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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). YES [ ] NO [X]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $25,027,342 on June 30, 2002.
There were 4,051,430 shares of the Registrant's Common Stock outstanding
on March 20, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2003 Annual Meeting
of Shareholders are incorporated by reference in Part III.
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 a manufacturing facility
in Moca, 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.
The Company's footwear is manufactured in the Company's facilities
located in the Dominican Republic and Puerto Rico, and the balance of the
footwear, apparel and accessories is sourced from factories in the Far East. The
Company's products are distributed nationwide and in Canada from the Company's
finished goods distribution facility located near Logan, Ohio.
In September 2001, the Board of Directors approved a plan to consolidate
and realign the Company's footwear manufacturing operations. Under this plan,
the Company moved the footwear manufacturing operations at the Nelsonville, Ohio
factory to the Company's factory in Puerto Rico. The restructuring plan was
completed in the fourth quarter of 2001.
In the past, the Company has benefited from a relatively low effective
tax rate. Rocky and 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. As of December 31,
2002, a provision has not been made for U.S. taxes on the accumulated
undistributed earnings of Five Star through December 31, 2002 of approximately
$6,575,000 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.
The Company operates in one financial reporting segment, footwear. The
footwear segment has several major product lines. Financial information,
including revenues, pre-tax income, and assets are included in the consolidated
financial statements.
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."
2
STRATEGY
The Company's objective is to design, supply and market innovative, high
performance, branded footwear and related outdoor gear that enhance shareholder
value while improving the quality of life of our employees, customers and the
communities in which we operate. Key elements of the Company's strategy are as
follows:
Leverage the ROCKY Brand. The Company believes the ROCKY brand has
become a recognizable and established name for performance and quality conscious
consumers in the rugged outdoor and occupational segments of the men's footwear
market. The Company intends to continue leveraging ROCKY with emphasis on the
occupational shoe market, including recent product introductions into the
western work boot segment of the occupational market, and complementary outdoor
gear, such as hunting apparel, socks and accessories in an effort to extend the
brand.
Build customer and consumer relationships. The Company believes it can
improve customer and consumer relationships through innovative sales and
marketing methods. These enhanced relationships will enable the Company to
better understand and satisfy its customers and consumer's needs.
Maximize benefit of current infrastructure. The Company believes it must
more extensively utilize the recent significant investments made in distribution
and information systems. These systems will enable the Company to better service
its customers in a more cost efficient manner.
Focus future investment. The Company believes it needs to continue as
the leader in design and engineering of new and innovative products and to focus
future investments on achieving this goal.
Expand Product Sourcing. The Company's sourced products represented
approximately 50% of net sales in 2002. The Company sources products which are
manufactured to its specifications from independent manufacturers in the Far
East. This enables the Company to offer product for sale at price points that
cannot generally be achieved with products manufactured in its own plants in
Puerto Rico and the Dominican Republic
PRODUCT LINES
The Company's product lines consist of rugged outdoor, occupational,
military and casual footwear and Rocky branded outdoor gear. 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:
PRODUCT LINE TARGET MARKET SUGGESTED DISTRIBUTION CHANNELS
------------ ------------- RETAIL ---------------------
PRICE
-----
RUGGED OUTDOOR Hunters and outdoorsmen $59 - $259 Sporting goods stores, outdoor specialty
stores, mail order catalogs, independent
retail stores and mass merchandisers
OCCUPATIONAL Law enforcement and military $69 - $179 Retail uniform stores, mail order
personnel, security guards, catalogs, specialty safety stores
postal workers, paramedics,
industrial workers and
construction workers
CASUAL Retail customers of premium $69 - $189 Independent retail stores, sporting goods
casual wear stores, mail order catalogs and sporting
goods stores
MILITARY U. S. Government NA U.S. government supply chain
OUTDOOR GEAR Hunters and outdoorsmen $7 - $200 Sporting goods stores, outdoor specialty
stores, mail order catalogs, independent
retail stores and mass merchandisers
Rugged Outdoor Footwear. Rugged outdoor footwear is the Company's
largest product line, representing $41.5 million, or 46.7%, of Fiscal 2002 net
sales. The Company's rugged outdoor footwear line consists of all season
sport/hunting boots that are typically waterproof and insulated and a line of
rubber footwear. These products are designed to keep
3
outdoorsmen comfortable in extreme conditions. Most of the Company's rugged
outdoor footwear styles 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, the Company's second
largest product line, represented $29.6 million, or 33.3%, of Fiscal 2002 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.
Several of the Company's occupational footwear products are similar in design to
certain of the Company's rugged outdoor footwear styles, except the 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.
Military Footwear. Sales of military footwear were $6.4 million in
Fiscal 2002, accounting for 7.2% of net sales. The military footwear were sold
under a now expired contract to the U.S. government.
Casual Footwear. Sales of the Company's casual footwear were $2.3
million in Fiscal 2002, accounting for 2.6% 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 reduced its emphasis on the
casual footwear segment beginning in Fiscal 2000. While continuing to offer high
performance rugged casual footwear, the Company's emphasis is on marketing this
line through the traditional dealer base.
Outdoor Gear. In 2002 the Company began marketing outdoor gear
consisting of hunting apparel, socks and accessories. Sales of the Company's
outdoor gear were $2.7 million in Fiscal 2002, accounting for 3.1% of net sales.
Outdoor gear is currently marketed through the Company's rugged outdoor footwear
channels and is designed to leverage on the Company's reputation within this
product line by offering products directly complementary to the needs of hunters
and outdoorsmen.
Factory outlet stores. During 2002 the Company operated factory outlet
stores in Nelsonville, Ohio and Edgefield, South Carolina. The Edgefield, South
Carolina store was opened in August 2002. Products principally include first
quality products, factory damaged goods and close-outs from the Company and
Rocky licensed products. In addition, related products from other manufacturers
are sold in the stores. For Fiscal 2002, net sales for factory outlet stores
were $4.1 million, or 4.6% of the Company's total net sales.
Other. The Company manufactures and/or markets a variety of accessories,
including innersole support systems, foot warmers, laces and foot powder. Sales
of other products were $2.2 million in Fiscal 2002, accounting for 2.5% 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 stores for
the periods indicated. Historical percentages may not be indicative of the
Company's future product mix.
FISCAL FISCAL FISCAL
2002 2001 2000
------ ------ ------
Rugged outdoor ....................... 46.7% 54.7% 60.4%
Occupational ......................... 33.3 26.2 27.3
Military ............................. 7.2 8.7 --
Casual ............................... 2.6 4.3 6.0
Outdoor Gear ......................... 3.1
Factory outlet stores ................ 4.6 4.6 5.7
Other ................................ 2.5 1.5 0.6
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
4
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 together 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 products. The Company strives to
develop products which respond to the changing needs and tastes of consumers.
SALES, MARKETING AND ADVERTISING
The Company has developed comprehensive marketing and advertising
programs to gain national exposure and create brand awareness for the ROCKY
brand products in targeted markets. By creating strong brand awareness, the
Company seeks to increase the general level of retail demand for its products,
expand the 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. No single customer accounted for more than 10% of the Company's revenues
in Fiscal 2002. The Company believes the loss of any single customer would not
have a material adverse effect on the Company's financial position.
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 sales
representatives who sell the Company's products throughout the United States.
The Company has historically sold its products through manufacturers'
representatives who carried ROCKY brand products as well as other non-competing
products. Currently, the majority of the Company's sales force is comprised of
sales representatives.
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 within 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 consumers. A
key component of this strategy includes advertising through cost-effective cable
broadcasts and national print publications aimed at audiences which share the
demographic profile of the Company's typical customers. 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.
MANUFACTURING AND SOURCING
The Company manufactures products in its facilities located in the
Dominican Republic and Puerto Rico utilizing a modular "Team Pass-Through"
manufacturing system. 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 production per square foot of
manufacturing space, reduces work-in-process inventory and direct labor and
improves 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
5
compressed air and submerging it in water to verify that it is waterproof.
Quality control personnel at the finished goods distribution facility located
near Logan, Ohio 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 the manufacturing
employees' compensation is based on the level of product quality of their work
group.
Approximately 50% of the Company's products are produced in its own
facilities in the Dominican Republic and Puerto Rico. The Company also sources
products from manufacturers in the Far East, which accounted for approximately
50% of net sales in Fiscal 2002. A greater portion of the Company's products may
be sourced in the future since the Company can achieve higher initial gross
margins on sourced products. The Company sources products from manufacturers who
have demonstrated the intent and ability to maintain the high quality that has
become associated with ROCKY brand.
As part of the Company's quality control process, the Company uses
employees in its China office 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 Ohio distribution center, another
inspection of sourced products is conducted by the Director of Quality Control.
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.
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 wholesale selling prices for an extended period of time. The
principal raw materials used in the production of the Company's products, 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, with the
possible exception of GORE-TEX waterproof breathable fabric, there are
acceptable present alternatives to these suppliers and materials.
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 Company 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 the
claims associated with this guarantee have been consistent with guarantee claims
in the footwear industry.
6
SEASONALITY AND WEATHER
The Company has historically experienced significant seasonal
fluctuations in the sale of rugged outdoor footwear. A majority of orders 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
and gear lines, are used by consumers in cold or wet weather. Mild or dry
weather conditions can have a material adverse effect on sales of the Company's
products, particularly if they 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.
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.
BACKLOG
At December 31, 2002, backlog was $4.4 million. At December 31, 2001,
backlog was $9.7 million including approximately $6.2 million related to the
military contract. 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 design and utility patents for
footwear. 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), AQUA GUARD(R), BEAR CLAW(R), CORNSTALKERS(R), FIRSTMED(R), FORMZ(R),
LONGBEARD(R), ROCKY and Design(R) (which claim a ram's head Design as part of
the mark), TAC-TEAM(R), ROCKY 911 SERIES and Design(R), SNOW STALKER(R), ROCKY
ELIMINATOR(R), SILENTHUNTER(R), ROCKY and Design(R) for cigars, ROCKY SHOES &
BOOTS INC. SINCE 1932 and Design(R) plus a detailed full ram Design, and
STALKERS(R). Additional mark variations for ROCKY BOOTS(TM) and Design (which
claims a ram's head Design as part of the mark), ALPHAFORCE(TM), BIG
MOUNTAIN(TM), SAWBLADE(TM), WILDWOLF(TM), PRO-HIKER(TM), ROCKY ELIMINATOR(TM),
PROHUNTER(TM), and FIRSTMED(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
7
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 products. The Company believes
that, based on these factors, it competes favorably in its rugged outdoor
footwear and occupational footwear market niches. The Company competes in
markets against competitors with greater financial, distribution and marketing
resources. These competitors have strong brand name recognition in the markets
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, 2002, the Company had approximately 814 full-time
employees and 10 part-time employees. Approximately 688 of these full-time
employees are in the Dominican Republic and Puerto Rico. The Company has
approximately 569 employees engaged in production and the balance in managerial
and administrative positions. Management considers its relations with all of its
employees to be good. The collective bargaining agreement between the Company
and the Union of Needletrades, Industrial and Textile Employees ("UNITE") was
cancelled with the closing of the Company's Nelsonville, Ohio manufacturing
facility in November, 2001.
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 Fiscal 2003
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, susceptibility to 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 with demand. In addition, the
Company's growth over the years has created the need to increase the investment
in infrastructure and product inventory and to enhance the Company's systems. To
the extent sales forecasts are not achieved, costs associated with the
infrastructure and carrying costs of product inventory would represent a higher
percentage of revenue, which would adversely affect the Company's financial
performance.
Changes in Consumer Demand. 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 its
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."
8
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 possible
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 and gear lines, 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 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
breathable fabric, CORDURA nylon fabric and soling materials. The Company
currently believes there are acceptable alternatives to these suppliers and
materials, with the exception of the GORE-TEX waterproof breathable 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 advance
written notice to the other party by October 1 of the current year of the
agreement that the agreement will terminate, effective December 31 of that same
year. 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 breathable 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 have a material adverse effect on
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."
Changing Retailing Trends. 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 these 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
9
merchandisers could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company established the Wild
Wolf(R) by Rocky(R) brand in Fiscal 2000 to offer rugged outdoor footwear for
sale in another segment of retail. This footwear includes some, but not all, of
the components of the traditional Rocky brand. Therefore, this line is sold to
the mass merchandise channel of distribution at lower retail prices than
historically available in Rocky brand products. 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, David Fraedrich, Senior Vice President
and Treasurer, David Sharp, Executive Vice President Chief Operating Officer,
and James McDonald, Vice President and Chief Financial Officer. Messrs. Brooks
and Fraedrich each have 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 loss of 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. A majority of the Company's products
are produced in the Dominican Republic and Far East. 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 and Far East; foreign governmental
regulation and taxation; fluctuations in foreign exchange rates; changes in
economic conditions; changes in the political stability of the these countries;
and changes in relationships between the United States and these countries. If
any such factors were to render the conduct of business in these countries
undesirable or impracticable, the Company would have to source its products
elsewhere. There can be no assurance that additional sources or products would
be available to the Company or, if available, that such sources could be relied
on to provide product at 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 scheduled to
expire in 2004. The Company provided no U.S. income tax on the unrepatriated
income generated by its subsidiary in the Dominican Republic. Consequently, no
income taxes are provided on these cumulative earnings of approximately
$6,575,000. During fourth quarter Fiscal 1996 and through December 31, 1998, the
Company elected to repatriate future earnings of its subsidiary in the Dominican
Republic and provided taxes on the earnings during that period. In 1999, the
Company elected not to repatriate all 1999 and future earnings of its subsidiary
in the Dominican Republic.
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. 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. In an effort to
enhance its competitive position, during the first quarter of 2000 the Company
began to curtail manufacturing at its Nelsonville, Ohio plant and to consolidate
production at its plants in Puerto Rico and the Dominican Republic. As of
November 16, 2001, the Company closed its Nelsonville, Ohio manufacturing
facility.
10
Concentration of Stock Ownership; Certain Corporate Governance Measures.
The directors, executive officers and principal shareholders of the Company
beneficially own approximately 35.1% 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 a merger more difficult, 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.
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 effect 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. See "Business -- Patents,
Trademarks and Trade Names."
Terrorist Acts and Acts of War. The terrorist attacks in New York and
Washington D.C. on September 11, 2001 have disrupted commerce throughout the
world and have intensified the uncertainty of the U.S. and global economies. The
long-term effects on the Company's business from these attacks are unknown. The
continued threat of terrorism and heightened security and military action in
response to this threat may cause further disruption to the economy. Any such
disruptions resulting in delays or cancellations of customer orders or the
manufacture or shipment of products could have a material adverse effect on the
Company's business, operating results and financial condition.
11
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 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. The Company does not assume any obligation to publicly update or
revise its forward-looking statements even if experience or future changes make
it clear that any projected results expressed or implied therein will not be
realized.
ITEM 2. PROPERTIES.
The Company owns, subject to a mortgage, executive offices and a factory
outlet store which are located in Nelsonville, Ohio in a two-story 25,000 square
foot building. 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 currently under lease to an unrelated entity.
The Company owns, subject to a mortgage, a 98,000 square foot
distribution warehouse in Nelsonville, Ohio. A portion of this facility is
currently under lease to an unrelated entity.
The Company leases a 41,000 square foot facility in Nelsonville, Ohio,
from the William Brooks Real Estate Company, which is owned by shareholders of
the Company. This building was used for manufacturing and presently houses
additional outlet store retail space. A portion of the space not currently
needed for the Company's use is under lease to unrelated entities. The lease
with the William Brooks Real Estate Company expires in February 2004 with
options for 1 year extensions.
Lifestyle leases two manufacturing facilities, on of which contains
44,978 sq. ft. and the other which contains 39,581 sq. ft. in Moca, Puerto Rico.
These buildings are leased from the Puerto Rico Industrial Development Company
under a net non-cancelable operating lease which expires in 2009.
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 foot building from the DRCID under a temporary lease.
The Company owns, subject to a mortgage, a finished goods distribution
facility near Logan, Ohio. The building contains 192,000 square feet and is
situated on 17.9 acres of land. The finished goods distribution facility became
fully operational in the first quarter of 2000. The Company has an option on an
additional four acres of land adjacent to this property.
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
12
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.
13
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, 2001................................. $6.25 $3.81
June 30, 2001.................................. $4.80 $2.98
September 30, 2001............................. $6.90 $4.46
December 31, 2001.............................. $6.49 $4.58
March 31, 2002................................. $7.75 $5.20
June 30, 2002.................................. $8.90 $5.40
September 30, 2002............................. $6.30 $4.18
December 31, 2002.............................. $5.65 $4.25
On March 20, 2003, the last reported sales price of the Common Stock on
the NASDAQ National Market was $6.45 per share. As of March 20, 2003, there were
approximately 150 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 restricts the payment of
dividends on the Common Stock. At December 31, 2002, the Company had no retained
earnings available for distribution.
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except for per share data)
FIVE YEAR FINANCIAL SUMMARY
---------------------------
12/31/02 12/31/01 12/31/00 12/31/99 12/31/98
-------- -------- -------- -------- --------
INCOME STATEMENT DATA
Net sales $ 88,959 $103,320 $103,229 $ 98,781 $ 89,316
Gross margin % of sales 26.3% 22.5% 23.8% 15.7% 23.6%
Net income (loss) $ 2,843 $ 1,531 $ 96 $ (5,130) $ 2,262
PER SHARE
Net income (loss):
Basic $ 0.63 $ 0.34 $ 0.02 $ (1.09) $ 0.42
Diluted $ 0.62 $ 0.34 $ 0.02 $ (1.09) $ 0.41
Weighted average number of common
shares outstanding:
Basic 4,500 4,489 4,489 4,710 5,425
Diluted 4,590 4,549 4,493 4,710 5,527
BALANCE SHEET DATA
Inventories $ 23,182 $ 27,714 $ 32,035 $ 32,573 $ 47,110
Total assets 68,417 74,660 86,051 89,333 96,598
Working capital 41,751 44,267 50,201 48,468 67,468
Long-term debt, less current
maturities 10,488 16,976 26,445 25,177 26,878
Shareholders' equity 52,393 51,043 50,326 50,229 59,635
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The purpose of this section is to discuss and analyze the Company's
consolidated financial condition, liquidity and capital resources and results of
operations. This section should be read in conjunction with the consolidated
financial statements and notes, which appear elsewhere in this Annual Report on
Form 10-K. Use of the terms "Rocky", "we", "us" and "our" in this discussion
refer to Rocky Shoes & Boots, Inc. and subsidiaries. Our fiscal year begins on
January 1 and ends on December 31. This section contains certain forward-looking
statements within the meaning of federal securities laws that involve risks and
uncertainties including statements regarding our plans, objectives, goals,
strategies, and financial performance. Our actual results could differ
materially from the results anticipated in these forward-looking statements as a
result of factors set forth under the caption "Safe Harbor Statement Under the
Private Securities Litigation Reform Act of 1995" below.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results
of Operations discuss the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. A summary
of our significant accounting policies is included in the Notes to Consolidated
Financial Statements included in this Annual Report.
Management regularly reviews its accounting policies to make certain
they are current and also provide readers of the consolidated financial
statements with useful and reliable information about our operating results and
financial condition. These include, but are not limited to, matters related to
accounts receivable, inventories, pension benefits, and income taxes.
Implementation of these accounting policies includes estimates and judgments by
management based on historical experience and other factors believed to be
reasonable. This may include judgments about the carrying value of assets and
liabilities based on considerations that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
Management believes the following critical accounting policies are most
important to the portrayal of the Company's financial condition and results of
operations, and require more significant judgments and estimates in the
preparation of its consolidated financial statements.
Revenue Recognition:
Customer sales are recognized when revenue is realized and earned. The
Company recognizes revenue when the risk and title passes to the customer,
generally at the time of shipment. Customer sales are recorded net of allowances
for estimated returns, trade promotions and other discounts, which are
recognized as a deduction from sales at the time of sale.
Accounts receivable allowances:
Management maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. Management also records estimates for customer
returns and discounts offered to customers. Should a greater proportion of
customers return goods and take advantage of discounts than estimated by the
Company, additional allowances may be required.
Inventories:
Management identifies slow moving or obsolete inventories and estimates
appropriate loss provisions related to these inventories. Historically, these
loss provisions have not been significant as the vast majority of the Company's
inventories are considered saleable and the Company has been able to liquidate
slow moving or obsolete inventories through the Company's factory outlet stores
or through various discounts to customers. Should management encounter
difficulties liquidating slow
16
moving or obsolete inventories, additional provisions may be necessary.
Management regularly reviews the adequacy of its inventory reserves and makes
adjustments to them as required.
Pension benefits:
Pension and post-retirement benefit expenses are determined by actuaries
using assumptions concerning the discount rate, expected return on plan assets,
rate of compensation increase, and health care cost trend rates. An actuarial
analysis of benefit obligations and plan assets is determined as of September 30
each year. The funded status of the Company's plans and reconciliation of
accrued pension cost is determined annually as of December 31. Further
discussion of the Company's pension and post-retirement benefit plans and
related assumptions is included in Note 8, Retirement Plans, to the consolidated
financial statements included in the Annual Report on Form 10-K. Actual results
would be different using other assumptions. Management records an accrual for
pension costs associated with the Company sponsored noncontributory defined
benefit pension plans covering the union and non-union workers of the Company's
operations. Future adverse changes in market conditions or poor operating
results of underlying plan assets could result in losses or a higher accrual.
Income taxes:
Currently, management has not recorded a valuation allowance to reduce
its deferred tax assets to the amount that it believes is more likely than not
to be realized. The Company has considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for the
valuation allowance, however in the event the Company were to determine that it
would not be able to realize all or part of its net deferred tax assets in the
future, an adjustment to the deferred tax assets would be charged to income in
the period such determination was made. Likewise, should the Company determine
that it would be able to realize its deferred tax assets in the future in excess
of its net recorded amount, an adjustment to the deferred tax assets would
increase income in the period such determination was made.
PERCENTAGE OF NET SALES
References to 2002, 2001 and 2000 are to Fiscal years of the Company ended
December 31 of the respective year.
2002 2001 2000
------ ------ ------
Net sales ....................................... 100.0% 100.0% 100.0%
Costs of goods sold ............................. 73.7 77.5 76.2
------ ------ ------
Gross margin .................................... 26.3 22.5 23.8
SG&A expenses and plant closing costs in 2001 ... 20.9 19.0 20.7
------ ------ ------
Income from operations .......................... 5.4% 3.5% 3.1%
====== ====== ======
2002 COMPARED TO 2001
NET SALES
Net sales declined 13.9% to $88,958,721 for 2002 compared with
$103,319,806 for 2001. This decline was primarily due to reduced sales of rugged
outdoor footwear, which declined $15.0 million to $41.5 million in 2002. A
number of the Company's customers had higher inventories than planned at the end
of the 2001 fall and winter seasons due to mild weather conditions. As a result,
orders for rugged outdoor footwear in 2002 were adversely affected. Demand
increased during the 2002 fall and winter seasons due to more traditional
seasonal weather conditions in most regions of the U.S. where the Company's
rugged outdoor footwear is sold, which resulted in improved sell-through
compared with the prior year. Occupational footwear sales increased $2.6 million
to $29.6 million in 2002. These sales are less susceptible to weather conditions
and occur throughout the year. The Company introduced additional work styles in
2002 that were well received by customers. Sales of military boots to the U.S.
government declined $2.5 million to $6.4 million in 2002 due to fulfillment of a
contract that began in 2001 which was completed in the second quarter 2002.
These sales are dependent on specific awards from the U.S. government based on a
competitive bidding process, which occur from time to time. Casual footwear
sales declined $2.1 million to $2.3 million in 2002, consistent with the
Company's reduced emphasis on this footwear category.
17
Rocky branded apparel and accessories, were introduced in the first
quarter 2002. This line extension of the ROCKY brand achieved strong
sell-through in 2002, resulting in sales of approximately $2.7 million. The
Company reacquired the licensing rights to ROCKY(R) Kids and ROCKY(R) socks in
the first quarter 2002. The Company's factory outlet stores had net sales of
$4.1 million in 2002 compared with $4.7 million the prior year. This was
primarily due to lower sales in the Company's Nelsonville store.
Average list prices for the Company's footwear, clothing and accessories
were similar in 2002 compared with 2001.
GROSS MARGIN
Gross margin increased to 26.3% of net sales in 2002 compared with 22.5%
in 2001. Benefits from the Company's manufacturing realignment, increased
sourcing, and more favorable product mix contributed to the improvement. In
absolute dollars, gross margin rose $178,568, or 0.8%, to $23,430,508 in 2002
from $23,251,940 the prior year. The Company closed its Nelsonville, Ohio
factory in the fourth quarter 2001 and moved that production capacity to its
factory in Puerto Rico. The manufacturing realignment was completed in the
fourth quarter 2001, contributing to improved operating efficiencies and lower
manufacturing costs in 2002.
The Company has been sourcing footwear from outside the United States
since 1996. In 2002, sourced footwear and branded apparel and accessories
represented 50% of total net sales versus 41% in 2001. The increase in sourced
products sales as a percentage of total sales is expected to continue in the
future; however, may not be at the same year-over-year growth rates.
Military boots are manufactured for the U.S. government based on
specific, competitively bid, contract awards. The Company manufactured military
boots from second quarter 2001 to second quarter 2002. These military boots were
produced at margins substantially below the Company's overall gross margin as a
percentage of net sales.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general & administrative ("SG&A") expenses increased $485,787,
or 2.7%, to $18,661,730 in 2002 compared to $18,175,973 in 2001. Higher pension
expenses, relatively small increases in multiple expense categories and start-up
costs associated with the launching of the Company's work western boot line (a
sub-category of the occupational category) accounted for the small increase in
SG&A. The more significant increase in SG&A as a percentage of net sales was the
result of reduced net sales for the year. SG&A expenses were 21.0% of net sales
in 2002 versus 17.6% the prior year, principally due to the 13.9% decline in
nets sales in 2002.
INTEREST EXPENSE
Interest expense declined $1,089,037, or 43.7%, to $1,404,496 for 2002
from $2,493,533 in 2001. The Company benefited from substantial improvement in
cash from operations, a portion of which was used to reduce outstanding debt
under the Company's credit facility. Lower interest rates also contributed to
the reduction in interest expense in 2002.
The Company's funded debt decreased 37.1% to $10,974,549 at December 31,
2002 versus $17,445,166 a year ago. The Company's investment in capital assets
was substantially below depreciation expense for 2002. It was also able to
continue to reduce inventory balances and accounts receivable. These factors,
along with the reinvestment back into the Company of income contributed to the
reduced reliance on borrowings.
INCOME TAXES
The Company recognized income tax expense of $953,000 for 2002 compared
with an income tax benefit of $93,438 for 2001. The Company's effective tax rate
for 2002 was 25%, which is lower than the statutory rate of 35% due to
proportionately more income being earned in offshore jurisdictions and the
decision to not repatriate foreign earnings to the U.S. The income tax benefit
recognized during 2001 resulted primarily from an abatement of Puerto Rico
tollgate taxes on all earnings subsequent to June 30, 1994. This resulted in a
deferred tax benefit of $408,000.
18
2001 COMPARED TO 2000
NET SALES
Net sales rose 0.1% to $103,319,806 for 2001 compared with $103,228,987
for 2000. This increase was primarily due to sales of military footwear, initial
shipments of which were made during second quarter 2001. To a lesser extent,
sales of accessory items contributed to the increase. Offsetting the increase
were decreases in sales within each other major footwear category for 2001. The
Company attributes these reduced sales to the general softness within the
economy, especially during the second half of 2001, and milder than normal
weather during its peak selling season. Average list prices for the Company's
product were approximately 7% higher in 2001 than in 2000.
GROSS MARGIN
Gross margin decreased $1,359,955, or 5.5%, to $23,251,940 in 2001
versus $24,611,895 in 2000. As a percentage of net sales, gross margin decreased
to 22.5% in 2001 from 23.8% in 2000. 2001 included sales of Intermediate Cold
Wet military boots with gross margins below the Company's average rate. In
addition, implementation of improved cost and reporting systems allowed the
Company to review its inventory costing methods and revise its costs during
fourth quarter 2001, which negatively impacted gross margin. Improved pricing
policies combined with an increase in sourced footwear to 41% of net sales in
2001 from 36% the prior year benefited gross margin for the year ended December
31, 2001.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general & administrative ("SG&A") expenses decreased
$3,250,815, or 15.2%, to $18,175,943 in 2001 compared to $21,426,758 in 2000. As
a percentage of net sales, SG&A declined to 17.6% from 20.7% in 2000. The most
significant factors contributing to the reduction in SG&A expenses for the 2001
were lower selling costs resulting from a restructuring of the sales force and
reduced bad debt expense. Salaries and wages as well as advertising expenses
were lower than the prior year, which offset higher fringe benefits for
increased pension accruals, anticipated performance incentives, and additional
professional fees. The Company continues to seek additional cost reductions that
will benefit long-term performance.
In addition, the Company announced plans to realign its manufacturing
operations on September 17, 2001, which included ceasing manufacturing
operations at the Nelsonville, Ohio factory during fourth quarter 2001. A
restructuring charge of $1.5 million was recorded in 2001 for anticipated
expenses associated with the realignment of manufacturing operations. A summary
of the costs accrued includes: severance, pension and employee benefit costs,
equipment and relocation costs, and legal and other expenses.
INTEREST EXPENSE
Interest expense declined $860,855, or 25.7%, to $2,493,533 for 2001
from $3,354,388 in 2000. The Company benefited from lower outstanding balances
and lower interest rates during 2001, which were partially offset by a $295,000
reduction in second quarter 2000 interest expense due to a gain on the
termination of an interest rate swap agreement.
The Company's funded debt decreased 36.6% to $17,445,166 at December 31,
2001 versus $27,515,650 a year ago due to reductions to inventories, accounts
receivable and capital expenditures.
INCOME TAXES
The Company recognized income tax benefit of $93,438 for 2001 compared
with an income tax expense of $183,464 for 2000. The current year benefit
resulted primarily from an abatement of Puerto Rico tollgate taxes on all
earnings subsequent to June 30, 1994. This resulted in a deferred tax benefit of
$408,000.
19
IMPACT OF ACCOUNTING STANDARDS
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
4, 44, and 64, Amendment of FASB Statement 13, and Technical Corrections." This
statement rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of
Debt," and an amendment of that statement, SFAS 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements." This statement also rescinds SFAS
44, "Accounting for Intangible Assets of Motor Carriers." This statement amends
SFAS 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. This statement is
effective for the first quarter in the year ended December 31, 2003. We do not
believe the adoption of SFAS 145 will have a significant impact on the
consolidated financial statements.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities included in
restructurings. This Statement eliminates the definition and requirements for
recognition of exit costs as defined in EITF Issue 94-3, and requires that
liabilities for exit activities be recognized when incurred instead of at the
exit activity commitment date. This Statement is effective for exit or disposal
activities initiated after December 31, 2002. We do not believe the adoption of
SFAS 146 will have a significant impact on the consolidated financial
statements.
In November 2002, the FASB issued FASB Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to
recognize a liability, at the inception of the guarantee, for the fair value of
obligations it has undertaken in issuing the guarantee and also includes more
detailed disclosures with respect to guarantees. FIN 45 is effective for
guarantees issued or modified starting January 1, 2003 and requires additional
disclosures for the year ended December 31, 2002. We do not expect the
provisions of FIN 45 to have a significant impact on the consolidated financial
statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS 123. The transition provisions and the disclosure
requirements of this Statement are effective for fiscal years ending after
December 15, 2002. We continue to apply the intrinsic value-based method to
account for stock options and have complied with the new disclosure
requirements.
In January 2003, the FASB issued FASB Interpretation 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), to expand upon and strengthen
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
Until now, one company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN 46 changes that by requiring a variable interest entity, as defined, to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN 46 also requires
disclosures about variable interest entities that the company is not required to
consolidate but in which it has significant variable interest. The consolidation
requirements of FIN 46 apply immediately to variable interest entities created
after January 31, 2003 and to older entities in the fiscal year or interim
period beginning after June 15, 2003. Certain of the disclosure requirements,
none of which appear to apply to us at this time, are effective in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. We do not expect the provisions of FIN 46 to
have a significant impact on the consolidated financial statements.
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. During 2002 the Company principally relied upon
borrowings under its revolving credit facility. 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
20
months of January through March of each year and highest during the months of
May through October of each year. The Company had working capital of $41,751,287
and $44,266,895 at December 31, 2002 and 2001, respectively.
Inventory declined by $4,531,675 or 16.4% to $23,181,989 at December 31,
2002 compared with $27,713,664 on the same date of the prior year. This decrease
resulted from improved forecasting and scheduling systems that allowed footwear
to be manufactured closer to actual delivery dates. In addition, the Company's
product lines included fewer styles for 2002. The Company believes it has
adequate inventory to meet anticipated demand.
Capital expenditures were $2,338,388 for 2002 versus $1,172,365 for
2001. Capital expenditures for the foreseeable future are expected to be similar
to 2002, as sourced manufacturing continues to increase as a percentage of
products sold.
The Company's borrowings and external sources of funds are as follows:
DECEMBER 31,
-----------------------------
2002 2001
Bank - revolving credit facility $ 5,000,000 $11,000,000
Equipment and other obligations 452,100 617,625
Real estate obligations 5,522,449 5,827,541
----------- -----------
Total debt 10,974,549 17,445,166
Less current maturities 486,161 469,143
----------- -----------
Net long-term debt $10,488,388 $16,976,023
=========== ===========
The Company and GMAC Business Credit, LLC entered into a two-year
extension to its credit facility on October 21, 2002. This new $45 million
credit facility replaced the previous $50 million credit facility and includes
terms more favorable to the Company, lower interest rates, and, to a lesser
extent, reduced administrative fees. The Company requested the reduction to the
line of credit as a cost cutting measure and to more closely align the credit
facility with anticipated borrowing requirements. The agreement expires
September 30, 2005. As of December 31, 2002, borrowings under the revolving line
of credit were $5,000,000 and $452,100 under the term loan agreement and the
amount available for the borrowings was $12,635,938. At December 31, 2002, the
Company was in compliance with all lender covenants.
During first quarter 2000, the Company completed mortgage financing 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 leases certain machinery and manufacturing facilities under
operating leases that generally provide for renewal options. Future minimum
lease payments under non-cancelable operating leases are $611,000, $716,000,
$743,000, $618,000, and $295,000 for years 2003 through 2007, respectively, and
$590,000 for all years after 2007, or $3,573,000 in total.
The Company's financing activities during 2002 and 2001 were primarily
in support of future growth and the purchase of a portion of the Company's
common stock. During 2002, the Company purchased $84,540 of the its common
stock, and from January through March 6, 2003, it acquired an additional 483,000
of its common shares for approximately $3,100,000. No single activity
represented a significant amount of the total expenditures. The Company believes
it will be able to finance capital additions, share repurchases and meet
operating expenditure requirements for 2003 through net income, borrowings under
its credit facility and other indebtedness.
The Company's ongoing business activities continue to be subject to
compliance with various laws, rules and regulations as may be issued and
enforced by various federal, state and local agencies. With respect to
environmental matters, costs are incurred pertaining to regulatory compliance.
Such costs have not been, and are not anticipated to become, material.
21
The Company is contingently liable with respect to lawsuits, taxes and
various other matters that routinely arise in the normal course of business. The
Company does not have off-balance sheet arrangements, financings, or other
relationships with unconsolidated entities or other persons, also known as
"Variable Interest Entities." Additionally, the Company does not have any
related party transactions that materially affect the result of operations, cash
flow or financial condition.
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 Management's Discussion and Analysis of Financial Condition and
Results of Operations 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. 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, economic
changes, 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 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. The Company assumes no obligation to update any
forward-looking statements.
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 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 consisting of a credit facility with a
balance at December 31, 2002 of $5,000,000, under which interest is payable
monthly at the lender's LIBOR rate plus 237.5 basis points or prime; (2)
equipment and other obligations totaling $452,100 at December 31, 2002 that bear
interest at a variable rate of prime; and (3) real estate obligations of
$5,522,449 at December 31, 2002, that bear interest at fixed rates of 7.625% and
8.275%. The credit facility agreement referenced above under (1) permits the
Company to borrow up to 75% of its revolving loan balance under 30 day notes
bearing interest at LIBOR plus 237.5 basis points with the remaining balance
bearing interest at prime.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated balance sheets as of December 31, 2002 and
2001 and the related consolidated statements of income, shareholders' equity,
and cash flows for the years ended December 31, 2002, 2001, and 2000, together
with the independent auditors' report thereon appear on pages F-1 through F-24
hereof, and are incorporated herein by reference.
22
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 2003 Annual Meeting of Shareholders (the "Proxy Statement") to be held on
May 20, 2003, and is incorporated herein by reference.
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.
Except for information concerning the Company's equity compensation
plans, 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.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information as of December 31, 2002,
concerning shares of our common stock that may be issued upon the exercise of
options and other rights under our existing equity compensation plans and
arrangements, divided between plans approved by our shareholders and plans or
arrangements not submitted to our shareholders for approval. The information
includes the number of shares covered by, and the weighted average exercise
price of, outstanding options and other rights and the number of shares
remaining available for future grants excluding the shares to be issued upon
exercise of outstanding options, warrants, and other rights.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE ISSUANCE UNDER EQUITY
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING COMPENSATION PLANS
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND (EXCLUDING SECURITIES
WARRANTS AND RIGHTS RIGHTS REFLECTED IN COLUMN (a))
(a) (b) (c)
Equity compensation plans
approved by security holders (1) 1,023,000 $6.68 304,500
Equity compensation plans
not approved by security holders -- $ -- --
--------- ----- ---------
Total 1,023,000 $6.68 304,500
(1) Equity compensation plans approved by shareholders include the 1992 Stock
Option Plan and the Second Amended and Restated 1995 Stock Option Plan.
23
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.
ITEM 14. CONTROLS AND PROCEDURES.
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer along with our Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon this evaluation, our
Chief Executive Officer along with our Chief Financial Officer concluded that
our disclosure controls and procedures are effective in alerting them in a
timely manner to material information relating to us (including our consolidated
subsidiaries) required to be included in our periodic SEC reports. It should be
noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
Since the date of our evaluation to the filing date of this Annual
Report on Form 10-K, there have been no significant changes in our internal
controls or in other factors that could significantly affect internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
PART IV
ITEM 15. 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.......................................... F-1
Consolidated Balance Sheets as of December 31, 2002 and 2001.......... F-2 - F-3
Consolidated Statements of Income for the fiscal years ended
December 31, 2002, 2001, and 2000................................... F-4
Consolidated Statements of Shareholders' Equity for the fiscal
years ended December 31, 2002, 2001, and 2000....................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 2002, 2001, and 2000................................... F-6
Notes to Consolidated Financial Statements for the fiscal years ended
December 31, 2002, 2001, and 2000................................... F-7 - F-24
(2) The following financial statement schedule for the fiscal years
ended December 31, 2002, 2001, and 2000 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.
Schedule II -- Consolidated Valuation and Qualifying Accounts.
24
Independent Auditors' Report on Financial Statement Schedule.
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.
25
(3) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Second Amended and Restated Articles of Incorporation of the
Company (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 Company
(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 Company (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 Company's Amended and Restated
Articles of Incorporation (see Exhibit 3.1).
4.3 Articles I and II of the Company'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 (incorporated by reference to Exhibit
10.2 to the 1995 Form 10-K).
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 (incorporated by reference
to Exhibit 10.4 to the Registration Statement).
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 Indemnification Agreement, dated December 21, 1992, between the
Company and Mike Brooks (incorporated by reference to Exhibit
10.10 to the Registration Statement).
10.8 Information concerning Indemnification Agreements substantially
similar to Exhibit 10.7 (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")).
10.9 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")).
10.10 Decree of Tax Exemption from the Government of the Commonwealth
of Puerto Rico (incorporated
26
EXHIBIT
NUMBER DESCRIPTION
------ -----------
by reference to Exhibit 10.13 to the Registration Statement).
10.10A English Translation of Addendum to Exhibit 10.16 (incorporated
by reference to Exhibit 10.13A to the Registration Statement).
10.11 Amended and Restated Lease Agreement, dated March 1, 2002,
between Rocky Shoes & Boots Co. and William Brooks Real Estate
Company regarding Nelsonville factory.
10.12 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).
10.13 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).
10.13A English translation of Exhibit 10.13 (incorporated by reference
to Exhibit 10.16A to the Registration Statement).
10.14 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")).
10.14A English translation of Exhibit 10.20 (incorporated by reference
to Exhibit 10.2A to the September 30, 1995 Form 10-Q).
10.15 Term Lease Master Agreement, dated April 27, 1993, between the
Company and IBM Credit Corporation (incorporated by reference to
Exhibit 10.22 to the 1993 Form 10-K).
10.16 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).
10.17 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).
10.18 Form of Stock Option Agreement under the 1995 Stock Option Plan
(incorporated by reference to Exhibit 10.28 to the 1995 Form
10-K).
10.19 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).
10.20 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).
10.21 Security Agreement, dated as of October 7, 1994, between the
Director of Development of the State
27
EXHIBIT
NUMBER DESCRIPTION
------ -----------
of Ohio and Rocky Shoes & Boots Co. (incorporated by reference
to Exhibit 10.45 to the 1995 Form 10-K).
10.22 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).
10.23 Information covering Employment Agreements substantially similar
to Exhibit 10.23 (incorporated by reference to Exhibit 10.5 to
the September 30, 1995 Form 10-Q).
10.24 Promissory Note, dated December 30, 1999, in favor of General
Electric Capital Business Asset Funding Corporation in the
amount of $1,050,000 (incorporated by reference to Exhibit 10.1
to the Quarterly Report on Form 10-Q for the quarter ended June
30, 2000 (the "June 30, 2000 Form 10-Q")).
10.25 Promissory Note, dated December 30, 1999, in favor of General
Electric Capital Business Asset Funding Corporation in the
amount of $1,500,000 (incorporated by reference to Exhibit 10.2
to the June 30, 2000 Form 10-Q).
10.26 Promissory Note, dated December 30, 1999, in favor of General
Electric Capital Business Asset Funding Corporation in the
amount of $3,750,000 (incorporated by reference to Exhibit 10.3
to the June 30, 2000 Form 10-Q).
10.27 Limited Waiver and Modification Agreement, dated May 14, 2000,
by and among the Company, Five Star Enterprises Ltd., Lifestyle
Footwear, Inc., Bank One, NA, The Huntington National Bank, and
Bank One, NA, as agent (incorporated by reference to Exhibit
10.4 to the June 30, 2000 Form 10-Q).
10.28 Extension of Limited Waiver and Modification Agreement, dated
June 30, 2000, by and among the Company, Five Star Enterprises
Ltd., Lifestyle Footwear, Inc., Bank One, NA, The Huntington
National Bank, and Bank One, NA, as agent (incorporated by
reference to Exhibit 10.5 to the June 30, 2000 Form 10-Q).
10.29 Loan and Security Agreement, dated September 18, 2000, among the
Company, Lifestyle Footwear, Inc., and GMAC Business Credit, LLC
(incorporated by reference to Exhibit 10.1 to the Current Report
on Form 8-K, filed on September 20, 2000).
10.30 First Amendment to Loan and Security Agreement, dated November
20, 2000, among the Company, Lifestyle Footwear, Inc., and GMAC
Business Credit, LLC (incorporated by reference to Exhibit 10.33
to the Annual Report on Form 10-K for the year ended December
31, 2000).
10.31 Second Amendment to Loan and Security Agreement, dated March 27,
2001, among the Company, Lifestyle Footwear, Inc., and GMAC
Business Credit, LLC (incorporated by reference to Exhibit 10.34
to the Annual Report on Form 10-K for the year ended December
31, 2000).
10.32 Third Amendment to Loan and Security Agreement, dated July 9,
2001, among the Company, Lifestyle Footwear, Inc., and GMAC
Business Credit, LLC (incorporated by reference to Exhibit 10.35
to the Annual Report on Form 10-K for the year ended December
31, 2001).
10.33 Fourth Amendment to Loan and Security Agreement, dated February
22, 2002, among the Company, Lifestyle Footwear, Inc., and GMAC
Business Credit, LLC (incorporated by reference to Exhibit 10.36
to the Annual Report on Form 10-K for the year ended December
31, 2001).
28
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.34 Fifth Amendment to Loan and Security Agreement, dated June 21,
2002, among the Company, Lifestyle Footwear, Inc., and GMAC
Business Credit, LLC (incorporated by reference to Exhibit 10.1
to the Quarterly Report on Form 10-Q for the quarter ended June
30, 2002).
10.35 Sixth Amendment to Loan and Security Agreement, dated as of
August 6, 2002, among Rocky Shoes & Boots, Inc., Lifestyle
Footwear, Inc., and GMAC Business Credit, LLC (incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002).
10.36 Seventh Amendment to Loan and Security Agreement, dated as of
September 30, 2002, among Rocky Shoes & Boots, Inc., Lifestyle
Footwear, Inc., and GMAC Business Credit, LLC (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002).
10.37 Eighth Amendment to Loan and Security Agreement, dated as of
October 21, 2002, among Rocky Shoes & Boots, Inc., Lifestyle
Footwear, Inc., and GMAC Business Credit, LLC (incorporated by
reference to Exhibit 10.12 to the Current Report on Form 8-K,
filed on October 24, 2002).
10.38 Company's Second Amended and Restated 1995 Stock Option Plan
(incorporated by reference to the Company's Definitive Proxy
Statement for the 2002 Annual Meeting of Shareholders held on
May 15, 2002, filed on April 15, 2002).
21 Subsidiaries of the Company (incorporated by reference to
Exhibit 21 to the Registration Statement on 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.
99.1 Independent Auditors' Report of Deloitte & Touche LLP on
Schedules (incorporated by reference to Exhibit 23).
99.2 Financial Statement Schedule.
99.3 Certification of CEO Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 of The Sarbanes-Oxley Act of
2002.
99.4 Certification of CFO Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 of The Sarbanes-Oxley Act of
2002.
The Registrant agrees to furnish to the Commission upon its request copies of
any omitted schedules or exhibits to any Exhibit filed herewith.
29
(b) REPORTS ON FORM 8-K
We filed the following Current Reports on Form 8-K with the
Securities and Exchange Commission during the quarter ended December 31,
2002:
(i) A current report on Form 8-K, dated September 30,
2002, was filed with the Securities and Exchange Commission on October
11, 2002 (Item 5).
(ii) A current report on Form 8-K, dated October 23,
2002, was filed with the Securities and Exchange Commission on October
24, 2002 (Item 5).
(c) EXHIBITS
The exhibits to this report begin immediately following the F-pages.
(d) FINANCIAL STATEMENT SCHEDULES
The Independent Auditors' Report and financial statement schedule are
included in this Annual Report on Form 10-K as Exhibit 99.1 and Exhibit
99.2, respectively.
30
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 26, 2003 By: /s/ James E. McDonald
----------------------------------------
James E. McDonald, Vice President 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
--------- ----- ----
/s/ Mike Brooks Chairman, President, Chief March 26, 2003
- ------------------------------------ Executive Officer and Director
Mike Brooks (Principal Executive Officer)
* DAVID FRAEDRICH Senior Vice President, Treasurer, March 26, 2003
- ------------------------------------ and Director
David Fraedrich
/s/ James E. McDonald Vice President and Chief Financial March 26, 2003
- ------------------------------------ Officer (Principal Financial and
James E. McDonald Accounting Officer)
* CURTIS A. LOVELAND Secretary and Director March 26, 2003
- ------------------------------------
Curtis A. Loveland
* LEONARD L. BROWN Director March 26, 2003
- ------------------------------------
Leonard L. Brown
* JAMES L. STEWART Director March 26, 2003
- ------------------------------------
James L. Stewart
* ROBERT D. ROCKEY Director March 26, 2003
- ------------------------------------
Robert D. Rockey
* GLENN E. CORLETT Director March 26, 2003
- ------------------------------------
Glenn E. Corlett
* By: /s/ Mike Brooks
- ------------------------------------
MIKE BROOKS, Attorney-in-Fact
31
CERTIFICATION
I, Mike Brooks, certify that:
1. I have reviewed this annual report on Form 10-K of Rocky Shoes &
Boots, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
(c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Mike Brooks
------------------------------------------------
Mike Brooks
Chairman, President, and Chief Executive Officer
32
CERTIFICATION
I, James E. McDonald, certify that:
1. I have reviewed this annual report on Form 10-K of Rocky Shoes &
Boots, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
(c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ James E. McDonald
------------------------------------------
James E. McDonald
Vice President and Chief Financial Officer
33
ROCKY SHOES & BOOTS, INC.
AND Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-2 - F-3
Consolidated Statements of Income for the Years Ended December 31, 2002,
2001 and 2000 F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 F-6
Notes to Consolidated Financial Statements F-7 - F-24
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, 2002 and 2001 and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2002. 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, 2002 and 2001 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
March 18, 2003
F - 1
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
DECEMBER 31,
2002 2001
CURRENT ASSETS:
Cash and cash equivalents $ 4,276,722 $ 2,954,935
Accounts receivable-trade, net 15,282,618 15,091,100
Other receivables 1,173,714 2,225,498
Inventories 23,181,989 27,713,664
Deferred income taxes-current 584,511 615,609
Other current assets 1,267,097 1,053,192
------------- --------------
Total current assets 45,766,651 49,653,998
FIXED ASSETS, AT COST:
Property, plant and equipment 45,238,866 43,024,219
Less accumulated depreciation (26,189,579) (22,258,125)
------------- --------------
Total fixed assets-net 19,049,287 20,766,094
DEFERRED PENSION ASSET 1,651,222 1,802,922
DEFERRED INCOME TAXES 153,495 295,784
OTHER ASSETS 1,796,359 2,141,016
------------- --------------
TOTAL ASSETS $ 68,417,014 $ 74,659,814
============= ==============
See notes to consolidated financial statements.
F - 2
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
DECEMBER 31,
2002 2001
CURRENT LIABILITIES:
Accounts payable $ 1,642,306 $ 1,559,444
Current maturities-long-term debt 486,161 469,143
Accrued expenses:
Taxes-other 346,168 991,295
Salaries and wages 807,611 985,992
Plant closing costs 210,000 903,291
Co-op advertising 270,390 231,862
Interest 90,408 121,417
Other 162,320 124,659
------------- -------------
Total current liabilities 4,015,364 5,387,103
LONG-TERM DEBT-Less current maturities 10,488,388 16,976,023
DEFERRED LIABILITIES:
Compensation 160,000 155,564
Pension 1,360,338 1,097,791
------------- -------------
Total deferred liabilities 1,520,338 1,253,355
------------- -------------
Total liabilities 16,024,090 23,616,481
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, Series A, no par value, $.06 stated value;
none outstanding 2002 and 2001
Common stock, no par value; 10,000,000 shares authorized;
outstanding 2002-4,489,065 and 2001-4,492,215 shares 35,289,038 35,302,159
Accumulated other comprehensive loss (2,311,749) (831,161)
Retained earnings 19,415,635 16,572,335
------------- -------------
Total shareholders' equity 52,392,924 51,043,333
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 68,417,014 $ 74,659,814
============= =============
See notes to consolidated financial statements.
F - 3
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
2002 2001 2000
NET SALES $ 88,958,721 $ 103,319,806 $ 103,228,987
COST OF GOODS SOLD 65,528,213 80,067,866 78,617,092
------------- -------------- --------------
GROSS MARGIN 23,430,508 23,251,940 24,611,895
------------- -------------- --------------
OTHER OPERATING EXPENSES:
Selling, general and administrative expenses 18,661,730 18,175,943 21,426,758
Plant closing costs 1,500,000
------------- -------------- --------------
Total other operating expenses 18,661,730 19,675,943 21,426,758
------------- -------------- --------------
INCOME FROM OPERATIONS 4,768,778 3,575,997 3,185,137
------------- -------------- --------------
OTHER INCOME AND (EXPENSES):
Interest expense (1,404,496) (2,493,533) (3,354,388)
Other-net 432,018 354,920 449,257
------------- -------------- --------------
Total other-net (972,478) (2,138,613) (2,905,131)
------------- -------------- --------------
INCOME BEFORE INCOME TAXES 3,796,300 1,437,384 280,006
INCOME TAX EXPENSE (BENEFIT) 953,000 (93,438) 183,464
------------- -------------- --------------
NET INCOME $ 2,843,300 $ 1,530,822 $ 96,542
============= ============== ==============
NET INCOME PER COMMON SHARE:
Basic $ 0.63 % 0.34 $ 0.02
============= ============== ==============
Diluted $ 0.62 $ 0.34 $ 0.02
============= ============== ==============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic $ 4,499,741 $ 4,489,322 $ 4,489,215
============= ============== ==============
Diluted $ 4,590,095 $ $4,548,632 $ 4,493,304
============= ============== ==============
See notes to consolidated financial statements.
F - 4
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
COMMON STOCK ACCUMULATED OTHER TOTAL
SHARES COMPREHENSIVE RETAINED SHAREHOLDERS'
OUTSTANDING AMOUNT LOSS EARNINGS EQUITY
BALANCE-December 31, 1999 4,489,215 $ 35,284,159 $ - $ 14,944,971 $ 50,229,130
YEAR ENDED DECEMBER 31, 2000-
Net income and comprehensive income 96,542 96,542
---------- ------------ ---------- ------------ ------------
BALANCE-December 31, 2000 4,489,215 35,284,159 15,041,513 50,325,672
YEAR ENDED DECEMBER 31, 2001:
Net income 1,530,822 1,530,822
Minimum pension liability, net of tax benefit
of $323,229 (831,161) (831,161)
Comprehensive income 699,661
Stock options exercised 3,000 18,000 18,000
---------- ------------ --------- ------------ ------------
BALANCE-December 31, 2001 4,492,215 35,302,159 (831,161) 16,572,335 51,043,333
YEAR ENDED DECEMBER 31, 2002:
Net income 2,843,300 2,843,300
Minimum pension liability, net of tax benefit
of $575,784 (1,480,588) (1,480,588)
Comprehensive income 1,362,712
Treasury stock purchased and retired (16,400) (84,540) (84,540)
Stock options exercised 13,250 71,419 71,419
---------- ------------ ---------- ------------ ------------
BALANCE-December 31, 2002 4,489,065 $ 35,289,038 $ (2,311,749) $ 19,415,635 $ 52,392,924
========== ============ ========== ============ ============
See notes to consolidated financial statements.
F - 5
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,843,300 $1,530,822 $96,542
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,032,442 4,409,361 4,698,554
Deferred income taxes 749,171 (52,152) (46,954)
Deferred compensation and pension-net (1,637,689) (1,661,232) (468,522)
Loss on sale of fixed assets (15,904) 353,681 32,116
Change in assets and liabilities:
Receivables 860,266 3,696,183 2,927,201
Inventories 4,531,675 4,321,573 537,830
Other current assets (213,905) 242,095 (72,373)
Other assets 321,088 14,731 (469,514)
Accounts payable 85,479 (1,936,064) 1,551,745
Accrued expenses (1,471,619) 1,134,840 335,969
--------------- -------------- ------------
Net cash provided by operating activities 10,084,304 12,053,838 9,122,594
--------------- -------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (2,338,388) (1,172,365) (3,113,529)
Proceeds from sale of fixed assets 59,609 7,952 39,770
--------------- -------------- ------------
Net cash used in investing activities (2,278,779) (1,164,413) (3,073,759)
--------------- -------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 87,589,294 96,926,759 106,607,246
Payments on long-term debt (94,059,911) (106,997,243) (112,868,411)
Purchase of treasury stock (84,540)
Proceeds from exercise of stock options 71,419 18,000
--------------- -------------- ------------
Net cash used in financing activities (6,483,738) (10,052,484) (6,261,165)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,321,787 836,941 (212,330)
CASH AND CASH EQUIVALENTS-Beginning of year 2,954,935 2,117,994 2,330,324
--------------- -------------- ------------
CASH AND CASH EQUIVALENTS-End of year $4,276,722 $2,954,935 $2,117,994
=============== ============== ============
See notes to consolidated financial statements.
F - 6
ROCKY SHOES & BOOTS, INC.
AND Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
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 and related outdoor gear primarily under
the registered trademark, ROCKY(R). The Company maintains a nationwide
network of Company sales representatives who sell the Company's products
primarily through independent shoe, sporting goods, specialty, uniform
stores and catalogs, and through mass merchandisers throughout the United
States. The Company did not have any customers that accounted for more than
10% of consolidated net sales in 2002, 2001 and 2000.
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 AND 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 uncollectible accounts of approximately $365,000 and $345,000
at December 31, 2002 and 2001, respectively.
CONCENTRATION OF CREDIT RISK--The Company has significant transactions with
a large number of customers. Accounts receivable from one customer
represented 10% of the Company's total accounts receivable - trade balance
as of December 31, 2002. Accounts receivable from another customer
represented 16% of the Company's total accounts receivable - trade balance
as of December 31, 2001. 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 the
majority 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 20 years and
has no reason to believe that such relationship will not continue.
F - 7
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.
The Company sources a significant portion of its footwear from
manufacturers in the Far East, primarily China. The Company has had
sourcing operations in China since 1993 and is not aware of any
governmental or economic restrictions that would alter its current sourcing
operations.
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.
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 3-12
Furniture and fixtures 4-8
Lasts, dies, and patterns 3-12
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.
LICENSING RIGHTS--On January 4, 2002, the Company re-acquired the licensing
rights to ROCKY(R) Kids for approximately $500,000. The rights to ROCKY(R)
Kids were purchased from Philip's Kids, LLC ("Philip's"), an entity owned
by a former member of the Company's Board of Directors. In 2003, the
Company paid approximately $25,000 as additional consideration for the
licensing rights. These licensing rights are considered indefinite lived
intangible assets and are not subject to amortization.
ADVERTISING--The Company expenses advertising costs as incurred.
Advertising expense was $1,921,367, $1,962,783 and $2,532,671 for 2002,
2001 and 2000, respectively.
REVENUE RECOGNITION--Revenue and related cost of goods sold are recognized
at the time footwear product is shipped to the customer and title
transfers. Revenue is recorded net of estimated sales discounts and returns
based upon historical trends. All sales are considered final upon shipment.
SHIPPING AND HANDLING COSTS--In accordance with EITF No. 00-10 "Accounting
For Shipping And Handling Fees And Costs", all shipping and handling costs
billed to customers have been included in net sales.
F - 8
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 stock options. A reconciliation of the
shares used in the basic and diluted income per share computations is as
follows:
YEARS ENDED DECEMBER 31,
2002 2001 2000
Basic-weighted average shares outstanding $ 4,499,741 $ 4,489,322 $ 4,489,215
Dilutive securities-stock options 90,354 59,310 4,089
----------- ------------ -----------
Diluted-weighted average shares outstanding $ 4,590,095 $ 4,548,632 $ 4,493,304
=========== ============ ===========
ASSET IMPAIRMENTS--Annually, or more frequently if events or circumstances
change, a determination is made by management, in accordance with SFAS No.
144, to ascertain whether property and equipment and other long-lived
assets have been impaired based on the sum of expected future undiscounted
cash flows from operating activities. If the estimated net cash flows are
less than the carrying amount of such assets, the Company will recognize an
impairment loss in an amount necessary to write down the assets to a fair
value as determined from expected future discounted cash flows.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS--Effective January 1, 2002,
the Company adopted Financial Accounting Standards Board (FASB) Statement
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001. The adoption of this statement did not have a material impact on its
consolidated financial statements. SFAS No. 142 changes the accounting for
goodwill and certain other intangible assets from an amortization method to
an impairment only approach. The Company has no goodwill recorded. The
total net book value of indefinite-lived intangible assets at December 31,
2002 was $1,026,323. Indefinite-lived intangible assets represent the cost
of acquiring the licensing rights to ROCKY(R) Kids from Philip's Kids, LLC,
and various other international trademarks. These rights have previously
been determined to have an indefinite useful life and were not subject to
amortization. Accordingly, the adoption of SFAS No. 142 did not have any
impact on the 2002 consolidated financial statements. In addition, the
Company has intangible assets consisting of patents totaling approximately
$62,000 at December 31, 2002 that are being amortized over 15 years.
Amortization expense related to these intangible assets during fiscal 2002
and 2001 was $23,569 and $39,993, respectively.
F - 9
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS
No. 144, which addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed
of, supercedes SFAS No. 121 and is effective for fiscal years beginning
after December 15, 2001. The adoption of FAS No. 144 had no impact on the
Company's Financial Statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that statement,
SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." This statement also rescinds SFAS No. 44, "Accounting for
Intangible Assets of Motor Carriers." This statement amends SFAS No. 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. This statement is
effective for the first quarter in the year ended December 31, 2003. We do
not believe the adoption of SFAS No. 145 will have a significant impact on
the consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities included in restructurings. This Statement eliminates
the definition and requirements for recognition of exit costs as defined in
EITF Issue 94-3, and requires that liabilities for exit activities be
recognized when incurred instead of at the exit activity commitment date.
This Statement is effective for exit or disposal activities initiated after
December 31, 2002. We do not believe the adoption of SFAS No. 146 will have
a significant impact on the consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a
guarantor to recognize a liability, at the inception of the guarantee, for
the fair value of obligations it has undertaken in issuing the guarantee
and also includes more detailed disclosures with respect to guarantees. FIN
45 is effective for guarantees issued or modified starting January 1, 2003
and requires additional disclosures for the year ended December 31, 2002.
The provisions of FIN 45 did not have a significant impact on the 2002
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation and
amends the disclosure requirements of SFAS No. 123. The transition
provisions and the disclosure requirements of this Statement are effective
for fiscal years ending after December 15, 2002. We continue to apply the
intrinsic value-based method to account for stock options and have complied
with the new disclosure requirements.
F - 10
In January 2003, the FASB issued FASB Interpretation 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), to expand upon and strengthen
existing accounting guidance that addresses when a company should include
in its financial statements the assets, liabilities and activities of
another entity. Until now, one company generally has included another
entity in its consolidated financial statements only if it controlled the
entity through voting interests. FIN 46 changes that by requiring a
variable interest entity, as defined, to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. FIN 46 also requires disclosures about
variable interest entities that the company is not required to consolidate
but in which it has significant variable interest. The consolidation
requirements of FIN 46 apply immediately to variable interest entities
created after January 31, 2003 and to older entities in the fiscal year or
interim period beginning after June 15, 2003. Certain of the disclosure
requirements are effective in all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established.
We do not expect the provisions of FIN 46 to have a significant impact on
the consolidated financial statements.
Segment Information--The Company is managed in one operating segment.
Within their one operating segment, the Company has identified five product
groups: Rugged Outdoor, Occupational - Work, Military, Outdoor Gear and
Casual. Outdoor Gear is a new product group established in 2002 for
reporting sales of ROCKY branded socks and apparel. During 2002, the
Company terminated, or allowed to expire, various license agreements it had
entered into for the marketing and sales of these items, which are now
being sourced and sold by the Company. The following is supplemental
information on net sales by product group:
% OF % OF % OF
2002 SALES 2001 SALES 2000 SALES
Rugged Outdoor $41,554,244 46.7% $56,596,762 54.7% $62,297,449 60.4%
Occupational 29,620,876 33.3% 27,054,015 26.2% 28,204,383 27.3%
Military 6,437,248 7.2% 8,948,426 8.7%
Casual 2,306,748 2.6% 4,446,109 4.3% 6,225,130 6.0%
Outdoor Gear 2,740,441 3.1% 0.0%
Factory Outlet Stores 4,050,823 4.6% 4,741,326 4.6% 5,916,952 5.7%
Other 2,248,341 2.5% 1,533,168 1.5% 585,073 0.6%
----------- ------ ------------ ------ ------------ ------
Total $88,958,721 100.0% $103,319,806 100.0% $103,228,987 100.0%
=========== ====== ============ ====== ============ ======
Net sales to foreign countries, primarily Canada, represented approximately
1% of net sales in 2002, 2001 and 2000.
F - 11
STOCK-BASED COMPENSATION--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.
YEARS ENDED DECEMBER 31,
2002 2001 2000
Net income, as reported $2,843,300 $1,530,822 $96,542
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects 405,854 433,870 195,797
---------- ---------- ---------
Pro forma net income (loss) $2,437,446 $1,096,952 $(99,255)
========== ========== =========
Earnings per share:
Basic-as reported $ 0.63 $ 0.34 $ 0.02
Basic-pro forma $ 0.54 $ 0.24 $ (0.02)
Diluted-as reported $ 0.62 $ 0.34 $ 0.02
Diluted-pro forma $ 0.54 $ 0.24 $ (0.02)
The pro forma amounts are not representative of the effects on reported net
income for future years.
Comprehensive Income--Comprehensive income includes changes in equity that
result from transactions and economic events from nonowner sources.
Comprehensive income is composed of two subsets - net income and other
comprehensive income/(loss). Included in other comprehensive loss for the
Company is a minimum pension liability adjustment, which is recorded net of
a related tax benefit. See Note 10. This adjustment is accumulated within
the Consolidated Statements of Shareholders' Equity under the caption
Accumulated Other Comprehensive Loss.
2. CLOSURE OF MANUFACTURING OPERATIONS
In September 2001, the Board of Directors approved a restructuring plan to
consolidate and realign the Company's footwear manufacturing operations.
Under this plan, the Company moved the footwear manufacturing operations at
its Nelsonville, Ohio factory to the Company's factory in Puerto Rico. The
restructuring plan was completed in the fourth quarter of 2001.
The execution of this plan, which started in September 2001, resulted in
the elimination of 67 employees at the Company's Nelsonville, Ohio
facility, and a transfer of a significant amount of machinery and equipment
located at the Nelsonville facility to the Moca, Puerto Rico facility.
F - 12
A reconciliation of the plant closing costs and accrual during 2002 and
2001 is as follows:
2002 EXPENSE
ACCRUED ADJUSTMENTS ACCRUED
2001 TOTAL BALANCE 2002 TO ORIGINAL BALANCE
EXPENSES DECEMBER 31, 2001 PAYMENTS ESTIMATE DECEMBER 31, 2002
Severance:
Non-union $ 71,668 $ 71,668 $ 25,574 $ 26,094 $ 20,000
Union 292,653
Curtailment of pension plan benefits 690,000 690,000 500,000 190,000
Employee benefits 34,223 33,000 31,047 1,953
Factory lease 90,000 85,000 40,000 45,000
Equipment and relocation costs 260,626 5,000 5,000
Legal and other costs 60,830 18,623 53,667 (35,044)
---------- ---------- ----------- ---------- -----------
Total $1,500,000 $ 903,291 $ 650,288 $ 43,003 $ 210,000
========== ========== =========== ========== ===========
The Company expects no additional restructuring and realignment costs
associated with this plan.
3. INVENTORIES
Inventories are comprised of the following:
DECEMBER 31,
2002 2001
Raw materials $ 3,535,884 $ 4,537,865
Work-in-process 436,435 1,578,107
Finished goods 18,301,351 20,077,999
Factory outlet finished goods 1,080,319 1,680,693
Less reserve for obsolescence or lower
of cost or market (172,000) (161,000)
----------- -----------
Total $23,181,989 $27,713,664
=========== ===========
F - 13
4. FIXED ASSETS
Fixed assets are comprised of the following:
DECEMBER 31,
2002 2001
Land $ 572,838 $ 572,838
Building and improvements 13,592,248 13,387,497
Machinery and equipment 21,100,798 20,415,510
Furniture and fixtures 2,045,655 1,685,485
Lasts, dies and patterns 7,317,988 6,739,027
Construction work-in-progress 609,339 223,862
----------- ------------
Total 45,238,866 43,024,219
Less-accumulated depreciation (26,189,579) (22,258,125)
----------- ------------
Net fixed assets $19,049,287 $ 20,766,094
=========== ============
5. LONG-TERM DEBT
Long-term debt is comprised of the following:
DECEMBER 31,
2002 2001
Bank-revolving credit facility $5,000,000 $11,000,000
Equipment and other obligations 452,100 617,625
Real estate obligations 5,522,449 5,827,541
------------ -------------
Total debt 10,974,549 17,445,166
Less current maturities 486,161 469,143
------------ -------------
Net long-term debt $10,488,388 $16,976,023
============ =============
On September 18, 2000, the Company entered into a three-year loan and
security agreement with GMAC Business Credit, LLC (GMAC) refinancing its
former bank revolving line of credit based on the collateral value of its
accounts receivable and inventory. On October 21, 2002, the Company
extended the agreement two years. This loan and security agreement permits
a borrowing base to a maximum of $45,000,000. Interest on the revolving
credit facility is payable monthly at GMAC's Prime rate, and the entire
principal is due September 17, 2005. Under terms of the agreement, the
Company has the option to borrow up to seventy five percent (75%) of its
outstanding obligation at LIBOR plus two and three-eights percent (2.375%)
or prime. The interest rate for the outstanding balance at December 31,
2002 was 3.88% (4.64% at December 31, 2001).
F - 14
Amounts borrowed under the agreement are secured by accounts receivable,
inventory, equipment, intangible assets of the Company and its wholly-owned
domestic subsidiary, Lifestyle Footwear, Inc. Additional security includes
65% of the capital stock of the Company's wholly-owned foreign subsidiary,
Five Star Enterprises, Ltd., and 100% of the capital stock of the Company's
wholly-owned domestic subsidiary.
The loan and security agreement contains certain restrictive covenants,
which among other things, requires the Company to maintain a certain level
of net worth, and fixed charge coverage. As of December 31, 2002, the
Company is in compliance with the loan covenants. Presently, the line of
credit restricts the payment of dividends on common stock.
Equipment and other obligations at December 31, 2002 bear interest at a
variable rate of prime and are payable in monthly installments to 2005. The
equipment is held as collateral against the outstanding obligations.
In January 2000, the Company completed a mortgage financing facility with
GE Capital Corp. for three of its facilities totaling $6,300,000. The
facility bears interest at 8.275%, with total monthly principal and
interest payments of $63,100 to 2014. The proceeds of the financing were
used to pay down borrowings under a former revolving credit facility.
During 2000, the Company had an interest rate swap agreement with a major
bank for a notional amount of $15,000,000 that was terminated in 2000 and
resulted in a gain of $294,000. At December 31, 2002 and 2001, the Company
has no interest rate swap agreements.
Long-term debt matures as follows for the years ended December 31:
2003 $ 486,161
2004 503,934
2005 492,020
2006 400,416
2007 434,837
Thereafter 8,657,181
------------
Total $ 10,974,549
============
The estimated fair value of the Company's long-term obligations
approximated their carrying amount at December 31, 2002 and 2001, based on
current market prices for the same or similar issues or on debt available
to the Company with similar rates and maturities.
6. OPERATING LEASES
The Company leases certain machinery and manufacturing facilities under
operating leases that generally provide for renewal options. The Company
incurred approximately $799,000, $1,096,000 and $1,161,000 in rent expense
under operating lease arrangements for 2002, 2001 and 2000, respectively.
Included in total rent expense above are monthly payments of $5,000 for
2002 and $7,000 for 2001 and 2000 for the Company's former Ohio
manufacturing and clearance center facility leased from an entity in which
the owners are also shareholders of the Company.
F - 15
Future minimum lease payments under non-cancelable operating leases are as
follows for the years ended December 31:
2003 $ 611,000
2004 716,000
2005 743,000
2006 618,000
2007 295,000
Thereafter 590,000
-----------
Total $ 3,573,000
===== ===========
7. 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, 2002, a provision has not been made for U.S. taxes on the
accumulated undistributed earnings of Five Star through December 31, 2002
of approximately $6,575,000 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 provided Puerto Rico tollgate taxes on
approximately $3,684,000 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. 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 $2,237,000 and $368,000, respectively. In 2001, the Company
received an abatement for Puerto Rico tollgate taxes on all earnings
subsequent to June 30, 1994. This resulted in the Company reducing its
deferred tax liability by $408,000.
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 - 16
Income taxes (benefits) are summarized as follows:
YEARS ENDED DECEMBER 31,
2002 2001 2000
Federal:
Current $200,134 $112,508 $(115,262)
----------- ----------- -------------
Deferred 683,867 (174,636) 263,071
----------- ----------- -------------
Total Federal 884,001 (62,128) 147,809
----------- ----------- -------------
State and local:
Current 3,695 (153,794) 345,680
Deferred 65,304 122,484 (310,025)
----------- ----------- -------------
Total state and local 68,999 (31,310) 35,655
----------- ----------- -------------
Total $953,000 $(93,438) $183,464
=========== =========== =============
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 before income taxes follows:
YEARS ENDED DECEMBER 31,
2002 2001 2000
Expected expense at statutory rate $ 1,290,742 $ 488,711 $ 95,202
Increase (decrease) in income taxes
resulting from:
Exempt (income) loss from operations in
Puerto Rico, net of tollgate taxes (97,344) 77,938
Exempt income from Dominican
Republic operations (430,416) (67,967) (74,034)
State and local income taxes (benefit) 45,539 (20,628) 23,532
Revision of prior year taxes (12,123) 56,229
Abatement of Puerto Rico taxes (408,000)
Other-net 47,135 23,913 4,597
----------- ----------- -----------
Total $ 953,000 $ (93,438) $ 183,464
=========== =========== ===========
F - 17
Deferred income taxes recorded in the consolidated balance sheets at
December 31, 2002 and 2001 consist of the following:
DECEMBER 31,
2002 2001
Deferred tax assets:
Alternative minimum tax carryforward-Rocky $ 118,829 $ 118,829
Alternative minimum tax carryforward-Lifestyle 283,200
Asset valuation allowances and accrued expenses 451,532 288,317
Plant closing costs 79,800 257,342
Pension and deferred compensation 854,300 148,004
Net operating loss carryforwards 681,317 1,616,901
Inventories 216,519 201,832
------------ --------------
Total deferred tax assets 2,402,297 2,914,425
------------ --------------
Deferred tax liabilities:
Fixed assets (1,132,516) (1,580,872)
State and local income taxes (69,437) (53,725)
Prepaid assets (93,903)
Tollgate tax on Lifestyle earnings (368,435) (368,435)
------------ --------------
Total deferred tax liabilities (1,664,291) (2,003,032)
------------ --------------
Net deferred tax asset $ 738,006 $ 911,393
============ ==============
At December 31, 2002, the Company has approximately $1,833,000 of net
operating loss carryforwards for Federal income tax purposes. The net
operating loss carryforward expires in 2021.
8. 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 - 18
In September, 2001 the Company announced a restructuring plan to
consolidate and realign the Company's footwear manufacturing operations. As
part of the plan, 67 employees were eliminated and their balances paid
directly from plan assets (a total of approximately $293,000). As a result
of the curtailment of certain retiree benefits and future employee service
periods, $690,570 is included in the calculation of 2001 net pension
expense as a curtailment loss. Also, benefits under the Company's union
plan were frozen at September 30, 2001.
The funded status of the Company's plans and reconciliation of accrued
pension cost at December 31, 2002 and 2001 is presented below (information
with respect to benefit obligations and plan assets is as of September 30):
DECEMBER 31,
2002 2001
Change in benefit obligation:
Projected benefit obligation at beginning of the year $8,242,465 $7,985,007
Service cost 269,715 316,572
Interest cost 580,032 571,295
Actuarial (gain) 799,613 (93,218)
Exchange (gain) (68,341) 115,396
Benefits paid (597,802) (652,587)
---------- ----------
Projected benefit obligation at end of year $9,225,682 $8,242,465
========== ==========
Change in plan assets:
Fair value of plan assets at beginning of year $5,066,458 $4,570,688
Actual loss on plan assets (1,056,666) (721,643)
Employer contribution 3,739,000 1,870,000
Benefits paid (597,802) (652,587)
---------- ----------
Fair value of plan assets at end of year $7,150,990 $5,066,458
========== ==========
Unfunded deficit $(2,074,692) $(3,176,007)
Remaining unrecognized benefit obligation existing
at transition 89,686 105,993
Unrecognized prior service costs due to plan amendments 1,561,536 1,696,929
Unrecognized net loss 3,734,547 1,542,036
Adjustment required to recognize minimum liability (4,861,985) (2,957,312)
Additional contributions (September 30-December 31) 1,000,000
Curtailment charge included in plant closing costs 190,570 690,570
---------- ----------
Accrued pension cost $(1,360,338) $(1,097,791)
========== ==========
F - 19
Net pension cost of the Company's plans is as follows:
YEARS ENDED DECEMBER 31,
2002 2001 2000
Service cost $ 269,715 $ $316,572 $ 303,748
Interest 580,032 571,295 403,542
Expected return on assets (456,422) (509,194) (393,877)
Amortization of unrecognized net loss 51,850
Amortization of unrecognized transition obligation 16,306 27,892 27,892
Amortization of unrecognized prior service cost 135,393 184,598 122,508
Curtailment charge 690,570
----------- ------------- -------------
Net pension cost $ 596,874 $ 1,281,733 $ 463,813
=========== ============= =============
The assets of the plans consist primarily of common stocks, bonds, and cash
equivalents. The assets of the plans include 117,900 and 81,400 shares of
the Company's common stock with a market value of $872,460 and $416,768 at
September 30, 2002 and 2001, respectively. The Company's unrecognized
benefit obligations existing at the date of transition for the non-union
plan is being amortized over 21 years. Actuarial assumptions used in the
accounting for the plans were as follows:
DECEMBER 31,
2002 2001
Discount rate 6.50 % 7.25 %
Average rate of increase in compensation levels
(non-union only) 3.0 % 3.0 %
Expected long-term rate of return on plan assets 8.0 % 8.0 %
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
consolidated financial statements a non-current deferred pension asset of
$1,651,822 and $1,802,922 as of December 31, 2002 and 2001, respectively.
In addition, under SFAS No. 87, if the minimum liability exceeds the
unrecognized prior service cost and the remaining unrecognized benefit
obligation at transition, the excess is reported in other comprehensive
income (loss) ($1,480,588), net of a deferred tax benefit of $575,784 for
2002 and $(831,161), net of a deferred tax benefit of $323,229 in 2001.
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. No Company contribution was made for 2002,
2001 and 2000.
F - 20
9. 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, 2002 and
2001, respectively.
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.
In September, 2002, the Company's Board of Directors authorized the
repurchase of up to 500,000 common shares outstanding in open market or
privately negotiated transactions through December 31, 2003. Purchases of
stock under this program will be funded from the Company's operating cash
flow. There were 16,400 shares repurchased and retired in 2002 for $84,540.
There were no treasury stock purchases in 2001 and 2000. From January 2003
through March 6, 2003, the Company repurchased 483,000 of its common shares
for approximately $3,100,000. Accordingly, the Company has repurchased
nearly all its allotted shares approved by the Board of Directors.
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. In addition in May 2002, the Board of Directors approved the
issuance of a total of 400,000 additional common shares of the Company
under the 1995 Stock Option Plan. 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.
F - 21
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, 2000 through December 31, 2002:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
Outstanding at January 1, 2000 693,750 $9.12
Issued 221,000 6.87
Forfeited (232,250) 8.40
------------- -----------
Outstanding at December 31, 2000 682,500 8.64
Issued 283,750 4.04
Exercised (3,000) 6.00
Forfeited (51,250) 7.60
------------- -----------
Outstanding at December 31, 2001 912,000 7.27
Issued 194,000 5.79
Exercised (13,250) 5.39
Forfeited (69,750) 8.63
------------- -----------
Outstanding at December 31, 2002 1,023,000 $6.92
============= ===========
Options exercisable at December 31:
2000 444,250 $9.37
2001 604,000 $8.45
2002 721,625 $7.67
The following table summarizes information about options outstanding at
December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE PRICE NUMBER PRICE
$3.875 - $5.00 309,250 5.8 $ 4.14 157,750 $ 4.08
$5.25- $6.50 377,750 5.5 $ 5.84 253,750 $ 5.86
$6.72- $7.625 128,000 4.6 $ 7.55 102,250 $ 7.56
$8.375 - $9.875 82,500 1.2 $ 8.72 82,375 $ 8.72
$13.125 - $16.875 125,500 3.0 $ 15.22 125,500 $ 15.22
--------- --------
1,023,000 $ 6.92 721,625 $ 7.67
========= ========
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 2002, 2001 and
2000, respectively; dividend yield of 0%; expected volatility of 44%,
F - 22
44% and 45%; risk-free interest rates of 2.83%, 4.21% and 6.70%; and
expected life of 6 years. The weighted average grant date fair value of
options issued during 2002, 2001 and 2000 was $5.79, $4.04 and $3.09,
respectively.
10. COMPREHENSIVE INCOME
Comprehensive income represents net income plus the results of certain
non-shareholders' equity changes not reflected in the Consolidated
Statements of Income. The components of comprehensive income (loss), net of
tax, are as follows:
YEARS ENDED DECEMBER 31,
2002 2001 2000
Net income $ 2,843,300 $ 1,530,822 $ 96,542
Minimum pension liability, net of tax
benefit (1,480,588) (831,161)
----------- ----------- -----------
Comprehensive income $ 1,362,712 $ 699,661 $ 96,542
=========== =========== ===========
The 2002 and 2001 minimum pension liability is net of a deferred tax
benefit of $575,784 and $323,229, respectively.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
YEARS ENDED DECEMBER 31,
2002 2001 2000
Interest $ 1,435,505 $ 2,644,998 $ 3,279,905
=========== =========== ===========
Federal, state and local
income taxes--net of refunds $ 68,066 $ (36,309) $(3,450,000)
=========== =========== ===========
Non-Cash Transaction--increase (decrease) in additional minimum pension
liability as follows:
YEARS ENDED DECEMBER 31,
2002 2001 2000
Deferred pension asset $ 2,056,372 $ 1,154,390 $ --
Deferred tax benefit (575,784) (323,229)
----------- ----------- -----------
Total $ 1,480,588 $ 831,161 $ --
=========== =========== ===========
Accounts payable at December 31, 2002, 2001 and 2000 include a total of
$2,693, $5,310 and $12,098, respectively, relating to the purchase of fixed
assets.
F - 23
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 2002 and 2001:
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL YEAR
2002
Net sales $ 13,749,588 $ 19,194,071 $ 30,453,543 $ 25,561,519 $ 88,958,721
Gross margin 2,340,653 4,937,633 8,852,358 7,299,864 23,430,508
Net income (loss) (1,227,188) 117,087 2,388,177 1,565,224 2,843,300
Net income (loss) per
common share:
Basic $ (0.27) $ 0.03 $ 0.53 $ 0.35 $ 0.63
Diluted $ (0.27) $ 0.03 $ 0.52 $ 0.34 $ 0.62
2001
Net sales $ 16,063,895 $ 22,006,132 $ 38,490,267 $ 26,759,512 $103,319,806
Gross margin 3,167,074 6,152,129 9,804,424 4,128,313 23,251,940
Net income (loss) (906,094) 702,339 1,479,694 254,883 1,530,822
Net income (loss) per
common share:
Basic $ (0.20) $ 0.16 $ 0.33 $ 0.06 $ 0.34
Diluted (0.20) 0.16 0.32 0.06 0.34
No cash dividends were paid during 2002 and 2001.
F - 24