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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, 2004
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $95,775,838 on June 30, 2004.
There were 5,200,021 shares of the Registrant's Common Stock outstanding
on March 1, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2005 Annual Meeting
of Shareholders are incorporated by reference in Part III.
TABLE OF CONTENTS
PART I
PAGE
Item 1. Business. 3
Item 2. Properties. 14
Item 3. Legal Proceedings. 15
Item 4. Submission of Matters to a Vote of Security Holders. 15
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuers Purchases of Equity Securities. 15
Item 6. Selected Consolidated Financial Data. 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation. 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 26
Item 8. Financial Statements and Supplementary Data. 27
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure. 28
Item 9A. Controls and Procedures. 28
Item 9B. Other Information. 30
PART III
Item 10. Directors and Executive Officers of the Registrant. 30
Item 11. Executive Compensation. 30
Item 12. Security Ownership of Certain Beneficial Owners and Management. 30
Item 13. Certain Relationships and Related Transactions. 30
Item 14. Principal Accountant Fees and Services. 30
PART IV
Item 15. Exhibits and Financial Statement Schedules. 30
SIGNATURES 35
2
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.
At December 31, 2004, Rocky Shoes & Boots, Inc. had three subsidiaries:
Five Star Enterprises Ltd. ("Five Star"), a Cayman Islands corporation, which
operates a manufacturing facility in La Vega, Dominican Republic; Lifestyle
Footwear, Inc. ("Lifestyle"), a Delaware corporation, which operates a
manufacturing facility in Moca, Puerto Rico; and Rocky Canada, Inc., an Ontario
corporation, a sales and distribution operation in Waterloo, Ontario. Unless the
context otherwise requires, all references to "Rocky" or the "Company" include
Rocky Shoes & Boots, Inc. and its subsidiaries.
On December 6, 2004, the Company announced a definitive agreement to
acquire EJ Footwear Group, consisting of three subsidiaries, EJ Footwear LLC,
Georgia Boot LLC, and HM Lehigh Safety Shoe Co. LLC. EJ Footwear Group and its
subsidiaries were owned by SILLC Holdings LLC. The Company announced the
completion of this acquisition on January 6, 2005. (See Note 2 "Acquisitions" in
the financial statements).
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 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 reorganization prior to the Company's
initial public offering. In 1996, Rocky Co. was merged with and into the
Company, and in 2003 Rocky Canada, Inc. was established resulting in the
Company's present corporate structure. In April 2003, the Company acquired
certain assets of Gates-Mills, Inc., including the Gates brand name.
In January 2005 the Company acquired EJ Footwear Group, consisting of
three subsidiaries, EJ Footwear LLC, Georgia Boot LLC, and HM Lehigh Safety Shoe
Co. LLC. EJ Footwear Group is also a licensee of the Dickies and John Deere
brands for footwear. This acquisition expanded the Company's portfolio of
branded products, and is expected to further strengthen its market position in
footwear and related apparel and accessories. The total purchase price,
including a closing date working capital adjustment, for 100% of the equity was
$91.2 million in cash plus 484,261 shares of Rocky Common Stock value at
$11,573,000 (valued at $10 million in the definitive agreement). Effective with
the closing of this transaction, Rocky entered into agreements with GMAC
Commercial Finance LLC and American Capital Strategies, Ltd. for credit
facilities totaling $148 million to fund the acquisition and replace its
existing revolving credit facility.
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. 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. In 2003, as a result of the
formation of Rocky Canada, Inc., the Company is now subject to Canadian income
tax. At December 31, 2004, a provision of $157,000 has been made for U.S. taxes
on the repatriation of $3,000,000 of accumulated undistributed earnings of Five
Star through December 31, 2004. At December 31, 2004, after the planned
repatriation above, approximately $6,839,000 is remaining that would become
taxable upon repatriation to the United States. During 2005, the Company will
complete its evaluation of foreign earnings and may repatriate up to an
additional $5,000,000 of accumulated undistributed earnings, which could result
in up to $260,000 of additional tax.
The Company operates in one financial reporting segment, footwear and
related apparel and accessories. Financial information, including revenues,
pre-tax income, and assets are included in the consolidated financial
statements.
3
ROCKY(R), GATES(R), DURANGO(R), GEORGIA BOOT(R), AND LEHIGH(R) are
federally registered trademarks of Rocky Shoes & Boots, Inc. This report also
refers to trademarks of corporations other than the Company. See "Business -
Patents, Trademarks and Trade Names."
STRATEGY
The Company's objective is to design, supply and market innovative, high
performance, branded footwear and related apparel and accessories 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 portfolio of brands. The Company believes the ROCKY, GATES,
DURANGO, GEORGIA BOOT and LEHIGH SAFETY SHOES brands are recognizable and
established names for performance and quality conscious consumers in the rugged
outdoor and occupational segments of the men's footwear market. Additionally,
the Company is a licensee of the Dickies and John Deere brands. The Company
plans to continue leveraging these brands with emphasis on the rugged outdoor
and occupational shoe markets, including recent product introductions in the
western work boot segment of the occupational market, and complementary apparel
and accessories in an effort to extend these brands.
Build customer and consumer relationships. The Company plans to 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 consumers' needs.
Maximize benefit of current infrastructure. The Company plans to more
extensively utilize 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 plans to continue as the leader in
design and engineering of new and innovative products, especially for the rugged
outdoor and occupational markets, and to focus future investments on achieving
this goal.
Expand product sourcing. The Company plans to emphasize product sourcing
over its own manufacturing as it grows. The Company's sourced products
represented approximately 63% of net sales in 2004. EJ Footwear Group, which was
acquired in January 2005, is expected to double the Company's 2004 business and
sources 100% of its products. The Company plans to source products which are
manufactured to its specifications by independent manufacturers in the Far East.
This enables the Company to offer products 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 in 2004 consisted of rugged outdoor,
occupational, military and casual footwear and outdoor apparel and Gates gloves.
ROCKY branded products emphasize quality, patented materials, such as GORE-TEX
waterproof breathable fabric, CORDURA nylon fabric, CAMBRELLE cushioned lining
and THINSULATE thermal insulation. DURANGO and GEORGIA BOOT, acquired in January
2005 through the acquisition of EJ Footwear Group, include some of the same
quality materials as well as Comfort Core(R) Insole Technology and SPR(R)
leather.
4
The following table summarizes the Company's product lines:
SUGGESTED
RETAIL
PRODUCT LINE TARGET MARKET PRICE DISTRIBUTION CHANNELS
- -------------- ------------------------------------ ---------- --------------------------------------------------
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 catalogs,
personnel, security guards, work specialty safety stores, shoemobiles and farm
western, postal workers, paramedics, stores.
industrial workers and construction
workers
MILITARY U. S. Government NA U.S. government supply chain
CASUAL Retail customers of premium casual $69 - $189 Independent retail stores, sporting goods stores,
wear mail order catalogs and sporting goods stores
APPAREL Hunters, outdoorsmen and $7 - $200 Sporting goods stores, outdoor specialty stores,
occupational workers mail order catalogs, independent retail stores and
mass merchandisers
GATES Skiers, hunters and outdoorsmen and $7 - $70 Sporting goods stores, outdoor specialty stores,
retail customers of premium casual mail order catalogs, independent retail stores and
wear mass merchandisers
5
Rugged Outdoor Footwear. Rugged outdoor footwear, the Company's largest
product line in Fiscal 2004, had net sales of $46.6 million, or 35.3%, of total
net sales. Warm weather conditions in the Company's markets during the fall and
winter months of Fiscal 2004 adversely impacted sales for the year. 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 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 in Fiscal 2004, had sales of $40.8 million, or 30.9%, of net sales.
The growth in occupational footwear sales is attributable to solid gains in the
work category, especially work western boots. 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. 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, work
western, and black duty footwear sold to security guards and law enforcement
agents.
Military Footwear. Sales of military footwear were $18.5 million in Fiscal
2004, representing 14.0% of net sales. These sales were attributable to two
subcontracts to produce boots for the U.S. military that were awarded in
September 2003 and March 2004.
Casual Footwear. Sales of the Company's casual footwear were $2.4 million
in Fiscal 2004, representing 1.8% 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 hand sewn.
Most of the Company's footwear in this segment is waterproof and highly
functional for outdoor activity.
Apparel. Sales of apparel products were $8.9 million in Fiscal 2004,
representing 6.7% of net sales. The Company began marketing outdoor gear
consisting of hunting apparel in 2002 and extended this product line to the
occupational market in February 2004. Apparel is currently marketed through the
Company's rugged outdoor footwear and occupational channels, respectively, and
is designed to leverage the Company's reputation within these lines by offering
products directly complementary to the specific needs of hunters, outdoorsmen,
and occupational workers.
Gates gloves. In April 2003 the Company acquired certain assets of
Gates-Mills, Inc., including the Gates brand name. Sales of Gates branded
products were $9.6 million in Fiscal 2004, representing 7.3% of net sales. Gates
branded products are primarily hunting, ski and dress gloves.
Factory outlet stores. The Company's factory outlet stores had $4.0
million in sales for Fiscal 2004, representing 3.0% of net sales. These stores
operate in Nelsonville, Ohio and Edgefield, South Carolina. The Edgefield, South
Carolina store was opened in August 2002. The outlet stores primarily sell first
quality products, factory damaged goods and close-outs from the Company and
Rocky licensed products. Related products from other manufacturers are also sold
in these stores. Fiscal 2004 net sales were adversely impacted by warm weather
in the fall and winter months.
Other. Sales of other products were $1.4 million in Fiscal 2004,
representing 1.0% of net sales. The Company manufactures and/or markets a
variety of accessories, including innersole support systems, foot warmers, laces
and foot powder.
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
2004 2003 2002
------ ------ ------
Rugged outdoor ............... 35.3% 45.3% 46.7%
Occupational ................. 30.9 32.6 33.3
Military ..................... 14.0 0.4 7.2
Casual ....................... 1.8 2.4 2.6
Apparel ...................... 6.7 4.2 3.1
Gates gloves ................. 7.3 9.6 --
Factory outlet stores ........ 3.0 4.3 4.6
Other ........................ 1.0 1.2 2.5
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
6
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 its portfolio of
branded products in target 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 and
apparel is sold by more than 3,000 retail and mail order companies in the United
States and Canada. One customer, which represented sales of military footwear,
accounted for 14% of the Company's revenues in Fiscal 2004. 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 and Canada. During
Fiscal 2004, these representatives were either independent representatives who
carried ROCKY and GATES branded products as well as other non-competing products
or company employees who carried the ROCKY and GATES branded products
exclusively.
The Company advertises and promotes its brands 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 its portfolio of brands 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 its portfolio of brands. To further increase the strength of its
brands, 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 products as well as its high
quality, comfort, functionality and durability. Management believes that by
continuing to target consumers, its portfolio of brands will become more
recognizable and establish the Company as an overall leader in the industry
leading to greater retail demand for the product.
MANUFACTURING AND SOURCING
The Company manufactures footwear in the Company's facilities located in
the Dominican Republic and Puerto Rico, and sources footwear, apparel and
accessories from factories in the Far East.
Approximately 37% of the Company's Fiscal 2004 net sales were attributable
to products produced in its own facilities in the Dominican Republic and Puerto
Rico. The Company also sources products from manufacturers in the Far East,
primarily China, which accounted for approximately 63% of net sales in Fiscal
2004. A greater portion of the Company's products are expected to be sourced in
the future following the acquisition of EJ Footwear Group in January 2005
because substantially all EJ Footwear Group's products are sourced. The Company
can generally 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 its
portfolio of brands.
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
7
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.
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.
The Company's products are distributed nationwide and in Canada from the
Company's finished goods distribution facilities located near Logan, Ohio and
Waterloo, Ontario, respectively. With the acquisition of EJ Footwear Group, the
Company's products are also distributed nationwide from an outsourced
distribution facility in Tunkhannock, Pennsylvania.
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
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 and GEORGIA BOOT 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 ROCKY 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.
SEASONALITY AND WEATHER
The Company has historically experienced significant seasonal fluctuations
in the sale of rugged outdoor footwear, apparel and accessories. 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
8
advance orders for these products 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 apparel 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 rugged
outdoor selling season. This historically increased the Company's business risk
because it had to produce and carry inventories for relatively longer periods.
In addition, the later placement of orders could 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. The acquisition of EJ Footwear Group in January 2005 is
expected to double the Company's Fiscal 2004 business and is expected to
significantly increase sales of occupational products. As a result, the
Company's risk to seasonality and weather is expected to decline beginning in
Fiscal 2005 since occupational footwear is sold throughout the year.
BACKLOG
At December 31, 2004, backlog was $8.7 million, including approximately
$3.3 million related to a military contract. At December 31, 2003, backlog was
$11.4 million, including approximately $5.7 million related to a 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. The Company's contracts
to produce boots for delivery to the U.S. military generally include specific
quantities and intervals for shipment.
PATENTS, TRADEMARKS AND TRADE NAMES
The Company owns numerous design and utility patents for footwear and
footwear components (such as insoles and outsoles) in the United States and in
foreign countries including Canada, Mexico, People's Republic of China, and
Taiwan. 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 and Design(R) (which claims a ram's head Design as part of
the mark), ROCKY and Design(R) (which claim a ram's head Design as part of the
mark), ROCKY and Design(R) (which claims a mountain range and ram's head inside
a triangle), ADIRONDACK COLLECTION(R), ADVANTA-FLEX(R), ALPHA FORCE(R), AOG(R),
AQUA GUARD(R), ARCTIC TOE(R), ASTRO(R), BARCLAY(R), BARNSTORMERS and Design(R)
(which claims an airplane on a path through the word), BEACON STRATEGIC
RESOURCING(R), BEAR CLAW(R), BOOTS UNLIMITED(R), CAMO-TEK(R), CHIEFTAN(R),
COMFORT CORE(R), COOL NOTES(R), CORNSTALKERS(R), D-TECH(R), DURANGO(R), DURANGO
and Design(R) (which claims the fanciful head of a cowboy), DURANGO and
Design(R) (which claims a footprint), EJ and Design (which claims the stylized
letters "EJ" inside of a square)(R), FARM & RANCH(R), FARM MASTERS(R),
FIRSTMED(R), FIT FOR SAFETY(R), FIT FOR WORK(R), FLX-POINT(R), GATES(R), GATES
GLOVES(R), GATES LIGHT (Stylized)(R), GATES ULTRA LITE(R), GEORGIA BOOT(R),
GEORGIA BOOT and Design(R) (which claims a large male character with the mark in
the body), INDUSTRY WORKS IN LEHIGH SAFETY SHOES(R), L and Design(R) (which
claims the letter "L" inside a diamond), LEHIGH(R), LEHIGH FOOTSHIELDS(R) (in
stylized letters), LOCKRIM(R). LONGBEARD(R), LSR(R) (in stylized letters),
MIRA-LUG(R), MUD DOG(R) (in stylized letters), NORTHLAKE(R), NUGUARD 75(R),
PARACORD(R), PARACREPE(R), PONDEROSA(R), PROHUNTER(R), PROMISE PLUS(R), ROCKY
and Design(R) for cigars, ROCKY ELIMINATOR(R), ROCKY 911 SERIES and Design(R),
SAWBLADE(R), SHADES OF THE OLD WEST(R), SHIELD TOE(R), SIGNATURE TOUR QUALITY
FOOTWEAR(R), SILENTHUNTER(R), SNAKE RIVER(R), SNOW STALKER(R), SPORTSET(R),
STALKERS(R), SWAMPERS(R), TAC-TEAM(R), TORQUE SUSPENSION SYSTEM(R), TRAIL
KING(R), TRIAD(R), US*1 and Design(R) (which claims "US*1" in the upper left
corner of a flag), X-10 ULTRASOLE(R) and WILD WOLF(R).
9
Additional mark variations for ROCKY(TM) and Design (which claims a ram's
head Design as part of the mark), BIG MOUNTAIN(TM), CLIMATRAC(TM), CONSTRUX(TM),
G and Design(TM), GATES(TM), GATES SMART GLOVE(TM), GEORGIA GIANT(TM), MUD
LITE(TM), MUD MASTER(TM), PRO-HIKER(TM), PROTECH(TM), SMART GLOVE BY GATES(R),
and WHATEVER IT TAKES(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.
With the acquisition of EJ Footwear Group, the Company has increased
distribution of its goods in several foreign countries, including individual
countries in Western Europe (as well as the European Union), Canada, Japan,
People's Republic of China, Taiwan, and Australia. The Company has received
trademark registrations of its marks COMFORT CORE(R), DURANGO(R), FARM &
RANCH(R), FIT FOR SAFETY(R), FIT FOR WORK(R), GEORGIA BOOT(R), LEHIGH(R),
NORTHLAKE(R), PROMISE PLUS(R), and ROCKY(R) in certain of these countries.
The Company also uses in its advertising and in other documents the
following trademarks owned by corporations other than the Company: GORE-TEX(R)
and CROSSTECH(R) are registered trademarks of W.L. Gore & Associates, Inc.;
CORDURA(R) is a registered trademark of E.I. DuPont de Nemours and Company;
THINSULATE(R) is a registered trademark of Minnesota Mining and Manufacturing
Company; and CAMBRELLE(R) is a trademark of Koppers Industries, Inc. As part of
the acquisition of EJ Footwear Group, the Company acquired a license to use
various trademarks owned by Deere & Company, including JOHN DEERE(R) and NOTHING
RUNS LIKE A DEERE(R). Also as part of the acquisition of EJ Footwear Group, the
Company acquired a license to use various trademarks owned by Williamson-Dickie
Manufacturing Company, including DICKIES(R) and DICKIES THE BRAND THAT
WORKS!(R). 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 the rugged outdoor and
occupational footwear and apparel 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 and apparel 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, 2004, the Company had approximately 1,079 full-time
employees and 12 part-time employees. Approximately 913 of these full-time
employees are in the Dominican Republic and Puerto Rico. The Company has
approximately 825 employees engaged in production and the balance in managerial
and administrative positions. EJ Footwear Group, acquired in January 2005, added
438 full-time and 54 part-time employees. The Company considers its relations
with all of its employees to be good.
BUSINESS RISKS
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). In
addition to the other information in this report, readers should carefully
consider that the following important factors, among others, in some cases have
affected, and in the future could affect, the Company's actual results and could
cause the Company's actual consolidated results of operations for Fiscal 2005
and beyond, to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.
10
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."
Seasonality. The Company has historically experienced significant seasonal
fluctuations in the sale of its products. The Company's operating results have
varied significantly in the past, partly due to such seasonal fluctuations. A
majority of the orders for the Company's rugged outdoor footwear have
historically been 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. EJ Footwear Group was acquired in January
2005. This acquisition is expected to reduce the Company's exposure to
seasonality beginning in 2005 since most of the EJ Footwear Group's brands are
occupational products that are sold throughout the year. Additionally, the
Company does not have long-term contracts with its customers. 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 apparel lines, have historically been 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. EJ Footwear Group was acquired in January 2005. This
acquisition is expected to reduce the Company's exposure to seasonality
beginning in 2005 since most of the EJ Footwear Group's brands are occupational
products that are sold throughout the year. See "Business -- Seasonality and
Weather."
Competition. The footwear and apparel industries are 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.
11
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 and GEORGIA BOOT 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
merchandisers could have a material adverse effect on the Company's business,
financial condition and results of operations. 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 and
Chief Executive Officer, David Sharp, President and Chief Operating Officer, and
James McDonald, Executive Vice President, Chief Financial Officer and Treasurer.
Mr. Brooks has an at-will employment agreement with the Company. The employment
agreement provides that in the event of termination of employment with the
Company, he 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, primarily the People's
Republic of China. 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 are capped beginning in 2002 and terminate in 2006. In
addition, the Company's local tax abatements in Puerto Rico are scheduled to
expire in 2009. In 2004, the Company elected to repatriate $3,000,000 of
earnings and accrued $157,000 of related taxes under the provisions of the
American Jobs Creation Act of 2004. No income taxes are provided on the
approximately $6,839,000 of remaining undistributed earnings. During 2005, the
Company will complete its evaluation of foreign earnings and may repatriate up
to an additional $5,000,000 of accumulated undistributed earnings, which could
result in up to $260,000 of additional tax. As a result of the January 2005
acquisition of EJ Footwear Group, the Company's effective tax rate for Fiscal
2005 is expected to increase compared to Fiscal 2004 as a higher percentage of
profits will be taxed at U. S. tax rates.
12
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.
Certain Corporate Governance Measures. The Company has adopted certain
corporate governance measures which, individually or collectively, could delay
or frustrate the removal of incumbent directors and could make a merger, tender
offer or proxy contest involving the Company, more difficult, 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."
Integration of EJ Footwear Group. In light of the Company's recent
acquisition of EJ Footwear Group, the Company's success will depend in part on
its ability to integrate the operations and personnel of EJ Footwear Group along
13
with the Company into a single organizational structure. There can be no
assurance that the Company will be able to effectively integrate the existing
operations of the Company with the newly-acquired EJ Footwear Group. Integration
of these operations could also place additional pressures on the Company's
management as well as on its key resources. The failure to successfully manage
this integration could have a material adverse effect on the Company.
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 which are
located in Nelsonville, Ohio in a two-story 25,000 square foot building. The
second floor of this building houses the Company's executive offices. The first
floor will house additional executive offices in the future.
The Company 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. This facility is currently under lease to an
unrelated entity.
In 2004 the Company leased a 41,000 square foot facility in Nelsonville,
Ohio. Until January 2005, the facility was leased from the William Brooks Real
Estate Company, which is 25% owned by Mike Brooks, Chairman and CEO of the
Company. In January 2005, the Company purchased the facility for $505,000. This
building was previously used for manufacturing and presently houses the
Company's factory outlet store.
Lifestyle leases two manufacturing facilities, one of which contains
44,978 square feet and the other which contains 39,581 square feet in Moca,
Puerto Rico. These buildings are leased from the Puerto Rico Industrial
Development Company under a net 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 82,000 square feet of this facility from
the Dominican Republic Corporation for Industrial Development (the "DRCID")
under a Consolidation of Lease Contract, dated as of February 1997, the term of
which expires on June 1, 2009. Five Star leases an additional stand-alone 37,000
square foot building from the DRCID under a lease that expires March 1, 2008.
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.
Rocky Canada leases an approximately 5,000 square foot facility in
Waterloo, Ontario, from Marshland Centre Limited. The facility is used for
distribution of certain of the Company's products in Canada. The lease expires
on July 31, 2006 with an option for a five-year extension.
14
EJ Footwear Group leases two offices in Franklin, TN and one office in Vestal,
NY. The Franklin, TN offices are approximately 13,400 and 22,500 square foot
facilities and the leases expire on August 30, 2005 and April 10, 2007,
respectively. The Vestal, NY office is an approximately 24,000 square foot
facility and the lease expires on June 30, 2005.
ITEM 3. LEGAL PROCEEDINGS.
The Company is, from time to time, a party to litigation which arises in
the normal course of its business. Although the ultimate resolution of pending
proceedings cannot be determined, in the opinion of management, the resolution
of such proceedings in the aggregate will not have a material adverse effect on
the Company's financial position, results of operations, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
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, 2003.......... $ 7.30 $ 4.77
June 30, 2003........... $ 9.54 $ 6.50
September 30, 2003...... $ 11.72 $ 9.10
December 31, 2003....... $ 26.01 $ 11.12
March 31, 2004.......... $ 31.95 $ 17.75
June 30, 2004........... $ 29.25 $ 17.96
September 30, 2004...... $ 23.70 $ 15.79
December 31, 2004....... $ 29.93 $ 17.00
On March 1, 2005, the last reported sales price of the Common Stock on the
NASDAQ National Market was $31.56 per share. As of March 1, 2005, there were 114
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 Company's credit facility restricts the
payment of dividends on the Common Stock. At December 31, 2004, the Company had
no retained earnings available for distribution.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except for per share data)
FIVE YEAR FINANCIAL SUMMARY
-------------------------------------------------------------------------
12/31/04 12/31/03 12/31/02 12/31/01 12/31/00
------------ ------------- ------------ ----------- -----------
INCOME STATEMENT DATA
Net sales $ 132,249 $ 106,165 $ 88,959 $ 103,320 $ 103,229
Gross margin (% of sales) 29.2% 30.9% 26.3% 22.5% 23.8%
Net income $ 8,594 6,039 $ 2,843 $ 1,531 $ 96
PER SHARE
Net income
Basic $ 1.89 1.44 $ 0.63 $ 0.34 $ 0.02
Diluted $ 1.74 1.32 $ 0.62 $ 0.34 $ 0.02
Weighted average number of common
shares outstanding
Basic 4,557 4,190 4,500 4,489 4,489
Diluted 4,954 4,561 4,590 4,549 4,493
BALANCE SHEET DATA
Inventories $ 32,959 38,068 $ 23,182 $ 27,714 $ 32,035
Total assets $ 96,706 86,175 $ 68,417 $ 74,660 $ 86,051
Working capital $ 55,612 54,210 $ 41,751 $ 44,267 $ 50,201
Long-term debt, less current
maturities $ 10,045 17,515 $ 10,488 $ 16,976 $ 26,445
Shareholders' equity $ 71,371 58,385 $ 52,393 $ 51,043 $ 50,326
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Result of Operations ("MD&A") describes the matters that we consider to be
important to understanding the results of our operations for each of the three
years in the period ended December 31, 2004, and our capital resources and
liquidity as of December 31, 2004 and 2003. Use of the terms "Rocky", the
"Company", "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. We analyze the results of our operations for the last three years, including
the trends in the overall business followed by a discussion of our cash flows
and liquidity, our credit facility, and contractual commitments. We then provide
a review of the critical accounting judgments and estimates that we have made
which we believe are most important to an understanding of our MD&A and our
consolidated financial statements. We conclude our MD&A with information on
recent accounting pronouncements which we adopted during the year, as well as
those not yet adopted that are expected to have an impact on our financial
accounting practices.
The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data" and our consolidated financial statements and the
notes thereto, all included elsewhere herein. The forward-looking statements in
this section and other parts of this document 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. The Private Securities Litigation Reform
Act of 1995 provides a "safe harbor" for forward-looking statements made by or
on behalf of the Company.
We have one reportable segment: the design, manufacture and distribution
of high quality men's and women's footwear and related apparel and accessories.
We sell our products primarily to large and small retailers throughout the
United States of America and Canada.
2004 OVERVIEW
The Company continued to implement its growth strategy in 2004 through key
line extensions in footwear and outdoor apparel. This strategy was initially
focused on leveraging the ROCKY brand in the rugged outdoor segment, and has
been expanded to include footwear and apparel in the occupational segment as
well as accessories.
HIGHLIGHTS OF OUR 2004 FINANCIAL PERFORMANCE INCLUDE THE FOLLOWING:
- Net sales, led by increases of approximately $18.1 million of
boots produced for delivery to the U.S. military and $7.9
million of higher branded sales, rose to $132.2 million from
$106.2 million in 2003.
- The Company's gross profit increased to $38.6 million from
$32.8 million the prior year. Gross profit margin was 29.2%
versus 30.9% in 2003, primarily due to substantially higher
shipments of boots to the U.S. military during 2004.
- Net income rose to $8.6 million compared to $6.0 million the
prior year. Diluted earnings per common share rose 32% to
$1.74 in 2004 versus $1.32 per diluted share in 2003.
- Capital expenditures were $6.0 million in 2004 compared to
$2.2 million in 2003. For 2004, capital expenditures included
the purchase and renovation of a factory outlet store for $2.2
million and purchase of in-store displays for $1.2 million.
- Net debt (total debt minus cash, cash equivalents, marketable
securities and interest-bearing deposits) was $11.5 million or
13.1% of total capitalization at December 31, 2004 compared to
$15.9 million or 20.8% of total capitalization at year-end
2003. Total debt was $16.5 million or 18.8% of total
capitalization at December 31, 2004 compared to $18.0 million
or 23.6% of total capitalization at year-end 2003.
17
On January 6, 2005, the Company acquired the equity interests in EJ
Footwear Group for $91.2 million in cash and 484,261 shares of common stock
valued at $11,573,000 (valued at $10,000,000 at the date of the definitive
agreement). To fund the acquisition the Company entered into a credit facility
with: (1) a five year $100 million revolving credit facility; and (2) a $18
million three year term loan and a $30 million six year term loan.
The Company anticipates further benefits from its growth strategy in 2005
due to increased net sales resulting from broader product lines and increased
demand for its portfolio of branded products. Improvement in net sales and
profitability is anticipated from the acquisition of EJ Footwear Group,
full-year sales of recently introduced line extensions, and a higher level of
footwear produced for delivery to the U.S. military than in 2004.
Market conditions were mixed during Fiscal 2004 compared to Fiscal 2003.
Sales of the Company's rugged outdoor products were solid during the first half
of 2004, but were impacted by warmer seasonal weather during the fall and winter
months of the year. These conditions also contributed to a slight reduction in
net sales of rugged outdoor footwear compared to the prior year.
Sales in the Company's occupational category, which are sold year-round,
achieved substantial growth in Fiscal 2004 compared to 2003 due to new product
introductions, especially in work western footwear and work apparel. The Company
continues to pursue key line extensions in its work and duty markets.
Sales of boots for delivery to the U.S. military occur from time to time
based on competitively bid contracts. The Company entered into a $6.1 million
contract with Belleville Shoe Manufacturing Company ("Belleville") in September
2003 for Intermediate Cold Wet Boots ("ICWs"). Initial shipments, $0.4 million,
of these ICWs began in the fourth quarter 2003 and the remaining amount of these
ICWs, $5.7 million, were shipped by May 2004. On March 9, 2004, the Company
announced a $16.4 million contract with Belleville to produce 200,000 pairs of
Infantry Combat Boots ("ICBs"). Shipments began in June 2004 and are expected to
continue at the rate of 20,000 pairs per 30-day period through April 2005. All
of the ICBs are manufactured in the Company's factory in Puerto Rico.
On February 14, 2005, the Company announced a $21.0 million order from the
U.S. military to produce ICBs beginning in the second quarter of 2005 with an
estimated completion date of December 2005.
PERCENTAGE OF NET SALES
References to 2004, 2003 and 2002 are to years ended December 31 of the
respective year.
2004 2003 2002
----- ----- -----
Net Sales 100.0% 100.0% 100.0%
Costs of goods sold 70.8 69.1 73.7
----- ----- -----
Gross margin 29.2 30.9 26.3
SG&A expenses 19.4 21.9 20.9
----- ----- -----
Income from operations 9.8% 9.0% 5.4%
===== ===== =====
18
2004 COMPARED TO 2003
NET SALES
Net sales rose 24.6% to $132.2 million for Fiscal 2004 from $106.2 million
the prior year. This was due to an $18.1 million increase in boots produced for
delivery to the U.S. military and a $7.9 million increase in the Company's
branded sales. Sales of boots to the U.S. military fluctuate based on
competitively bid contracts.
Branded footwear sales increases were led by the occupational product
line. Sales of rugged outdoor footwear declined 3.1% to $46.6 million for 2004
primarily due to warmer, drier weather during the fall and winter months. These
conditions impacted re-orders during the second half of 2004. Sales in the
occupational product line, led by solid gains in work, especially work western
footwear, increased 18.2% to $40.8 million, benefiting from product line
extensions and expanded distribution.
ROCKY branded apparel was initially introduced in the outdoor market in
2002 and the line was extended to the occupational market in February 2004.
Customer acceptance of these items remains strong. Net sales in this category
increased 96.6% to $8.9 million for 2004 from $4.5 million the prior year.
GATES branded product sales were $9.6 million for 2004 compared to $10.2
million for the nine-month period following the acquisition of certain assets of
Gates-Mills, Inc. in April 2003. The decrease in sales was due to the Company's
decision to exit the dress glove segment of this business.
Military sales, which occur from time to time, were $18.5 million in 2004
versus $0.4 million in 2003. This represented final shipments of $5.7 million
under a contract awarded in September 2003 and $12.8 million of shipments under
a contract awarded in March 2004 to produce boots for delivery to the U.S.
military. The remaining $3.6 million of military boots under the March 2004
contract award are expected to be shipped by the second quarter of 2005.
Net sales for the Company's factory outlet stores declined 12.3% to $4.0
million in 2004 compared to $4.6 million the prior year. The decline in retail
sales resulted from less traditional seasonal cold and wet weather during the
fall and winter months of 2004.
Average list prices for the Company's footwear, apparel and accessories
were similar in 2004 compared to 2003.
GROSS MARGIN
Gross profit rose to $38.6 million for 2004 from $32.8 million the prior
year. Expressed as a percentage of net sales, gross margin declined 170 basis
points to 29.2% of net sales in 2004 compared to 30.9% in 2003. The lower gross
margin was primarily attributable to higher sales of boots for delivery to the
U.S. military, which totaled $18.5 million in 2004 compared to $0.4 million in
2003. These boots traditionally have substantially lower gross margins than the
Company's branded products.
The Company has been sourcing footwear from outside the United States
since 1993. In 2004, sourced footwear, apparel and accessories declined to 63%
of net sales versus 66% in 2003 because of the effect of the military sales.
Sales of sourced products are generally higher than for footwear produced in the
Company's factories. Sourced product sales are expected to remain a significant
percentage of the Company's total net sales.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses rose $2.3 million to
$25.6 million for Fiscal 2004. The increase in SG&A expenses for the year ended
December 31, 2004 was due to higher commissions paid of $.4 million, $.6 million
of additional distribution costs, higher advertising expenses of $.6 million, as
well as testing and documentation of internal controls required by the
Sarbanes-Oxley Act of 2002 of $.4 million. Most of the Company's SG&A expenses
are relatively fixed and changes between periods are generally in response to
increased sales and profitability. As a percent of net sales, SG&A expenses
declined to 19.4% for Fiscal 2004 from 21.9% the prior year, due to nominal SG&A
expenses associated with military boot sales.
19
INCOME FROM OPERATIONS
Income from operations improved 37.1% to $13.0 million, or 9.8% of net
sales, for Fiscal 2004 from $9.5 million, or 9.0% of net sales, in Fiscal 2003.
INTEREST EXPENSE
Interest expense declined slightly to $1.3 million for Fiscal 2004 from
$1.4 million in 2003 because of lower average borrowings in 2004 versus 2003.
The Company's funded debt declined to $16.5 million at December 31, 2004
versus $18.0 million a year ago. This was principally due to inventory
reductions during 2004.
INCOME TAXES
Income tax expense was $3.5 million for Fiscal 2004 compared to $2.4
million in 2003. The Company's effective tax rate remained stable between the
two years at 28.8% and 28.7%, respectively. This effective rate is lower than
the statutory rate of 35.0% due to a portion of income being earned in offshore
jurisdictions where effective tax rates are lower than the U.S. effective tax
rate. Sourced products are taxed at U.S. effective tax rates. In addition, the
provision includes $157,000 related to the Company's decision to repatriate
foreign earnings totaling $3,000,000.
2003 COMPARED TO 2002
NET SALES
Net sales rose 19.3% to $106.2 million for the year ended December 31,
2003 from $89.0 million the prior year. This was attributable to a 28% increase
in branded product sales, which include ROCKY footwear, apparel and accessories
and GATES products. Shipments of boots to the U.S. military for the year ended
December 31, 2003 were $6.0 million below the prior year. These sales fluctuate
in response to specific competitively bid contracts to produce boots for the
U.S. military.
Footwear sales increases were led by the rugged outdoor category, which
sales increased 15.7% to $48.1 million for 2003. These sales benefited from
increased demand and more seasonal weather conditions in most regions of the
U.S. where the Company's rugged outdoor footwear is sold. Initial sell-through
and re-orders were particularly strong during the fall and winter season due to
the weather conditions which also benefited from increased demand for the ROCKY
brand. Occupational footwear increased 16.7% to $34.6 million reflecting product
line extensions, particularly a line of western influenced footwear. Casual
footwear sales increased $0.2 million to $2.5 million in 2003, consistent with
the Company's emphasis on controlled growth within this category through its
existing dealer network.
ROCKY branded apparel, particularly for the outdoor market, was introduced
in 2002. Net sales in this category increased 67% to $4.5 million for 2003
compared to $2.7 the prior year.
GATES branded product sales were $10.2 million for 2003 due to the
acquisition of the Gates brand in April 2003.
Military sales, which occur from time to time, were $0.4 million in 2003
versus $6.4 million in 2002. This represented initial shipments under a $6.1
million contract to produce boots for delivery to the U.S. military. The
remaining amount of this contract was completed in the second quarter 2004.
Net sales for the Company's factory outlet stores increased 13% to $4.6
million in 2003 compared with $4.1 million the prior year. The retail sales
increase was the result of more traditional seasonal weather, expansion of the
Company's Nelsonville store, and refocused merchandising of the retail stores.
Average list prices for the Company's footwear, apparel and accessories
were similar in 2003 compared to 2002.
20
GROSS MARGIN
Gross margin rose to $32.8 million for 2003 from $23.4 million the prior
year. Expressed as a percentage of net sales, gross margin increased 460 basis
points to 30.9% of net sales in 2003 compared with 26.3% in 2002. This increase
in gross margin was attributable to sales mix and a 17 percentage point increase
in sourced product sales. The 2003 gross margin benefited from lower shipments
of boots to the U.S. military in 2003. Historically, these boots are produced at
gross margins below the Company's overall average.
The Company has been sourcing footwear from outside the United States
since 1993. In 2003, sourced footwear, apparel and accessories increased to 66%
of net sales from 49% in 2002. The increase in sourced products sales as a
percentage of total sales is expected to continue in the future; however, such
increase is not expected to be at the same year-over-year growth rate as the
Company experienced in 2003.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses were $23.3 million,
or 21.9% of net sales, for 2003 versus $18.7 million, or 21.0% of net sales, the
prior year. The increase in SG&A expenses for the year ended December 31, 2003
was due to higher commissions paid, additional distribution costs, and higher
incentive compensation. All of these factors are attributable to the increase in
net sales and profitability compared to the prior year. Most of the Company's
SG&A expenses are relatively fixed and changes between periods are generally in
response to increased sales and profitability.
INTEREST EXPENSE
Interest expense was $1.4 million for both of the years 2003 and 2002. The
Company benefited from generally lower interest rates, which was partially
offset by higher average outstanding borrowings.
The Company's funded debt increased to $18.0 million at December 31, 2003
versus $11.0 million a year ago. The increase in funded debt in 2003 was due to
the purchase of certain assets of Gates-Mills, Inc., the repurchase of 483,500
shares of common stock, and increased inventory to support sales growth. The
Company's investment in capital assets was substantially below depreciation
expense for 2003 and 2002.
INCOME TAXES
Income tax expense increased $1.4 million to $2.4 million in 2003 compared
to $1.0 million in 2002. The Company's effective tax rate was 28.7% for 2003
compared to 25.1% the previous year. This effective rate is lower than the
statutory rate of 35.0% due to a portion of income being earned in offshore
jurisdictions where effective tax rates are lower than the U.S. effective tax
rate and the Company's decision not to repatriate foreign earnings to the U.S.
The increase in the effective tax rate in 2003 over 2002 is due primarily to the
increase in sales of sourced products which are taxed at U.S. effective tax
rates.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The Company principally funds its working capital requirements and capital
expenditures through income from operations, borrowings under its credit
facility and other indebtedness. During 2004, the Company primarily relied upon
cash provided from operating activities. Working capital is used to support
changes in accounts receivable and inventory as a result of the Company's
seasonal business cycle and business expansion. These requirements are generally
lowest in the months of January through March of each year and highest during
the months of May through October of each year. The Company's working capital
increased to $55.6 million and $54.2 million at December 31, 2004 and 2003,
respectively.
Inventory was $33.0 million at December 31, 2004 compared to $38.1 million
at year-end 2003. This decline was due to efforts initiated during Fiscal 2004
to reduce the Company's overall inventory. The funds provided by the inventory
reduction were used for increased receivables from higher sales in the second
half of 2004.
21
Capital expenditures were $5.5 million for 2004 versus $2.2 million for
2003. The Fiscal 2004 expenditures included projects for the Company's purchase
and renovation of a factory outlet store for $2.2 million and the purchase of
in-store displays for $1.2 million. Capital expenditures for the year 2005 are
anticipated to be approximately $6.0 million.
Total debt outstanding declined to $16.5 million or 18.8% of total
capitalization at December 31, 2004 compared to $18.0 million or 23.6% of total
capitalization at year-end 2003. This improvement was attributable to improved
cash flow and strong inventory management.
In conjunction with completion of the acquisition of EJ Footwear Group,
the Company entered into agreements with GMAC Commercial Finance LLC and
American Capital Strategies, Ltd. for credit facilities totaling $148 million.
The agreements include a $100 million revolving credit facility and term loans
totaling $48 million with maturities between 3-6 years to fund the acquisition
of EJ Footwear Group and replace the Company's $45 million revolving credit
facility. Under the terms of the agreement, the interest rates and repayment
terms are: (1) a revolving credit facility with an interest rate of LIBOR plus
two and a half percent (2.5%) or prime plus one percent (1.0%); (2) a $18
million term loan with an interest rate of LIBOR plus three and a quarter
percent (3.25%) or prime plus one and three quarters percent (1.75%) and payable
equally over three years; and (3) a $30 million term loan with an interest rate
of LIBOR plus eight percent (8.0%) and payable equally over years four through
six. We believe that our existing credit facilities coupled with our available
cash generated from operations will provide sufficient liquidity to fund our
operations in 2005. Our continued liquidity, however, is contingent upon future
operating performance, cash flows, and our ability to meet financial covenants
in the credit facilities.
CASH FLOWS
2004 2003 2002
Cash Flow Summary $ in million
Cash provided by (used in):
Operating activities $ 7.6 $ (1.6) $ 10.1
Investing activities (5.5) (7.0) (2.3)
Financing activities .8 6.5 (6.5)
-------- -------- --------
Net change in cash and cash equivalents $ 2.9 $ (2.1) $ 1.3
======== ======== ========
Operating Activities. Net cash provided by operating activities totaled
$7.6 million for Fiscal 2004 compared to net cash used by operating activities
of $1.6 million in 2003, and net cash provided by operations of $10.1 million in
2002. Principal uses of net cash compared to the prior year included a $7.6
million increase in accounts receivable-trade during 2004, which was partially
offset by a $5.1 million reduction in inventory. The principal uses of net cash
in 2003 included $14.9 million in increased inventory to support the Company's
growth and a $4.2 million increase in accounts receivable-trade related to the
Company's sales growth. For 2002, the Company had $10.1 million of net cash
provided by operating activities, which benefited from a $4.5 million reduction
in inventories, as well as reductions in deferred compensation and pension and
accrued expenses of $1.6 million and $1.5 million, respectively.
Investing Activities. Net cash used in investing activities was $5.5
million in Fiscal 2004 versus $7.0 million of net cash used in investing
activities in 2003. The principal uses of cash in 2004 were for the purchase of
fixed assets. The principal uses of cash in 2003 were for the purchase of fixed
assets ($2.2 million), and the acquisition of certain assets of Gates-Mills,
Inc. ($4.9 million). For 2002, the Company purchased $2.3 million of fixed
assets.
Financing Activities. The Company's financing activity during 2004 was $.8
million. This included proceeds from the exercise of stock options ($2.2
million), which was offset by a reduction in borrowings ($1.5 million). The
Company's financing activity during 2003 totaled $6.5 million, which included
the repurchase of common stock ($3.1 million) which was partially offset by
proceeds from the exercise of stock options ($2.5 million), and increased
borrowings ($7.0 million) to support sales growth as well as inventory acquired
in conjunction with the acquisition of Gates-Mills, Inc. For the year 2002, cash
provided in financing activities was $6.5 million due to a reduction in total
debt outstanding.
22
BORROWINGS AND EXTERNAL SOURCES OF FUNDS
The Company's borrowings and external sources of funds were as follows at
December 31, 2004 and 2003:
December 31,
------------------
2004 2003
$ in millions
Bank - revolving credit facility $ 11.5 $ 12.5
Equipment and other obligations 0.1 0.3
Real estate obligations 4.9 5.2
-------- --------
Total debt 16.5 18.0
Less current maturities 6.5 0.5
-------- --------
Net long-term debt $ 10.0 $ 17.5
======== ========
Our real estate obligations were $4.9 million at December 31, 2004. The
mortgage financing, completed in the year 2000, includes three of the Company's
facilities, with monthly payments of approximately $0.1 million through 2014.
We lease certain machinery and manufacturing facilities under operating
leases that generally provide for renewal options. Future minimum lease payments
under non-cancelable operating leases are $0.7 million, $0.6 million, $0.3
million and $0.3 million for years 2005 through 2008, respectively, and $0.3
million for all years after 2008, or approximately $2.2 million in total. We
continually evaluate our external credit arrangements in light of our growth
strategy and new opportunities. We anticipate no further changes in our credit
arrangements in 2005 beyond the $148 credit facilities announced on January 6,
2005, to fund the acquisition of EJ Footwear Group and to replace our $45
million revolving credit facility.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes our contractual obligations at December 31,
2004 resulting from financial contracts and commitments. We have not included
information on our recurring purchases of materials for use in our manufacturing
operations. These amounts are generally consistent from year to year, closely
reflect our levels of production, and are not long-term in nature (less than
three months).
Contractual Obligations at December 31, 2004:
PAYMENTS DUE BY YEAR
$ MILLIONS
LESS THAN OVER 5
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
Long-term debt, adjusted for the January
2005 refinancing $ 111.3 $ 6.5 $ 12.8 $ 21.0 $ 71.0
Pension benefits (1) 4.1 0.3 0.6 0.7 2.5
Minimum operating lease commitments 2.2 0.7 0.9 0.6 -
Expected cash requirements for interest(2) 36.3 7.8 14.7 12.8 1.0
Building purchase obligation 0.5 0.5 - - -
-------- ----------- ----------- ----------- -------
Total contractual obligations $ 154.4 $ 15.8 $ 29.0 $ 35.1 $ 74.5
======== =========== =========== =========== =======
(1) Assumes no plan termination and includes estimated pension plan
contributions.
(2) Assumes the following interest rates: (1) 6.0% on the $58.4 million
revolving credit facility; (2) 5.65% on the $18 million three year term
loan; (3) 10.4% on the $30 million six year term loan; and (4) 8.275% on
the $4.9 million mortgage loans.
From time to time we enter into purchase commitments with our suppliers
under customary purchase order terms. Any significant losses implicit in these
contracts would be recognized in accordance with generally accepted accounting
principles. At December 31, 2004, no such losses existed.
23
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.
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's financial performance is influenced by factors such as
higher raw material costs as well as higher salaries and employee benefits.
Management attempts to minimize or offset the effects of inflation through
increased selling prices, productivity improvements, and cost reductions. The
Company was able to mitigate the effects of inflation during 2004 due to these
factors. It is anticipated that inflationary pressures during 2005 will be
offset through increases in sales and profitability, due to improved operating
leverage in the Company's business.
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.
24
Sales returns and allowances:
Revenue principally consists of sales to customers. Revenue is recognized
upon shipment of product to customers, while license fees are recognized when
earned. The Company records a reduction to gross sales based on estimated
customer returns and allowances. These reductions are influenced by historical
experience, based on customer returns and allowances. The actual amount of sales
returns and allowances realized may differ from the Company's estimates. If the
Company determines that sales returns or allowances should be either increased
or decreased, then the adjustment would be made to net sales in the period in
which such a determination is made.
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 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.
Intangible assets:
The Company had $4.1 million of intangible assets at December 31, 2004.
Goodwill, trademarks and patents are tested for impairment at least annually by
comparing the fair value of the reporting units to their carrying values. Fair
values are estimated using discounted cash flow methodologies that are based on
projections of the amounts and timing of future revenues and cash flows. Based
on this testing, none of our goodwill, trademarks or patents were impaired as of
December 31, 2004.
Pension benefits:
Accounting for pensions involves estimating the cost of benefits to be
provided well into the future and attributing that cost over the time period
each employee works. To accomplish this, extensive use is made of assumptions
about inflation, investment returns, mortality, turnover, medical costs and
discount rates. These assumptions are reviewed annually. See Note 9, "Retirement
Plans," of this Form 10-K for information on these plans and the assumptions
used.
Pension expenses are determined by actuaries using assumptions concerning
the discount rate, expected return on plan assets and rate of compensation
increase. 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 9 "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 non-union workers of the
Company. A union plan, which was frozen in 2001, was settled in April 2004.
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 a 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. Finally, at December 31, 2004, a provision of
$157,000 has been made for U.S. taxes on the repatriation of $3,000,000 of
accumulated undistributed earnings of Five Star through December 31, 2004. At
December 31, 2004, after the planned repatriation above, approximately
$6,839,000 is remaining that would become taxable upon repatriation to the
United States. During 2005, the Company will complete its evaluation of foreign
earnings and may repatriate up to an additional $5,000,000 of accumulated
undistributed earnings, which could result in up to $260,000 of additional tax.
RECENTLY ISSUED FINANCIAL ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued a revision to Interpretation 46 (FIN
46R) to clarify certain provisions of FASB Interpretation No. 46. Variable
interests in a variable interest entity are contractual, ownership, or other
pecuniary interests in an entity that change with changes in the entity's net
asset value. Variable interests are investments or other interests that will
25
absorb a portion of an entity's expected losses if they occur or receive
portions of the entity's expected residual returns if they occur. FIN 46R defers
the effective date of FIN 46 for certain entities and makes several other
changes to FIN 46. The Company's adoption of FIN 46 or FIN 46R did not have a
material impact on the Company's consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4," which clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage) and also requires that the allocation of fixed production overhead be
based on the normal capacity of the production facilities. SFAS No. 151 is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The Company is currently evaluating the impact of adopting this
statement.
In December 2004, the FASB issued revised SFAS No. 123, "Share-Based
Payment" which replaces SFAS No. 123, "Accounting for Stock-Based Compensation"
and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
This statement, which requires the cost of all share-based payment transactions
be recognized in the financial statements, establishes fair value as the
measurement objective and requires entities to apply a fair-value-based
measurement method in accounting for share-based payment transactions. The
statement applies to all awards granted, modified, repurchased or cancelled
after July 1, 2005, and unvested portions of previously issued and outstanding
awards. The Company is currently evaluating the impact of adopting this
statement.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - an amendment of APB Opinion No. 29." The statement addresses the
measurement of exchanges of nonmonetary assets and eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive assets
and replaces it with an exception for exchanges that do not have commercial
substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. The Company is currently
evaluating the impact of adopting this statement.
In December 2004, the FASB issued FSP No. FAS 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004," which provides a practical exception to the
SFAS No. 109 requirement to reflect the effect of a new tax law in the period of
enactment by allowing additional time beyond the financial reporting period to
evaluate the effects on plans for reinvestment or repatriation of unremitted
foreign earnings. At December 31, 2004 the Company determined it would
repatriate a portion of its foreign earnings and accrued the related taxes. (See
Note 8)
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995
This Management's Discussion and Analysis of Financial Conditions 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 risk and uncertainties including, without limitations,
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
can generally be passed along to the customer. The Company does not hold any
material market risk sensitive instruments for trading purposes.
26
The following three items are market rate sensitive for interest rates for
the Company: (1) long-term debt consisting of a credit facility with a balance
at December 31, 2004 of $11.5 million, was refinanced by the credit facility
described below; (2) equipment and other obligations totaling $0.1 million at
December 31, 2004 that bear interest at a variable rate based on prime; and (3)
real estate obligations of $4.9 million at December 31, 2004, that bear interest
at a fixed rate of 8.275%.
On January 6, 2005, we announced the Company had entered into credit
facilities with GMAC Commercial Finance LLC and American Capital Strategies,
Ltd. totaling $148 million to fund the acquisition of EJ Footwear Group and to
replace our $45 million revolving credit facility. The agreements include a $100
million revolving credit facility and term loans totaling $48 million with
maturities between 3-6 years. Under the terms of the agreement, the interest
rates and repayment terms are: (1) a revolving credit facility with an interest
rate of LIBOR plus two and a half percent (2.5%) or prime plus one percent
(1.0%); (2) a $18 million term loan with an interest rate of LIBOR plus three
and a quarter percent (3.25%) or prime plus one and three quarters percent
(1.75%) and payable equally over three years; and (3) a $30 million term loan
with an interest rate of LIBOR plus eight percent (8.0%) and payable equally
over years four through six.
The Company does not have any interest rate management agreements as of
December 31, 2004.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated balance sheets as of December 31, 2004 and 2003
and the related consolidated statements of income, shareholders' equity, and
cash flows for the years ended December 31, 2004, 2003, and 2002, together with
the independent auditors' report thereon appear on pages F-1 through F-27 hereof
and are incorporated herein by reference.
27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's
management carried out an evaluation, with the participation of the Company's
principal executive officer and principal financial officer, of the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act).
Based upon that evaluation, the Company's principal executive officer and
principal financial officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report. 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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As part of the Company's evaluation of the effectiveness of internal
controls over financial reporting described below, the Company made certain
improvements to its internal controls. However, there were no changes in the
Company's internal controls over financial reporting that occurred during the
Company's most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Rule 13a-15(f) under the Exchange Act. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate. Under the supervision and with the participation of
the Company's principal executive officer and principal financial officer, the
Company's management conducted an evaluation of the effectiveness of the
Company's internal control over financial reporting based on the framework in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based upon that evaluation under the
framework in Internal Control - Integrated Framework, the Company's management
concluded that our internal control over financial reporting was effective as of
December 31, 2004.
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Rocky Shoes & Boots, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Rocky
Shoes & Boots, Inc. and subsidiaries (the "Company") maintained effective
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's Board of Directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the balance sheets of the Company as
of December 31, 2004 and 2003, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 2004. Our report dated March 15, 2005 expressed an
unqualified opinion on those financial statements and financial statement
schedule.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
March 15, 2005
29
ITEM 9B. OTHER INFORMATION
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 2005 Annual Meeting of Shareholders (the "Proxy Statement") to be held on
May 10, 2005, to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A promulgated under the Securities Exchange Act of 1934, is
incorporated herein by reference.
We have adopted a Code of Business Conduct and Ethics that applies to our
directors, officers and all employees. The Code of Business Conduct and Ethics
is posted on our website at www.rockyboots.com. The Code of Business Conduct and
Ethics may be obtained free of charge by writing to Rocky Shoes & Boots, Inc.,
Attn: Chief Financial Officer, 39 East Canal Street, Nelsonville, Ohio 45764.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the captions
"INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
SHAREHOLDERS" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION"
in the Company's Proxy Statement, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the caption
"INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
SHAREHOLDERS - OWNERSHIP OF COMMON STOCK BY MANAGEMENT," "- OWNERSHIP OF COMMON
STOCK BY PRINCIPAL SHAREHOLDERS," and "EQUITY COMPENSATION PLAN INFORMATION," in
the Company's Proxy Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the caption
"INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
SHAREHOLDERS - COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" in
the Company's Proxy Statement, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this item is included under the caption
"REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS" in the Company's Proxy
Statement, and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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:
Report of Independent Registered Public Accounting Firm........................................ F-1
Consolidated Balance Sheets as of December 31, 2004 and 2003................................... F-2 - F-3
30
Consolidated Statements of Income for the years ended
December 31, 2004, 2003, and 2002........................................................ F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2004, 2003, and 2002............................................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003, and 2002........................................................ F-6
Notes to Consolidated Financial Statements for the years ended
December 31, 2004, 2003, and 2002........................................................ F-7 - F-27
(2) The following financial statement schedule for the years ended
December 31, 2004, 2003, and 2002 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.
Report of Independent Registered Public Accounting Firm 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.
(3) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Purchase and Sale of Equity Interests Agreement by and among Rocky
Shoes & Boots, Inc., SILLC Holdings, LLC, a Delaware limited
liability company and Strategic Industries, LLC, dated as of
December 6, 2004 (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K dated December 6, 2004, filed with the
Securities and Exchange Commission on December 8, 2004).
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).
31
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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 Amended and Restated Lease Agreement, dated March 1, 2002, between
Rocky Shoes & Boots Co. and William Brooks Real Estate Company
regarding Nelsonville factory (incorporated by reference to Exhibit
10.11 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002).
10.10 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).
10.11 Form of Stock Option Agreement under the 1995 Stock Option Plan
(incorporated by reference to Exhibit 10.28 to the 1995 Form 10-K).
10.12 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).
10.13 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).
10.14* Lease Contract dated December 16, 1999, between Lifestyle Footwear,
Inc. and The Puerto Rico Industrial Development Company.
10.15 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")).
10.16 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).
10.17 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).
10.18 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).
32
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.19 Company's 2004 Stock Incentive Plan (incorporated by reference to
the Company's Definitive Proxy Statement for the 2004 Annual Meeting
of Shareholders, held on May 11, 2004, filed on April 6, 2004).
10.20* Renewal of Lease Contract, dated June 24, 2004, between Five Star
Enterprises Ltd. and the Dominican Republic Corporation for
Industrial Development.
10.21 Second Amendment to Lease Agreement, dated as of July 26, 2004,
between Rocky Shoes & Boots, Inc. and the William Brooks Real Estate
Company (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2004).
10.22 Form of Option Award Agreement under the Company's 2004 Stock
Incentive Plan (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K dated January 3, 2005, filed with the
Securities and Exchange Commission on January 7, 2005).
10.23 Form of Restricted Stock Award Agreement relating to the Retainer
Shares issued under the Company's 2004 Stock Incentive Plan
(incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K dated January 3, 2005, filed with the Securities and
Exchange Commission on January 7, 2005).
10.24 Loan and Security Agreement, dated as of January 6, 2005, by and
among Rocky Shoes & Boots, Inc., Lifestyle Footwear, Inc., EJ
Footwear LLC, HM Lehigh Safety Shoe Co. LLC, Georgia Boot LLC,
Durango Boot Company LLC, Northlake Boot Company LLC, Lehigh Safety
Shoe Co. LLC, Georgia Boot Properties LLC, and Lehigh Safety Shoe
Properties LLC, as Borrowers, GMAC Commercial Finance LLC, as Agent
and as Lender (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K dated January 6, 2005, filed with the
Securities and Exchange Commission on January 12, 2005).
10.25 Note Purchase Agreement, dated as of January 6, 2005, by and among
Rocky Shoes & Boots, Inc., Lifestyle Footwear, Inc., EJ Footwear
LLC, HM Lehigh Safety Shoe Co. LLC, Georgia Boot LLC, Georgia Boot
Properties LLC, Durango Boot Company LLC, Northlake Boot Company
LLC, Lehigh Safety Shoe Co. LLC, and Lehigh Safety Shoe Properties
LLC, as Loan Parties, American Capital Financial Services, Inc., as
Agent, and American Capital Strategies, Ltd., as Purchaser
(incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K dated January 6, 2005, filed with the Securities and
Exchange Commission on January 12, 2005).
10.26 Amendment No. 1 to Loan and Security Agreement and Consent, dated as
of January 19, 2005, by and among Rocky Shoes & Boots, Inc.,
Lifestyle Footwear, Inc., EJ Footwear LLC, HM Lehigh Safety Shoe Co.
LLC, Georgia Boot LLC, Durango Boot Company LLC, Northlake Boot
Company LLC, Lehigh Safety Shoe Co. LLC, Georgia Boot Properties
LLC, and Lehigh Safety Shoe Properties LLC, as Borrowers, GMAC
Commercial Finance LLC, as administrative agent and sole lead
arranger for the Lenders, Bank of America, N.A., as syndication
agent and Royal Bank of Scotland PLC, as documentation
agent(incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K dated January 19, 2005, filed with the Securities
and Exchange Commission on January 21, 2005).
21* Subsidiaries of the Company.
23* Independent Registered Public Accounting Firm's Consent and Report
on Schedules of Deloitte & Touche LLP.
24* Powers of Attorney.
33
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
31.1* Rule 13a-14(a) Certification of Principal Executive Officer.
31.2* Rule 13a-14(a) Certification of Principal Financial Officer.
32** Section 1350 Certification of Principal Executive Officer and
Principal Financial Officer.
99.1* Independent Registered Public Accounting Firm's Report of Deloitte &
Touche LLP on Schedules (incorporated by reference to Exhibit 23).
99.2* Financial Statement Schedule.
* Filed with this Annual Report on Form 10-K.
** Furnished with this Annual Report on Form 10-K.
The Registrant agrees to furnish to the Commission upon its request copies of
any omitted schedules or exhibits to any Exhibit filed herewith.
(b) EXHIBITS
The exhibits to this report begin immediately following the F- pages.
(c) FINANCIAL STATEMENT SCHEDULES
The Report of the Independent Registered Public Accounting Firm and
financial statement schedule are included in the Annual Report on Form 10-K as
Exhibit 99.1 and Exhibit 99.2, respectively.
34
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 16, 2005 By: /s/ James E. McDonald
------------------------------------
James E. McDonald, Executive 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, Chief Executive Officer and March 16, 2005
- -------------------------------------------- Director (Principal Executive Officer)
Mike Brooks
/s/ James E. McDonald Executive Vice President and March 16, 2005
- -------------------------------------------- Chief Financial Officer
James E. McDonald (Principal Financial and Accounting Officer)
* CURTIS A. LOVELAND Secretary and Director March 16, 2005
- --------------------------------------------
Curtis A. Loveland
* J. PATRICK CAMPBELL Director March 16, 2005
- --------------------------------------------
J. Patrick Campbell
* GLENN E. CORLETT Director March 16, 2005
- --------------------------------------------
Glenn E. Corlett
* MICHAEL L. FINN Director March 16, 2005
- --------------------------------------------
Micahel L. Finn
* G. COURTNEY HANING Director March 16, 2005
- --------------------------------------------
G. Courtney Haning
* HARLEY E. ROUDA Director March 16, 2005
- --------------------------------------------
Harley E. Rouda
* JAMES L. STEWART Director March 16, 2005
- --------------------------------------------
James L. Stewart
* By: /s/ Mike Brooks
- --------------------------------------------
Mike Brooks, Attorney-in-Fact
35
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-2 - F-3
Consolidated Statements of Income for the Years Ended December 31, 2004,
2003 and 2002 F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2004, 2003 and 2002 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002 F-6
Notes to Consolidated Financial Statements F-7 - F-27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Rocky Shoes & Boots, Inc.:
We have audited the accompanying consolidated balance sheets of Rocky Shoes &
Boots, Inc. and subsidiaries (the "Company") as of December 31, 2004 and 2003,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2004.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Rocky Shoes & Boots, Inc. and
subsidiaries at December 31, 2004 and 2003, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2004, in conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 15, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
/s/ Deloitte & Touche LLP
Columbus, Ohio
March 15, 2005
F - 1
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
2004 2003
CURRENT ASSETS:
Cash and cash equivalents $ 5,060,859 $ 2,159,050
Accounts receivable - trade, net 27,182,198 19,532,287
Other receivables 1,114,959 830,131
Inventories 32,959,124 38,068,187
Deferred income taxes - current 230,151 959,810
Income tax receivable 2,264,531
Other current assets 588,618 1,045,238
------------ ------------
Total current assets 69,400,440 62,594,703
FIXED ASSETS, AT COST:
Property, plant and equipment 52,732,896 46,790,708
Less accumulated depreciation (32,553,410) (29,180,470)
------------ ------------
Total fixed assets - net 20,179,486 17,610,238
DEFERRED PENSION ASSET 1,347,824 1,499,524
GOODWILL 1,557,861 1,557,861
OTHER ASSETS 4,220,043 2,912,510
------------ ------------
TOTAL ASSETS $ 96,705,654 $ 86,174,836
============ ============
F - 2
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
2004 2003
CURRENT LIABILITIES:
Accounts payable $ 4,349,248 $ 2,810,161
Current maturities - long-term debt 6,492,020 503,934
Accrued expenses:
Income taxes 1,929,808
Taxes - other 422,692 372,432
Salaries and wages 1,295,722 1,885,896
Plant closing costs 195,500
Co-op advertising 263,000 402,000
Interest 82,904 65,796
Building purchase obligation-related party 505,000
Other 377,804 219,138
------------ ------------
Total current liabilities 13,788,390 8,384,665
LONG-TERM DEBT - Less current maturities 10,044,544 17,514,994
DEFERRED LIABILITIES:
Compensation 206,913 166,641
Pension 89,195 1,460,952
Income Taxes 1,205,814 262,907
------------ ------------
Total deferred liabilities 1,501,922 1,890,500
------------ ------------
Total liabilities 25,334,856 27,790,159
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, Series A, no par value, $.06 stated value;
none outstanding 2004 and 2003
Common stock, no par value; 10,000,000 shares authorized;
outstanding 2004 - 4,694,670 and 2003 - 4,360,400 38,399,114 34,880,199
Accumulated other comprehensive loss (1,077,586) (1,950,400)
Retained earnings 34,049,270 25,454,878
------------ ------------
Total shareholders' equity 71,370,798 58,384,677
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 96,705,654 $ 86,174,836
============ ============
See notes to consolidated financial statements.
F - 3
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
2004 2003 2002
NET SALES $ 132,248,963 $106,164,753 $ 88,958,721
COST OF GOODS SOLD 93,606,600 73,383,128 65,528,213
------------- ------------ ------------
GROSS MARGIN 38,642,363 32,781,625 23,430,508
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 25,617,944 23,278,449 18,661,730
------------- ------------ ------------
INCOME FROM OPERATIONS 13,024,419 9,503,176 4,768,778
OTHER INCOME AND (EXPENSES):
Interest expense (1,335,100) (1,378,131) (1,404,496)
Other - net 381,073 348,448 432,018
------------- ------------ ------------
Total other - net (954,027) (1,029,683) (972,478)
------------- ------------ ------------
INCOME BEFORE INCOME TAXES 12,070,392 8,473,493 3,796,300
INCOME TAX EXPENSE 3,476,000 2,434,250 953,000
------------- ------------ ------------
NET INCOME $ 8,594,392 $ 6,039,243 $ 2,843,300
============= ============ ============
NET INCOME PER COMMON SHARE:
Basic $ 1.89 $ 1.44 $ 0.63
============= ============ ============
Diluted $ 1.74 $ 1.32 $ 0.62
============= ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 4,557,283 4,189,794 4,499,741
============= ============ ============
Diluted 4,953,529 4,560,763 4,590,095
============= ============ ============
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, 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
YEAR ENDED DECEMBER 31, 2003:
Net income 6,039,243 6,039,243
Minimum pension liability, net of tax effect
of $154,864 361,349 361,349
------------
Comprehensive income 6,400,592
Treasury stock purchased and retired (483,533) (3,106,156) (3,106,156)
Stock issued and options exercised
including related tax benefits 354,868 2,697,317 2,697,317
--------- ------------ ----------- ------------ ------------
BALANCE - December 31, 2003 4,360,400 34,880,199 (1,950,400) 25,454,878 58,384,677
YEAR ENDED DECEMBER 31, 2004:
Net income 8,594,392 8,594,392
Minimum pension liability, net of tax effect
of $356,501 872,814 872,814
------------
Comprehensive income 9,467,206
Stock issued and options exercised
including related tax benefits 334,270 3,518,915 3,518,915
--------- ------------ ----------- ------------ ------------
BALANCE - December 31, 2004 4,694,670 $ 38,399,114 $(1,077,586) $ 34,049,270 $71,370,798
========= ============ =========== ============ ============
See notes to consolidated financial statements.
F - 5
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
2004 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,594,392 $ 6,039,243 $ 2,843,300
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,407,790 3,556,544 4,032,442
Deferred income taxes 1,316,065 (113,761) 749,171
Tax benefit related to stock options 1,205,300 150,000
Deferred compensation and pension - net 49,530 775,166 (1,637,689)
(Gain) loss on sale of fixed assets 2,220 5,943 (15,904)
Stock issued as directors' compensation 66,885 60,000
Change in assets and liabilities:
Receivables (7,934,739) (3,906,086) 860,266
Inventories 5,109,063 (12,846,128) 4,531,675
Income taxes receivable (2,264,531)
Other current assets 456,620 221,859 (213,905)
Other assets (1,333,747) 95,672 321,088
Accounts payable 1,557,084 1,216,130 85,479
Accrued expenses (2,628,448) 3,183,675 (1,471,619)
-------------- -------------- --------------
Net cash provided by (used in) operating activities 7,603,484 (1,561,743) 10,084,304
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (5,466,041) (2,154,829) (2,338,388)
Acquisition of business (4,880,468)
Proceeds from sale of fixed assets 53,829 59,609
-------------- -------------- --------------
Net cash used in investing activities (5,466,041) (6,981,468) (2,278,779)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 127,659,452 123,166,498 87,589,294
Payments on long-term debt (129,141,816) (116,122,120) (94,059,911)
Purchase of treasury stock (3,106,156) (84,540)
Proceeds from exercise of stock options 2,246,730 2,487,317 71,419
-------------- -------------- --------------
Net cash provided by (used in) financing activities 764,366 6,425,539 (6,483,738)
-------------- -------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,901,809 (2,117,672) 1,321,787
CASH AND CASH EQUIVALENTS - Beginning of year 2,159,050 4,276,722 2,954,935
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS - End of year $ 5,060,859 $ 2,159,050 $ 4,276,722
============== ============== ==============
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, 2004, 2003 AND 2002
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"), Five Star Enterprises Ltd. ("Five Star") and Rocky Canada,
Inc. (Rocky Canada), 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, gloves and related outdoor apparel
primarily under the registered trademarks, ROCKY(R) and GATES(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 had one customer,
which represented sales of military footwear under a subcontracting
agreement, which accounted for 14% of consolidated net sales in 2004 and
did not have any customers that accounted for more than 10% of
consolidated net sales in 2003 and 2002.
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 $715,000 and
$620,000 at December 31, 2004 and 2003, respectively.
CONCENTRATION OF CREDIT RISK - The Company has significant transactions
with a large number of customers. Accounts receivable from one customer,
which represented sales of military footwear under a subcontracting
agreement, represented 11.5% of the Company's total accounts receivable -
trade balance as of December 31, 2004. No customer represented 10% of the
Company's total accounts receivable - trade balance as of December 31,
2003. 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
F - 7
(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.
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, apparel and
gloves 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 3-8
Furniture and fixtures 3-8
Lasts, dies, and patterns 3
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. Additional
payments of approximately $30,000, which were conditional on sales in
excess of a predetermined amount, were paid during 2003 completing the
transaction. 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. These licensing rights are considered
indefinite lived intangible assets and are not subject to amortization and
are recorded in goodwill.
GOODWILL AND OTHER INTANGIBLES - Goodwill and trademarks are considered
indefinite lived assets and are not amortizable. At December 31, 2004, the
goodwill is deductible for tax purposes. Patents are amortized over the
life the patents and amortization expense related to these assets was
approximately $26,200, $25,100, and $19,800 in 2004, 2003 and 2002
respectively. Such amortization expense will be approximately $26,000 per
year from 2005 to 2009.
ADVERTISING - The Company expenses advertising costs as incurred.
Advertising expense was $2,265,086, $1,776,909, and $1,921,367 for 2004,
2003 and 2002, respectively.
REVENUE RECOGNITION - Revenue and related cost of goods sold are
recognized at the time footwear, outdoor apparel and accessories are
shipped to the customer and title transfers. Revenue is recorded
F - 8
net of estimated sales discounts and returns based upon specific customer
agreements and historical trends. All sales are final upon shipment.
SHIPPING AND HANDLING COSTS - In accordance with the Emerging Issues Tax
Force ("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. Shipping and handling costs are included in
selling, general and administrative costs and totaled $1,789,194,
$1,469,565, and $1,491,259 in 2004, 2003 and 2002, respectively. The
Company's gross profit may not be comparable to other entities whose
shipping and handling is a component of cost of sales.
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,
2004 2003 2002
Basic - weighted average shares outstanding 4,557,283 4,189,794 4,499,741
Dilutive securities - stock options 396,246 370,969 90,354
--------- --------- ---------
Diluted - weighted average shares outstanding 4,953,529 4,560,763 4,590,095
========= ========= =========
Anti-Diluted - weighted average shares outstanding 84,000 0 207,587
========= ========= =========
ASSET IMPAIRMENTS - Annually, or more frequently if events or
circumstances change, a determination is made by management, in accordance
with Statement of Financial Accounting Standards ("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.
In accordance with SFAS No. 142, the Company tests intangible assets with
indefinite lives and goodwill for impairment annually or when conditions
indicate an impairment may have occurred.
RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARDS - In December 2003, the
FASB issued a revision to Interpretation 46 (FIN 46R) to clarify certain
provisions of FASB Interpretation No. 46. Variable interests in a variable
interest entity are contractual, ownership, or other pecuniary interests
in an entity that change with changes in the entity's net asset value.
Variable interests are investments or other interests that will absorb a
portion of an entity's expected losses if they occur or receive portions
of the entity's expected residual returns if they occur. FIN 46R defers
the effective date of FIN 46 for certain entities and makes several other
changes to FIN 46. The Company's adoption of FIN 46 or FIN 46R did not
have a material impact on the Company's consolidated financial statements.
F - 9
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs -
an amendment of ARB No. 43, Chapter 4," which clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage) and also requires that the allocation of fixed
production overhead be based on the normal capacity of the production
facilities. SFAS No. 151 is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Company is currently
evaluating the impact of adopting this statement.
In December 2004, the FASB issued revised SFAS No. 123, "Share-Based
Payment" which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees." This statement, which requires the cost of all
share-based payment transactions be recognized in the financial
statements, establishes fair value as the measurement objective and
requires entities to apply a fair-value-based measurement method in
accounting for share-based payment transactions. The statement applies to
all awards granted, modified, repurchased or cancelled after July 1, 2005,
and unvested portions of previously issued and outstanding awards. The
Company is currently evaluating the impact of adopting this statement.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - an amendment of APB Opinion No. 29." The statement
addresses the measurement of exchanges of nonmonetary assets and
eliminates the exception from fair value measurement for nonmonetary
exchanges of similar productive assets and replaces it with an exception
for exchanges that do not have commercial substance. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company is currently evaluating the
impact of adopting this statement.
In December 2004, the FASB issued FSP No. FAS 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004," which provides a practical
exception to the SFAS No. 109 requirement to reflect the effect of a new
tax law in the period of enactment by allowing additional time beyond the
financial reporting period to evaluate the effects on plans for
reinvestment or repatriation of unremitted foreign earnings. At December
31, 2004 the Company determined it would repatriate a portion of its
foreign earnings and accrued the related taxes. (See Note 8).
F - 10
PRODUCT GROUP INFORMATION - The Company is managed in one operating
segment. Gates Gloves is a product group established in 2003 for reporting
sales of GATES(R) branded gloves and accessories. The following is
supplemental information on net sales by product group:
% OF % OF % OF
2004 SALES 2003 SALES 2002 SALES
Rugged Outdoor $ 46,627,583 35.3% $ 48,100,097 45.3% $ 41,554,244 46.7%
Occupational 40,838,295 30.9% 34,560,154 32.6% 29,620,876 33.3%
Military 18,542,564 14.0% 408,204 0.4% 6,437,248 7.2%
Casual 2,392,526 1.8% 2,498,089 2.4% 2,306,748 2.6%
Apparel 8,854,804 6.7% 4,502,865 4.2% 2,740,441 3.1%
Gates Gloves 9,622,923 7.3% 10,240,548 9.6%
Factory Outlet Stores 4,017,359 3.0% 4,582,687 4.3% 4,050,823 4.6%
Other 1,352,909 1.0% 1,272,109 1.2% 2,248,341 2.5%
------------- ------ ------------- ----- ------------- -----
Total $ 132,248,963 100.00% $ 106,164,753 100.0% $ 88,958,721 100.0%
============= ====== ============= ===== ============= =====
Net sales to foreign countries, primarily Canada, represented
approximately 2.1% of net sales in 2004, 1.4% of net sales in 2003 and
1.0% of net sales in 2002.
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 because the exercise price under the plan is equal to the market
value of this underlying common stock on the date of grant. 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 and net income per share would have resulted in the amounts as
reported below.
YEARS ENDED DECEMBER 31,
2004 2003 2002
Net income, as reported $ 8,594,392 $ 6,039,243 $ 2,843,300
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects 1,003,446 454,299 405,854
-------------- -------------- --------------
Pro forma net income $ 7,590,946 $ 5,584,944 $ 2,437,446
============== ============== ==============
Earnings per share:
Basic--as reported $ 1.89 $ 1.44 $ 0.63
Basic--pro forma $ 1.67 $ 1.33 $ 0.54
Diluted--as reported $ 1.74 $ 1.32 $ 0.62
Diluted--pro forma $ 1.53 $ 1.24 $ 0.54
The pro forma amounts are not representative of the effects on reported
net income for future years.
F - 11
COMPREHENSIVE INCOME - Comprehensive income includes changes in equity
that result from transactions and economic events from non-owner sources.
Comprehensive income is composed of two subsets - net income and other
comprehensive income (loss). Included in other comprehensive income (loss)
for the Company is a minimum pension liability adjustment, which is
recorded net of a related tax effect. This adjustment is accumulated
within the Consolidated Statements of Shareholders' Equity under the
caption Accumulated Other Comprehensive Loss.
2. ACQUISITIONS
On April 15, 2003, the Company completed the purchase of certain assets
from Gates-Mills, Inc. ("Gates"). Under the terms of the purchase
agreement, Rocky acquired all of the intellectual property of Gates,
including ownership of the Gates(R) trademark, selected raw material and
finished goods inventory, and certain records in connection with the Gates
business in exchange for $3,510,070 plus a deferred purchase price if
sales by the Company related to the Gates product line from the date of
purchase through December 31, 2003 reach certain performance targets. The
Company recorded an additional purchase price of $1,324,400 because net
sales of the product line have exceeded the performance targets
established for 2003. No additional payments are required. The acquisition
was accounted for under the purchase method and results of operations of
the Gates business have been included in the Company's results of
operations since the date of acquisition. The following unaudited
pro-forma information presents results as if the acquisition had occurred
on January 1, 2002: net sales ($108,847,526); net loss ($395,462); and net
loss per diluted share ($0.09). Unaudited pro-forma results of operations
for the year ended December 31, 2003 are not presented due to the
unavailability of information from Gates-Mills, Inc. Final allocation of
the purchase price is follows:
Inventory $ 2,040,070
Goodwill 1,032,400
Trademarks 1,762,000
------------
Total acquisition cost $ 4,834,470
Transaction costs 91,580
------------
Total $ 4,926,050
============
On January 6, 2005, the Company completed the purchase of 100% of the
issued and outstanding voting limited liability interests of EJ Footwear
LLC, Georgia Boot LLC, and HM Lehigh Safety Shoe Co. LLC (the "EJ Footwear
Group") from SILLC Holdings LLC. The EJ Footwear Group was acquired to
expand the Company's branded product lines, principally occupational
products. The aggregate purchase price for the interests of EJ Footwear
Group was $91.2 million in cash plus 484,261 shares of the Company's
common stock valued at $11,573,000 (valued at $10,000,000 in the
definitive agreement). Common stock value is based on the share price at
the date of the agreement. To fund the transaction the Company refinanced
its existing credit agreement and entered into an additional note
agreement. (See Note 6).
The results of operations of EJ Footwear Group will be included in the
results of operations of the Company effective January 1, 2005, as
management determined that results of operations were not significant and
no material transactions occurred during the period from January 1, 2005
to January 6, 2005.
F - 12
The purchase price, which includes $1.6 million in transaction cost, will
be allocated to the Company's tangible and intangible assets and
liabilities based upon estimated fair values as of the date of the
acquisition. The Company is in the process of obtaining appraisals of all
tangible and intangible assets and liabilities to establish the fair
values and determining a final working capital adjustment. As the purchase
price allocation has not been completed, the amounts and lives assigned to
finite and indefinite life intangibles, and the related amortizations
periods have been estimated. Goodwill resulting from the transaction will
not be tax deductible. The purchase price is preliminarily allocated,
based on management's estimates, as follows:
Current assets $ 64,736,890
Fixed assets and other assets 3,109,170
Identifiable intangibles 47,000,000
Goodwill 16,378,518
Liabilities (8,900,005)
Deferred Taxes - long term (17,935,223)
---------------
Purchase price $ 104,389,350
===============
The following unaudited pro-forma information presents results as if the
acquisition had occurred on January 1, 2004:
Net sales $ 279,051,000
Net income 12,782,000
Earning per share:
Basic $ 2.54
Diluted $ 2.35
3. INVENTORIES
Inventories are comprised of the following:
DECEMBER 31,
2004 2003
Raw Materials $ 4,711,014 $ 5,087,468
Work-in-progress 564,717 878,091
Finished goods 26,565,240 31,168,371
Factory outlet finished goods 1,268,153 1,299,257
Less reserve for obsolescence or lower
of cost or market (150,000) (365,000)
-------------- --------------
Total $ 32,959,124 $ 38,068,187
============== ==============
F - 13
4. OTHER ASSETS
Intangible assets are recorded in other assets and consist of the
following:
DECEMBER 31,
2004 2003
Trademarks 2,225,887 2,149,694
Patents - net of amortization 335,540 310,071
Deferred Acquisition Costs 933,502
Other 725,114 452,745
---------- ----------
Total $4,220,043 $2,912,510
========== ==========
5. FIXED ASSETS
Fixed assets are comprised of the following:
DECEMBER 31,
2004 2003
Land $ 572,838 $ 572,838
Building and improvements 15,484,035 13,112,334
Machinery and equipment 22,730,530 21,949,160
Furniture and fixtures 3,472,210 2,110,909
Lasts, dies and patterns 9,911,316 8,958,470
Construction work-in-progress 561,967 86,997
------------ ------------
Total 52,732,896 46,790,708
Less - accumulated depreciation (32,553,410) (29,180,470)
------------ ------------
Net fixed assets $ 20,179,486 $ 17,610,238
============ ============
F - 14
6. LONG-TERM DEBT
Long-term debt is comprised of the following:
DECEMBER 31,
2004 2003
Bank - revolving credit facility $ 11,552,109 $ 12,530,539
Equipment and other obligations 123,300 287,700
Real estate obligations 4,861,155 5,200,689
------------- -------------
Total debt 16,536,564 18,018,928
Less current maturities 6,492,020 503,934
------------- -------------
Net long-term debt $ 10,044,544 $ 17,514,994
============= =============
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,
2004 was 5.25% (4.00% at December 31, 2003).
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, 2004, 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, 2004 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.
At December 31, 2004 and 2003, the Company has no interest rate management
agreements.
F - 15
The estimated fair value of the Company's long-term obligations
approximated their carrying amount at December 31, 2004 and 2003, based on
current market prices for the same or similar issues or on debt available
to the Company with similar rates and maturities.
On January 6, 2005, to fund the acquisition of EJ Footwear Group, the
Company entered into a loan and security agreement with GMAC Commercial
Finance LLC, refinancing its former $45,000,000 revolving line of credit,
for certain extensions of credit (the "Credit Facility"). The Credit
Facility is comprised of (i) a five-year revolving credit facility up to a
principal amount of $100,000,000 with an interest rate of LIBOR plus two
and a half percent (2.5%) or prime plus one percent (1.0%) and (ii) a
three-year term loan in the principal amount of $18,000,000 with an
interest rate of LIBOR plus three and a quarter percent (3.25%) or prime
plus one and three quarters percent (1.75%). The Credit Facility is
secured by a first priority perfected security interest in all presently
owned and hereafter acquired domestic personal property of the Borrowers,
subject to specified exceptions. The credit facility restricts the payment
of dividends. At December 31, 2004, the Company has no retained earnings
available for distribution.
Also on January 6, 2005, the Company entered into a note agreement (the
"Note Purchase Agreement") with American Capital Financial Services, Inc.,
as agent, and American Capital Strategies, Ltd., as lender (collectively,
"ACAS"), regarding $30,000,000 in six-year Senior Secured Term B Notes
with an interest rate of LIBOR plus eight percent (8.0%). The Note
Purchase Agreement provides, among other terms, that (i) the ACAS Second
Lien Term Loan will be senior indebtedness of the Company, secured by
essentially the same collateral as the Credit Facility, (ii) such note
facility will be "last out" in the event of liquidation of the Company and
its subsidiaries, and (iii) principal payments on such note facility will
begin in the fourth year of such note facility.
Long-term debt maturities, adjusted for the January 2005 refinancing, are
as follows for the years ended December 31:
2005 $ 6,492,020
2006 6,400,416
2007 6,434,837
2008 10,472,216
2009 10,512,809
7. OPERATING LEASES
The Company leases certain machinery and manufacturing facilities under
operating leases that generally provide for renewal options. The Company
incurred approximately $918,000, $793,000 and $799,000 in rent expense
under operating lease arrangements for 2004, 2003 and 2002, respectively.
Included in total rent expense above are monthly payments of $5,000 for
2004, 2003 and 2002 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. The Company purchased the facility in
January 2005 and relocated its factory outlet store in Nelsonville, Ohio
to this location.
F - 16
Future minimum lease payments under non-cancelable operating leases are as
follows for the years ended December 31:
2005 $ 742,000
2006 616,000
2007 294,000
2008 294,000
2009 258,000
-----------
Total $ 2,204,000
===========
8. 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. Rocky Canada began operations in July 2003 and is
subject to Canadian income taxes.
At December 31, 2004, a provision of $157,000 has been made for U.S. taxes
on the repatriation of $3,000,000 of accumulated undistributed earnings of
Five Star through December 31, 2004. At December 31, 2004, after the
planned repatriation above, approximately $6,839,000 is remaining that
would become taxable upon repatriation to the United States. During 2005,
the Company will complete its evaluation of foreign earnings and may
repatriate up to an additional $5,000,000 of accumulated undistributed
earnings, which could result in up to $260,000 of additional tax. 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 $2,394,000 and $379,000, respectively. In 2001, the
Company received 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 recognized a tax benefit
for the exercise of its stock options in the amount of $1,205,300 for the
year ended December 31, 2004.
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 - 17
YEARS ENDED DECEMBER 31,
2004 2003 2002
Federal:
Current $ 1,836,232 $ 2,308,011 $ 200,134
Deferred 1,173,870 (93,011) 683,867
------------ --------------- ------------
Total Federal 3,010,102 2,215,000 884,001
------------ --------------- ------------
State and local:
Current 146,858 229,000 3,695
Deferred 142,195 (20,750) 65,304
------------ --------------- ------------
Total state and local 289,053 208,250 68,999
------------ --------------- ------------
Foreign-current 176,845 11,000
------------ --------------- ------------
Total $ 3,476,000 $ 2,434,250 $ 953,000
============ =============== ============
A reconciliation of recorded Federal income tax expense (benefit) to the
expected expense (benefit) computed by applying the Federal statutory rate
of 35% for 2004 and 34% for all periods to income before income taxes
follows:
YEARS ENDED DECEMBER 31,
2004 2003 2002
Expected expense at statutory rate $ 4,224,637 $ 2,880,988 $ 1,290,742
Increase (decrease) in income taxes
resulting from:
Exempt (income) from operations in
Puerto Rico, net of tollgate taxes (560,000)
Exempt (income) from Dominican
Republic operations (580,009) (545,792) (430,416)
Tax on repatriated earnings from
Dominican Republic operations 157,000
State and local income taxes 187,884 132,796 45,539
Other--net 46,488 (33,742) 47,135
------------ --------------- ------------
Total $ 3,476,000 $ 2,434,250 $ 953,000
============ =============== ============
F - 18
Deferred income taxes recorded in the consolidated balance sheets at December
31, 2004 and 2003 consist of the following:
DECEMBER 31,
2004 2003
Deferred tax assets:
Asset valuation allowances and accrued expenses $ 580,503 $ 809,023
Pension and deferred compensation 759,341
Plant closing costs 74,290
Inventories 275,397 373,721
State and local income taxes 50,256
------------- ---------------
Total deferred tax assets 906,156 2,016,375
------------- ---------------
Deferred tax liabilities:
Fixed assets (806,642) (858,175)
State and local income taxes (51,372)
Prepaid assets (210,525) (41,490)
Pension and deferred compensation (485,381)
Tollgate tax on Lifestyle earnings (379,271) (368,435)
------------- ---------------
Total deferred tax liabilities (1,881,819) (1,319,472)
------------- ---------------
Net deferred tax asset $ (975,663) $ 696,903
============= ===============
9. RETIREMENT PLANS
The Company sponsors a noncontributory defined benefit pension plan
covering non-union workers of the Company's Ohio and Puerto Rico
operations. 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.
The Company sponsored a non-contributory defined benefit plan for certain
union employees. The plan was frozen in September 2001 and terminated
March 2004. The settlement of the plan resulted in a gain of $63,228 in
2004.
F - 19
The funded status of the Company's plans and reconciliation of accrued
pension cost at December 31, 2004 and 2003 is presented below (information
with respect to benefit obligations and plan assets is as of September
30):
DECEMBER 31,
2004 2003
Change in benefit obligation:
Projected benefit obligation at beginning of the year $ 11,121,263 $ 9,225,682
Service cost 512,317 387,693
Interest cost 646,052 603,481
Actuarial loss 152,722 1,230,283
Exchange loss 352,612 297,293
Benefits paid (403,330) (623,169)
Settlement (2,752,605)
--------------- ----------------
Projected benefit obligation at end of year $ 9,629,031 $ 11,121,263
=============== ================
Change in plan assets:
Fair value of plan assets at beginning of year $ 8,791,904 $ 7,150,990
Actual gain on plan assets 1,953,062 2,264,083
Employer contribution 1,120,000
Benefits paid (403,330) (623,169)
Settlement (2,752,605)
--------------- ----------------
Fair value of plan assets at end of year $ 8,709,031 $ 8,791,904
=============== ================
Funded Status:
Unfunded deficit $ (920,000) $ (2,329,359)
Remaining unrecognized benefit obligation existing
at transition 57,073 73,380
Unrecognized prior service costs due to plan amendments 1,290,751 1,426,144
Unrecognized net loss 2,296,041 3,372,387
Adjustment required to recognize minimum liability (2,813,060) (4,194,074)
Curtailment charge included in plant closing costs 190,570
--------------- ----------------
Accrued pension liability $ (89,195) $ (1,460,952)
=============== ================
Amounts recognized in the consolidated financial statements:
Deferred pension asset $ (1,347,824) $ (1,499,524)
Deferred pension liability and curtailment liability 2,723,865 2,733,122
Accumulated other comprehensive loss (1,465,236) (2,694,550)
--------------- ----------------
Net amount recognized $ (89,195) $ (1,460,952)
=============== ================
Accumulated benefit obligation $ 8,798,226 $ 10,443,426
=============== ================
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
F - 20
accompanying consolidated financial statements a non-current deferred
pension asset of $1,347,824 and $1,499,524 as of December 31, 2004 and
2003, 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 of $872,814 net of a deferred tax of $356,501
for 2004 and $361,349 net of a deferred tax of $154,864 for 2003.
Net pension cost of the Company's plans is as follows:
YEARS ENDED DECEMBER 31,
2004 2003 2002
Service cost $ 512,317 $ 387,692 $ 269,715
Interest 646,052 603,481 580,032
Expected return on assets (684,297) (552,988) (456,422)
A mortization of unrecognized net loss 141,642 178,641 51,850
A mortization of unrecognized transition obligation 16,306 16,306 16,306
A mortization of unrecognized prior service cost 135,393 135,393 135,393
------------- -------------- ---------------
Net pension cost $ 767,413 $ 768,525 $ 596,874
============= ============== ===============
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,
2004 2003
Discount rate 5.75% 5.75%
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%
The Company's pension plans weighted-average asset allocations at December
31, 2004 and 2003 by asset category are:
DECEMBER 31,
2004 2003
Rocky, Inc. common stock 19.3% 17.2%
Other equity securities 61.2% 65.5%
Debt securities 6.2% 14.7%
Other 13.3% 2.6%
----- -----
Total 100.0% 100.0%
===== =====
F - 21
The Company's investment objectives are (1) to maintain the purchasing
power of the current assets and all future contributions; (2) to maximize
return within reasonable and prudent levels of risk; (3) to maintain an
appropriate asset allocation policy (80% equity securities and 20% debt
securities) that is compatible with the actuarial assumptions, while still
having the potential to produce positive returns; and (4) to control costs
of administering the plan and managing the investments.
The expected benefit payments for pensions are as follows for the years
ended December 31:
2005 $ 297,000
2006 294,000
2007 331,000
2008 346,000
2009 356,000
Thereafter 2,504,000
--------------
Total $ 4,128,000
==============
The Company anticipates making a contribution of approximately $800,000 to
the pension plan in 2005.
The Company's desired investment result is a long-term rate of return on
assets that is at least 8%. The target rate of return for the plans have
been based upon the assumption that returns will approximate the long-term
rates of return experienced for each asset class in the Company's
investment policy. The Company's investment guidelines are based upon an
investment horizon of greater than five years, so that interim
fluctuations should be viewed with appropriate prospective. Similarly, the
Plan's strategic asset allocation is based on this long-term perspective.
The Company also sponsors a 401(k) savings plan for substantially all of
its employees. The Company provides contributions to the plan only on a
discretionary basis. No Company contribution was made for 2004, 2003 and
2002.
10. COMMITMENTS AND CONTINGENCIES
The Company is, from time to time, a party to litigation which arises in
the normal course of its business. Although the ultimate resolution of
pending proceedings cannot be determined, in the opinion of management,
the resolution of such proceedings in the aggregate will not have a
material adverse effect on the Company's financial position, results of
operations, or liquidity.
11. 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, 2004
and 2003, respectively.
F - 22
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, 2004. Purchases of
stock under this program were funded with borrowings from the Company's
credit facility. There were 16,400 shares repurchased and retired in 2002
for $84,540. The Company completed the repurchase program during the first
quarter 2003 and retired the remaining shares. There were 483,533 shares
repurchased and retired in 2003 for $3,106,153.
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. On May 11, 2004 shareholders of the
Company approved the 2004 Stock Incentive Plan. This Stock Incentive Plan
includes 750,000 of the Company's common shares that may be granted for
stock options and restricted stock awards. As of December 31, 2004, the
Company is authorized to issue 663,935 options under the 2004 Stock
Incentive Plan.
F - 23
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, 2002 through December 31, 2004:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
Outstanding at January 1, 2002 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
Issued 224,000 6.59
Exercised (334,500) 7.46
Forfeited (61,000) 6.80
--------- ----------
Outstanding at December 31, 2003 851,500 6.63
Issued 175,000 20.78
Exercised (330,700) 6.79
Forfeited (16,250) 7.57
--------- ----------
Outstanding at December 31, 2004 679,550 $ 10.03
========= ==========
Options exercisable at December 31:
2002 721,625 $ 7.67
2003 515,250 $ 6.97
2004 402,926 $ 7.07
Fair value of options granted during the year:
2002 $ 2.40
2003 $ 2.79
2004 $ 8.97
F - 24
The following table summarizes information about options outstanding at
December 31, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------- -------------------
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE PRICE NUMBER PRICE
$3.875 - $5.00 111,300 3.9 $ 4.12 105,363 $ 4.09
$5.01 - $5.75 110,500 5.6 $ 5.24 62,750 $ 5.24
$5.76 - $6.50 178,000 4.2 $ 5.87 138,500 $ 5.83
$6.51 - $8.875 40,750 3.5 $ 7.40 34,188 $ 7.51
$8.89 - $15.25 72,000 3.8 $ 13.33 46,125 $ 14.41
$15.26 - $27.25 167,000 6.8 $ 20.78 16,000 $ 22.39
------- -------
679,550 $ 10.03 402,926 $ 7.07
======= =======
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 2004, 2003 and
2002, respectively; dividend yield of 0%; expected volatility of 51%, 44%
and 44 %; risk-free interest rates of 3.28%, 2.80% and 2.83% and expected
life of 4 years, 6 years and 6 years.
12. 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, net of tax,
are as follows:
YEARS ENDED DECEMBER 31,
2004 2003 2002
Net income $ 8,594,392 $ 6,039,243 $ 2,843,300
Minimum pension liability, net of tax effect 872,814 361,349 (1,480,588)
------------ ------------ --------------
Comprehensive income $ 9,467,206 $ 6,400,592 $ 1,362,712
============ ============ ==============
The 2004, 2003 and 2002 minimum pension liability is net of a deferred tax
(expense) benefit of $(356,501), ($154,864) and $575,784, respectively.
F - 25
13. 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.
A reconciliation of the plant closing costs and accrual is as follows:
2002 Expense 2004 Expense
Accrued Adjustments Accrued Accrued Adjustments
Balance 2002 to Original Balance 2003 Balance 2004 to Original
Dec. 31, 2001 Payments Estimate Dec. 31, 2002 Payments Dec. 31, 2003 Payments Estimate
------------- -------- ------------ ------------- -------- ------------- -------- ------------
Severance:
Non-union $ 71,668 $ 25,574 $ 26,094 $ 20,000 $ 14,500 $ 5,500 $ $ 5,500
Union
Curtailment of
pension plan benefits 690,000 500,000 190,000 190,000 132,272 57,728
Employee benefits 33,000 31,047 1,953
Factory lease 85,000 40,000 45,000
Equipment and
relocation costs 5,000 5,000
Legal and other costs 18,623 53,667 (35,044)
------------- -------- ------------ ------------- -------- ------------- -------- ------------
Total $ 903,291 $650,288 $ 43,003 $ 210,000 $ 14,500 $ 195,500 $132,272 $ 63,228
============= ======== ============ ============= ======== ============= ======== ============
The Company expects no additional restructuring and realignment costs
associated with this plan and therefore recognized $63,228 of income in
2004.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
YEARS ENDED DECEMBER 31,
2004 2003 2002
Interest $ 1,317,991 $ 1,402,743 $ 1,435,505
============= ============= =============
Federal, state and local
income taxes - net of refunds $ 5,126,694 $ 206,232 $ 68,066
============= ============= =============
Accounts payable at December 31, 2004, 2003 and 2002 include a total of
$522,997, $45,582 and $2,693, respectively, relating to the additional
goodwill accrued in the acquisition of certain assets
F - 26
of Gates-Mills, Inc. in 2003 and the purchase of fixed assets. In 2004,
the Company agreed to purchase a building for $505,000 from a partnership
25% owned by the Company's Chairman and CEO.
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for the years ended December 31, 2004 and 2003:
2004 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Year
Net sales $21,882,089 $27,433,987 $50,052,894 $32,879,993 $132,248,963
Gross margin 5,618,604 7,776,209 15,996,490 9,251,060 38,642,363
Net income 72,451 1,447,822 4,887,359 2,186,760 8,594,392
Net income
per common share:
Basic $ 0.02 $ 0.32 $ 1.06 $ 0.47 $ 1.89
Diluted $ 0.01 $ 0.29 $ 0.98 $ 0.43 $ 1.74
2003
Net sales $13,754,941 $21,863,148 $41,349,824 $29,196,840 $106,164,753
Gross margin 3,465,528 6,734,984 13,085,792 9,495,321 32,781,625
Net income (loss) (622,569) 1,095,819 3,467,595 2,098,398 6,039,243
Net income (loss)
per common share:
Basic $ (0.14) $ 0.27 $ 0.84 $ 0.50 $ 1.44
Diluted $ (0.14) $ 0.25 $ 0.77 $ 0.44 $ 1.32
No cash dividends were paid during 2004 and 2003.
F - 27