ended December 31, 2012 , the Company did not have any customers who account for more than 10% of total net sales or 10% of total accounts receivable. +For the year ended December 31, 2011 , the Company did not have any customers who account for more than 10% of total net sales or 10% of total accounts receivable. +Sales to one customer accounted for 10% of total net sales for the year ended December 31, 2010 . Three other customers represented 12% , 12% and 11% of accounts receivable at December 31, 2010 . +Sales to such customers are included in the Wholesale segment (see Note P). Purchases are made primarily in United States dollars. +[7] Valuation and qualifying accounts: +The following is a summary of the allowance for chargebacks and doubtful accounts related to accounts receivable and the allowance for chargebacks related to the amount due from factor for the years ended: +December 31, +2012 +2011 +2010 +Balance at beginning of year +$ +18,219 +$ +15,258 +$ +13,682 +Charged to reserve +— +— +— +Increase in reserve +4,218 +2,961 +1,576 +Balance at end of year +$ +22,437 +$ +18,219 +$ +15,258 +The following is a summary of goodwill and the related accumulated amortization for the: +Year Ended December 31, +2012 +2011 +2010 +Cost basis +Balance at beginning of year +$ +76,193 +$ +39,211 +$ +24,911 +Acquisitions and purchase price adjustments +15,964 +36,982 +14,300 +Write-off of impaired assets +— +— +— +Balance at end of year +92,157 +76,193 +39,211 +Accumulated amortization +Balance at beginning of year +598 +598 +598 +Write-off of impaired assets +— +— +— +Balance at end of year +598 +598 +598 +Goodwill +$ +91,559 +$ +75,595 +$ +38,613 +F-32 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands, except share and per share data) +Note P – Operating Segment Information +The Company operates the following business segments: Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing. The Wholesale Footwear segment, through sales to department stores, mid-tier retailers, mass market merchants and specialty stores, derives revenue, both domestically and worldwide through our International business, from sales of branded and private label women’s, men’s, girls’ and children’s footwear. The Wholesale Accessories segment, which includes branded and private label handbags, belts and small leather goods as well as cold weather and selected other fashion accessories, derives revenue, both domestically and worldwide through our International business, from sales to department stores, mid-tier retailers, mass market merchants and specialty stores. Our Wholesale Footwear and Wholesale Accessories segments, through our International business, derive revenue from Canada and, under special distribution arrangements, from Asia, Europe, the Middle East, Mexico, Australia, India, South Africa and South America. The Retail segment, through the operation of Company-owned retail stores in the United States and Canada and the Company’s websites, derives revenue from sales of branded women’s, men’s and children’s footwear, accessories and licensed products to consumers. The First Cost segment represents activities of a subsidiary which earns commissions for serving as a buying agent of footwear products to mass-market merchandisers, mid-tier department stores and other retailers with respect to their purchase of footwear. In the Licensing segment, the Company licenses its Steve Madden® and Steven by Steve Madden® trademarks and other trademark rights for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery and women's fashion apparel, jewelry and luggage. In addition, this segment licenses the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, swimwear, eyewear, watches, fragrances and outerwear. +F-33 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands, except share and per share data) +Note P – Operating Segment Information (continued) +Year ended +Wholesale Footwear +Wholesale Accessories +Total Wholesale +Retail +First Cost +Licensing +Corporate +Consolidated +December 31, 2012: +Net sales to external customers +$ +794,486 +$ +241,339 +$ +1,035,825 +$ +191,247 +$ +— +$ +— +$ +— +$ +1,227,072 +Gross profit +249,547 +87,055 +336,602 +119,100 +— +— +— +455,702 +Commissions and licensing fees – net +— +— +— +— +7,778 +7,617 +— +15,395 +Income from operations +104,326 +41,376 +145,702 +26,311 +7,778 +7,617 +(8,432 +) +178,976 +Depreciation and amortization +7,717 +4,818 +107 +— +— +12,642 +Segment assets +$ +511,011 +$ +138,602 +649,613 +101,674 +52,752 +— +— +804,039 +Capital expenditures +$ +7,506 +$ +12,596 +$ +— +$ +— +$ +— +$ +20,102 +December 31, 2011: +Net sales to external customers +$ +636,809 +$ +176,824 +$ +813,633 +$ +154,916 +$ +— +$ +— +$ +— +$ +968,549 +Gross profit +205,379 +61,474 +266,853 +95,095 +— +— +— +361,948 +Commissions and licensing fees – net +— +— +— +— +9,795 +8,920 +$ +— +18,715 +Income from operations +86,676 +28,009 +114,685 +20,370 +9,795 +8,920 +— +153,770 +Depreciation and amortization +6,604 +4,378 +78 +— +— +11,060 +Segment assets +$ +383,170 +$ +132,648 +515,818 +76,630 +47,338 +— +— +639,786 +Capital expenditures +$ +10,314 +$ +5,163 +$ +— +$ +— +$ +— +$ +15,477 +December 31, 2010: +Net sales to external customers +$ +402,567 +$ +98,548 +$ +501,115 +$ +134,303 +$ +— +$ +— +$ +— +$ +635,418 +Gross profit +156,603 +37,926 +194,529 +81,325 +— +— +— +275,854 +Commissions and licensing fees – net +— +— +— +— +17,258 +5,371 +— +22,629 +Income from operations +75,543 +14,323 +89,866 +9,129 +17,258 +5,371 +— +121,624 +Depreciation and amortization +5,164 +4,631 +204 +— +— +9,999 +Segment assets +$ +268,544 +$ +71,856 +340,400 +65,835 +41,461 +— +— +447,696 +Capital expenditures +$ +1,020 +$ +2,404 +$ +— +$ +— +$ +— +$ +3,424 +Revenues by geographic area are as follows: +Year Ended December 31, +2012 +2011 +2010 +Domestic +$ +1,133,077 +$ +915,286 +$ +600,637 +International +93,995 +53,263 +34,781 +Total +$ +1,227,072 +$ +968,549 +$ +635,418 +F-34 +STEVEN MADDEN, LTD. AND SUBSIDIARIES +Notes to Consolidated Financial Statements +December 31, 2012 and 2011 +($ in thousands, except share and per share data) +Note Q - Quarterly Results of Operations (unaudited) +The following is a summary of the quarterly results of operations for the years ended December 31, 2012 and 2011 : +March 31, +June 30, +September 30, +December 31, +2012: +Net sales +$ +265,970 +$ +288,692 +$ +356,883 +$ +315,527 +Cost of sales +169,877 +184,438 +225,668 +191,387 +Gross profit +96,093 +104,254 +131,215 +124,140 +Commissions, royalty and licensing fee income - net +4,473 +4,252 +3,875 +2,795 +Net income attributable to Steven Madden, Ltd. +$ +21,868 +$ +26,899 +$ +37,896 +$ +32,963 +Net income per share: +Basic +0.51 +0.63 +0.88 +0.76 +Diluted +0.50 +0.61 +0.86 +0.74 +2011: +Net sales +$ +165,755 +$ +209,152 +$ +313,887 +$ +279,755 +Cost of sales +96,623 +125,057 +204,434 +180,487 +Gross profit +69,132 +84,095 +109,453 +99,268 +Commissions, royalty and licensing fee income - net +4,567 +4,432 +5,649 +4,067 +Net income attributable to Steven Madden, Ltd. +$ +17,852 +$ +23,784 +$ +31,911 +$ +23,772 +Net income per share: +Basic +0.43 +0.56 +0.75 +0.56 +Diluted +0.42 +0.55 +0.74 +0.55 +F-35 +Exhibit Index +2.01 +Stock Purchase Agreement dated February 10, 2010 between the Company and Jeremy Bassan (incorporated by reference to Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2010 filed with the SEC on November 9, 2010) +2.02 +Restructuring Agreement dated October 5, 2010 among the Company, BJ Acquisition LLC, BJ Agent LLC, Betsey Johnson LLC, Betsey Johnson (UK) Limited, Betsey Johnson Canada Ltd., BJ Vines, Inc., Betsey Johnson, Chantal Bacon, Castanea Family Investments, LLC, Castanea Family Holdings, LLC and Castanea Partners Fund III, L.P. (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on October 8, 2010) +2.03 +Stock Purchase Agreement dated May 20, 2011 among the Company, The Topline Corporation and William F. Snowden (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on May 25, 2011) +2.04 +Stock Purchase Agreement dated May 25, 2011 among the Company, David Seerherman, Cejon, Inc., and Kenneth Rogala (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on May 26, 2011) +2.05 +Asset Purchase Agreement, dated as of January 20, 2012, among Steve Madden Canada Inc., Steve Madden Retail Canada Inc., Pasa Agency Inc., Gelati Imports Inc., the Company, SML Canada Acquisition Corp., 6798039 Canada Inc., 6798012 Canada Inc., 3574563 Canada Inc. and Thomas Alberga (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on January 26, 2012) +3.01 +Certificate of Incorporation of Steven Madden, Ltd. (incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K filed with the SEC on November 23, 1998) +3.02 +Amended & Restated By-Laws of Steven Madden, Ltd. (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the SEC on March 28, 2008) +4.01 +Specimen Certificate for shares of Common Stock (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form SB-2/A filed with the SEC on September 29, 1993) +10.01 +Third Amended and Restated Secured Promissory Note dated as of June 25, 2007 of Steven H. Madden to the Company (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on January 9, 2012) +10.02 +Consulting Agreement dated February 23, 2012 between the Company and J.L.M. Consultants Inc. † +10.03 +Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and the Company (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2010 filed with the SEC on November 9, 2010) +10.04 +Amendment to Collection Agency Agreement dated February 16, 2010 between Rosenthal & Rosenthal, Inc. and the Company (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2010 filed with the SEC on March 12, 2010) +10.05 +Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and Daniel Friedman & Associates, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on July 16, 2009) +10.06 +Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and Diva Acquisition Corp. (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the SEC on July 16, 2009) +10.07 +Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and Steven Madden Retail, Inc. (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed with the SEC on July 16, 2009) +10.08 +Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and Stevies, Inc. (incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed with the SEC on July 16, 2009) +10.09 +Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and SML Acquisition Corp. (incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed with the SEC on July 16, 2009) +10.10 +Letter Agreement dated July 10, 2009 among Rosenthal & Rosenthal, Inc., the Company, Daniel Friedman & Associates, Inc., Diva Acquisition Corp., Steven Madden Retail, Inc., Stevies, Inc., and SML Acquisition Corp. (incorporated by reference to Exhibit 10.7 to the Company's Current Report on Form 8-K filed with the SEC on July 16, 2009) +10.11 +Guarantee dated July 10, 2009 of the Company, Daniel Friedman & Associates, Inc., Diva Acquisition Corp., Steven Madden Retail, Inc., Stevies, Inc., and SML Acquisition Corp. in favor of Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.8 to the Company's Current Report on Form 8-K filed with the SEC on July 16, 2009) +10.12 +Earn-Out Agreement dated February 10, 2010 among the Company, Jeremy Bassan and Big Buddha, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on February 11, 2010) +10.13 +Purchase and Sale Agreement for Distressed Trades dated August 26, 2010 between BJ Acquisition LLC and Paradox Lending LLC (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2010 filed with the SEC on November 9, 2010) +10.14 +Earn-Out Agreement dated May 25, 2011 among Steven Madden, Ltd., David Seerherman, Cejon, Inc., Cejon Accessories, Inc., New East Designs, LLC and Kenneth Rogala (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on May 26, 2011). +10.15 +Third Amended Employment Agreement dated July 15, 2005 between the Company and Steven Madden (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on July 20, 2005) +10.16 +Amendment dated December 14, 2009 to Third Amended Employment Agreement between the Company and Steven Madden (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on December 17, 2009) +10.17 +Amended and Restated Second Amendment dated as of December 31, 2011 to Third Amended Employment Agreement between the Company and Steven Madden (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2011 filed with the SEC on February 29, 2012) +10.18 +Employment Agreement dated January 1, 1998 between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.07 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2000 filed with the SEC on March 30, 2001) # +10.19 +Amendment No. 1 dated June 29, 2001 to Employment Agreement between the Company and Arvind Dharia (incorporated by reference to Exhibit 99.4 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended June 30, 2001 filed August 14, 2001) # +10.2 +Amendment No. 2 dated October 30, 2002 to Employment Agreement between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2002 filed with the SEC on November 14, 2002) # +10.21 +Amendment No. 3 dated February 1, 2006 to Employment Agreement between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on February 3, 2006) # +10.22 +Amendment No. 4 dated October 7, 2009 to Employment Agreement of Arvind Dharia between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on October 13, 2009) # +10.23 +Amendment No. 5 dated February 8, 2012 to Employment Agreement of Arvind Dharia between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on February 14, 2012) # +10.24 +Employment Agreement dated December 1, 2010 between the Company and Awadhesh Sinha (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on December 3, 2010) # +10.25 +Amendment dated February 25, 2011 to Employment Agreement dated December 1, 2010 between the Company and Awadhesh Sinha (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2010, filed with the SEC on February 28, 2011) # +10.26 +Employment Agreement dated January 2, 2013 between the Company and Robert Schmertz (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on January 8, 2013) # +10.27 +Employment Agreement dated January 31, 2011 between the Company and Amelia Newton Varela (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on February 2, 2011) # +10.28 +Employment Agreement dated December 31, 2012 between the Company and Edward R. Rosenfeld (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on January 3, 2013) # +10.29 +The 1999 Stock Plan, approved and adopted on March 15, 1999, amended as of March 20, 2000 and March 30, 2001 (incorporated by reference to Exhibit 10.A to the Company's Registration Statement on Form S-8 filed with the SEC on July 26, 2004) # +10.3 +2006 Stock Incentive Plan (Amended and Restated Effective May 22, 2009), amended by the Board on April 5, 2012 and approved and adopted by the Company's stockholders on May 25, 2012 †# +21.01 +Subsidiaries of the Registrant † +23.01 +Consent of EisnerAmper LLP † +24.01 +Power of Attorney (included on signature page hereto) +31.01 +Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 † +31.02 +Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 † +32.01 +Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 †* +32.02 +Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 †* +101 +The following materials from Steven Madden, Ltd.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Stockholders' Equity, (iv) the Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text.* +† +Filed herewith. +# +Indicates management contract or compensatory plan or arrangement required to be identified pursuant to Item 15(b) of this Annual Report on Form 10-K. +* +This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any filing, except to the extent the Company specifically incorporates it by reference. \ No newline at end of file diff --git a/raw/filings/0000913241/2012/0001445305-13-000408/filing_metadata.csv b/raw/filings/0000913241/2012/0001445305-13-000408/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..0cb70e734e923790f3ae589a749b8dcd022d9b68 --- /dev/null +++ b/raw/filings/0000913241/2012/0001445305-13-000408/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000913241,SHOO,"STEVEN MADDEN, LTD.",10-K,2013-03-01,2012-12-31,2013-03-01T15:32:47.000Z,0001445305-13-000408,shoo-20121231x10k.htm,10-K,14683777,1,0,https://www.sec.gov/Archives/edgar/data/913241/000144530513000408/shoo-20121231x10k.htm,https://www.sec.gov/Archives/edgar/data/913241/000144530513000408/,2012,2012,1 diff --git a/raw/filings/0000913241/2012/0001445305-13-000408/item1.txt b/raw/filings/0000913241/2012/0001445305-13-000408/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..b2b17b7f838010454f187cedbfd6a55ff30c8125 --- /dev/null +++ b/raw/filings/0000913241/2012/0001445305-13-000408/item1.txt @@ -0,0 +1,168 @@ +ITEM 1 BUSINESS +Overview +Steven Madden, Ltd. and its subsidiaries (collectively, the “Company”) design, source, market and sell fashion-forward name brand and private label footwear for women, men and children and name brand and private label fashion handbags and accessories and license our trademarks for use in connection with the manufacture, marketing and sale of various products of our licensees. Our products are marketed through our retail stores and our e-commerce websites, as well as better department stores, major department stores, mid-tier department stores, specialty stores, luxury retailers, value priced retailers, national chains, mass merchants and catalog retailers throughout the United States and Canada. In addition, we have special distribution arrangements for the marketing of our products in Asia, Europe, the Middle East, Mexico, Australia, South Africa, South America and India. We offer a broad range of updated styles designed to establish or complement and capitalize on market trends. We have established a reputation for design creativity and our ability to offer quality products in popular styles at affordable prices, delivered in an efficient manner and time frame. +The Company was incorporated as a New York corporation on July 9, 1990, reincorporated under the same name in Delaware in November 1998 and completed its initial public offering in December 1993. Shares of the Company's common stock, $.0001 par value per share, currently trade on the NASDAQ Global Select Market under the symbol “SHOO”. Our principal executive offices are located at 52-16 Barnett Avenue, Long Island City, NY 11104. Our telephone number is (718) 446-1800 and our website address is http://www.stevemadden.com. +We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and information with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). These reports, any amendments to such reports, and our proxy statements for our stockholders' meetings are available free of charge, on the "Investor Relations" section of our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We will provide paper copies of such filings free of charge upon request. The public may read and copy any materials filed by us with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information regarding the operation of the SEC's Public Reference Room is available by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding us, which is available at http://www.sec.gov. +Fiscal year 2012 represents the fourth consecutive year that the Company achieved record sales and earnings. Net sales for 2012 increased 27% to $1,227,072 from $968,549 in the same period of last year. Net income attributable to Steven Madden, Ltd. increased 23% to 119,626 in 2012 compared to $97,319 in the same period of last year. Net income attributable to Steven +1 +Madden, Ltd. in 2012 included $5.93 million of impairment charges related to the bankruptcies of Betsey Johnson LLC and Bakers Footwear Group, Inc. and $2.5 million for the settlement of a class action lawsuit. The Company's effective tax rate for 2012 decreased to 35.1% compared to 38.8% recorded in 2011 due primarily to a tax benefit of $6.0 million related to a portion of earnings from the Company's foreign operations that has been invested indefinitely in the acquisition and expansion of our SM Canada business. Inclusive of the impairment charges, the settlement of the lawsuit and the bad debt expense, which negatively impacted earnings per share by $0.13, diluted earnings per share in 2013 increased to $2.71 per share on 44,170,000 diluted weighted average shares outstanding compared to $2.25 per share on 43,239,000 diluted weighted average shares outstanding in the prior year. See Item 3, "Legal Proceedings," below for a description of the class action and its settlement and Note D to our Consolidated Financial Statements for additional information concerning the bankruptcy-related charges. +As part of our strategic initiative to grow the Company's International business, on February 21, 2012, we purchased all of the assets of Steve Madden Canada Inc., Steve Madden Retail Canada Inc., Pasa Agency Inc. and Gelati Imports Inc. (collectively, “SM Canada”), the Company's sole distributor in Canada since 1994, comprising SM Canada's footwear, handbags and accessories wholesale and retail businesses. Management believes that Canada represents a strong and growing market for the Company. The transaction was completed for consideration consisting of a cash payment at closing of approximately $29.13 million (Canadian dollars, which converts to approximately the same in U.S. dollars) plus potential earn-out payments of up to a maximum of $38 million (Canadian dollars, which converts to approximately the same in U.S. dollars), in the aggregate, based on achievement of certain earnings targets over a five-year period. The fair value of contingent payments was estimated based on management's projections of the financial results of SM Canada during the earn-out period. As of December 31, 2012, the Company estimates the fair value of the contingent consideration to be $19.98 million in U.S. dollars. +Product Distribution Segments +Our business is comprised of five distinct segments: Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing. +Our Wholesale Footwear segment is comprised of the following brands: Steve Madden Women's, Madden Girl, Steve Madden Men's, Steven, l.e.i.® (under license), Elizabeth and James® (under license), Olsenboye® (under license), Stevies, Steve Madden Kids, Madden, Betsey Johnson shoes, Report, Superga® (under license), International business and certain private label business. Our Wholesale Accessories segment includes Big Buddha, Betseyville, Betsey Johnson, Steve Madden, Steven by Steve Madden, Cejon and, through license agreements, Daisy Fuentes® and Olsenboye® accessories brands and includes our private label business. Steven Madden Retail, Inc., our wholly-owned retail subsidiary, operates Steve Madden, Steven, Superga and Betsey Johnson retail stores and e-commerce websites. Three additional Steve Madden stores are operated under license to a third party. The First Cost segment represents activities of a subsidiary that earns commissions for serving as a buying agent for footwear products under private labels and licensed brands (such as Candie's®) for many of the country's large mass-market merchandisers, shoe chains and other value priced retailers. Our Licensing segment is engaged in the licensing of the Steve Madden and Steven by Steve Madden marks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery, women's fashion apparel, jewelry and luggage. In addition, we license our Betsey Johnson® and Betseyville® marks for use in connection with the manufacture, marketing and sale of apparel, jewelry, swimwear, eyewear, watches, fragrances and outerwear. +Wholesale Footwear Segment +Steve Madden Women's. We design, source and market our Steve Madden brand to department stores, specialty stores, luxury retailers, value priced retailers, national chains, mass merchants and catalog retailers throughout the United States. The Steve Madden brand has become a leading life-style brand in the fashion conscious marketplace. To serve our customers (primarily women ages 16 to 35), Steve Madden Women's creates and markets fashion forward footwear designed to appeal to customers seeking exciting, new footwear designs at affordable prices. New products for Steve Madden Women's are test marketed at Company-owned retail stores. Typically, within a few days, we can determine if the test product appeals to our customers. This enables us to use our flexible sourcing model to rapidly respond to changing trends and customer preferences, which we believe is essential for success in the fashion industry. +Madden Girl. We design, source and market a full collection of directional young women's shoes under the Madden Girl brand. Madden Girl is geared for young women ages 13 to 20, and is an “opening price point” brand currently sold at major department stores, mid-tier retailers and specialty stores. +Steve Madden Men's. We design, source and market a full collection of directional men's shoes and fashion forward athletic shoes targeted at men ages 18 to 40 years old under the Steve Madden® brand and sold in major department stores, mid- +2 +tier department stores, better specialty stores and independent shoe stores throughout the United States as well as in our retail stores. Price points for Steve Madden Men's products range from $70 to $125 at retail. The division maintains open stock inventory positions in select patterns to serve the replenishment programs of its wholesale customers. +Steven. We design, source and market women's fashion footwear under the Steven® trademark through major department and better footwear specialty stores throughout the United States as well as in our retail stores. Priced a tier above the Steve Madden brand, Steven products are designed to appeal principally to fashion conscious women, ages 25 to 45, who shop at department stores and footwear boutiques. +l.e.i. On July 1, 2008, we entered into a license agreement with Jones Investment Co. Inc., under which we have the right to use the l.e.i.® trademark in connection with the sale and marketing of footwear exclusively to Wal-Mart. +Elizabeth and James. On September 10, 2008, we entered into a license agreement with Dualstar Entertainment Group, LLC, under which we have the right to use the Elizabeth and James® trademark in connection with the sale and marketing of footwear. Our footwear bearing the Elizabeth and James® brand, which was created by Mary-Kate and Ashley Olsen, is distributed through luxury retailers to women ages 25 to 36 with average retail price points ranging from $200 to $350 for shoes and from $350 to $500 for boots. +Olsenboye. On September 2, 2009, we entered into a license agreement with Dualstar Entertainment Group, under which we have the right to use the Olsenboye® trademark in connection with the sale and marketing of footwear exclusively to J.C. Penney. Pursuant to the customer's request that we sell directly to the customer, in 2011 we transitioned our Olsenboye® footwear business from the commission model to the wholesale model. +Stevies and Steve Madden Kids. Our Stevies® and Steve Madden Kids brands are designed, sourced and marketed to appeal to young girls, ages six to twelve, and are sold at department stores, specialty stores and independent boutiques throughout the United States. +Madden. Our Madden brand, which began shipping in the first quarter of 2010, includes a full collection of men's shoes. Madden is an “opening price point” brand that is currently sold at major department stores, mid-tier retailers and specialty stores. +Betsey Johnson Shoes . On October 5, 2010, the Company acquired the Betsey Johnson® trademark and substantially all other intellectual property of Betsey Johnson LLC. Shoes are sold under the Betsey Johnson and Betseyville brands and are distributed through department stores such as Nordstrom, Dillard's and J.C. Penney and online retailers such as Amazon.com and Zappos. +Superga. On February 9, 2011, the Company entered into a license agreement with Basic Properties America Inc. and BasicNet S.p.A., for the use of the Superga® trademark in connection with the marketing and sale of footwear. Founded in Italy in 1911, Superga is known for its fashion sneakers that come in a wide range of colors, fabrics and prints. +Report. The Report and Report Signature brand was part of our May 2011 acquisition of Topline. We design, manufacture, market and sell our Report brand to major department stores, mid-tier department stores, better specialty stores and independently owned boutiques throughout the United States. +Mad Love. Formed in April 2011 as a joint venture, the Mad Love® brand is an exclusive beach to-the-street life style brand for Target, created to appeal to women with a young attitude and active lifestyle. +International Division. Prior to 2009, our international business (the “International Division”) operated under the “first cost” model and, as a result, the revenues derived from the International Division business were included in Commissions and Licensing Fees in the Consolidated Statements of Income included in our Financial Statements. In order to improve operating efficiencies, and to give our international partners better visibility in the process, as of January 2009, we have changed the operating model for our International Division to the “wholesale” model. The International Division ships products to Asia, Canada, Europe, the Middle East, Mexico, Australia and Central and South America. +Private label business. We design, source and market private label footwear primarily to specialty retailers, mid-tier chains and mass market merchants. In addition, we design, source and market footwear for third party brands, such as Material Girl and Candies. +3 +Wholesale Accessories Segment +Our Wholesale Accessories segment designs, sources and markets name brands (including Daisy Fuentes® and Olsenboye®, each under license, and our Steve Madden®, Steven by Steve Madden®, Betsey Johnson®, Betseyville® and Big Buddha® brands) and private label fashion handbags and accessories to department stores, mass merchants, value priced retailers and specialty stores throughout the United States. In addition, we market and sell cold weather accessories, fashion scarves, wraps and other trend accessories primarily under our Cejon and the Steve Madden brand names and private labels to department stores and specialty stores. +Retail Segment +As of December 31, 2012 , the Company's wholly-owned subsidiary, Steven Madden Retail, Inc., owned and operated 109 retail stores including 91 Steve Madden full price stores, eleven Steve Madden outlet stores, two Steven stores, one Report store, one Superga store and three e-commerce websites. In 2012 , we opened twenty new stores, acquired seven stores as part of the acquisition of SM Canada, established Superga® and Betsey Johnson online stores and closed four under-performing stores. Steve Madden stores are located in major shopping malls and in urban street locations across the United States and Canada. In 2012 , our retail stores generated annual sales in excess of $890 per square foot compared to $853 (recomputed using current year methodology) per square foot generated in 2011 . Comparative store sales (sales of those stores, including the e-commerce websites, that were open for all of 2012 and 2011 ) increased 7.9% in fiscal year 2012 . +We anticipate that the Retail segment will continue to enhance the Company's overall sales and profitability while increasing recognition for the brand. Additionally, our retail stores enable us to evaluate the appeal of new products and designs to our customers and respond accordingly, which, in turn, strengthens the product development efforts of our two Wholesale segments. We expect to open between ten and fourteen new retail stores and we do not anticipate closing any stores in 2013 . +First Cost Segment +The First Cost segment represents activities of a wholly owned subsidiary of the Company that earns commissions for serving as a buying agent for footwear products under private labels and licensed brands (such as Candie's®) for many of the large mass-market merchandisers, shoe chains and other mid-tier retailers. As a buying agent, we utilize our expertise and our relationships with shoe manufacturers to facilitate the production of private label shoes to our customers' specifications. We believe that by operating in the private label, mass merchandising market, we are able to maximize additional non-branded sales opportunities. This leverages our overall sourcing and design capabilities. Currently, our First Cost segment serves as a buying agent for the procurement of women's, men's and children's footwear for large retailers, including Kohl's, K-Mart, Sears and Bakers. The First Cost segment receives buying agent's commissions from its customers. In addition, by leveraging the strength of our Steve Madden brands and product designs, we have been able to partially recover our design, product and development costs from our suppliers. +Licensing Segment +We license our Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery and women's fashion apparel, jewelry and luggage. In addition, the Company licenses the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, swimwear, eyewear, watches, fragrances and outerwear. Most of our license agreements require the licensee to pay us a royalty based on actual net sales, a minimum royalty in the event that specified net sales targets are not achieved and a percentage of sales for advertising the brand. +See Note P to our Consolidated Financial Statements for additional information relating to our five operating segments. +Product Design and Development +We have established a reputation for our creative designs, marketing and trendy products at affordable price points. We believe that our future success will substantially depend on our ability to continue to anticipate and react to changing consumer demands in a timely manner. To meet this objective, we have developed what we believe is an unparalleled design process that allows us to recognize and respond quickly to changing consumer demands. Our design team strives to create designs which it believes fit our image, reflect current or future trends and can be manufactured in a timely and cost-effective manner. Most new Steve Madden products are tested in select Steve Madden retail stores. Based on these tests, among other things, management selects the Steve Madden products that are then offered for wholesale and retail distribution nationwide. We believe that our +4 +design and testing process and flexible sourcing models provide the Steve Madden brand with a significant competitive advantage allowing us to mitigate the risk of incurring costs associated with the production and distribution of less desirable designs. +Product Sourcing and Distribution +We source each of our product lines separately based on the individual design, style and quality specifications of the products in such product lines. We do not own or operate manufacturing facilities; rather, we use agents and our own sourcing office to source our products from independently owned manufacturers in China, Mexico, Brazil, Taiwan, Italy and India. We have established relationships with a number of manufacturers and agents in each of these countries. Although we have not entered into any long-term manufacturing or supply contracts, we believe that a sufficient number of alternative sources exist for the manufacture of our products. We continually monitor the availability of the principal materials used in our footwear, which are currently available from a number of sources in various parts of the world. We track inventory flow on a regular basis, monitor sell-through data and incorporate input on product demand from wholesale customers. We use retailers' feedback to adjust the production or manufacture of new products on a timely basis, which helps reduce the close out of slow-moving products. +We distribute our products from four third-party distribution warehouse centers, two located in California, one located in Texas, and one located in New Jersey, and through two Company owned warehouses located in New Jersey and Canada. By utilizing distribution facilities specializing in distribution fulfillment to effect distribution to certain wholesale accounts, Steve Madden retail stores and Internet customers, we believe that our customers are served more promptly and efficiently. +Customers +Our wholesale customers consist principally of better department stores, major department stores, mid-tier department stores, national chains, mass merchants, value priced retailers, specialty stores and catalog retailers. Our customers include Macy's, DSW, Nordstrom, Dillard's, J.C. Penney, Kohl's, Famous Footwear, Marshall's, TJ Maxx, Ross and Belks. +Distribution Channels +United States and Canada +We sell our products principally through department stores, specialty stores, luxury retailers, national chains and mass merchants and in our Company-owned retail stores in the United States and Canada and our e-commerce websites. For the year ended December 31, 2012 , our Retail segment and our two Wholesale segments generated net sales of approximately $191.2 million and $1,035.8 million, or 16% and 84% of our total net sales, respectively. Each of these distribution channels is described below. +Steve Madden and Steven Retail Stores. As of December 31, 2012 , we operated 91 Steve Madden full price stores, 11 Steve Madden outlet stores, 2 Steven stores, one Report store, one Superga store and three e-commerce websites. We believe that our retail stores will continue to enhance overall sales, profitability, and our ability to react to changing consumer trends. Our stores are also a marketing tool that allows us to strengthen brand recognition and to showcase selected items from our full line of branded and licensed products. Furthermore, our retail stores provide us with venues through which to test and introduce new products, designs and merchandising strategies. Specifically, we often test new designs at our Steve Madden retail stores before scheduling them for mass production and wholesale distribution. In addition to these test marketing benefits, we have been able to leverage sales information gathered at Steve Madden retail stores to assist our wholesale customers in order placement and inventory management. +A typical Steve Madden store is approximately 1,400 to 1,600 square feet and is located in a mall or street location that we expect will attract the highest concentration of our core demographic, style-conscious customer base. The Steven stores, which are generally the same size as our Steve Madden stores, have a more sophisticated design and format styled to appeal to a more mature target audience. In addition to carefully analyzing mall demographics and locations, we set profitability guidelines for each potential store site. Specifically, we target well trafficked sites at which the demographics fit our consumer profile and seek new locations where the projected fixed annual rent expense stays within our guidelines. By setting these guidelines, we seek to identify stores that will contribute to our overall profitability both in the near and longer terms. +Department Stores. We currently sell to over 4,400 doors of 15 department stores throughout the United States and Canada. Our major accounts include Macy's, Nordstrom, Bloomingdale's, Dillard's and Lord & Taylor. +5 +We provide merchandising support to our department store customers which includes in-store fixtures and signage, supervision of displays and merchandising of our various product lines. Our wholesale merchandising effort includes the creation of in-store concept shops in which a broader collection of our branded products are showcased. These in-store concept shops create an environment that is consistent with our image and are designed to enable the retailer to display and sell a greater volume of our products per square foot of retail space. In addition, these in-store concept shops encourage longer term commitment by the retailer to our products and enhance consumer brand awareness. +In addition to merchandising support, our key account executives maintain weekly communications with their respective accounts to guide them in placing orders and to assist them in managing inventory, assortment and retail sales. We leverage our sell-through data gathered at our retail stores to assist department stores in allocating their open-to-buy dollars to the most popular styles in the product line and phasing out styles with weaker sell-throughs, which, in turn, reduces markdown exposure at season's end. +Specialty Stores/Catalog Sales. We currently sell to specialty store locations throughout the United States. Our major specialty store accounts include DSW, Famous Footwear and Journeys. We offer our specialty store accounts the same merchandising, sell-through and inventory tracking support offered to our department store accounts. Sales of our products are also made through various catalogs, such as Victoria's Secret. +Internet Sales. We operate three Internet website stores, where customers can purchase numerous styles of our Steve Madden Women's, Steven, Madden Men's, Big Buddha, and Report, as well as selected styles of Madden Girl, footwear and accessory products. +International +Our products are available in many countries and territories worldwide via several retail selling and distribution agreements. Under the terms of the various agreements, the distributors and retailers are generally required to open a minimum number of stores each year and to pay us a fee for each pair of footwear purchased and an additional sales royalty as a percentage of sales or a predetermined amount per unit of sale. Most of the distributors are required to purchase a specified minimum number of products within specified periods. The agreements we have in place expire at various times through February 14, 2031 and include automatic renewals at the distributors' option if certain conditions are met. These agreements are exclusive in their specific territories, which include Asia, the Middle East, South America, Europe, Mexico, Australia, South Africa and India. +Competition +The fashion industry is highly competitive. We compete with specialty shoe and accessory companies as well as companies with diversified footwear product lines, such as Nine West, Jessica Simpson, Guess, Ugg and Aldo. Our competitors may have greater financial and other resources than we do. We believe effective advertising and marketing, favorable brand image, fashionable styling, high quality, value and fast manufacturing turnaround are the most important competitive factors and intend to continue to employ these elements as we develop our products. However, we cannot be certain that we will be able to compete successfully against our current and future competitors, or that competitive pressures will not have a material adverse effect on our business, financial condition and results of operations. +Marketing and Sales +We have focused on creating an integrated brand building program to establish Steve Madden as a leading designer of fashion footwear for style-conscious young women and men. Principal marketing activities include product placements in lifestyle and fashion magazines, personal appearances by our founder and Creative and Design Chief, Steve Madden, and in-store promotions. We continue to promote our e-commerce website (www.stevemadden.com) where customers can purchase products under the brands Steve Madden, Steven, Steve Madden Men's and selected styles of Madden Girl footwear, as well as view exclusive content, participate in contests and “live chat” with customer service representatives. We also connect with our customers through social media forums including Twitter and Facebook. +Management Information Systems (MIS) Operations +Sophisticated information systems are essential to our ability to maintain our competitive position and to support continued growth. We operate on a dual AS/400 system which provides system support for all aspects of our business, including manufacturing, purchase orders, customer purchase orders, order allocations, invoicing, accounts receivable management, quick response +6 +replenishment, point-of-sale support and financial and management reporting functions. We have a PKMS bar coded warehousing system that is integrated with the wholesale system in order to provide accurate inventory positions and quick response size replenishment for our customers. In addition, we have installed an electronic data interchange (“EDI”) system which provides a computer link between us and certain wholesale customers that enables both the customer and us to monitor purchases, shipments and invoicing. The EDI system also improves our ability to respond to customer inventory requirements on a weekly basis. We are currently implementing a new Company-wide ERP system which we expect to go live in the summer of this year. We expect the new system to provide operating efficiencies and enhance customer service. +Intellectual Property +Trademarks +We own numerous trademarks, including, among others: +• +Steve Madden® +• +Steve Madden plus Design® +• +STEVE MADDEN in Chinese Characters® +• +Madden Girl® +• +Madden Girl By Steve Madden® +• +Steven® +• +Steven by Steve Madden® +• +SM New York® +• +Madden Girl by Steve Madden® +• +Eyeshadows by Steve Madden® +• +Soho Cobbler® +• +Steve Madden Luxe® +• +Natural Comfort® +• +Arc Stripe Design® +• +Asterisk with Shaded Circle Design® +• +Trissino® +• +Stacey and Steve® +• +Stacey and Steve Stylized Design® +• +Heart Design by Steve Madden® +• +Steve Madden and Heart Design® +• +Steve Madden's Fix® (logo and various trademarks) +• +PEACE LOVE SHOES® (logo and various trademarks) +• +Stevies® +• +Stevies by Steve Madden® +• +Stevies plus Design® +• +Big Buddha® +• +BIG BUDDHA plus Design® +• +Buddha Lux® +• +Betsey Johnson® +• +Betseyville® +• +BETSEYVILLE BY BETSEY JOHNSON® +7 +• +Betsey Johnson (Stylized) ® +• +THE WILD PAIR (word mark)® +• +WILD PAIR (word mark)® +• +WILD PAIR (stylized mark)® (logo and various trademarks) +• +THE WILD PAIR plus Circle Design® +• +Cejon® +• +Report® +• +Report Signature® +• +R2® +• +Mad Love® +We consider these marks to be among our most valuable assets and have registered these marks in numerous countries and in numerous International Classes. From time to time we adopt new trademarks in connection with the marketing of new product lines. We believe that our trademarks have significant value and are important for purposes of identifying the Company, the marketing of our products and the products of our licensees, distinguishing them from the products of others. We act aggressively to register and vigorously protect our trademarks against infringement. There can be no assurance, however, that we will be able to effectively obtain rights to our marks throughout all of the countries of the world. Moreover, no assurance can be given that others will not assert rights in or ownership of, our marks and other proprietary rights or that we will be able to resolve any such conflicts successfully. Our failure to protect such rights from unlawful and improper appropriation may have a material adverse effect on our business, financial condition, results of operations and liquidity. +Trademark Licensing +Our strategy for the continued growth of the Company's business includes expanding the Company's presence beyond footwear and accessories through the selective licensing of our brands. As of December 31, 2012 , we license our Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery and women's fashion apparel, jewelry and luggage. In addition, the Company licenses the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, swimwear, eyewear, watches, fragrances and outerwear. Most of our license agreements require the licensee to pay us a royalty based on actual net sales, a minimum royalty in the event that specified net sales targets are not achieved and a percentage of sales for advertising the brand. See Notes A[12] and O[4] to our Consolidated Financial Statements included in this Annual Report on Form 10-K for additional disclosure regarding these licensing arrangements. +In addition to the licensing of our trademarks, we also license from third parties trademarks used in connection with certain of our product lines. Under licenses from Dualstar Entertainment Group, LLC, the Company has the right to use the Olsenboye® trademark in connection with the sale and marketing of footwear and accessories and the Elizabeth and James® trademark in connection with the sale and marketing of footwear. The term of these licenses expire on December 31, 2013 and March 31, 2015, respectively. In addition, we hold licenses from Jones Investment Co. Inc. under which the Company has the right to use the GLO Jeans® trademark in connection with the marketing and sale of women's footwear exclusively to K-Mart and the l.e.i.® trademark in connection with the marketing and sale of women's footwear exclusively to Wal-Mart. The term of the licenses from Jones Investment Co, Inc. expire on December 31, 2015 and December 31, 2014, respectively. We also hold a license from Basic Properties America Inc. and BasicNet S.p.A under which we have the right to use the Superga® trademark in connection with the marketing and sale of footwear. The initial term of our license with Basic Properties America Inc. and BasicNet S.p.A expires on December 31, 2013, with a four year renewal term at our option if certain provisions are met. We also hold a license from G-III Apparel Group to design, manufacture and distribute eyewear and sunglasses under the Andrew Marc brand. The initial term of the license with G-III Apparel Group expires on July 31, 2013, with a three year renewal term at our option if certain provisions are met. Substantially all of these licensing agreements require us to make royalty and advertising payments to the licensor equal to a percentage of our net sales or a minimum royalty and advertising payment in the event that specified net sales targets are not achieved. +8 +Employees +On February 1, 2013 , we employed approximately 2,650 employees, of whom approximately 1,800 work on a full-time basis and approximately 850 work on a part-time basis, with most of the part-time employees being employed in the Retail segment. Approximately 1,860 of our employees are located in the United States, approximately 590 employees are located in Hong Kong, China and Taiwan, and approximately 200 employees are located in Canada. None of our employees are represented by a union. Our management considers relations with our employees to be good. The Company has never experienced a material interruption of its operations due to a labor dispute. +Seasonality +Historically, some of our businesses, including our Retail segment, have experienced holiday retail seasonality. In addition to seasonal fluctuations, our operating results fluctuate from quarter to quarter as a result of the timing of holidays, weather, the timing of larger shipments of footwear, market acceptance of our products, product mix, pricing and presentation of the products offered and sold, the hiring and training of additional personnel, inventory write downs for obsolescence, the cost of materials, the product mix between wholesale, retail and licensing businesses, the incurrence of other operating costs and factors beyond our control, such as general economic conditions and actions of competitors. +Backlog +We had unfilled wholesale customer orders of $302.3 million and $280.8 million, as of February 1, 2013 and 2012 , respectively. Our backlog at a particular time is affected by a number of factors, including seasonality, timing of market weeks and wholesale customer purchases of our core products through our open stock program. Accordingly, a comparison of backlog from period to period may not be indicative of eventual shipments. \ No newline at end of file diff --git a/raw/filings/0000913241/2012/0001445305-13-000408/item13.txt b/raw/filings/0000913241/2012/0001445305-13-000408/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..e09536a5f54953b76c7c22c16fefc3049b803268 --- /dev/null +++ b/raw/filings/0000913241/2012/0001445305-13-000408/item13.txt @@ -0,0 +1,4 @@ +ITEM 13 +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE +The information required to be furnished pursuant to this Item will be set forth in our proxy statement for the 2013 Annual Meeting of Stockholders, and is incorporated herein by reference. +30 \ No newline at end of file diff --git a/raw/filings/0000913241/2012/0001445305-13-000408/item9a.txt b/raw/filings/0000913241/2012/0001445305-13-000408/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..9ad2db06dca87e38120552a5fc09aaff643c9919 --- /dev/null +++ b/raw/filings/0000913241/2012/0001445305-13-000408/item9a.txt @@ -0,0 +1,13 @@ +ITEM 9A CONTROLS AND PROCEDURES +Disclosure Controls and Procedures +As required by Rule 13a-15(b) of the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal year covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of the end of the fiscal year covered by this Annual Report on Form 10-K. +Management's Annual Report on Internal Control Over Financial Reporting +Management of Steven Madden, Ltd. is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). +Our internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by the board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our 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. We have excluded SM Canada, which were acquired on February 21, 2012, from the scope of our annual report on internal control over +29 +financial reporting as of December 31, 2012. SM Canada represent approximately 8% of our total assets at December 31, 2012 and approximately 3% and 7% of our revenues and net income, respectively, for the year ended December 31, 2012. +With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness, as of the end of our fiscal year ended December 31, 2012, of our internal control over financial reporting based on the framework and criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation our management has concluded that, as of December 31, 2012, our internal control over financial reporting was effective. +Our independent registered public accounting firm, EisnerAmper LLP, has audited the Company's consolidated financial statements and the effectiveness of the Company's internal control over financial reporting as of December 31, 2012. Their report appears in this Annual Report on Form 10-K. +Changes in Internal Control Over Financial Reporting +There was no change in our internal control over financial reporting, identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act, that occurred during the fiscal quarter ended December 31, 2012, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000913241/2012/0001445305-13-000408/rp_note.txt b/raw/filings/0000913241/2012/0001445305-13-000408/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000913241/2012/0001445305-13-000408/rpt_disclosure.txt b/raw/filings/0000913241/2012/0001445305-13-000408/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..26a37758cca5fcdd332ca1e067374f14db313ace --- /dev/null +++ b/raw/filings/0000913241/2012/0001445305-13-000408/rpt_disclosure.txt @@ -0,0 +1,136 @@ +and Related Party Transactions +JLM +Consultants, Inc., a company wholly-owned by John L. Madden. Since 2004, the Company has engaged JLM Consultants, Inc., +a company wholly-owned by John L. Madden, a member of the Board and the brother of Steven Madden, the Company’s founder +and Creative and Design Chief, to provide consulting services to the Company with respect to the development of international +sales of the Company. On February 23, 2012, the Company entered into a consulting agreement (the “JLM Consulting Agreement”) +with JLM Consultants, Inc., which replaced a prior consulting agreement, and continues in effect until December 31, 2014. In accordance +with the terms of the JLM Consulting Agreement, for the 2013 Fiscal Year, JLM Consultants, Inc. received the following compensation +from the Company for services rendered: (a) a commission equal to 1% of net sales, excluding retail royalty income; (b) a commission +equal to 10% of retail royalty income, (c) 1% of any commission income to the International division that is not recognized in +net sales; (d) a monthly draw in the amount of $25,000, which amount is offset against commissions earned, (e) a $1,000 per month +travel allowance and (f) $4,576.08 per month reimbursement for health insurance premiums for John L. Madden. Pursuant to this +arrangement, JLM Consultants, Inc. received a total of $1,310,349 from the Company in the 2013 Fiscal Year. +15 +Pursuant +to the JLM Consulting Agreement, on January 2, 2013, the Company issued 72,012 restricted shares of the Company’s Common +Stock (the number of shares indicated having been adjusted for an October 1, 2013 three-for-two stock split effected as a stock +dividend) to JLM Consultants, Inc. under the Steven Madden, Ltd. 2006 Stock Incentive Plan, as amended (the “2006 Plan”), +which shares will vest in twelve substantially equal quarterly installments over a three-year period commencing on April 1, 2013 +and continuing to vest quarterly thereafter until the final installment vests on January 1, 2016. +Steven +Madden Employment Agreement. Effective as of July 1, 2005, the Company amended and restated its employment agreement with +the Company’s founder and Creative and Design Chief, Steven Madden, pursuant to which Mr. Madden agreed to continue to serve +as the Company’s Creative and Design Chief. The term of Mr. Madden’s employment under his employment agreement commenced +on July 1, 2005 and, in accordance with the amendment of the agreement effective December 31, 2011, will end on December 31, 2023. +Prior to this recent amendment, the agreement had provided for an annual salary of $600,000, with a 7% increase of base salary +on a compound basis in each of the third, fifth, seventh and ninth years of the agreement. The agreement had also provided for +an annual cash bonus in an amount equal to at least 2% of the Company’s EBITDA (the “Annual Bonus”) and an annual +cash bonus in relation to “new business” (as defined in the agreement) in an amount equal to at least (i) 2.5% of +new business gross direct revenues plus (ii) 10% of all license or other fee income above $2,000,000 (the “New Business +Bonus”). The agreement, as amended, increases Mr. Madden’s annual base salary but eliminates the Annual Bonus and +the New Business Bonus and provides that all cash bonuses subsequent to the fiscal year ended December 31, 2011 will be at the +sole discretion of the Company’s Board of Directors. Under the agreement, as amended, Mr. Madden’s annual base salary +was fixed at $5,416,667 in 2012, $7,416,667 in 2013, $9,666,667 in 2014, $11,916,667 in 2015 and $10,697,917 in 2016 and in each +year thereafter through the end of the term of employment. In addition, the amended agreement entitles Mr. Madden to an annual +life insurance premium reimbursement of up to $200,000. The amendment also eliminates an annual non-accountable expense allowance +of $200,000 that had been previously provided to Mr. Madden under the agreement. Pursuant to the amended agreement, on February +8, 2012, Mr. Madden was granted 1,463,056 restricted shares of Common Stock (the number of shares indicated having been adjusted +for an October 1, 2013 three-for-two stock split effected as a stock dividend), valued at approximately $40 million, under the +2006 Plan. The restricted Common Stock will vest in equal annual installments over seven years commencing on December 31, 2017 +through December 31, 2023, subject to Mr. Madden’s continued employment with the Company on each such vesting date. +On +June 30, 2012, pursuant to an election right granted to him under the agreement, as amended, Mr. Madden notified the Company of +his election to receive an additional restricted stock award valued at $40 million in consideration of a reduction in his annual +base salary in years subsequent to 2012. Accordingly, on July 3, 2012, Mr. Madden was issued 1,893,342 restricted shares of Common +Stock (the number of shares indicated having been adjusted for an October 1, 2013 three-for-two stock split effected as a stock +dividend) under the 2006 Plan. The restricted Common Stock will vest in equal annual installments over six years commencing on +December 31, 2018 through December 31, 2023, subject to Mr. Madden’s continued employment with the Company on each such +vesting date. As a result of his election to receive an additional restricted stock award, Mr. Madden’s annual base salary +for years subsequent to 2012 has been reduced as follows: $4,000,000 in 2013, $6,125,000 in 2014, $8,250,000 in 2015 and $7,026,042 +in 2016 and in each year thereafter through the end of the term of employment. +Mr. +Madden is also eligible to receive annually, on or about the date of the Company’s annual meeting of stockholders (but not +later than June 30 th ), an option grant (the “Annual Option”) to purchase a number of shares of Common Stock, +with such number to be equal to the greater of (a) 100% of the largest aggregate number of shares of Common Stock available upon +the exercise of an option or options granted to any other continuing full-time employee of the Company during the preceding twelve-month +period and (b) 100,000 shares of Common Stock; provided, however, that a grant to Mr. Madden in excess of 150% of the number of +shares of Common Stock subject to options granted to such other continuing full-time employee would require stockholder approval. +Any Annual Option granted to Mr. Madden would vest quarterly over a one-year period following the grant date and would be exercisable +at a price equal to the closing price of the Company’s Common Stock on the grant date for a period of five years following +the grant date. Mr. Madden opted to waive his right to the Annual Option in 2013. In addition to the Annual Option, the agreement, +as amended, provides for a potential additional one-time stock option grant to purchase 750,000 shares of the Company’s +Common Stock (the number of shares subject to this potential stock option award having been adjusted for an October 1, 2013 three-for-two +stock split effected as a stock dividend) in the event that the Company achieves earnings per share, on a fully-diluted basis, +equal to $3.00 in any fiscal year ending December 31, 2015 or after. If granted, the option would vest in equal annual installments +of 20% over a five-year period and be exercisable for a period of seven years at a price equal to the closing price of the Company’s +Common Stock on the date immediately preceding the grant date. +16 +In +the event of Mr. Madden’s death, his employment agreement provides for the payment to Mr. Madden’s estate of his base +salary for the 12-month period immediately subsequent to the date of his death. Further, in the event that Mr. Madden’s +employment agreement is terminated due to Mr. Madden’s total disability (as defined in the agreement), “for cause” +(as defined in the agreement) or due to Mr. Madden’s resignation, the Company is obligated to pay Mr. Madden the amount +of compensation that is accrued and unpaid through the date of termination. In the event Mr. Madden’s employment agreement +is terminated for any reason (other than “for cause” or due to his death, total disability or resignation), the Company +is obligated to pay Mr. Madden, in installments, the balance of his base salary that would have been paid by the Company under +the agreement for the full term of the agreement. If, during the period commencing 120 days prior to a “change of control” +(as defined in the employment agreement) transaction and ending on the first anniversary of a change of control transaction, Mr. +Madden’s employment is terminated by the Company other than for cause or by the resignation of Mr. Madden for “good +reason” (as defined in the employment agreement), or if Mr. Madden resigns for good reason or without good reason within +30 days following a change of control transaction, all unvested options to purchase shares of Common Stock held by Mr. Madden +will vest on the date of termination or resignation and Mr. Madden will be entitled to receive a lump sum cash payment equal to +the amount of compensation that is accrued and unpaid through the date of termination plus $35 million. Mr. Madden’s employment +agreement contains other customary provisions, including provisions regarding expense reimbursement, confidentiality, solicitation +and competition. +For +the 2013 Fiscal Year, Mr. Madden earned $4,000,000 in base salary and received $200,000 for the payment of an annual life insurance +premium. Mr. Madden opted to waive his right to the Annual Option for the 2013 Fiscal Year. +Loan +to Steven Madden. On June 25, 2007, the Company made a loan to Steven Madden, its Creative and Design Chief and a principal +stockholder of the Company, in the amount of $3,000,000, in order for Mr. Madden to satisfy a personal tax obligation resulting +from the exercise of a stock option which was due to expire and to hold the underlying shares of Common Stock. Mr. Madden executed +a promissory note in favor of the Company, which is secured by a pledge of 472,500 shares of the Company’s Common Stock +beneficially owned by Mr. Madden (the number of shares indicated having been adjusted for an October 1, 2013 three-for-two stock +split effected as a stock dividend). There have been successive amendments to the note, the most recent of which occurred on January +3, 2012, at which time the note was amended and restated to extend the maturity date of the obligation to December 31, 2023 and +eliminate the accrual of interest after December 31, 2011. Prior to the most recent amendment, the note had been accruing interest +at the rate of 6% per annum. In addition, the amended and restated note provides that, commencing on December 31, 2014 and annually +on each December 31 thereafter through the maturity date, one-tenth of the principal amount thereof, together with accrued interest, +will be cancelled by the Company provided that Mr. Madden continues to be employed by the Company on each such December 31. Contemporaneously, +the Company will release a number of pledged shares of Common Stock from the pledge generally correlating to the amount of indebtedness +cancelled on such date. As of December 31, 2011, interest in the amount of $1,090,000 had accrued on the principal amount of the +note and, as noted above, interest was eliminated after December 31, 2011. +Steven +Madden is the brother of John L. Madden, who has been a director of the Company since 1993. +Review, Approval or Ratification +of Transactions with Related Persons +The +Company’s written Conduct Code and Employee Handbook prohibit all conflicts of interest. Under the Conduct Code, conflicts +of interest occur when private or family interests interfere in any way, or even appear to interfere, with the interests of the +Company. The Company’s prohibition on conflicts of interest under the Conduct Code includes any related person transaction. +17 +Related +person transactions must be approved by the Board, or by a committee of the Board consisting solely of independent directors, +who will approve the transaction only if they determine that it is in the best interests of the Company. In considering the transaction, +the Board or committee will consider all relevant factors, including, as applicable, (i) the Company’s business rationale +for entering into the transaction; (ii) the alternatives to entering into a related person transaction; (iii) whether the transaction +is on terms comparable to those available to third parties or, in the case of employment relationships, to employees generally; +(iv) the potential for the transaction to lead to an actual or apparent conflict of interest and any safeguards imposed to prevent +such actual or apparent conflicts; and (v) the overall fairness of the transaction to the Company. +The +Company has multiple processes for reporting conflicts of interests, including related person transactions. Under the Conduct +Code, all employees are required to report any actual or apparent conflict of interest, or potential conflict of interest, to +management. The Chief Financial Officer distributes a questionnaire to the Company’s executive officers and management personnel +on a quarterly basis and distributes a questionnaire to the members of the Board of Directors on an annual basis requesting certain +information regarding, among other things, their immediate family members, employment and beneficial ownership interests, which +information is then reviewed for any conflicts of interest under the Conduct Code. +The +Board of Directors, the Audit Committee and the Disclosure Committee, which is comprised of management personnel, discuss the +related party transactions, specifically, and in connection with the regular review processes attendant to the Company’s +periodic filings, including related party transaction disclosures. +If +a director is a party to or in some manner involved in a transaction involving the Company, he will be recused from all discussions +and decisions about the transaction. The transaction must be approved in advance whenever practicable, and if not practicable, +must be ratified as promptly as practicable. +COMPENSATION \ No newline at end of file