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1
FORM 10-K
U.S. Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1943
Commission File Number: 0-21026
ROCKY SHOES & BOOTS, INC.
(Exact name of Registrant as specified in its charter)
OHIO NO. 31-1364046
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
39 EAST CANAL STREET
NELSONVILLE, OHIO 45764
(Address of principal executive offices, including zip code)
(740) 753-1951
(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,
without par value
Preferred Stock
Purchase Rights
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to the filing
requirements for at least the past 90 days. YES X NO
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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. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $15,000,000 on March 16,
2000.
There were 4,489,215 shares of the Registrant's Common Stock
outstanding on March 16, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for 2000 Annual Meeting of
Shareholders are incorporated by reference in Part III.
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This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended. The words
"anticipate," "believe," "expect," "estimate," and "project" and similar words
and expressions identify forward-looking statements which speak only as of the
date hereof. Investors are cautioned that such statements involve risks and
uncertainties that could cause actual results to differ materially from
historical or anticipated results due to many factors, including, but not
limited to, the factors discussed in "Business - Business Risks." The Company
undertakes no obligation to publicly update or revise any forward-looking
statements.
PART I
ITEM 1. BUSINESS.
Rocky Shoes & Boots, Inc. has two subsidiaries: Five Star Enterprises Ltd.
("Five Star"), a Cayman Islands corporation, which operates a manufacturing
facility in La Vega, Dominican Republic, and Lifestyle Footwear, Inc.
("Lifestyle"), a Delaware corporation, which operates two manufacturing
facilities in Aquadilla, Puerto Rico. Unless the context otherwise requires, all
references to "Rocky" or the "Company" include Rocky Shoes & Boots, Inc. and its
subsidiaries.
OVERVIEW
The Company is the successor to the business of The Wm. Brooks Shoe
Company, a company established in 1932 by William Brooks, who was later joined
by F. M. Brooks, the grandfather of the Company's current Chairman, President
and Chief Executive Officer, Mike Brooks. The business was sold in 1959 to a
company headquartered in Lancaster, Ohio. John W. Brooks, the father of Mike
Brooks, remained as an employee of the business when it was sold. In 1975, John
W. Brooks formed John W. Brooks, Inc. (later known as Rocky Shoes & Boots Co.
("Rocky Co.")) as an Ohio corporation, reacquired the Nelsonville, Ohio
operating assets of the original company and moved the business's principal
executive offices back to Nelsonville, Ohio. In 1993, the Company, Rocky Co.,
Lifestyle and Five Star were parties to a reorganization, and in 1996, Rocky Co.
was merged with and into the Company, resulting in the Company's present
corporate structure.
Following completion of the Company's initial public offering in 1993, the
Company began to convert all of its factories to a modular "Team Pass-Through"
manufacturing system. This system substantially increased total manufacturing
capacity and operating efficiencies. Most of the Company's footwear is
manufactured in the Company's facilities located in Nelsonville, Ohio, the
Dominican Republic and Puerto Rico. The Company purchases raw materials from a
number of domestic and foreign sources. The principal raw materials used in the
production of the Company's footwear, in terms of dollar value, are leather,
GORE-TEX waterproof fabric, CORDURA nylon fabric and soling materials. The
Company's footwear is distributed nationwide and in Canada from the Company's
finished warehouse located near Logan, Ohio. The Company stores finished goods
in the warehouse until they are used to fill an order. If the product ordered is
in inventory, it can be shipped to customers within one week of the order. In
1999, the Company made adjustments to production to bring inventory in line with
demand. These adjustments led to temporary inefficiencies and affected gross
margin.
In the past, the Company has benefited from a relatively low effective tax
rate. The Company receives favorable tax treatment on income earned by its
subsidiary in Puerto Rico and benefits from local tax abatements available to
such subsidiary. Beginning the fourth quarter of Fiscal 1996, the Company
elected to repatriate future earnings of its subsidiary in the Dominican
Republic. The repatriation of earnings from its subsidiary in the Dominican
Republic is subject to U.S. federal income tax, but is exempt from state and
local taxation. In 1999, the Company elected not to repatriate all 1999 and
future earnings of its subsidiary in the Dominican Republic. Consequently, no
income taxes are provided on these cumulative earnings of approximately
$5,109,000.
ROCKY(R) is a federally registered trademark of Rocky Shoes & Boots, Inc. This
report also refers to trademarks oF corporations other than the Company. See
"Business - Patents, Trademarks and Trade Names."
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STRATEGY
The Company's objective is to increase sales within its core product
categories and markets and to leverage the ROCKY brand into new markets with
products that emphasize the reputation of the Company's footwear for
performance, innovation, quality, comfort and durability. Key elements of the
Company's strategy are as follows:
Maintain Performance, Innovation and Quality. Performance, innovation and
quality are hallmarks of the ROCKY brand. The Company believes it has developed
a competitive advantage through its ability to produce high quality performance
footwear incorporating premium materials such as GORE-TEX waterproof breathable
fabric. The Company continually strives to develop new products and to introduce
innovations in each of its footwear market segments. Recently, the Company
introduced an extensive line of scent suppressant footwear featuring the
ROCKY(R) Scent Control System(TM) as well as ROCKY(R) TMC Series of casual
shoes. The Company stresses quality control at every stage of its manufacturing
process. Each manufacturing facility is staffed with trained quality assurance
personnel, and a portion of each manufacturing employee's compensation is based
on the level of product quality of each employee's respective work group.
Increase Awareness of the ROCKY Brand. The Company believes that its
long-term reputation for performance, innovation and quality has increased
awareness of the ROCKY brand. To increase the strength of its brand, the Company
has reformulated its advertising strategy by shifting its focus from the retail
trade directly to the consumer. A key component of this new strategy includes
advertising through cost-effective cable broadcasts aimed at audiences which
share the demographic profile of the Company's typical customers. Similarly, the
Company has shifted its national print advertising campaign to more
consumer-oriented publications. Management believes that by directly targeting
the consumer it can convey a broader and more consistent image of the ROCKY
brand, thereby increasing demand for its products at higher retail prices.
Leverage the ROCKY Brand. The Company believes that the ROCKY brand has
become a recognizable and established brand name for performance
quality-conscious consumers in the rugged outdoor and occupational segments of
the men's footwear market. The Company intends to continue to leverage the ROCKY
brand with a major emphasis on broadening its share of the casual market segment
Additionally, the Company licenses the ROCKY brand for use on certain
complementary products, such as socks, hats and accessories in an effort to
expand brand recognition.
Utilize Exclusive Rocky-Focused Sales Force. The Company historically sold
its footwear through manufacturers' representatives who carried ROCKY brand
products as well as other non-competing products. In an effort to ensure full
representation of its complete product line and consistent support of its
customers, late in 1995, the Company began replacing its manufacturers'
representatives with exclusive sales representatives who sell only ROCKY brand
products. Currently, approximately 87% of the Company's sales force is comprised
of exclusive sales representatives.
Capitalize on Manufacturing Process. The Company manufactures its products
under a twin-plant concept by producing its labor intensive "upper portion" in
its lower wage rate plants in the Dominican Republic and Puerto Rico and
completing its footwear in Puerto Rico and Nelsonville, Ohio where it uses
state-of-the-art bottoming techniques. In early 1999, the Company began to
manufacture opening price point hunting boots in the Dominican Republic. On
March 1, 2000 the Company announced it plans to substantially decrease
manufacturing at its Nelsonville, Ohio plant during 2000 by moving additional
production to its plants in Puerto Rico and the Dominican Republic. The Company
utilizes a modular "Team Pass-Through" manufacturing system in each of its
manufacturing facilities. The Company believes that this system, which allows
each person to perform a number of different tasks, is superior to a traditional
assembly line approach, which requires each person to perform a single
repetitive task. This system increases the number of pairs of footwear produced
per square foot of manufacturing space, reduces work-in-process inventory and
direct labor and improves the Company's production yields. In addition, the
Company believes that its manufacturing process allows it to respond quickly to
changes in product demand and consumer preferences.
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Expand Product Sourcing. The Company's sourced products represented
approximately 26% of its net sales in 1999. The Company primarily sources
products from independent manufacturers in the Far East. The Company sources
products which are manufactured to its specifications. This enables the Company
to reach price points that it cannot obtain with most products manufactured in
its own facilities. A greater portion of the Company's products may be sourced
in the future if the Company expands and reaches capacity in its manufacturing
facilities. The Company employs a full-time quality assurance staff to inspect
each shipment sourced in the Far East. All of the Company's sourced products are
designed by the Company's design and engineering team.
PRODUCT LINES
The Company's product lines consist of rugged outdoor, occupational and
casual footwear. ROCKY brand products emphasize quality, patented materials,
such as GORE-TEX waterproof breathable fabric, CORDURA nylon fabric, CAMBRELLE
cushioned lining and THINSULATE thermal insulation. The following table
summarizes the Company's product lines:
RUGGED OUTDOOR OCCUPATIONAL CASUAL
-------------- ------------ ------
TARGET MARKET........... Hunters and outdoorsmen Law enforcement and Retail customers of
military personnel, premium casual wear
security guards, postal
workers, paramedics,
industrial and
construction workers
SUGGESTED RETAIL
PRICE RANGE........... $89 - 259 $69 - $179 $69 - $189
DISTRIBUTION Sporting goods stores, Retail uniform stores, Independent retail stores,
CHANNELS.............. outdoor specialty stores mail order catalogs, department store chains,
and mail order catalogs specialty safety stores mail order catalogs and
and independent retail sporting goods stores
stores
COMPANY'S LEADING BEAR CLAW, BEAR CLAW II, ELIMINATOR, ROCKY 911 EURO TRAVELERS, ROCKY
BRAND NAMES........... JASPER, and PRO HUNTER SERIES, ALPHA FORCE, ROCKERS, FORMZ and
WORKSMART, and WORKMAX WATERPROOF EXPLORERS
Rugged Outdoor Footwear. Rugged outdoor footwear, which is the Company's
largest product line in terms of total net sales, represented $51.0 million, or
52.0%, of Fiscal 1999 net sales. The Company's rugged outdoor footwear consists
of all season sport/hunting boots that are typically waterproof and insulated
and a line of rubber footwear. Rubber footwear was introduced by the Company in
1998 and consists of patterned and non-patterned knee boots, chest and hip
waders and insulated cold weather pack boots. These products are designed to
keep outdoorsmen comfortable in extreme conditions. Most of the Company's rugged
outdoor footwear have outsoles which are designed to provide excellent
cushioning and traction. Although Rocky's rugged outdoor footwear is regularly
updated to incorporate new camouflage patterns, the Company believes its
products in this category are relatively insensitive to changing fashion trends.
Occupational Footwear. Occupational footwear, which is the Company's second
largest product line, represented $29.9 million, or 30.5%, of Fiscal 1999 net
sales. All occupational footwear styles are designed to be comfortable,
flexible, lightweight, slip resistant and durable and are typically worn by
people who are required to spend a majority of their time at work on their feet.
Certain styles of the Company's occupational wear incorporate Gore's CROSSTECH
fabric, which is resistant to blood born pathogens. Several of the Company's
occupational footwear products are similar in design to certain of the Company's
rugged outdoor footwear styles, except the
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Company's occupational footwear is primarily black in color and features
innersole support systems. This product category includes work/steel toe
footwear designed for industrial, construction and manufacturing workers who
demand leather work boots that are durable, flexible and comfortable. Many
companies require their workers to wear steel toe boots and often provide
purchase programs for their employees' footwear needs.
Casual Footwear. Aggregate sales of the Company's casual footwear were $9.0
million in Fiscal 1999, accounting for 9.1% of net sales. The Company's casual
products target the upscale segment of the market and include well-styled,
comfortable leather shoes of a variety of constructions, including traditional
handsewn. Most of the Company's footwear in this segment is waterproof and
highly functional for outdoor activity. The Company has placed increased
emphasis on expanding its market share within the casual segment by increasing
the number of its product offerings and more directly targeting the retail
consumer. The Company currently offers approximately 80 styles of footwear
within this market segment.
Factory outlet stores. The Company operates factory outlet stores in
Nelsonville, Ohio and Westpoint, Mississippi. Products principally include
factory damaged goods and close-outs from the Company and other manufacturers.
In addition, related products manufactured by other manufacturers are sold in
the stores. For 1999, net sales for factory outlet stores were $5.2 million, or
5.3% of the Company's total net sales.
Other. The Company manufactures and/or markets a variety of accessories,
including GORE-TEX waterproof oversocks, GORE-TEX waterproof booties, innersole
support systems, foot warmers, laces and foot powder. GORE-TEX waterproof
oversocks are sold under the ROCKY brand and as private label products.
Aggregate sales of other products were $3.0 million in Fiscal 1999, representing
3.1% of net sales.
Net Sales Composition. The following table indicates the percentage of net
sales derived from each major product line and the factory outlet store for the
periods indicated. Historical percentages may not be indicative of the Company's
future product mix.
FISCAL FISCAL FISCAL
1999 1998 1997
------ ------ ------
Rugged outdoor footwear........................................ 52.0% 53.7% 52.4%
Occupational footwear.......................................... 30.5 26.9 24.3
Casual footwear................................................ 9.1 9.1 8.2
Factory outlet stores.......................................... 5.3 5.5 5.2
Other.......................................................... 3.1 4.8 9.9
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100.0% 100.0% 100.0%
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PRODUCT DESIGN AND DEVELOPMENT
Product design and development are initiated both internally by the
Company's development staff and externally by customers and suppliers. The
Company's product development personnel, marketing personnel and sales
representatives work closely to identify opportunities for new styles,
camouflage patterns, design improvements and the incorporation of new materials.
These opportunities are reported to the Company's development staff which
oversees the development and testing of the new footwear. The Company also
receives design and product innovation ideas from tradeshows and from its
customers and suppliers who work with the Company to design footwear
incorporating desired features or product innovations. The Company strives to
develop products which respond to the changing needs and tastes of consumers
under time constraints imposed by the market. As part of the design process, the
Company maintains a computer aided design (CAD) system, which significantly
shortens the development period for new footwear styles. Once the product design
has been approved for production, a last (a
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reusable form utilized in the manufacture of footwear) is developed by the
Company and then reproduced by a third-party supplier.
SALES, MARKETING AND ADVERTISING
The Company has developed comprehensive marketing and advertising programs
to gain national exposure and create brand awareness for its ROCKY brand
products in its targeted markets. By creating strong brand awareness, the
Company seeks to increase the general level of retail demand for its products,
expand its customer base and increase brand loyalty. The Company's footwear is
sold by more than 3,000 retail and mail order companies in the United States and
Canada. The Company's largest customers include: Cabela's, Inc., Bass Pro Shops,
Inc., Dick's Clothing and Sporting Goods and Gander Mountain for rugged outdoor
footwear; Fecheimer Brothers Uniforms, Inc., R & R Uniforms, Inc. and Galls,
Inc. for occupational footwear; and J.C. Penney Company, Inc. for casual
footwear. No single customer accounted for more than 10% of the Company's
revenues in Fiscal 1999.
The Company's sales and marketing personnel are responsible for developing
and implementing all aspects of advertising and promotion of the Company's
products. In addition, the Company maintains a network of 53 exclusive sales
representatives and manufacturers' representatives, operating in 17 geographic
territories, who sell the Company's products throughout the United States and in
Canada. The Company has historically sold its products through manufacturers'
representatives who carried ROCKY brand products as well as other non-competing
products. In an effort to ensure full representation of its complete product
line and consistent support of its customers, late in 1995, the Company began
replacing its manufacturers' representatives with exclusive sales
representatives who sell only ROCKY brand products. Currently, 87% of the
Company's sales force is comprised of exclusive sales representatives. The
Company also changed its sales and manufacturing representatives compensation
program by setting performance goals based on sales growth, development of new
accounts and increased penetration of existing accounts with new products. The
Company's exclusive sales representatives and manufacturers' representatives are
paid on a commission basis and are responsible for sales, service and follow-up.
The Company advertises and promotes the ROCKY brand through a variety of
methods, including product packaging, national print and television advertising
and a telemarketing operation. In addition, the Company attends numerous
tradeshows, which have historically been an important source of new orders and
also works to establish the ROCKY brand amongst the trade industry. The
Company's marketing personnel have developed a product list, product catalog and
dealer support system which includes attractive point-of-sale displays and co-op
advertising programs.
The Company believes its long-term reputation for quality has increased
awareness of the ROCKY brand. To further increase the strength of its brand, the
Company has targeted the majority of its advertising efforts toward end
consumers. A key component of this strategy includes advertising through
cost-effective cable broadcasts aimed at audiences which share the demographic
profile of the Company's typical customers. Similarly, the Company has shifted
its national print advertising campaign to several consumer publications:
including: Field & Stream, North American Hunter, Outdoor Life, Men's Journal,
Police and Security News, Rescue and Law and Order. The Company's print
advertisements and television commercials emphasize the waterproof nature of the
Company's footwear as well as its high quality, comfort, functionality and
durability. Management believes that by continuing to target consumers, the
ROCKY brand will become more recognizable and establish it as an overall leader
in the industry leading to greater retail demand for the product.
All of the Company's advertisements include a toll free number for
consumers to inquire about the Company's products and to locate their nearest
retailer. When the consumer calls into this automated telemarketing service,
they elect to speak with a customer service representative, receive a free
brochure, or locate the three nearest dealers. The dealer locator service
prompts the consumer for their zip code and responds with the name, address, and
phone number of the three nearest dealers indicated by the zip code entered. By
using different phone numbers for various advertising campaigns, the marketing
department is able to track the effectiveness of the advertising and media used.
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MANUFACTURING AND SOURCING
The Company manufactures its products under a twin-plant concept by
producing the labor intensive "upper portions" in its lower wage rate plants in
the Dominican Republic and Puerto Rico and completing its footwear in Puerto
Rico and Nelsonville, Ohio where it uses state-of-the-art bottoming techniques.
In early 1999, the Company began to manufacture opening price point hunting
boots in the Dominican Republic. During 2000, the Company plans to move certain
manufacturing operations from Nelsonville to Puerto Rico and the Dominican
Republic. The Company utilizes a modular "Team Pass-Through" manufacturing
system in each of its manufacturing facilities. The Company believes that this
system, which allows each person to perform a number of different tasks, is
superior to a traditional assembly line approach, which requires each person to
perform a single repetitive task. This system increases the number of pairs of
footwear produced per square foot of manufacturing space, reduces
work-in-process inventory and direct labor and improves the Company's production
yields. In addition, the Company believes that its manufacturing process allows
it to respond quickly to changes in product demand and consumer preferences.
Quality control is stressed at every stage of the manufacturing process and
is monitored by trained quality assurance personnel at each of the Company's
manufacturing facilities. Every pair of ROCKY footwear, or its component parts,
produced at the Company's facilities is inspected at least five times during the
manufacturing process with some styles inspected up to nine times. Every
GORE-TEX waterproof fabric bootie liner is individually tested by filling it
with compressed air and submerging it in water to verify that it is waterproof.
Quality control personnel at the Nelsonville, Ohio warehouse conduct quality
control testing on incoming sourced finished goods and raw materials and inspect
random samples from the finished goods inventory from each of the Company's
manufacturing facilities to ensure that all items meet the Company's high
quality standards. A portion of each manufacturing employee's compensation is
based on the level of product quality of each employee's respective work group.
Most of the Company's footwear is produced in its own facilities in
Nelsonville, Ohio, the Dominican Republic and Puerto Rico. The Company sources
some footwear from manufacturers in the Far East, primarily China, which in 1999
accounted for approximately 26% of its revenues. During late 1998, the Company
entered into a joint venture with a factory in China to develop GORE-TEX
footwear products. Pursuant to the joint venture, the Company will supply the
technology and know-how to the factory to become W. L. Gore certified. The
Company has an exclusive agreement with the product source for two years. The
Company believes this source will improve sourced product quality and produce
better gross margins. A greater portion of the Company's products may be sourced
in the future if the Company expands and reaches capacity in its manufacturing
facilities. The Company sources products to reach price points that it cannot
obtain with products manufactured in its own facilities. The Company will source
products from outside facilities only if the Company believes that these
facilities will maintain the high quality that has become associated with ROCKY
brand footwear. All product sourcing is planned and implemented under the
direction and supervision of the Company's Director of Sourcing.
As part of the Company's quality control process, the Company uses agents
to visit foreign factories to conduct quality control reviews of raw materials,
work in process inventory, and finished goods. In addition, upon arrival at the
Company's facilities, another inspection of raw material and work in process
inventory is conducted by Company personnel. The Company does not use hedging
instruments with respect to foreign sourced products.
Compliance with federal, state and local regulations with respect to the
environment has not had any material effect on the earnings, manufacturing
process, capital expenditures or competitive position of the Company. Compliance
with such laws or changes therein could have a negative impact in the future.
SUPPLIERS
The Company purchases raw materials from a number of domestic and foreign
sources. The Company does not have any long-term supply contracts for the
purchase of its raw materials, except for limited blanket orders on leather to
protect the Company's wholesale selling prices for an extended period of time.
The principal raw materials used in the production of the Company's footwear, in
terms of dollar value, are leather, GORE-TEX waterproof breathable fabric,
CORDURA nylon fabric and soling materials. The Company believes that these
materials will continue to be available from its current suppliers, and that,
with the exception of GORE-TEX waterproof breathable fabric, there are
acceptable present alternatives to these suppliers and materials.
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GORE-TEX waterproof fabric is purchased under license directly from W. L.
Gore & Associates, Inc. ("Gore"). A majority of the Company's footwear
incorporates GORE-TEX waterproof breathable fabric. The Company, which has been
a customer of Gore since 1980, was the first footwear manufacturer licensed by
Gore to manufacture, promote, sell and distribute footwear worldwide using
GORE-TEX waterproof breathable fabric. The Company is currently one of the
largest customers of GORE-TEX waterproof breathable fabric for footwear.
Although other waterproofing techniques or materials are available, the Company
places a high value on its GORE-TEX license because the GORE-TEX trade name has
high brand name recognition and the GORE-TEX waterproof breathable fabric used
in the manufacture of ROCKY footwear has a reputation for quality and proven
performance.
Under the Company's licensing agreement with Gore, a prototype or sample of
each style of shoe or boot designed and produced by the Company that
incorporates GORE-TEX waterproof breathable fabric must be tested and approved
by Gore before the Company is permitted to manufacture or sell commercial
quantities of that style of footwear. Gore's testing involves immersing the
Company's footwear prototype for days in a water exclusion tester and flexing
the prototype 500,000 times, simulating a 500-mile march through several inches
of water. The prototype is then placed in a sweat absorption and transmission
tester to measure "breathability," which is the amount of perspiration that can
escape from the footwear.
All of the Company's GORE-TEX fabric footwear is guaranteed to be
waterproof for one year from the date of purchase. When a customer claims that a
product is not waterproof, the product is returned to the Nelsonville, Ohio
manufacturing facility for further testing. If the product fails this testing
process, it is either replaced or credit is given, at the customer's discretion.
The Company believes that, historically, the claims associated with this
guarantee have been consistent with guarantee claims in the footwear industry.
SEASONALITY AND WEATHER
The Company has historically experienced significant seasonal fluctuations
in the sale of rugged outdoor footwear. A majority of orders for the Company's
rugged outdoor footwear are placed in January through April for delivery in July
through October. In order to meet demand, the Company must manufacture rugged
outdoor footwear year round to be in a position to ship advance orders during
the last two quarters of each calendar year. Accordingly, average inventory
levels have been highest during the second and third quarters of each calendar
year and sales have been highest in the last two quarters of each calendar year.
Because of seasonal fluctuations, there can be no assurance that the results for
any particular interim period will be indicative of results for the full year or
for future interim periods.
Many of the Company's products, particularly its rugged outdoor footwear
line, are used by consumers in cold or wet weather. Mild or dry weather can have
a material adverse effect on sales of the Company's products, particularly if
mild or dry weather conditions occur in broad geographical areas during late
fall or early winter. Also, due to variations in weather conditions from year to
year, results for any single quarter or year may not be indicative of results
for any future quarter or year.
Footwear retailers in general have begun placing orders closer to the
selling season. This increases the Company's business risk because it must
produce and carry inventories for relatively longer periods. In addition, the
later placement of orders may change the historical pattern of orders and sales
and increase the seasonal fluctuations in the Company's business. There can be
no assurance that the results for any particular interim period or year will be
indicative of results for the full year or for any future interim period or
year.
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BACKLOG
At December 31, 1999 and December 31, 1998, backlog was $7.7 and $4.7
million, respectively. Because a majority of the Company's orders are placed in
January through April for delivery in July through October, the Company's
backlog is lowest during the October through December period and peaks during
the April through June period. Factors other than seasonality could have a
significant impact on the Company's backlog and, therefore, the Company's
backlog at any one point in time may not be indicative of future results.
Generally, orders may be canceled by customers prior to shipment without
penalty.
PATENTS, TRADEMARKS AND TRADE NAMES
The Company owns numerous United States patents for shoe upper and shoe
sole designs. The Company is not aware of any infringement of its patents or
that it is infringing any patents owned by third parties.
The Company owns United States federal registrations for its marks
ROCKY(R), ROCKY BOOTS(R) (which claims a ram's head Design as part of the mark),
ROCKY BOOTS and Design(R) (which claims a ram's head Design as part of the
mark), BEAR CLAW(R), CORNSTALKERS(R), COME WALK WITH U.S. and Design(R),
TAC-TEAM and Design(R), ROCKY 911 SERIES and Design(R), SNOW STALKER(R), 4 WAY
STOP and Design(R), ROCKY and Design(R) for cigars, ROCKY ROCKY SHOES & BOOTS
INC. SINCE 1932 and Design(R) plus a detailed full ram Design, and STALKERS(R).
Additional mark variations for ROCKY BOOTS(R) and Design (which claims a ram's
head Design as part of the mark), AQUAGUARD(TM), FORMZ(TM), SILENTHUNTER(TM),
PROHIKER(TM), ELIMINATOR(TM), PROHUNTER(TM), and LONGBEARD(TM) are the subject
of pending United States federal applications for registration. In addition, the
Company uses and has common law rights in the marks ROCKY(R) MOUNTAIN
STALKERS(R), and other ROCKY(R) marks. During 1994, the Company began to
increase distribution of its goods in several countries, including countries in
Western Europe, Canada and Japan. The Company has applied for trademark
registration of its ROCKY(R) mark in a number of foreign countries.
The Company also uses in its advertising and in other documents the
following trademarks owned by corporations other than the Company: GORE-TEX(R)
and CROSSTECH(R) are registered trademarks of W.L. Gore & Associates, Inc.;
CORDURA(R) is a registered trademark of E.I. DuPont de Nemours and Company;
THINSULATE(R) is a registered trademark of Minnesota Mining and Manufacturing
Company; and CAMBRELLE(R) is a trademark of Koppers Industries, Inc. The Company
is not aware of any material conflicts concerning its marks or its use of marks
owned by other corporations.
COMPETITION
The Company operates in a very competitive environment. Product function,
design, comfort, quality, technological improvements, brand awareness,
timeliness of product delivery and pricing are all important elements of
competition in the markets for the Company's footwear. The Company believes
that, based on these factors, it competes favorably in its rugged outdoor
footwear and occupational footwear market niches. Many of the Company's
competitors have greater financial, distribution and marketing resources than
the Company. The Company has at least five major competitors in each of its
markets. All of these competitors have strong brand name recognition in the
markets that they serve.
The footwear industry is subject to rapid changes in consumer preferences.
The Company's casual product line and certain styles within its rugged outdoor
and occupational product lines are susceptible to fashion trends. Therefore, the
success of these products and styles are more dependent on the Company's ability
to anticipate and respond to changing fashion trends and consumer demands within
its niche market in a timely manner. The Company's inability or failure to do so
could adversely affect consumer acceptance of these product lines and styles and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
EMPLOYEES
At December 31, 1999, the Company had approximately 1,397 full-time
employees and 22 part-time employees. Approximately 1,020 of these full-time
employees are in the Dominican Republic and Puerto Rico. The Company has
approximately 1,141 employees engaged in production and the balance in
managerial and administrative
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positions. The production employees at the Nelsonville, Ohio facility are
represented by the Union of Needletrades, Industrial and Textile Employees
("UNITE"). The current collective bargaining agreement between the Company and
the union was reached in May 1998 and will expire in May 2000. The Company has
initiated negotiations concerning its collective bargaining agreement with
UNITE. The Company believes the agreement is consistent with other contracts in
the footwear industry. Management considers its relations with all of its
employees, both union and non-union, to be good.
BUSINESS RISKS
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). In
addition to the other information in this report, readers should carefully
consider that the following important factors, among others, in some cases have
affected, and in the future could affect, the Company's actual results and could
cause the Company's actual consolidated results of operations for 1998 and
beyond, to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.
Dependence on Sales Forecasts. The Company's investments in infrastructure
and product inventory are based on sales forecasts and are necessarily made in
advance of actual sales. The markets in which the Company does business are
highly competitive, and the Company's business is affected by a variety of
factors, including brand awareness, changing consumer preferences, product
innovations, fashion trends, retail market conditions, weather conditions and
economic and other factors. One of management's principal challenges is to
improve its ability to predict these factors, in order to enable the Company to
better match production of its products with demand. In addition, the Company's
growth over the years has created the need to increase these investments in
infrastructure and product and to enhance the Company's operational systems. To
the extent sales forecasts are not achieved, costs associated with
infrastructure and carrying cost of product inventory would represent a higher
percentage of revenue, which would adversely affect the Company's financial
performance.
Changes in Consumer Demand. The footwear industry is subject to rapid
changes in consumer preferences. Demand for the Company's products, particularly
the Company's casual product line and certain styles within its rugged outdoor
and occupational product lines, may be adversely affected by changing fashion
trends. The future success of the Company will depend upon the Company's ability
to anticipate and respond to changing consumer preferences and fashion trends in
a timely manner. The Company's failure to adequately anticipate or respond to
such changes could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, sales of the
Company's products may be negatively affected by weak consumer spending as a
result of adverse economic trends or uncertainties regarding the economy. See
"Business -- Competition."
Seasonality. The Company has historically experienced, and expects to
continue to experience, significant seasonal fluctuations in the sale of its
products. The Company's operating results have varied significantly in the past,
and may vary significantly in the future, partly due to such seasonal
fluctuations. A majority of the orders for the Company's rugged outdoor footwear
are placed in January through April for delivery in July through October. To
meet demand, the Company must manufacture its products year-round. Accordingly,
average inventory levels have been highest during the second and third quarters
of each calendar year, and sales have been highest in the last two quarters of
each calendar year. The Company believes that sales of its products will
continue to follow this seasonal cycle. Additionally, the Company does not have
long-term contracts with its customers. Accordingly, there is no assurance that
the results for any particular quarter will be indicative of results for the
full year or for the future. The Company believes that comparisons of its
interim results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to the factors mentioned
above as well as factors discussed elsewhere in this Form 10-K, it is likely
that in some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock will likely be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Seasonality and Weather."
Impact of Weather. Many of the Company's products, particularly its rugged
outdoor footwear line, are used primarily in cold or wet weather. Mild or dry
weather has in the past and may in the future have a material adverse
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effect on sales of the Company's products, particularly if mild or dry weather
conditions occur in broad geographical areas during late fall or early winter.
Also, due to variations in weather conditions from year to year, results for any
single quarter or year may not be indicative of results for any future period.
See "Business -- Seasonality and Weather."
Competition. The footwear industry is intensely competitive, and the
Company expects competition to increase in the future. Many of the Company's
competitors have greater financial, distribution and marketing resources than
the Company. The Company's ability to succeed depends on its ability to remain
competitive with respect to the quality, design, price and timely delivery of
products. Competition could materially adversely affect the Company's business,
financial condition and results of operations. See "Business -- Competition."
Reliance on Suppliers. The Company purchases raw materials from a number of
domestic and foreign sources. The Company does not have any long-term supply
contracts for the purchase of its raw materials, except for limited blanket
orders on leather. The principal raw materials used in the production of the
Company's footwear, in terms of dollar value, are leather, GORE-TEX waterproof
fabric, CORDURA nylon fabric and soling materials. The Company believes that
currently there are acceptable alternatives to these suppliers and materials,
with the exception of the GORE-TEX waterproof fabric.
The Company is currently one of the largest customers of GORE-TEX
waterproof fabric for use in footwear. The Company's licensing agreement with
W.L. Gore & Associates, Inc. may be terminated by either party upon 90 days
written notice. Although other waterproofing techniques and materials are
available, the Company places a high value on its GORE-TEX waterproof breathable
fabric license because GORE-TEX has high brand name recognition and the GORE-TEX
waterproof fabric used in the manufacture of ROCKY footwear has a reputation for
quality and proven performance. Even though the Company does not believe that
its supply of GORE-TEX waterproof fabric will be interrupted in the future, no
assurance can be given in this regard. The Company's loss of its license to use
GORE-TEX waterproof breathable fabric could materially adversely affect the
Company's competitive position, which could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Suppliers."
The Company delivers a majority of shipments to its customers via United
Parcel Service ("UPS"). Possible interruptions of UPS's service in the future
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company utilizes other carriers and the
U.S. Postal Service to deliver its shipments.
Changing Retailing Trends. Historically, the Company has chosen not to sell
products to discount mass merchandisers. A continued shift in the marketplace
from traditional independent retailers to large discount mass merchandisers has
increased the pressure on many footwear manufacturers to sell products to large
discount mass merchandisers at less favorable margins. Because of competition
from large discount mass merchandisers, a number of small retailing customers of
the Company have gone out of business, and in the future more of such customers
may go out of business, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Although
progressive independent retailers have attempted to improve their competitive
position by joining buying groups, stressing personal service and stocking more
products that address specific local needs, a continued shift to discount mass
merchandisers could have a material adverse effect on the Company's business,
Financial condition and results of operations and could cause the Company to
reevaluate its strategy. See "Business -- Sales, Marketing and Advertising."
Reliance on Key Personnel. The development of the Company's business has
been, and will continue to be, highly dependent upon Mike Brooks, Chairman,
President and Chief Executive Officer, and David Fraedrich, Executive Vice
President and Chief Financial Officer, and John Friday, Executive Vice
President-Sales. Each of these executive officers has an at-will employment
agreement with the Company. The employment agreements provide that in the event
of termination of employment with the Company, the employee will receive a
severance benefit and may not compete with the Company for a period of one year.
The Company has obtained key man life insurance on Messrs. Brooks and Fraedrich
in the amount of $1,146,022 and $1,143,602, respectively. The loss of
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the services of any of these officers could have a material adverse effect upon
the Company's business, financial condition and results of operations.
Reliance on Foreign Manufacturing. Most of the Company's rugged outdoor and
casual footwear uppers and some opening price point hunting boots are produced
in the Dominican Republic. Therefore, the Company's business is subject to the
risks of doing business offshore, such as: the imposition of additional United
States legislation and regulations relating to imports, including quotas,
duties, taxes or other charges or restrictions; weather conditions in the
Dominican Republic; foreign governmental regulation and taxation; fluctuations
in foreign exchange rates; changes in economic conditions; changes in the
political stability of the Dominican Republic; and changes in relationships
between the United States and the Dominican Republic. If any such factors were
to render the conduct of business in the Dominican Republic undesirable or
impracticable, the Company would have to locate new facilities for its
manufacturing operations. There can be no assurance that additional facilities
would be available to the Company or, if available, that such facilities could
be obtained on terms favorable to the Company. Such a development would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing and Sourcing."
Changes in Tax Rates. In past years, the Company's effective tax rate
typically has been substantially below the United States federal statutory
rates. The Company has paid minimal income taxes on income earned by its
subsidiary in Puerto Rico due to tax credits afforded the Company under Section
936 of the Internal Revenue Code and local tax abatements. However, Section 936
of the Internal Revenue Code has been repealed such that future tax credits
available to the Company will be capped beginning in 2002 and terminate in 2006.
In addition, the Company's local tax abatements in Puerto Rico are due to expire
in 2004. Before Fiscal 1996, the Company paid no foreign income tax on the
income generated by its subsidiary in the Dominican Republic. During fourth
quarter Fiscal 1996, the Company elected to repatriate future earnings of its
subsidiary in the Dominican Republic. In 1999, the Company elected not to
repatriate all 1999 and future earnings of its subsidiary in the Dominican
Republic. Consequently, no income taxes are provided on these cumulative
earnings of approximately $5,109,000.
The Company's future tax rate will vary depending on many factors,
including the level of relative earnings and tax rates in each jurisdiction in
which it operates and the repatriation of any foreign income to the United
States. Accordingly, since October 1, 1996, the Company has accrued taxes on all
amounts repatriated and will accrue taxes on future earnings as they are no
longer deemed permanently invested. The Company cannot anticipate future changes
in such laws. Increases in effective tax rates or changes in tax laws may have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Manufacturing. The Company currently plans to retain its internal
manufacturing capability in order to continue benefiting from expertise the
Company has gained with respect to footwear manufacturing methods conducted at
its manufacturing facilities. The Company continues to evaluate its
manufacturing facilities and independent manufacturing alternatives in order to
determine the appropriate size and scope of its manufacturing facilities. There
can be no assurance that the costs of products that continue to be manufactured
by the Company can remain competitive with sourced products. On March 1, 2000
the Company announced it plans to substantially decrease manufacturing at its
Nelsonville, Ohio plant during 2000 by moving additional production to its
plants in Puerto Rico and the Dominican Republic.
Concentration of Stock Ownership; Certain Corporate Governance Measures.
The directors, executive officers and principal shareholders of the Company
beneficially own approximately 16.5 % of the Company's outstanding Common Stock.
As a result, these shareholders are able to exert significant influence over all
matters requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. Such concentration of ownership
may also have the effect of delaying or preventing a change in control of the
Company. The Company has also adopted certain corporate governance measures
which, individually or collectively, could delay or frustrate the removal of
incumbent directors and could make more difficult a merger, tender offer or
proxy contest involving the Company even if such events might be deemed by
certain shareholders to be beneficial to the interest of the shareholders.
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Volatility of Market Price. From time to time, there may be significant
volatility in the market price of the Common Stock. The Company believes that
the current market price of its Common Stock reflects expectations that the
Company will be able to continue to market its products profitably and develop
new products with market appeal. If the Company is unable to market its products
profitably and develop new products at a pace that reflects the expectations of
the market, investors could sell shares of the Common Stock at or after the time
that it becomes apparent that such expectations may not be realized, resulting
in a decrease in the market price of the Common Stock.
In addition to the operating results of the Company, changes in earnings
estimates by analysts, changes in general conditions in the economy or the
financial markets or other developments affecting the Company or its industry
could cause the market price of the Common Stock to fluctuate substantially. In
recent years, the stock market has experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies, including the Company, for reasons
unrelated to their operating performance. See "Market for the Registrant's
Common Equity and Related Matters."
Accounting Standards. Changes in the accounting standards promulgated by
the Financial Accounting Standards Board or other authoritative bodies could
have an adverse affect on the Company's future reported operating results.
Environmental and Other Regulation. The Company is subject to various
environmental and other laws and regulations, which may change periodically.
Compliance with such laws or changes therein could have a negative impact on the
Company's future reported operating results.
Limited Protection of Intellectual Property. The Company regards certain of
its footwear designs as proprietary and relies on patents to protect those
designs. The Company believes that the ownership of the patents is a significant
factor in its business. Existing intellectual property laws afford only limited
protection of the Company's proprietary rights, and it may be possible for
unauthorized third parties to copy certain of the Company's footwear designs or
to reverse engineer or otherwise obtain and use information that the Company
regards as proprietary. The Company believes its patents provide a measure of
security against competition, and the Company intends to enforce its patents
against infringement by third parties. However, if the Company's patents are
found to be invalid, to the extent they have served, or would in the future
serve, as a barrier to entry to the Company's competitors, such invalidity could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company owns United States federal registrations for a number of its
trademarks, trade names and designs. Additional trademarks, trade names and
designs are the subject of pending federal applications for registration. The
Company also uses and has common law rights in certain trademarks. During 1994,
the Company began to increase distribution of its goods in several foreign
countries. Accordingly, the Company has applied for trademark registrations in a
number of these countries. The Company intends to enforce its trademarks and
trade names against unauthorized use by third parties. However, existing
trademark and trade name laws afford only limited protection, and the laws of
countries other than the United States may not protect the Company's proprietary
rights to as great an extent as do the laws of the United States. Accordingly,
regardless of the legal rights of the Company, it may be possible for
unauthorized third parties to use the Company's trademarks, trade names or
designs and realize monetary gain at the Company's expense. Although such
unauthorized use may be illegal, the Company may be forced to expend substantial
resources to enforce its rights and nonetheless be divested of a portion of its
goodwill as a result of such unauthorized use. See "Business -- Patents,
Trademarks and Trade Names."
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS. This Annual Report on Form
10-K contains certain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which are intended to be covered by the safe harbors created thereby.
Those statements include, but may not be limited to, all statements regarding
the intent, belief and expectations of the Company and its management, such as
statements concerning the Company's future profitability and its operating and
growth strategy. Investors are cautioned that all forward-looking statements
involve risks and uncertainties including, without limitation, the factors set
forth under
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the caption "Business Risks" in this Annual Report on Form 10-K and other
factors detailed from time to time in the Company's filings with the Securities
and Exchange Commission. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate. Therefore, there can be no assurance
that the forward-looking statements included in this Annual Report on Form 10-K
will prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
ITEM 2. PROPERTIES.
The Company's executive offices and factory outlet store are located in
Nelsonville, Ohio in a two-story 25,000 square foot building adjacent to the
Company's Nelsonville manufacturing facility. The first floor of this building,
which consists of approximately 12,500 square feet, houses the Company's factory
outlet store which was opened in late 1994. The second floor houses the
Company's executive offices. The Company also owns a 5,000 square foot office
building in Nelsonville, Ohio, subject to a mortgage, which is used to house
administrative staff.
The Company owns a 98,000 square foot distribution warehouse in
Nelsonville, Ohio. This facility is currently used to receive and warehouse raw
materials and footwear uppers, and houses the footwear returns department.
The Company leases a 41,000 square foot manufacturing facility in
Nelsonville, Ohio, from the William Brooks Real Estate Company, which is 20%
owned by Mike Brooks, President and Chief Executive Officer of the Company. The
lease expires in April 2003 and is renewable for two five-year terms.
During 1999, the Company leased three buildings of 54,000, 16,000 and
24,000 square feet, respectively, in Newark Ohio to store finished goods
inventory, rubber products and retail inventory. The Company vacated the Newark
facilities in late 1999 and consolidated finished goods, rubber products and
retail inventory into Company-owned facilities.
Lifestyle leases a 20,500 square foot manufacturing facility and a 22,700
square foot manufacturing facility and warehouse in Puerto Rico from the Puerto
Rico Industrial Development Company under net noncancellable operating leases,
one of which expired in 1998 and one of which expires in 2002. The Company is
currently on a month-to-month basis in the facility whose lease expired in 1998.
The Company has signed a lease for an 84,559 square foot facility in Puerto Rico
and plans to move all of its operations to this location during second quarter
2000.
Five Star's manufacturing facility, consisting of three connected buildings
and a stand-alone building, is located in a tax-free trade zone in the Dominican
Republic. Five Star leases 82,600 square feet of this facility from the
Dominican Republic Corporation for Industrial Development (the "DRCID") under a
Consolidation of Lease Contract, dated as of December 13, 1993, the term of
which expires on February 1, 2003. Five Star leases an additional stand-alone
32,000 square feet from the DRCID under a temporary lease. The Company is
currently negotiating a permanent lease for the 32,000 square foot facility.
The Company leased a 3,900 square foot retail outlet store in Westpoint,
Mississippi in October of 1998, pursuant to a lease which expires October 30,
2000.
The Company substantially completed construction of a finished goods
distribution center near Logan, Ohio in December 1999. The building contains
192,000 square feet and is situated on 17.9 acres of land. The new distribution
center became fully operational in the first quarter of 2000. The company has an
option on an additional four acres of land.
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ITEM 3. LEGAL PROCEEDINGS.
The Company is, from time to time, a party to litigation which arises in
the normal course of its business. Although the ultimate resolution of pending
proceedings cannot be determined, in the opinion of management, the resolution
of such proceedings in the aggregate will not have a material adverse effect on
the Company's financial position, results of operations, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "RCKY." The following table sets forth the range of high and low sales
prices for the Common Stock for the periods indicated, as reported by the Nasdaq
National Market:
QUARTER ENDED HIGH LOW
------------- ----- -----
March 31, 1998......................................... 19.00 14.38
June 30, 1998.......................................... 17.50 13.75
September 30, 1998..................................... 14.38 7.25
December 31, 1998...................................... 8.00 5.00
March 31, 1999......................................... 6.75 4.75
June 30, 1999.......................................... 9.38 4.81
September 30, 1999..................................... 8.50 5.53
December 31, 1999...................................... 8.13 6.63
On March 16, 2000, the last reported sales price of the Common Stock on the
Nasdaq National Market was $4.00 per share. As of March 16, 2000, there were
approximately 172 shareholders of record of the Common Stock.
The Company presently intends to retain its earnings to finance the growth
and development of its business and does not anticipate paying any cash
dividends in the foreseeable future. Future dividend policy will depend upon the
earnings and financial condition of the Company, the Company's need for funds
and other factors. Presently, the Line of Credit (as defined below) restricts
the payment of dividends on the Common Stock. At December 31, 1999, the Company
had no retained earnings available for distribution.
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ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
(in thousands, except for per share data)
YEARS ENDED TWELVE MONTHS
----------- ENDED SIX MONTHS
12/31/95 ENDED
12/31/99 12/31/98 12/31/97 12/31/96 (UNAUDITED) 12/31/95
-------- -------- -------- -------- ----------- --------
INCOME STATEMENT DATA
Net sales .................. $ 98,099 $ 88,699 $ 95,027 $ 73,148 $ 60,384 $ 36,124
Net income (loss) .......... $ (5,130) $ 2,262 $ 4,761 $ 2,806 $ (537) $ (490)
BALANCE SHEET DATA
Total assets ............... $ 89,333 $ 96,598 $ 80,955 $ 58,090 $ 49,081 $ 49,081
Long-term debt, less current
maturities ................. 25,177 26,878 13,407 19,520 16,554 16,554
Shareholders' equity ....... 50,229 59,635 59,197 26,375 23,569 23,569
PER SHARE
Net income (loss):
Basic ................ $ (1.09) $ 0.42 $ 1.16 $ 0.77 $ (0.15) $ (0.13)
Diluted .............. $ (1.09) $ 0.41 $ 1.10 $ 0.74 $ (0.15) $ (0.13)
Weighted average number of
shares outstanding:
Basic ................ 4,710 5,425 4,088 3,666 3,666 3,666
Diluted .............. 4,710 5,527 4,330 3,776 3,666 3,666
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
References to Fiscal 1999, 1998 and 1997 are to Fiscal years of the
Company ended December 31 of the respective year.
PERCENTAGE OF NET SALES
1999 1998 1997
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Costs of goods sold 84.9 76.9 72.9
----- ----- -----
Gross margin 15.1 23.1 27.1
Selling, general and
Administrative expenses 20.4 19.4 17.3
----- ----- -----
Income (Loss) from operations (5.3%) 3.7% 9.8%
===== ===== =====
FISCAL 1999 COMPARED TO FISCAL 1998
NET SALES
Net sales rose 10.6% to $98,099,184 for Fiscal 1999 compared with
$88,699,413 for Fiscal 1998. A significant portion of this increase was due to
higher sales in the Company's occupational and rugged outdoor footwear
categories. The occupational category grew approximately $6.0 million in Fiscal
1999 versus the prior year, benefiting from additional styles and increased
market acceptance of the Company's branded products. The rugged outdoor
category, which includes all season sport/hunting boots that are typically
waterproof and insulated, and a line of rubber footwear, increased approximately
$3.4 million in Fiscal 1999 compared with a year ago. Sales of rubber footwear,
which were introduced in Fiscal 1998, were particularly strong compared to
Fiscal 1998. Casual footwear sales rose $0.9 million for Fiscal 1999 compared to
Fiscal 1998. Average list prices for the Company's products were approximately
2% higher in Fiscal 1999 than the prior year.
GROSS MARGIN
Gross margin declined $5,671,956 to $14,842,416 in Fiscal 1999 from
$20,514,372 in Fiscal 1998. As a percentage of net sales, gross margin was 15.1%
for Fiscal 1999 versus 23.1% for Fiscal 1998. The Company ended Fiscal 1998 with
higher than anticipated inventory and implemented plans during Fiscal 1999 to
bring it into line with expected sales, including an aggressive inventory
reduction program during the fourth quarter of the year. Manufacturing
inefficiencies resulting from relocating certain production operations to the
Company's Dominican Republic facilities throughout the second half of Fiscal
1999, as well as the sale of certain inventory at low or negative margins during
fourth quarter 1999, adversely impacted Fiscal 1999 gross margin compared to
Fiscal 1998. As a result of the inventory reduction program, the Company
established a reserve of $445,000 for inventories where the estimated net
realizable value is deemed to be less than cost. The reserve was recorded in
cost of goods sold.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general & administrative ("SG&A") expenses increased $2,812,146 to
$20,020,357 for Fiscal 1999 from $17,208,211 for Fiscal 1998. As a percentage of
net sales, SG&A expenses were 20.4% for Fiscal 1999 versus 19.4% the prior year.
This was principally due to substantially higher costs to temporarily operate
four warehouse facilities and additional shipping costs while the Company's
finished goods distribution center was being constructed and substantially
completed in December 1999. In addition, the Company expanded the use of co-op
advertising during Fiscal 1999 to support sales.
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INTEREST EXPENSE
Interest expense rose $681,071 to $2,415,682 for Fiscal 1999 versus
$1,734,611 for Fiscal 1998. The higher interest expense was attributable to
additional interest expense associated with the higher than anticipated
inventory during most of Fiscal 1999, the Company's share repurchase program,
and somewhat higher interest rates in Fiscal 1999 versus Fiscal 1998.
OTHER INCOME
Other income-net decreased $454,786 to $236,287 in Fiscal 1999 compared to
$691,073 in Fiscal 1998. The lower other income is due to a decrease in interest
income earned on the Company's lower average cash balances in 1999 compared to
1998, and fewer cash discounts earned on early payments of trade payables.
INCOME TAXES
The Company recognized an income tax benefit of $2,227,579 for Fiscal 1999
compared with income tax expense of $426 for Fiscal 1998. The current year
benefit resulted from losses generated in Rocky, Inc., offset by income earned
in the Dominican Republic and losses in the Company's Puerto Rican subsidiary.
The primary components of the income tax benefit were a net operating loss carry
back of $1,671,000 and a net operating loss carry forward of $1,794,000 which
was offset by a $822,000 reduction of the uniform capitalization costs as a
result of reduced inventory levels. The Company's effective tax benefit rate of
31.1% reflects favorable tax treatment in Puerto Rico and the Dominican
Republic. Effective in 1999, the Company intends to reinvest accumulated
undistributed earnings of Five Star, which amounted to $5,109,000 as of December
1999, in the Dominican Republic. As a result of this decision, no taxes were
provided on the 1999 earnings of the Company's Dominican Republic subsidiary. In
addition, Section 936 of the Internal Revenue Code has been repealed such that
future tax credits available to the Company will be capped beginning in 2002 and
terminate in 2006. The Company receives abatements on its Commonwealth and
municipal taxes on its subsidiary in Puerto Rico.
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES
Net sales increased $6,327,373, or 6.7%, to $88,699,413 for Fiscal 1998
versus $95,026,786 for Fiscal 1997. Rugged outdoor footwear sales decreased
$2,145,547 in Fiscal 1998 versus Fiscal 1997. This decrease resulted from lower
sales of insulated rugged outdoor footwear due to retail carryover from the
prior year's selling season and unusually mild weather during the final four
months of the year. These factors caused the Company to experience substantial
order cancellations and reductions of re-orders of rugged outdoor footwear
during the second half of Fiscal 1998. Although sales of rugged outdoor footwear
declined in Fiscal 1998 versus Fiscal 1997, the category benefited from the
introduction of ROCKY(R) rubber products. Occupational footwear sales increased
$750,506 in Fiscal 1998 compared to Fiscal 1997. Casual footwear sales rose
$331,047 in Fiscal 1998 versus Fiscal 1997. Average prices for the Company's
products were approximately 2% higher in Fiscal 1998 than the prior year.
Additionally, in Fiscal 1998 the Company discontinued a contract to manufacture
shoe uppers on a private label basis for a customer.
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GROSS MARGIN
Gross margin declined $5,212,343, or 20.3%, to $20,514,372 for Fiscal 1998
versus $25,726,715 for Fiscal 1997. As a percentage of net sales, gross margin
declined to 23.1% for Fiscal 1998 from 27.1% for Fiscal 1997. The reduction in
gross margin was primarily a result of lower than expected sales, which resulted
in temporary manufacturing inefficiencies. The Company attempted to respond
promptly throughout Fiscal 1998 to changes in retail demand, unusual weather
conditions, and higher than planned inventories. However, some manufacturing
inefficiencies could not be avoided due to fluctuating demand for the Company's
products. Additionally, gross margin was negatively impacted by increased
expenses associated with hardware and software upgrades to enhance inventory
management systems.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general & administrative expenses ("SG&A") increased $791,870, or
4.8%, to $17,208,211 for Fiscal 1998 versus $16,416,341 for Fiscal 1997. As a
percentage of net sales, SG&A increased to 19.4% for Fiscal 1998, versus 17.3%
for Fiscal 1997. The increase in SG&A for Fiscal 1998 was due to the addition of
new product managers, higher employee benefit costs and increased advertising
expenditures.
INTEREST EXPENSE
Interest expense declined $818,121, or 32.0%, to $1,734,611 for Fiscal 1998
versus $2,552,732 for Fiscal 1997. This decrease was a result of lower
outstanding balances on the Company's credit facility during Fiscal 1998, and
more favorable interest rates due to re-negotiation of the Company's credit
facility during the second quarter of Fiscal 1998. The Company received net
proceeds of $26.9 million from a follow-on common stock offering during the
fourth quarter of Fiscal 1997. The proceeds were used to reduce outstanding debt
which resulted in lower interest expense for the fourth quarter of Fiscal 1997
and first nine months of Fiscal 1998.
OTHER INCOME
Other income-net increased $588,385, to $691,073, in Fiscal 1998 compared
to $108,688 in Fiscal 1997 due primarily to increases in interest income earned
on the Company's cash balances, increases in licensing income, and increases on
discounts earned on early payments of trade payables.
INCOME TAXES
Income tax expense was $426 for Fiscal 1998 versus $2,105,000 for Fiscal
1997. The current year tax expense resulted from taxes on the Company's Puerto
Rican subsidiary offset by a benefit generated from the net operating losses
incurred in the U.S. and the Dominican Republic. The Company's effective tax
rate in Fiscal 1997 was 30.7%, which reflected favorable tax treatment afforded
income earned by the Company's subsidiary in Puerto Rico and local tax
abatements available to the Company's subsidiary in Puerto Rico. The income of
this subsidiary is exempt from taxation under Section 936 of the Internal
Revenue Code. However, Section 936 of the Internal Revenue Code has been
repealed such that future tax credits available to the Company will be capped
beginning in 2002 and terminate in 2006. The Company receives abatements on its
Commonwealth and municipal taxes on its subsidiary in Puerto Rico.
LIQUIDITY AND CAPITAL RESOURCES
The Company principally funds its working capital requirements and capital
expenditures through net income, borrowings under its credit facility and other
indebtedness. Working capital is primarily used to support changes in accounts
receivable and inventory as a result of the Company's seasonal business cycle
and business expansion. These requirements are generally lowest in the months of
January through March of each year and highest during the months of May through
October of each year. In addition, the Company requires capital to support
additions to machinery, equipment and facilities as well as the introduction of
new footwear styles. The Company had working capital of $48,467,902 and
$67,468,343 at December 31, 1999 and 1998, respectively.
The Company renegotiated its credit facility during second quarter 1998,
which reduced its cost of borrowed funds. The credit facility has maximum
borrowings that range from $25,000,000 (from January 28 to March 31 annually) to
$42,000,000 (from April 1 to January 27 annually). At December 31, 1999, the
Company had
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20
borrowings under the credit facility of $31,900,000. At December 31, 1999, the
Company did not comply with certain bank covenants. In March 2000, the Company
obtained a waiver from the bank with respect to such events of noncompliance. In
addition, the Company and the bank have had discussions with respect to the
possible modification and adjustment of certain terms of the agreement. The
Company and the bank expect these discussions to continue in the near future.
Based on the Company's projected results of operations for 2000 and the possible
modification of certain covenants, management believes it is probable that the
Company will be in compliance with the covenants in 2000. However, if the
Company's performance falls below the projected results of operations for 2000,
the Company's liquidity and ability to obtain further financing to fund future
operating and capital requirements could be negatively impacted.
During first quarter 2000, the Company completed mortgage financing with GE
Capital for three of its facilities totaling $6,300,000, with monthly payments
of $63,100 to 2014. Proceeds from the financing were used to pay down borrowings
under the revolving credit facility.
The Company's cash flow from operations increased to $5,100,000 in 1999,
while the Company's operating activities in 1998 and 1997 used $7,900,000 and
$6,400,000 of cash flows, respectively. The primary cause of the cash generated
from operations in 1999 was due to the significant reduction in inventory due to
increased sales in the fourth quarter. Correspondingly, the cash flows used in
operating activities in 1998 and 1997 were due primarily to the increase in
inventory in those years.
The principal use of cash flows in investing activities over the last three
years has been for investment in property, plant and equipment. In 1999,
property, plant and equipment expenditures were $9,600,000 or $2,800,000 over
1998 amounts due primarily to the completion of the Company's new distribution
facility in late December 1999. 1998 fixed asset expenditures were $6,800,000 or
$2,400,000 greater than 1997 amounts due primarily to hardware and software
upgrades and manufacturing equipment purchases. Capital expenditures for Fiscal
2000 are expected to be approximately $2 million to support manufacturing,
including expenditures for lasts, dies and patterns for new footwear styles.
The largest financing activity in 1999 and 1998 involved the purchase of
$4,300,000 and $2,000,000, respectively, of the Company's common stock which was
financed primarily by increased borrowings under its revolving credit facility.
In 1997, the Company received $26,900,000 in net proceeds from a common stock
offering. The proceeds were used to reduce borrowings and increase working
capital.
The Company believes it will be able to finance capital additions and meet
operating expenditure requirements for Fiscal 2000 through cash balances,
additional long-term borrowings, and operating cash flows.
INFLATION
The Company cannot determine the precise effects of inflation; however,
inflation continues to have an influence on the cost of raw materials, salaries
and employee benefits. The Company attempts to minimize or offset the effects of
inflation through increased selling prices, productivity improvements, and
reduction of costs.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended, which are intended to be covered by
the safe harbors created thereby. Those statements include, but may not be
limited to, all statements regarding the intent, belief and expectations of the
Company and its management, such as statements concerning the Company's future
capital expenditures. Investors are cautioned that all forward-looking
statements involve risks and uncertainties including, without limitation,
dependence on sales forecasts, changes in consumer demand, seasonality, impact
of weather, competition, reliance on suppliers, changing retail trends, as well
as other factors set forth under the caption "Business Risks" in this Annual
Report on Form 10-K and other factors detailed from time to time in the
Company's filings with the Securities and Exchange Commission. Although the
Company believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of
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21
the assumptions could be inaccurate. Therefore, there can be no assurance that
the forward-looking statements included herein will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk results from fluctuations in interest
rates. The Company is also exposed to changes in the price of commodities used
in its manufacturing operations. However, commodity price risk related to the
Company's current commodities is not material as price changes in commodities
are usually passed along to the final customer. The Company does not hold any
material market risk sensitive instruments for trading purposes.
The Company has the following three items that are market rate sensitive
for interest rates: (1) Long-term debt consists of a credit facility with a
balance at December 31, 1999 of $31,900,000. Interest is payable monthly at the
bank's LIBOR rate (plus 100 to 190 basis points) or prime. In order to minimize
the effect of the interest rate fluctuation, the Company has one interest rate
swap arrangement with a major bank for a total notional amount of $15,000,000.
Under this agreement, the Company pays a weighted average fixed rate of 6% (plus
100 to 190 basis points). (2) The Company also has equipment and other
obligations at December 31, 1999, that bear interest at fixed and variable rates
ranging from 3.0% to 8.5%. (3) The Company has a real estate obligation at
December 31, 1999, that bears interest at a variable rate of 7.375%.
Assuming a hypothetical 20% change in short-term interest rates, interest
expense would not change significantly, as the interest rate swap agreement
would principally offset the impact.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial balance sheets as of December 31, 1999
and 1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years ended December 31, 1999, 1998, and 1997,
together with the independent auditors' report thereon appear on pages F-1
through F-20 hereof, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is included under the captions
"ELECTION OF DIRECTORS" and "INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE
OFFICERS, AND PRINCIPAL SHAREHOLDERS - EXECUTIVE OFFICERS" and "SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in the Company's Proxy Statement for
the 2000 Annual Meeting of Shareholders (the "Proxy Statement") to be held on
May 24, 2000, and is incorporated herein by reference.
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22
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the captions
"INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
SHAREHOLDERS" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION"
in the Company's Proxy Statement, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the caption
"INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
SHAREHOLDERS - OWNERSHIP OF COMMON STOCK BY MANAGEMENT" and "- OWNERSHIP OF
COMMON STOCK BY PRINCIPAL SHAREHOLDERS," in the Company's Proxy Statement, and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the caption
"INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
SHAREHOLDERS - COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" in
the Company's Proxy Statement, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) The following Financial Statements are included in this Annual Report
on Form 10-K on the pages indicated below:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1999 and 1998................... F-2 - F-3
Consolidated Statements of Operations for the fiscal years ended
December 31, 1999, 1998, and 1997..................................... F-4
Consolidated Statements of Shareholders' Equity for the fiscal years ended
December 31, 1999, 1998, and 1997..................................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 1999, 1998, and 1997..................................... F-6
Notes to Consolidated Financial Statements for the fiscal years ended
December 31, 1999, 1998, and 1997..................................... F-7 - F-20
(2) The following financial statement schedule for the fiscal years ended
December 31, 1999, 1998, and 1997 is included in this Annual Report on
Form 10-K and should be read in conjunction with the Consolidated
Financial Statements contained in the Annual Report.
-22-
23
Schedule II -- Consolidated Valuation and Qualifying Accounts
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the required
information is included in the Consolidated Financial Statements or the
notes thereto.
-23-
24
(3) Exhibits:
Exhibit
Number Description
------ -----------
3.1 Second Amended and Restated Articles of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 to the
Annual Report on Form 10-K for the fiscal year ended December
31, 1997).
3.2 Amended and Restated Code of Regulations of the Registrant
(incorporated by reference to Exhibit 3.2 to the Registration
Statement on Form S-1, registration number 33-56118 (the
"Registration Statement").
4.1 Form of Stock Certificate for the Registrant (incorporated by
reference to Exhibit 4.1 to the Registration Statement).
4.2 Articles Fourth, Fifth, Sixth, Seventh, Eighth, Eleventh,
Twelfth, and Thirteenth of the Registrant's Amended and
Restated Articles of Incorporation (see Exhibit 3.1).
4.3 Articles I and II of the Registrant's Code of Regulations (see
Exhibit 3.2).
10.1 Form of Employment Agreement, dated July 1, 1995, for
executive officers (incorporated by reference to Exhibit 10.1
to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1995 (the "1995 Form 10-K")).
10.2 Information concerning Employment Agreements substantially
similar to Exhibit 10.1.
10.3 Deferred Compensation Agreement, dated May 1, 1984, between
Rocky Shoes & Boots Co. and Mike Brooks (incorporated by
reference to Exhibit 10.3 to the Registration Statement).
10.4 Information concerning Deferred Compensation Agreements
substantially similar to Exhibit 10.3.
10.5 Form of Company's amended 1992 Stock Option Plan (incorporated
by reference to Exhibit 10.5 to the 1995 Form 10-K).
10.6 Form of Stock Option Agreement (incorporated by reference to
Exhibit 10.6 to the Registration Statement).
10.7 Revolving Credit Loan Agreement, dated January 28, 1997, among
Rocky Shoes & Boots, Inc., Five Star Enterprises Ltd.,
Lifestyle Footwear, Inc., Bank One Columbus, N.A., The
Huntington National Bank, and Bank One, Columbus, N.A., as
Agent (incorporated by reference to Exhibit 10.7 to the Annual
Report on Form 10-K for the fiscal year ended December 31,
1996 (the "1996 Form 10-K")).
10.8 Term Loan Agreement and First Amendment to Revolving Credit
Loan Agreement, dated as of April 18, 1997, between the
Registrant, Five Star Enterprises Ltd., Lifestyle Footwear,
Inc., Bank One, Columbus, N.A., the Huntington National Bank,
and Bank One, Columbus, N.A., as Agent (incorporated by
reference to Exhibit 10.8 to Form S-2 filed September 11,
1997, registration number 333-35391).
-24-
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Exhibit
Number Description
------ -----------
10.9 Second Amendment to Revolving Credit Loan Agreement dated May
29, 1998, among the Registrant, Five Star Enterprises Ltd.,
Lifestyle Footwear, Inc., Bank One, N.A., The Huntington
National Bank, and Bank One, N.A., as Agent (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998 (the "June 30, 1998 Form
10-Q")).
10.10 Second Amended and Restated Master Business Loan Note, dated
May 29, 1998, among the Registrant, Five Star Enterprises
Ltd., Lifestyle Footwear, Inc., and payable to Bank One, N.A.
(incorporated by reference to Exhibit 10.3 of the June 30,
1998 Form 10-Q).
10.11 Second Amended and Restated Master Business Loan Note, dated
May 29, 1998, among the Registrant, Five Star Enterprises
Ltd., Lifestyle Footwear, Inc., and payable to The Huntington
National Bank (incorporated by reference to Exhibit 10.3 of
the June 30, 1998 Form 10-Q).
10.12 Master Agreement, dated as of February 1, 1996, by and between
Bank One, Columbus, N.A., and Rocky Shoes & Boots Co.
(incorporated by reference to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the transition period ended
December 31, 1995).
10.13 Indemnification Agreement, dated December 21, 1992, between
the Registrant and Mike Brooks (incorporated by reference to
Exhibit 10.10 to the Registration Statement).
10.14 Information concerning Indemnification Agreements
substantially similar to Exhibit 10.13 (incorporated by
reference to Exhibit 10.11 to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1993 (the "1993
Form 10-K")).
10.15 Trademark License Agreement and Manufacturing Certification
Agreement, each dated May 14, 1994, between Rocky Shoes &
Boots Co. and W. L. Gore & Associates, Inc. (incorporated by
reference to Exhibit 10.12 to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1994 (the "1994
Form 10-K")).
10.16 Decree of Tax Exemption from the Government of the
Commonwealth of Puerto Rico (incorporated by reference to
Exhibit 10.13 to the Registration Statement).
10.16A English Translation of Addendum to Exhibit 10.16 (incorporated
by reference to Exhibit 10.13A to the Registration Statement).
10.17 Lease Agreement, dated May 1, 1998, as amended, between Rocky
Shoes & Boots Co. and William Brooks Real Estate Company
regarding Nelsonville factory (incorporated by reference to
Exhibit 10.3 of the June 30, 1998 Form 10-Q).
10.18 Lease Contract, dated August 31, 1988, between Lifestyle
Footwear, Inc. and The Puerto Rico Industrial Development
Company regarding factory location 1 (incorporated by
reference to Exhibit 10.15 to the Registration Statement).
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26
Exhibit
Number Description
------ -----------
10.19 Lease Contract, undated, between Lifestyle Footwear, Inc. and
The Puerto Rico Industrial Development company regarding
factory location 2 (incorporated by reference to Exhibit 10.16
to the Registration Statement).
10.19A English translation of Exhibit 10.19 (incorporated by
reference to Exhibit 10.16A to the Registration Statement).
10.20 Lease Agreement, dated December 13, 1993, between Five Star
Enterprises Ltd. and the Dominican Republic Corporation for
Industrial Development regarding buildings and annexes of a
combined manufacturing surface of 75,526 square feet, located
in the Industrial Free Zone of La Vega (incorporated by
reference to Exhibit 10.17 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995 (the
"September 30, 1995 Form 10-Q")).
10.20A English translation of Exhibit 10.20 (incorporated by
reference to Exhibit 10.2A to the September 30, 1995 Form
10-Q).
10.21 Continuing Security Agreement, dated January 28, 1997, among
Rocky Shoes & Boots, Inc., Five Star Enterprises Ltd.,
Lifestyle Footwear, Inc., and Bank One, Columbus, N.A., as
Agent (incorporated by reference to Exhibit 10.18 to the 1996
Form 10-K).
10.22 Loan Purchase, Assignment and Master Amendment Agreement,
dated as of February 1, 1996, among Bank One Columbus, N.A.,
NBD Bank, NBD Bank, as Agent, Rocky Shoes & Boots, Inc., Rocky
Shoes & Boots, Co., Five Star Enterprises Ltd., and Lifestyle
Footwear, Inc. (incorporated by reference to Exhibit 10.19 to
the Company's Annual Report on Form 10-K for the transition
period ended December 31, 1995).
10.23 Installment Business Loan Note, dated August 19, 1993, among
Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star
Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank
(incorporated by reference to Exhibit 10.20 to the 1994 Form
10-K).
10.24 Second Amendment to Business Loan Note, dated January 28,
1997, among Rocky Shoes & Boots, Inc., Five Star Enterprises
Ltd., and Lifestyle Footwear, Inc. (incorporated by reference
to Exhibit 10.21 to the 1996 Form 10-K).
10.25 Term Lease Master Agreement, dated April 27, 1993, between
Rocky Shoes & Boots, Inc. and IBM Credit Corporation
(incorporated by reference to Exhibit 10.22 to the 1993 Form
10-K).
10.26 Fourth Amendment to Promissory Note, dated January 28, 1997,
among Rocky Shoes & Boots, Inc., Five Star Enterprises Ltd.,
and Lifestyle Footwear, Inc. (incorporated by reference to
Exhibit 10.23 to the 1996 Form 10-K).
10.27 Acceptance Credit Agreement, dated May 4, 1993, among Rocky
Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star
Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank
(incorporated by reference to Exhibit 10.24 to the 1994 Form
10-K).
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27
Exhibit
Number Description
------ -----------
10.28 Adjustable Rate Note, dated May 23, 1988, between Nelsonville
Home and Savings Association and Rocky Shoes & Boots Co.
(incorporated by reference to Exhibit 10.25 to the
Registration Statement).
10.29 First Amendment to Acceptance Credit Agreement, dated October
20, 1993, among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots
Co., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and
NBD Bank (incorporated by reference to Exhibit 10.26 to the
1994 Form 10-K).
10.30 Form of Company's Amended and Restated 1995 Stock Option Plan
(incorporated by reference to Exhibit 4(a) to the Registration
Statement on Form S-8, registration number 333-67357).
10.31 Form of Stock Option Agreement under the 1995 Stock Option
Plan (incorporated by reference to Exhibit 10.28 to the 1995
Form 10-K).
10.32 Open-End Mortgage, Security Agreement and Assignment of Rents
and Leases, dated March 30, 1995, between Rocky Shoes & Boots
Co. and NBD Bank, as Agent (incorporated by reference to
Exhibit No. 10.3 to the March 31, 1995 Form 10-Q).
10.33 Installment Business Loan Note, dated May 11, 1994, among
Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star
Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank
(incorporated by reference to Exhibit 10.30 to the 1994 Form
10-K).
10.34 Construction and Term Loan Agreement, dated October 27, 1993,
among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five
Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank
(incorporated by reference to Exhibit 10.31 to the 1994 Form
10-K).
10.35 Promissory Note, dated October 27, 1993, among Rocky Shoes &
Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises
Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated by
reference to Exhibit 10.32 to the 1994 Form 10-K).
10.36 Open-End Mortgage, Security Agreement and Assignment of Rents
and Leases, dated October 27, 1993, among Rocky Shoes & Boots,
Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd.,
Lifestyle Footwear, Inc., and NBD Bank (incorporated by
reference to Exhibit 10.33 to the 1994 Form 10-K).
10.37 First Amendment to Construction and Term Loan Agreement, dated
January 28, 1994, among Rocky Shoes & Boots, Inc., Rocky Shoes
& Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear,
Inc., and NBD Bank (incorporated by reference to Exhibit 10.34
to the 1994 Form 10-K).
10.38 First Amendment to Promissory Note, dated January 28, 1994,
among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five
Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank
(incorporated by reference to Exhibit 10.35 to the 1994 Form
10-K).
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Exhibit
Number Description
------ -----------
10.39 First Amendment to Open-End Mortgage, Security Agreement and
Assignment of Rents and Leases, dated January 28, 1994, among
Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star
Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank
(incorporated by reference to Exhibit 10.36 to the 1994 Form
10-K).
10.40 Letter Agreement between the Registrant and the Kravetz Group,
dated August 3, 1994 (incorporated by reference to Exhibit No.
10.6 to the March 31, 1995 Form 10-Q).
10.41 Amended and Restated Master Business Loan Note, dated March
30, 1995, among the Registrant, Rocky Shoes & Boots Co., Five
Star Enterprises Ltd., Lifestyle Footwear, Inc. (incorporated
by reference to Exhibit No. 10.4 to the March 31, 1995 Form
10-Q).
10.42 Third Amendment to Construction and Term Loan Agreement, dated
as of March 30, 1995, among the Registrant, Rocky Shoes &
Boots Co., Five Star Enterprises Ltd., and Lifestyle Footwear,
Inc. (incorporated by reference to Exhibit No. 10.5 to the
March 31, 1995 Form 10-Q).
10.43 Loan Agreement, dated as of October 7, 1994, between the
Director of Development of the State of Ohio and Rocky Shoes &
Boots Co. (incorporated by reference to Exhibit 10.43 to the
1995 Form 10-K).
10.44 Promissory Note, dated October 7, 1994, by Rocky Shoes & Boots
Co. to the Director of Development of the State of Ohio
(incorporated by reference to Exhibit 10.44 to the 1995 Form
10-K).
10.45 Security Agreement, dated as of October 7, 1994, between the
Director of Development of the State of Ohio and Rocky Shoes &
Boots Co. (incorporated by reference to Exhibit 10.45 to the
1995 Form 10-K).
10.46 Form of Employment Agreement, dated September 7, 1995, for
executive officers (incorporated by reference to Exhibit 10.5
to the September 30, 1995 Form 10-Q).
10.47 Information covering Employment Agreements substantially
similar to Exhibit 10.46 (incorporated by reference to Exhibit
10.5 to the September 30, 1995 Form 10-Q).
10.48 Termination of Buy-Sell Agreement, dated August 18, 1998,
among the Registrant, Mike Brooks, Barbara Brooks Fuller,
Patricia H. Robey, Jay W. Brooks, and Charles Stuart Brooks
(incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998).
10.49 Employment Agreement, dated April 27, 1999, between the
Company and John E. Friday.
21 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21 to Form S-2 filed September 11, 1997, registration
number 333-35391).
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29
Exhibit
Number Description
------ -----------
23 Independent Auditors' Consent and Report on Schedules of
Deloitte & Touche LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
99.1 Independent Auditors' Report on Schedules of Deloitte & Touche
LLP (incorporated by reference to Exhibit 23).
99.2 Financial Statement Schedule.
The Registrant agrees to furnish to the Commission upon its request copies
of any omitted schedules or exhibits to any Exhibit filed herewith.
(b) REPORTS ON FORM 8-K
None
(c) EXHIBITS
The exhibits to this report begin immediately following the signature page.
(d) FINANCIAL STATEMENT SCHEDULES
The financial statement schedule and the independent auditors' report
thereon are included on the following pages.
-29-
30
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Rocky Shoes & Boots, Inc.:
We have audited the accompanying consolidated balance sheets of Rocky Shoes &
Boots, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. 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 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Rocky Shoes & Boots, Inc. and
subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America.
Columbus, Ohio
March 30, 2000
31
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
-------------------------------
1999 1998
CURRENT ASSETS:
Cash and cash equivalents $ 2,330,324 $ 7,232,876
Accounts receivable - trade, net 18,712,588 15,595,483
Refundable income taxes 3,850,000
Other receivables 1,377,394 1,654,471
Inventories 32,573,067 47,110,011
Deferred income taxes 1,017,331 1,735,699
Other current assets 1,222,914 871,533
------------ -------------
Total current assets 61,083,618 74,200,073
FIXED ASSETS, AT COST:
Property, plant and equipment 45,012,101 37,346,300
Less - accumulated depreciation (18,879,879) (16,842,446)
Total fixed assets - net 26,132,222 20,503,854
DEFERRED PENSION ASSET 357,520 884,268
OTHER ASSETS 1,759,994 1,010,274
------------ -------------
TOTAL ASSETS $ 89,333,354 $ 96,598,469
============ =============
See notes to consolidated financial statements.
F-2
32
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------
December 31,
---------------------------
1999 1998
CURRENT LIABILITIES:
Accounts payable $ 2,128,112 $ 2,194,026
Current maturities - long-term debt 8,599,897 2,927,625
Accrued expenses:
Taxes - other 412,721 479,211
Salaries and wages 569,203 511,916
Other 905,783 618,952
----------- -----------
Total current liabilities 12,615,716 6,731,730
LONG-TERM DEBT - Less current maturities 25,176,918 26,877,509
DEFERRED LIABILITIES:
Compensation 170,294 173,535
Income taxes 528,273 2,298,863
Pension 613,023 881,761
----------- -----------
Total deferred liabilities 1,311,590 3,354,159
----------- -----------
Total liabilities 39,104,224 36,963,398
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, Series A, no par value, $.06 stated value;
none outstanding 1999 and 1998
Common stock, no par value; 10,000,000 shares authorized; outstanding
1999 - 4,489,215 shares; 1998 - 5,172,815 shares 35,284,159 39,560,343
Retained earnings 14,944,971 20,074,728
----------- -----------
Total shareholders' equity 50,229,130 59,635,071
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $89,333,354 $96,598,469
=========== ===========
See notes to consolidated financial statements.
F-3
33
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------
1999 1998 1997
NET SALES $ 98,099,184 $ 88,699,413 $ 95,026,786
COST OF GOODS SOLD 83,256,768 68,185,041 69,300,071
------------ ------------ ------------
GROSS MARGIN 14,842,416 20,514,372 25,726,715
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 20,020,357 17,208,211 16,416,341
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (5,177,941) 3,306,161 9,310,374
------------ ------------ ------------
OTHER INCOME AND (EXPENSES):
Interest expense (2,415,682) (1,734,611) (2,552,732)
Other - net 236,287 691,073 108,688
------------ ------------ ------------
Total other - net (2,179,395) (1,043,538) (2,444,044)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (7,357,336) 2,262,623 6,866,330
INCOME TAX EXPENSE (BENEFIT) (2,227,579) 426 2,105,000
------------ ------------ ------------
NET INCOME (LOSS) $ (5,129,757) $ 2,262,197 $ 4,761,330
============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ (1.09) $ 0.42 $ 1.16
============ ============ ============
Diluted $ (1.09) $ 0.41 $ 1.10
============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 4,710,039 5,425,026 4,087,682
============ ============ ============
Diluted 4,710,039 5,526,863 4,329,907
============ ============ ============
See notes to consolidated financial statements.
F - 4
34
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL
PREFERRED COMMON TREASURY RETAINED SHAREHOLDERS'
STOCK STOCK STOCK EARNINGS EQUITY
BALANCE, DECEMBER 31, 1996 $ 6,000 $14,543,947 $ (1,226,059) $ 13,051,201 $26,375,089
YEAR ENDED DECEMBER 31, 1997:
Net income 4,761,330 4,761,330
Shares issued (1,570,000) pursuant to public
offering, net of costs of $453,483 26,895,917 26,895,917
Stock options exercised 1,020,794 1,020,794
Tax benefit related to stock options 143,400 143,400
Preferred stock converted to common stock (600) 600
-------- ----------- ------------ ------------ -----------
BALANCE, DECEMBER 31, 1997 5,400 42,604,658 (1,226,059) 17,812,531 59,196,530
YEAR ENDED DECEMBER 31, 1998:
Net income 2,262,197 2,262,197
Treasury stock retired (124,095 shares) (1,226,059) 1,226,059
Treasury stock purchased and retired (292,600 shares) (2,038,118) (2,038,118)
Stock options exercised 214,462 214,462
Preferred stock converted to common stock (5,400) 5,400
-------- ----------- ------------ ------------ -----------
BALANCE, DECEMBER 31, 1998 0 39,560,343 0 20,074,728 59,635,071
YEAR ENDED DECEMBER 31, 1999:
Net loss (5,129,757) (5,129,757)
Treasury stock purchased and retired (685,100 shares) (4,285,184) (4,285,184)
Stock options exercised 9,000 9,000
-------- ----------- ------------ ------------ -----------
BALANCE, DECEMBER 31, 1999 $ 0 $ 35,284,159 $ 0 $ 14,944,971 $50,229,130
======== =========== ============ ============ ===========
See notes to consolidated financial statements.
F - 5
35
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,129,757) $ 2,262,197 $ 4,761,330
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,836,586 4,226,313 2,925,932
Deferred income taxes (1,052,222) (11,293) 156,247
Deferred compensation and pension - net 254,769 138,485 (13,227)
Loss on sale of fixed assets 9,048 837 1,213
Change in assets and liabilities:
Receivables (6,690,028) 1,014,968 (5,176,709)
Inventories 14,536,944 (14,215,775) (7,504,334)
Other current assets (378,992) (21,515) (143,921)
Other assets (749,720) 58,811 78,951
Accounts payable 162,705 (506,171) (711,792)
Accrued liabilities 277,628 (854,432) (740,704)
------------ ------------ ------------
Net cash provided by (used in) operating activities 5,076,961 (7,907,575) (6,367,014)
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES - Purchase of fixed assets (9,675,010) (6,817,108) (4,462,236)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 57,527,000 79,835,000 77,050,000
Payments on long-term debt (53,555,319) (64,610,668) (86,073,615)
Proceeds from issuance of stock (net of
offering expenses) 26,895,917
Purchase of treasury stock (4,285,184) (2,038,118)
Proceeds from exercise of stock options, including
related tax benefit 9,000 214,462 1,164,194
------------ ------------ ------------
Net cash provided by (used in) financing activities (304,503) 13,400,676 19,036,496
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (4,902,552) (1,324,007) 8,207,246
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 7,232,876 8,556,883 349,637
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,330,324 $ 7,232,876 $ 8,556,883
============ ============ ============
See notes to consolidated financial statements.
F - 6
36
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Rocky Shoes & Boots, Inc. ("Rocky
Inc.") and its wholly-owned subsidiaries, Lifestyle Footwear, Inc.
("Lifestyle") and Five Star Enterprises Ltd. ("Five Star"), collectively
referred to as the "Company." All significant intercompany transactions
have been eliminated.
BUSINESS ACTIVITY - The Company designs, manufactures, and markets high
quality men's and women's footwear primarily under the registered
trademark, ROCKY(R). The Company maintains a nationwide network of
independent and Company sales representatives who sell the Company's
products primarily through independent shoe, sporting goods, specialty,
and uniform stores and catalogs throughout the United States. The Company
did not have any customers that accounted for more than 10% of
consolidated net sales in 1999, 1998 and 1997.
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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS - The Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents. The Company's cash and cash equivalents are primarily held in
four banks.
TRADE RECEIVABLES - Trade receivables are presented net of the related
allowance for doubtful accounts of approximately $715,000 and $606,000 at
December 31, 1999 and 1998, respectively.
CONCENTRATION OF CREDIT RISK - The Company's exposure to credit risk is
impacted by the economic climate affecting its industry. The Company
manages this risk by performing ongoing credit evaluations of its
customers and maintains reserves for potential uncollectible accounts.
SUPPLIER AND LABOR CONCENTRATIONS - The Company purchases raw materials
from a number of domestic and foreign sources. The Company currently buys
all of its waterproof fabric, a component used in a significant portion of
the Company's shoes and boots, from one supplier (GORE-TEX(R)). The
Company has had a relationship with this supplier for over 18 years and
has no reason to believe that such relationship will not continue.
A significant portion of the Company's shoes and boots are produced in the
Company's Dominican Republic operations. The Company has conducted
operations in the Dominican Republic since 1987 and is not aware of any
governmental or economic restrictions that would alter its current
operations.
F-7
37
INVENTORIES - Inventories are valued at the lower of cost, determined on a
first-in, first-out (FIFO) basis, or market. Reserves are established for
inventories when the net realizable value (NRV) is deemed to be less than
its cost based on management's periodic estimates of NRV (see Notes 10).
FIXED ASSETS - The Company records fixed assets at historical cost and
generally utilizes the straight-line method of computing depreciation for
financial reporting purposes over the estimated useful lives of the assets
as follows:
YEARS
Building and improvements 5-40
Machinery and equipment 8-12
Furniture and fixtures 8-12
Lasts, dies, and patterns 8-12
Effective January 1, 1998, the Company changed the estimated useful life
of certain computer software costs. This change decreased 1998 net income
by $447,600, or $.08 per diluted share. This change was made to better
reflect how the asset is expected to be used over time and to provide a
better matching of revenues and expenses.
Management periodically evaluates the future economic benefit of its
long-term assets when events or circumstances indicate potential
recoverability concerns. This evaluation is based on consideration of
expected future undiscounted cash flows and other operating factors.
Carrying amounts are adjusted appropriately when determined to have been
impaired.
For income tax purposes, the Company generally computes depreciation
utilizing accelerated methods.
ADVERTISING - The Company expenses advertising costs as incurred.
Advertising expense was $2,997,462, $2,323,372 and $1,334,034 for 1999,
1998 and 1997, respectively.
REVENUE RECOGNITION - Revenue and related cost of goods sold are
recognized at the time footwear product is shipped to the customer and is
recorded net of estimated sales discounts and returns based upon
historical trends. All sales are considered final upon shipment.
PER SHARE INFORMATION - Basic net income per common share is computed
based on the weighted average number of common shares outstanding during
the period. Diluted net income per common share is computed similarly but
includes the dilutive effect of the Company's Series A preferred stock and
stock options. A reconciliation of the shares used in the basic and
diluted income per share computations is as follows:
F-8
38
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
Basic - Weighted average shares outstanding 4,710,039 5,425,026 4,087,682
Dilutive securities:
Preferred stock 7,365 85,549
Stock options 94,472 156,676
--------- --------- ---------
Diluted - Weighted average shares outstanding 4,710,039 5,526,863 4,329,907
========= ========= =========
No adjustments to net income were required for purposes of computing
diluted per share amounts. In 1999, stock options of 30,236 were not used
to compute diluted weighted average common shares outstanding since the
loss the Company incurred in 1999 makes these stock options anti-dilutive.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS - In June 1998, the
Financial Accounting Standards Board (FASB) issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". In June,
1999, the FASB issued Statement of Financial Accounting Standards No. 137
(SFAS 137). SFAS 133 now is required to be adopted for the Company's 2001
annual consolidated financial statements. The Company has not yet
determined what, if any, impact the adoption of this standard will have on
its consolidated financial statements.
SEGMENT INFORMATION - The Company is managed in one operating segment,
footwear. Within their one operating segment, the Company has identified
three product groups; Rugged Outdoor, Occupational, and Handsewn Casual.
The following is supplemental information on net sales by product group:
HANDSEWN
RUGGED CASUAL
OUTDOOR OCCUPATIONAL AND OTHER TOTAL
1999 $ 51,029,943 $ 29,847,018 $ 17,222,223 $ 98,099,184
1998 47,640,000 23,847,520 17,211,893 88,699,413
1997 58,661,798 27,232,590 9,132,398 95,026,786
F-9
39
2. INVENTORIES
Inventories are comprised of the following:
DECEMBER 31,
------------------------------
1999 1998
Raw materials $ 4,133,520 $ 7,917,557
Work-in-process 2,128,738 5,184,591
Finished goods 24,110,469 31,882,217
Factory outlet finished goods 2,645,340 2,475,646
Less reserve for obsolescence or lower of
cost or market (see Note 10) (445,000) (350,000)
------------ ------------
Total $ 32,573,067 $ 47,110,011
============ ============
3. FIXED ASSETS
Fixed assets are comprised of the following:
DECEMBER 31,
------------------------------
1999 1998
Land $ 557,071 $ 544,816
Building and improvements 6,314,768 6,346,976
Machinery and equipment 21,765,027 19,622,714
Furniture and fixtures 3,479,787 2,959,471
Lasts, dies and patterns 5,509,926 5,157,100
Construction work-in-progress 7,385,522 2,715,223
------------ ------------
Total 45,012,101 37,346,300
Less - accumulated depreciation (18,879,879) (16,842,446)
------------ ------------
Net fixed assets $ 26,132,222 $ 20,503,854
============ ============
F-10
40
4. LONG-TERM DEBT
Long-term debt is comprised of the following:
DECEMBER 31,
---------------------------
1999 1998
Bank - revolving credit facility $31,900,000 $27,000,000
Equipment and other obligations 1,687,898 2,495,129
Real estate obligation 56,875 70,741
Other 132,042 239,264
----------- -----------
Total long-term debt 33,776,815 29,805,134
Less current maturities 8,599,897 2,927,625
----------- -----------
Net long-term debt $25,176,918 $26,877,509
=========== ===========
The Company has a loan agreement with a bank, as amended on April 18,
1997, May 29, 1998, April 1, 1999 and July 23, 1999 with maximum
borrowings that range from $25,000,000 (from January 28 to March 31,
annually), to $42,000,000 (from April 1 to January 27, annually). Interest
on the revolving credit facility is payable monthly at the bank's LIBOR
rate (plus 100 to 190 basis points) or prime, and the principal is due May
31, 2003. The weighted average interest rate for the outstanding balance
at December 31, 1999 was 6.01% (6.63% at December 31, 1998). At December
31, 1999, the Company had no retained earnings available for distribution
and $6,900,000 was classified as current based on the scheduled reduction
in the maximum borrowings that occurred on January 28, 2000.
Any amounts borrowed under the agreement are secured by the accounts
receivable, inventories, and equipment of the Company. The bank debt
agreement contains certain restrictive covenants which, among others,
require the Company to maintain a certain level of tangible net worth, as
defined, certain current and debt service coverage ratios, and restrict
the amount of capital expenditures. At December 31, 1999, the Company did
not comply with certain of the bank covenant requirements. In March 2000,
the Company obtained a waiver from the bank with respect to such events of
noncompliance. In addition, the Company and the banks have had discussions
with respect to the possible modification and adjustment of certain terms
of the agreement. The Company and the banks expect these discussions to
continue in the near future. Based on the Company's projected results of
operations for 2000 and the possible modification of certain covenants,
management believes it is probable that the Company will be in compliance
with the covenants in 2000.
Equipment and other obligations at December 31, 1999 bear interest at
fixed and variable rates ranging from 3% to 8.5% and are payable in
monthly installments to 2002. The obligations are secured by equipment and
are subject to the security agreement and covenants applicable to the
revolving credit facility.
The real estate obligation at December 31, 1999 bears interest at a
variable rate of 7.375% and is payable in monthly installments through
2003. The obligation is secured by real estate and is subject to the
security agreement and covenants applicable to the revolving credit
facility.
In 1998 the Company entered into two interest rate swap agreements with a
major bank for a total notional amount of $25,000,000 with average
maturities of seven years to reduce the impact of changes in interest
rates on its variable rate long-term debt. The Company is exposed to
credit loss only in the event of nonperformance by the bank on the
interest rate swap agreements, which the Company does not anticipate. One
interest rate swap agreement for a notional amount of $10,000,000 was
terminated in 1999 and resulted in a gain of $103,000. The fair value of
the
F-11
41
remaining $15,000,000 interest rate swap at December 31, 1999 is an
unrealized gain of $450,926, that represents the amount at which it could
be settled, based on an estimate obtained from a dealer. The fair value of
the interest rate swaps at December 31, 1998 was an unrealized loss of
$1,105,676.
At December 31, 1999 essentially all trade accounts receivable,
inventories and property are held as collateral for the Company's
long-term debt.
Long-term debt matures as follows for the years ended December 31:
2000 $ 8,599,897
2001 149,871
2002 18,374
2003 25,008,673
-----------
Total $33,776,815
===========
The estimated fair value of the Company's long-term obligations
approximated their carrying amount at December 31, 1999 and 1998, based on
current market prices for the same or similar issues or on debt available
to the Company with similar rates and maturities.
During the first quarter of 2000, the Company completed mortgage financing
with GE Capital for three of its facilities totaling $6,300,000, with
total monthly payments of $63,100 (including principal and 8.275%
interest) to 2014. The proceeds of the financing were used to pay down
borrowings under the revolving credit facility.
5. OPERATING LEASES
The Company leases certain machinery and manufacturing facilities under
operating leases that generally provide for renewal options. The Company
incurred approximately $1,069,000, $840,000, $643,000 in rent expense
under operating lease arrangements for 1999, 1998, and 1997, respectively.
Included in total rent expense above are monthly payments of $7,000 for
1999 and 1998 and $6,000 for 1997, respectively, for the Company's Ohio
manufacturing facility leased from an entity in which the owners are also
shareholders of the Company.
Future minimum lease payments under non-cancelable operating leases are as
follows for the years ended December 31:
2000 $358,000
2001 238,000
2002 153,000
2003 30,000
--------
Total $779,000
========
F-12
42
6. INCOME TAXES
Rocky Inc. and its wholly-owned subsidiary doing business in Puerto Rico,
Lifestyle, are subject to U.S. Federal income taxes; however, the
Company's income earned in Puerto Rico is allowed favorable tax treatment
under Section 936 of the Internal Revenue Code if conditions as defined
therein are met. Five Star is incorporated in the Cayman Islands and
conducts its operations in a "free trade zone" in the Dominican Republic
and, accordingly, is currently not subject to Cayman Islands or Dominican
Republic income taxes. Thus, the Company is not subject to foreign income
taxes.
At December 31, 1999, a provision has not been made for U.S. taxes on the
accumulated undistributed earnings of Five Star through December 31, 1999
of approximately $5,109,000 that would become payable upon repatriation to
the United States. It is the intention of the Company to reinvest all such
earnings of Five Star in operations and facilities outside of the United
States. In addition, the Company has not provided any U.S. tollgate taxes
on approximately $2,257,000 of accumulated undistributed earnings of
Lifestyle prior to the fiscal year ended June 30, 1994, that would be
payable if such earnings were repatriated to the United States. It is the
intention of the Company to reinvest all such earnings of Lifestyle. If
the Five Star and Lifestyle undistributed earnings were distributed to the
Company in the form of dividends, the related taxes on such distributions
would be approximately $1,737,000 and $226,000, respectively.
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires an asset and liability
approach to financial accounting and reporting for income taxes.
Accordingly, deferred income taxes have been provided for the temporary
differences between the financial reporting and the income tax basis of
the Company's assets and liabilities by applying enacted statutory tax
rates applicable to future years to the basis differences.
F-13
43
Income taxes (benefits) are summarized as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
Federal:
Current $(1,273,033) $ (76,294) $ 1,556,631
Deferred (1,007,542) 10,357 146,143
----------- ----------- -----------
Total Federal (2,280,575) (65,937) 1,702,774
----------- ----------- -----------
State and local:
Current 97,676 88,013 392,122
Deferred (44,680) (21,650) 10,104
----------- ----------- -----------
Total state and local 52,996 66,363 402,226
----------- ----------- -----------
Total $(2,227,579) $ 426 $ 2,105,000
=========== =========== ===========
A reconciliation of recorded Federal income tax expense (benefit) to the
expected expense (benefit) computed by applying the Federal statutory rate
of 34% for all periods to income (loss) before income taxes follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
Expected expense (benefit) at statutory rate $(2,501,494) $ 769,286 $ 2,334,552
Decrease in income taxes resulting from:
Exempt (income) loss from operations in
Puerto Rico, net of tollgate taxes 563,663 (802,791) (476,493)
Exempt (income) loss from Dominican
Republic operations (625,978)
State and local income taxes (18,019) (22,563) (136,757)
Alternative minimum tax 118,829
Other - net 182,424 (9,869) (18,528)
----------- ----------- -----------
Total $(2,280,575) $ (65,937) $ 1,702,774
=========== =========== ===========
F-14
44
Deferred income taxes recorded in the consolidated balance sheets at
December 31, 1999 and 1998 consist of the following:
DECEMBER 31,
----------------------------
1999 1998
Deferred tax assets:
State and local income taxes $ 47,546
Alternative minimum tax carryforward $ 118,829
Asset valuation allowances 549,265 454,494
Pension and deferred compensation 168,755 197,535
Net operating loss carryforwards 1,854,661 215,445
Inventories 309,066 1,131,231
----------- -----------
Total deferred tax assets 3,000,576 2,046,251
----------- -----------
Deferred tax liabilities:
Fixed assets (1,630,696) (1,499,613)
Prepaid assets (40,048) (34,173)
Tax on Five Star earnings (64,339) (64,339)
Tollgate tax on Lifestyle earnings (776,435) (1,011,290)
----------- -----------
Total deferred tax liabilities (2,511,518) (2,609,415)
----------- -----------
Net deferred tax asset (liability) $ 489,058 $ (563,164)
=========== ===========
At December 31, 1999, the Company has approximately $4,810,000 of net
operating loss carryforwards for Federal income tax purposes. There are
annual utilization limitations over the next two years for $425,000 of the
net operating loss carryforwards. The remaining net operating loss
carryforward expires in 2019.
7. RETIREMENT PLANS
The Company sponsors separate noncontributory defined benefit pension
plans covering the union and non-union workers of the Company's Ohio and
Puerto Rico operations. Benefits under the union plan are primarily based
upon negotiated rates and years of service. Benefits under the non-union
plan are based upon years of service and highest compensation levels as
defined. Annually, the Company contributes to the plans at least the
minimum amount required by regulation.
F-15
45
Net pension cost of the Company's plans is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
Service cost $ 323,726 $ 273,091 $ 215,263
Interest 356,194 317,725 284,420
Actual loss (return) on plan assets (404,283) 42,745 (953,212)
Amortization and deferral 152,373 (327,398) 781,589
--------- --------- ---------
Net pension cost $ 428,010 $ 306,163 $ 328,060
========= ========= =========
The funded status of the Company's plans and reconciliation of accrued pension
cost at December 31, 1999 and 1998 are presented below (information with respect
to benefit obligations and plan assets as of September 30 is):
DECEMBER 31,
----------------------------
1999 1998
Change in benefit obligation:
Benefit obligation at beginning of the year $ 5,463,914 $ 4,486,537
Service cost 323,726 273,091
Interest cost 356,194 317,725
Actuarial gain (433,965) 186,659
Amendments 233,278
Exchange (gain)/loss (93,418) 130,596
Benefits paid (193,633) (163,972)
----------- -----------
Benefit obligation at end of year $ 5,422,818 $ 5,463,914
=========== ===========
Change in plan assets:
Fair value of plan assets at beginning of year $ 3,906,376 $ 3,897,093
Actual return on plan assets 404,283 (42,745)
Employer contribution 270,000 216,000
Benefits paid (193,633) (163,972)
----------- -----------
Fair value of plan assets at end of year $ 4,387,026 $ 3,906,376
=========== ===========
Funded status (deficit) $(1,035,792) $(1,557,538)
Remaining unrecognized benefit obligation existing 260,255 288,146
at transition
Unrecognized prior service costs due to plan amendments 688,260 748,678
Unrecognized net loss (gain) (168,226) 423,221
Adjustment required to recognize minimum liability (357,520) (884,268)
Additional contributions (September 30-December31) 100,000
----------- -----------
Accrued pension cost $ (613,023) $ (881,761)
=========== ===========
The assets of the plans consist primarily of common stocks, bonds, and cash
equivalents. The assets of the plans include 61,000 and 43,400 shares of the
Company's common stock with a market value of $468,000 and $254,975 at September
30, 1999 and 1998, respectively. The
F-16
46
Company's unrecognized benefit obligations existing at the date of
transition for the union and non-union plans are being amortized over 23
and 21 years, respectively. Actuarial assumptions used in the accounting
for the plans were as follows:
DECEMBER 31,
-----------------
1999 1998
Discount rate 7.25% 6.75%
Average rate of increase in compensation levels
(non-union only) 3.0% 3.0%
Expected long-term rate of return on plan assets 9.0% 9.0%
SFAS No. 87, "Employers' Accounting for Pensions," generally requires the
Company to recognize a minimum liability in instances in which a plan's
accumulated benefit obligation exceeds the fair value of plan assets. In
accordance with the Statement, the Company has recorded in the
accompanying financial statements a non-current intangible asset of
$357,520, and $884,268 as of December 31, 1999 and 1998, respectively.
The Company also sponsors a 401(k) savings plan for substantially all of
its union and non-union employees. The Company only matches contributions
for non-union employees. Funding for non-union employees electing to
contribute a percentage of their compensation is matched by the Company,
subject to certain limitations. Company contributions to the 401(k)
savings plan were $14,504 for 1998. No Company contribution was made for
1999 and 1997.
8. CAPITAL STOCK
The Company has authorized 250,000 shares of voting preferred stock
without par value. No shares are issued or outstanding. Also, the Company
has authorized 250,000 shares of non-voting preferred stock without par
value. Of these, 125,000 shares have been designated Series A non-voting
convertible preferred stock with a stated value of $.06 per share, of
which no shares are issued and none are outstanding at December 31, 1999
and 1998, respectively. In accordance with its terms, all of the
outstanding Series A preferred stock was converted into common shares of
the Company on a one for one basis on February 3, 1998.
In November 1997, the Company's Board of Directors adopted a Rights
Agreement which provides for one preferred share purchase right to be
associated with each share of the Company's outstanding common stock.
Shareholders exercising these rights would become entitled to purchase
shares of Series B Junior Participating Cumulative Preferred Stock. The
rights may be exercised after the time when a person or group of persons
without the approval of the Board of Directors acquire beneficial
ownership of 20 percent or more of the Company's common stock or announce
the initiation of a tender or exchange offer which if successful would
cause such person or group to beneficially own 20 percent or more of the
common stock. Such exercise may ultimately entitle the holders of the
rights to purchase for $80 per right, common stock of the Company having a
market value of $160. The person or groups effecting such 20 percent
acquisition or undertaking such tender offer will not be entitled to
exercise any rights. These rights expire November 2007 unless earlier
redeemed by the Company under circumstances permitted by the Rights
Agreement.
F-17
47
The Company reacquired 124,095 and 292,600 shares of common stock in 1994
and 1998 for $1,226,059 and $2,038,118, respectively. In December 1998,
the Board of Directors approved the retirement of all shares held in
treasury (total of 416,695 shares). During 1998 and 1999, the Company
purchased and retired 292,600 and 685,100 shares for $2,038,118 and
$4,285,184, respectively, under its share repurchase program. At December
31, 1999, the Company's Board of Directors has not authorized any
additional share repurchase.
The Company adopted a Stock Option Plan in 1992 which provides for the
issuance of options to purchase up to 400,000 common shares of the
Company. On October 11, 1995, the Company adopted the 1995 Stock Option
Plan which provides for the issuance of options to purchase up to an
additional 400,000 common shares of the Company. In May 1998, the Company
adopted the Amended and Restated 1995 Stock Option Plan which provides for
the issuance of options to purchase up to an additional 500,000 common
shares of the Company. All employees, officers, directors, consultants and
advisors providing services to the Company are eligible to receive options
under the Plans. In addition, the Plans provide for the annual issuance of
options to purchase 5,000 shares of common stock to each non-employee
director of the Company. The plans generally provide for grants with the
exercise price equal to fair value on the date of grant, graduated vesting
periods of up to 5 years, and lives not exceeding 10 years. The following
summarizes all stock option transactions from January 1, 1997 through
December 31, 1999:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
Outstanding at January 1, 1997 447,900 $ 8.74
Issued 85,500 9.37
Exercised (114,120) 8.94
Forfeited (11,320) 8.28
-------- --------
Outstanding at December 31, 1997 407,960 8.82
Issued 210,000 14.44
Exercised (22,890) 9.37
Forfeited (34,660) 9.47
-------- --------
Outstanding at December 31, 1998 560,410 10.86
Issued 247,000 5.82
Exercised (1,500) 6.00
Forfeited (112,160) 10.61
-------- --------
Outstanding at December 31, 1999 693,750 $ 9.12
======== ========
Options exercisable at December 31:
1997 235,140 $ 9.24
1998 359,785 $ 10.01
1999 386,035 $ 9.27
F-18
48
The following table summarizes information about options outstanding at
December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------- -------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE PRICE NUMBER PRICE
$5.375 - $6.75 295,250 6.5 $ 5.87 120,000 $ 5.88
$7.50 - $8.875 125,750 4.2 $ 8.55 81,125 $ 8.57
$9.50 - $10.125 122,250 1.8 $ 9.81 123,410 $ 9.82
$13.125 - $20.00 150,500 5.8 $ 15.42 61,500 $ 15.69
------- ---------
Total 693,750 5.1 $ 9.12 386,035 $ 9.27
======= =========
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized for its stock option plans. Had compensation costs for
the Company's stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans consistent with
the method of SFAS No. 123, the Company's net income (loss) and net income
(loss) per share would have resulted in the amounts as reported below. In
determining the estimated fair value of each option granted on the date of
grant the Company uses the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1999, 1998, and
1997, respectively; dividend yield of 0%; expected volatility of 41%, 48%
and 40%; risk-free interest rates of 6.66%, 5.29%, and 6.40%; and expected
life of 6 years. The weighted average grant date fair value of options
issued during 1999, 1998, and 1997 was $3.40, $8.55, and $4.62,
respectively.
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
Net income (loss):
As reported $ (5,129,757) $2,262,197 $4,761,330
Pro forma $ (5,201,230) $1,301,976 $4,498,370
Income (loss) per share:
As reported:
Basic $ (1.09) $ 0.42 $ 1.16
Diluted $ (1.09) $ 0.41 $ 1.10
Pro forma:
Basic $ (1.10) $ 0.24 $ 1.10
Diluted $ (1.10) $ 0.24 $ 1.04
The pro forma amounts are not representative of the effects on reported net
income for future years.
F-19
49
9. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
Interest $2,547,104 $1,756,078 $2,619,374
=========== =========== ==========
Federal, state and local
income taxes - net of refunds $2,370,588 $1,210,445 $2,306,150
=========== =========== ==========
The Company entered into no capital lease arrangements during the year
ended December 31, 1999 and 1998. During the years ended December 31,
1997, the Company entered into capital lease arrangements for certain
equipment which had a present value of $474,743. Accounts payable at
December 31, 1999, 1998 and 1997 include a total of $189,659, $418,278
and $133,017, respectively, relating to the purchase of fixed assets.
10. FOURTH QUARTER RESULTS (UNAUDITED)
For the fourth quarter of 1999, the Company incurred a net loss of $7.2
million or $1.59 loss per basic and diluted share compared to a loss of
$1.1 million or $0.21 loss per basic and diluted share in the fourth
quarter of 1998. The primary reason for the loss in the fourth quarter
and the year is due to the Company's inventory reduction program. During
1999 (principally in the fourth quarter), the Company reduced its
inventory to $32.6 million from $47.1 million at December 31, 1998. As a
result of this program, the Company had a negative gross margin of $3.1
million in the fourth quarter of 1999, primarily due to sales agreements
the Company entered into in December 1999 resulting in sales of
approximately $3.8 million with a negative gross margin of $2.3 million.
In addition, the Company recorded a reserve to the lower of cost or
market of $445,000 at December 31, 1999 related to finished goods
inventory that was sold in the first quarter of 2000 at a price below
cost.
Also contributing to the loss in the fourth quarter of 1999 were
increased selling, general, and administrative expenses of $1.6 million
compared to the fourth quarter of 1998. This was principally due to
substantially higher costs to temporarily operate four warehouse
facilities, additional shipping costs while the Company's new finished
goods distribution center was being constructed, and expanded use of
co-op advertising.
******
F-20
50
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.
ROCKY SHOES & BOOTS, INC.
Date: March 30, 2000 By: /s/ Dave Fraedrich
-----------------------------------------
Dave Fraedrich, Executive Vice President,
Treasurer, and Chief 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 indicated on the dates indicated.
Signature Title Date
--------- ----- ----
* Mike Brooks Chairman, President and Chief March 30, 2000
- ------------------------------------ Executive Officer (Principal
Mike Brooks Executive Officer)
/s/ Dave Fraedrich Executive Vice President, Treasurer, March 30, 2000
- ------------------------------------ Chief Financial Officer and Director
Dave Fraedrich (Principal Financial and Accounting
Officer)
* Curtis A. Loveland Secretary and Director March 30, 2000
- ------------------------------------
Curtis A. Loveland
Director March 30, 2000
- ------------------------------------
Leonard L. Brown
* Barbara Brooks Fuller Director March 30, 2000
- ------------------------------------
Barbara Brooks Fuller
* Stanley I. Kravetz Director March 30, 2000
- ------------------------------------
Stanley I. Kravetz
* James L. Stewart Director March 30, 2000
- ------------------------------------
James L. Stewart
* Robert D. Stix Director March 30, 2000
- ------------------------------------
Robert D. Stix
*By: /s/ Curtis A. Loveland
------------------------------------
Curtis A. Loveland, Attorney-in-Fact
-32-
51
ROCKY SHOES & BOOTS, INC.
------------------------
EXHIBIT INDEX
TO
ANNUAL REPORT
ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999
---------------------------
52
Exhibit
Number Description
------ -----------
3.1 Second Amended and Restated Articles of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 to the
Annual Report on Form 10-K for the fiscal year ended December
31, 1997).
3.2 Amended and Restated Code of Regulations of the Registrant
(incorporated by reference to Exhibit 3.2 to the Registration
Statement on Form S-1, registration number 33-56118 (the
"Registration Statement").
4.1 Form of Stock Certificate for the Registrant (incorporated by
reference to Exhibit 4.1 to the Registration Statement).
4.2 Articles Fourth, Fifth, Sixth, Seventh, Eighth, Eleventh,
Twelfth, and Thirteenth of the Registrant's Amended and
Restated Articles of Incorporation (see Exhibit 3.1).
4.3 Articles I and II of the Registrant's Code of Regulations (see
Exhibit 3.2).
10.1 Form of Employment Agreement, dated July 1, 1995, for
executive officers (incorporated by reference to Exhibit 10.1
to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1995 (the "1995 Form 10-K")).
10.2 Information concerning Employment Agreements substantially
similar to Exhibit 10.1.
10.3 Deferred Compensation Agreement, dated May 1, 1984, between
Rocky Shoes & Boots Co. and Mike Brooks (incorporated by
reference to Exhibit 10.3 to the Registration Statement).
10.4 Information concerning Deferred Compensation Agreements
substantially similar to Exhibit 10.3.
10.5 Form of Company's amended 1992 Stock Option Plan (incorporated
by reference to Exhibit 10.5 to the 1995 Form 10-K).
10.6 Form of Stock Option Agreement (incorporated by reference to
Exhibit 10.6 to the Registration Statement).
10.7 Revolving Credit Loan Agreement, dated January 28, 1997, among
Rocky Shoes & Boots, Inc., Five Star Enterprises Ltd.,
Lifestyle Footwear, Inc., Bank One Columbus, N.A., The
Huntington National Bank, and Bank One, Columbus, N.A., as
Agent (incorporated by reference to Exhibit 10.7 to the Annual
Report on Form 10-K for the fiscal year ended December 31,
1996 (the "1996 Form 10-K")).
10.8 Term Loan Agreement and First Amendment to Revolving Credit
Loan Agreement, dated as of April 18, 1997, between the
Registrant, Five Star Enterprises Ltd., Lifestyle Footwear,
Inc., Bank One, Columbus, N.A., the Huntington National Bank,
and Bank One, Columbus, N.A., as Agent (incorporated by
reference to Exhibit 10.8 to Form S-2 filed September 11,
1997, registration number 333-35391).
10.9 Second Amendment to Revolving Credit Loan Agreement dated May
29, 1998, among the Registrant, Five Star Enterprises Ltd.,
Lifestyle Footwear, Inc., Bank One, N.A., The Huntington
National Bank, and Bank One, N.A., as Agent (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998 (the "June 30, 1998 Form
10-Q")).
10.10 Second Amended and Restated Master Business Loan Note, dated
May 29, 1998, among the Registrant, Five Star Enterprises
Ltd., Lifestyle Footwear, Inc., and payable to Bank One, N.A.
(incorporated by reference to Exhibit 10.3 of the June 30,
1998 Form 10-Q).
53
Exhibit
Number Description
------ -----------
10.11 Second Amended and Restated Master Business Loan Note, dated
May 29, 1998, among the Registrant, Five Star Enterprises
Ltd., Lifestyle Footwear, Inc., and payable to Bank One, N.A.
(incorporated by reference to Exhibit 10.3 of the June 30,
1998 Form 10-Q).
10.12 Master Agreement, dated as of February 1, 1996, by and between
Bank One, Columbus, N.A., and Rocky Shoes & Boots Co.
(incorporated by reference to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the transition period ended
December 31, 1995).
10.13 Indemnification Agreement, dated December 21, 1992, between
the Registrant and Mike Brooks (incorporated by reference to
Exhibit 10.10 to the Registration Statement).
10.14 Information concerning Indemnification Agreements
substantially similar to Exhibit 10.13 (incorporated by
reference to Exhibit 10.11 to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1993 (the "1993
Form 10-K")).
10.15 Trademark License Agreement and Manufacturing Certification
Agreement, each dated May 14, 1994, between Rocky Shoes &
Boots Co. and W. L. Gore & Associates, Inc. (incorporated by
reference to Exhibit 10.12 to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1994 (the "1994
Form 10-K")).
10.16 Decree of Tax Exemption from the Government of the
Commonwealth of Puerto Rico (incorporated by reference to
Exhibit 10.13 to the Registration Statement).
10.16A English Translation of Addendum to Exhibit 10.16 (incorporated
by reference to Exhibit 10.13A to the Registration Statement).
10.17 Lease Agreement, dated May 1, 1998, as amended, between Rocky
Shoes & Boots Co. and William Brooks Real Estate Company
regarding Nelsonville factory (incorporated by reference to
Exhibit 10.3 of the June 30, 1998 Form 10-Q).
10.18 Lease Contract, dated August 31, 1988, between Lifestyle
Footwear, Inc. and The Puerto Rico Industrial Development
Company regarding factory location 1 (incorporated by
reference to Exhibit 10.15 to the Registration Statement).
10.19 Lease Contract, undated, between Lifestyle Footwear, Inc. and
The Puerto Rico Industrial Development company regarding
factory location 2 (incorporated by reference to Exhibit 10.16
to the Registration Statement).
10.19A English translation of Exhibit 10.19 (incorporated by
reference to Exhibit 10.16A to the Registration Statement).
10.20 Lease Agreement, dated December 13, 1993, between Five Star
Enterprises Ltd. and the Dominican Republic Corporation for
Industrial Development regarding buildings and annexes of a
combined manufacturing surface of 75,526 square feet, located
in the Industrial Free Zone of La Vega (incorporated by
reference to Exhibit 10.17 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995 (the
"September 30, 1995 Form 10-Q")).
10.20A English translation of Exhibit 10.20 (incorporated by
reference to Exhibit 10.2A to the September 30, 1995 Form
10-Q).
54
Exhibit
Number Description
------ -----------
10.21 Continuing Security Agreement, dated January 28, 1997, among
Rocky Shoes & Boots, Inc., Five Star Enterprises Ltd.,
Lifestyle Footwear, Inc., and Bank One, Columbus, N.A., as
Agent (incorporated by reference to Exhibit 10.18 to the 1996
Form 10-K).
10.22 Loan Purchase, Assignment and Master Amendment Agreement,
dated as of February 1, 1996, among Bank One Columbus, N.A.,
NBD Bank, NBD Bank, as Agent, Rocky Shoes & Boots, Inc., Rocky
Shoes & Boots, Co., Five Star Enterprises Ltd., and Lifestyle
Footwear, Inc. (incorporated by reference to Exhibit 10.19 to
the Company's Annual Report on Form 10-K for the transition
period ended December 31, 1995).
10.23 Installment Business Loan Note, dated August 19, 1993, among
Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star
Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank
(incorporated by reference to Exhibit 10.20 to the 1994 Form
10-K).
10.24 Second Amendment to Business Loan Note, dated January 28,
1997, among Rocky Shoes & Boots, Inc., Five Star Enterprises
Ltd., and Lifestyle Footwear, Inc. (incorporated by reference
to Exhibit 10.21 to the 1996 Form 10-K).
10.25 Term Lease Master Agreement, dated April 27, 1993, between
Rocky Shoes & Boots, Inc. and IBM Credit Corporation
(incorporated by reference to Exhibit 10.22 to the 1993 Form
10-K).
10.26 Fourth Amendment to Promissory Note, dated January 28, 1997,
among Rocky Shoes & Boots, Inc., Five Star Enterprises Ltd.,
and Lifestyle Footwear, Inc. (incorporated by reference to
Exhibit 10.23 to the 1996 Form 10-K).
10.27 Acceptance Credit Agreement, dated May 4, 1993, among Rocky
Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star
Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank
(incorporated by reference to Exhibit 10.24 to the 1994 Form
10-K).
10.28 Adjustable Rate Note, dated May 23, 1988, between Nelsonville
Home and Savings Association and Rocky Shoes & Boots Co.
(incorporated by reference to Exhibit 10.25 to the
Registration Statement).
10.29 First Amendment to Acceptance Credit Agreement, dated October
20, 1993, among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots
Co., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and
NBD Bank (incorporated by reference to Exhibit 10.26 to the
1994 Form 10-K).
10.30 Form of Company's Amended and Restated 1995 Stock Option Plan
(incorporated by reference to Exhibit 4(a) to the Registration
Statement on Form S-8, registration number 333-67357).
10.31 Form of Stock Option Agreement under the 1995 Stock Option
Plan (incorporated by reference to Exhibit 10.28 to the 1995
Form 10-K).
10.32 Open-End Mortgage, Security Agreement and Assignment of Rents
and Leases, dated March 30, 1995, between Rocky Shoes & Boots
Co. and NBD Bank, as Agent (incorporated by reference to
Exhibit No. 10.3 to the March 31, 1995 Form 10-Q).
10.33 Installment Business Loan Note, dated May 11, 1994, among
Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star
Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank
(incorporated by reference to Exhibit 10.30 to the 1994 Form
10-K).
55
Exhibit
Number Description
------ -----------
10.34 Construction and Term Loan Agreement, dated October 27, 1993,
among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five
Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank
(incorporated by reference to Exhibit 10.31 to the 1994 Form
10-K).
10.35 Promissory Note, dated October 27, 1993, among Rocky Shoes &
Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises
Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated by
reference to Exhibit 10.32 to the 1994 Form 10-K).
10.36 Open-End Mortgage, Security Agreement and Assignment of Rents
and Leases, dated October 27, 1993, among Rocky Shoes & Boots,
Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd.,
Lifestyle Footwear, Inc., and NBD Bank (incorporated by
reference to Exhibit 10.33 to the 1994 Form 10-K).
10.37 First Amendment to Construction and Term Loan Agreement, dated
January 28, 1994, among Rocky Shoes & Boots, Inc., Rocky Shoes
& Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear,
Inc., and NBD Bank (incorporated by reference to Exhibit 10.34
to the 1994 Form 10-K).
10.38 First Amendment to Promissory Note, dated January 28, 1994,
among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five
Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank
(incorporated by reference to Exhibit 10.35 to the 1994 Form
10-K).
10.39 First Amendment to Open-End Mortgage, Security Agreement and
Assignment of Rents and Leases, dated January 28, 1994, among
Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star
Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank
(incorporated by reference to Exhibit 10.36 to the 1994 Form
10-K).
10.40 Letter Agreement between the Registrant and the Kravetz Group,
dated August 3, 1994 (incorporated by reference to Exhibit No.
10.6 to the March 31, 1995 Form 10-Q).
10.41 Amended and Restated Master Business Loan Note, dated March
30, 1995, among the Registrant, Rocky Shoes & Boots Co., Five
Star Enterprises Ltd., Lifestyle Footwear, Inc. (incorporated
by reference to Exhibit No. 10.4 to the March 31, 1995 Form
10-Q).
10.42 Third Amendment to Construction and Term Loan Agreement, dated
as of March 30, 1995, among the Registrant, Rocky Shoes &
Boots Co., Five Star Enterprises Ltd., and Lifestyle Footwear,
Inc. (incorporated by reference to Exhibit No. 10.5 to the
March 31, 1995 Form 10-Q).
10.43 Loan Agreement, dated as of October 7, 1994, between the
Director of Development of the State of Ohio and Rocky Shoes &
Boots Co. (incorporated by reference to Exhibit 10.43 to the
1995 Form 10-K).
10.44 Promissory Note, dated October 7, 1994, by Rocky Shoes & Boots
Co. to the Director of Development of the State of Ohio
(incorporated by reference to Exhibit 10.44 to the 1995 Form
10-K).
10.45 Security Agreement, dated as of October 7, 1994, between the
Director of Development of the State of Ohio and Rocky Shoes &
Boots Co. (incorporated by reference to Exhibit 10.45 to the
1995 Form 10-K).
10.46 Form of Employment Agreement, dated September 7, 1995, for
executive officers (incorporated by reference to Exhibit 10.5
to the September 30, 1995 Form 10-Q).
56
Exhibit
Number Description
------ -----------
10.47 Information covering Employment Agreements substantially
similar to Exhibit 10.46 (incorporated by reference to Exhibit
10.5 to the September 30, 1995 Form 10-Q).
10.48 Termination of Buy-Sell Agreement, dated August 18, 1998,
among the Registrant, Mike Brooks, Barbara Brooks Fuller,
Patricia H. Robey, Jay W. Brooks, and Charles Stuart Brooks
(incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998).
10.49 Employment Agreement, dated April 27, 1999, between the
Company and John E. Friday.
21 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21 to Form S-2 filed September 11, 1997, registration
number 333-35391).
23 Independent Auditors' Consent and Report on Schedules of
Deloitte & Touche LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
99.1 Independent Auditors' Report on Schedules of Deloitte & Touche
LLP (incorporated by reference to Exhibit 23).
99.2 Financial Statement Schedule.